Adidas or Zara: Europe''s footwear giant or fashion leader? A year ago we benchmarked Adidas against Inditex, and since then the earnings trajectory couldn''t have been more divergent, with Adidas profits wiped out and Inditex delivering consistent upgrades. But today we revisit the set-up between Europe''s footwear giant against Europe''s fashion leader and switch our preference, upgrading Adidas to Outperform and lowering Inditex to Neutral. The Adidas brand is inflecting Profits matter, but sales momentum needs to come first. Our analysis of social media, app usage and search trends suggest that Adidas'' brand heat is warming up, while our US colleagues show that Nike''s is cooling in their downgrade report (Hair Jordan). Gross margins should muscle up Adidas'' profitability Last year Inditex generated three times more profit per item than Adidas. The key for Adidas'' profit recovery is gross margin, and we bridge all the moving parts to show that margins should recover rapidly. We look for EBIT margins of c.6% in 2024 and c.9% in 2025. Inditex earns a lofty c.18%. Adidas'' EPS momentum should build The sell-side still favours both Inditex and Puma over Adidas. However, we sit c.30% ahead of Adidas 2024 consensus whereas we sit in line with consensus for Inditex. We upgrade Adidas to Outperform, with a DCF-driven target price of EUR 210, arguing for an earnings upgrade cycle. As we go to print, Adidas has pre-announced a small underlying Q2 23 beat, reinforcing our conviction in this. What''s changed at Inditex (+ to =)? Inditex has grown sales well ahead of its peers since the Covid pandemic and earnings momentum has been positive. From here, with a near-record market capitalisation and EBIT margins back to decade-highs, we see less scope for earnings upgrades. We sit in line with consensus, and with the stock pushing up against our target price we downgrade to Neutral.