Tuesday 21 November 2017

Adidas finds the route to fresh success with five-year plan

THE great French novelist, philosopher and sometime goalkeeper Albert Camus once let it be known that what he knew about morality and the duty of man he owed "to sport". While there is no reason to think he was fibbing, he never came even close to owing as much to sport as the German Dassler brothers.

Adolph and Rudolph Dassler were the dynamos that powered sports clothing and accessories manufacturers Adidas and Puma and it is probably fair to say they helped change the European face of sport.

One or other name is ubiquitous wherever sport is played these days. Adidas kitted out the French rugby team that beat Scotland last weekend; it supplied the ball in Ireland's defeat to Italy in Rome (God forgive it); it sponsors tennis players Andy Murray and Caroline Wozniacki; it has deals with Liverpool's Stephen Gerrard and Barcelona's Lionel Messi, as well as Real Madrid, Chelsea and Bayern Munich.

Puma is no slouch also and has supplied boots to the likes of Pele, Eusebio, Cruyff, Maradona and Kenny Dalglish.

Until quite recently it was the equipment sponsor of the Irish rugby team.

But the company we want to focus on as a likely stock market play today is Adidas.

First a bit of history. In the 1920s Adolf and Rudolf were trading as the Dassler Brothers Shoe Company.

However, in the 1940s the relationship soured and the brothers set up rival companies Adidas and Puma.

Adidas was incorporated in 1949 and named after its founder Adolf 'Adi' Dassler (Adidas). In the 1980s it was briefly in French hands but in 1995 the company was floated on the Frankfurt Stock Exchange and today is a constituent of the Dax 30.

This Bavarian-based group has a global footprint, 46,000 employees and its products are used in most sports. It focuses on four principal brands: Adidas, Reebok, Taylormade and Rockport.

Adidas sports performance division concentrates on three key sports: football, basketball and athletics. Adidas Sports markets a number of labels for normal street wear. Taylormade is a global brand concentrating on golf clubs, golf footwear, golf apparel and Rockport manufactures and markets casual and outdoor footwear.

The Adidas brand has 76pc of all sales, showing an increase of €2.6bn over the last two years. Golf appears immune to recession as Taylormade has seen increased sales of €435m. Sales are static at Rockport and Reebok has problems.

Over the last two years footwear has been the star with an increase of €1.5bn since 2010. It now accounts for 48pc of group sales. Apparel has been disappointing and hardware (golf clubs are included) had a significant increase (36pc) but coming from a low base.

Group sales are concentrated on Western Europe and North America, with 23pc each of global sales. China is coming along nicely, with 10pc of total sales, while Latin America and Asia show promise.

What makes Adidas interesting at the moment is that it is in the middle of a five-year plan which it calls 'Route 2015'.

This intends to outperform the sporting goods market by being more focused on markets with high potential and has identified these markets as China, Russia and the US.

Revenues are to grow in the period by half and margins to 11pc.

So two years later how is the Route 2015 plan going? Patchy is the answer.

Net sales of €15bn for 2012 are up €3bn from that of two years ago. However, the Reebok brand's weakness has been unhelpful.

Acquired in 2005 for €3.8bn it has had to cope with various difficulties – an ice hockey strike, poor US sales and problems with its Indian operation. It is no surprise that net income fell in 2012 from €613m to €526m but the company is projecting income of €900m this year.

Earnings per share are anticipated to grow by a minimum of 12pc.

P/E ratio is a high of 30, so somebody believes Route 2015 is delivering the goods. Prospects are bright for Adidas as long as people, believe, like Camus did, that football is more enjoyable than theatre.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares mentioned

Irish Independent

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