At Least Adidas Nailed the Trend for Investors
(Bloomberg Opinion) -- The days of Adidas AG upgrading its annual sales forecasts feel as distant as when millennials regarded the Stan Smith sneaker as the cutting edge of fashion. Now it’s all ugly “dad” footwear and the company is suffering.
On Wednesday it forecast slower sales growth for 2019. The style pivot contributed to a loss of momentum in Europe, though difficult market conditions, not least a spell of unseasonably warm weather, also likely dragged on performance. Shortages of mid-market clothing in North America, stemming from a failure to respond quickly enough to a demand surge, will weigh on revenue. That looks careless for a company that has made improving its supply chain a priority.
Moreover, Nike Inc.’s recovery is gaining traction, and its new models are chiming with consumers.
Shares in Adidas fell as much as 6 percent before recovering slightly. Although they are still up about 20 percent over the past year, they have lost their premium to Nike, and now trade at a steep discount.
To stand any chance of closing the gap, Adidas must reignite sales growth in Europe. Chief Executive Officer Kasper Rorsted told Bloomberg TV that the company needed to increase sales of sports lines in the region.
This will need investment. And, despite the problems last year, it looks like Adidas has got a handle on finding the right combination of spending and returning capital to shareholders. This shows Rorsted has a good read on investors’ current mood — as with Kraft Heinz Co. and Unilever NV, they now want a better balance between revenue and earnings expansion, rather than a focus on boosting profits by cutting costs, at the expense of the top line.
It has some promising candidates for its spending. It is making progress with Reebok, which returned to profitability last year. Sales of Reebok Classics — a new millennial favorite — were up by a percentage in the double digits. As I have argued, the brand has a good chance of picking up the baton from the retro shoe craze since some of its styles fit easily into the ugly sneaker category. The collaboration with Vetements is a smart move.
There is also Kanye West’s Yeezy line. This will be distributed more widely this year, something Rorsted says will be more about building the brand than increasing sales this year.
Success is not guaranteed. West’s high-profile mishaps last year were a worry, and the gains in Reebok trainers were offset by a decline in the label’s sports offering.
Adidas has already taken some of the right steps. Capital expenditure rose 5 percent to 794 million euros in 2018, while investment in marketing rose 10 percent in 2018 to a record 3 billion euros, driven by the World Cup. Rorsted will need to maintain, if not increase, both this year.
There is certainly scope to do so.
One of his long-term goals has been to lift the operating margin to 11.5 percent by 2020, and the company expects to be at or close to this level in 2019. Rorsted could have raised the target to, say, 12 percent, but chose not to, leaving room for investment to continue.
The company also had net cash of 959 million euros ($1.1 billion) at the end of 2018, almost double the year earlier position. Although Adidas expects to return 1.5 billion euros to shareholders this year, Rorsted will still be left with plenty of firepower.
Adidas is vulnerable to changes in fashion as well as in the macroeconomic environment. But at least it isn’t having to return money to shareholders because it’s out of ideas.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.
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