Thursday 24 May 2018

Nimble Adidas is running rings around opposition

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The Adidas brand, with over 1,400 stores, accounts for 85pc of total sales and profits and is growing by double digits
The Adidas brand, with over 1,400 stores, accounts for 85pc of total sales and profits and is growing by double digits

John Lynch

I know this may sound like the beginning of a Monty Python sketch, but kids with a love of sport these days have it made!

In my day, football boots extended half-way up your shins. They each weighed as much as a large bag of coal. The leather footballs we played with were even heavier, especially in the rain, and if you were brave enough to threaten the goal with a thumping header, the chances were that you would bear on your forehead the impression of the football's lace (yes, footballs had their own laces) for the best part of a week. Sport wasn't for sissies those days.

Fifty years ago, however, there was a transformation and the company we are analysing today, the German company Adidas, was at the front and centre of the changes, defining a new industry called 'sporting goods'. With origins in shoe manufacturing in Bavaria, Adidas was incorporated in 1949 and named after its founder, Adolf 'Adi' Dassler. From the beginning, the company was innovative.

It designed the first lightweight football boots with screw-on studs for the German national soccer team. The West Germans around that time were beginning to assert their infallibility on the field, which helped the company with its keen eye for publicity.

It supplied legendary German centre-half Franz Beckenbauer with a track suit. This was the first piece of apparel made by Adidas and it opened up a whole new business for the group.

By 1987, the Dassler family had exited the company. Subsequently it was acquired by the French politician Bernard Tapie. Following his financial problems, it was controversially passed on to the French state bank, Credit Lyonnais. This deal has become a long-running legal saga. In spite of all the shenanigans, the bank succeeded in floating the group in 1995 on the Frankfurt Stock Exchange. Today, it is a truly global group with 60,000 employees, 2,600 retail outlets, a market value of €37bn and a constituent of the German Dax 30.

Following the sale of its global golf brand, Taylormade, the group now concentrates on its Adidas and Reebok brands.

The Adidas brand, with over 1,400 stores, accounts for 85pc of total sales and profits and is growing by double digits. Reebok, which is moving from a general sports brand to a fitness one, has slower growth than its competitors, lower margins and unsatisfactory progress in the critical US market.

The group worldwide sales are reasonably balanced. They are concentrated in Western Europe (27pc), North America (18pc) and China (15pc). While Latin America and Asia are showing promise, Russia continues to disappoint.

Footwear is still the group's largest product with over 60pc of total revenues. Apparel kicks in 35pc and the remainder rests in the 'miscellaneous' category. However, footwear growth is three times that of apparel.

Last year, Adidas outperformed its competitors. One of its rivals, Under Armour, lowered its sales and profit guidance citing poor results in the US. Another rival, Nike, with the once unassailable brand, is stumbling and has announced staff reductions. Puma, too, has been showing sluggish growth.

Adidas, meanwhile, is on a roll with its highest organic growth in 20 years and progress is shown by its record net incomes of €1bn, almost double that of five years ago. Sales this year are expected to exceed the record of €19bn set in 2016. The group is focusing on markets like China and the US, both showing impressive growth. Adidas's share price at €180.25, while below its yearly high of €202, is holding up despite the recent market correction.

While the road ahead is not clear, investors should get used to more volatility than has been the case for some time.

Adidas shares are still worthwhile. And while its investors still have faith in the group, some have concerns over its elevated price-earnings multiple of 35. In addition, the era of quantitative easing that created a safety net for shares is changing.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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