Figures in this article reflect prices as of market close on 12/19/2014 unless otherwise specified.
Adidas (ETR:ADS) (FRA:ADS) had a disappointing year: a 40% drop in its share price made it the worst performing DAX stock in 2014. Should we expect a better performance in 2015? Or will the company continue to struggle?
In a recent article we highlighted the key reasons — losing market share, golf, Russia and currencies — behind the company’s 2014 performance. Let’s look at how these items could develop in 2015.
Losing ground in the core Western Europe and North America markets is Adidas’ biggest long-term headache
2014 calendar year is not yet finished. However, Adidas’ results will very likely show that it is not the largest sportswear company in Western Europe any more. The title probably goes to Nike (NYSE:NKE) (ETR:NKE), which managed to increase its sales in the region by 22% (compared to Adidas, which probably only had single-digit growth).
In North America, sales of the German company fell compared to 2013, while both Nike and Under Armour (NYSE:UA) (FRA:U9R) grew double digits. As a result, Adidas is slipping back to third place.
This is a slap in the face for Adidas. The company likes to tout the success of certain products and categories (such as record-breaking soccer sales), but the overall results don’t reflect this optimism — Adidas is losing market share. Nike’s marketing efforts work better: Many consumers believed that Nike was the official sponsor of the World Cup, even though Adidas is rumored to have paid $100 million for the rights. Also, as one marketing consultant put it, “At the moment, Nike is cool, very cool. If you ask a 20-year-old, they are not going to pick Adidas right now.”
Adidas is fighting back by hiring designers from its arch-rival and signing major deals with NBA stars and top football clubs (even Darth Vader is wearing Adidas nowadays). Also, it is planning to launch its “biggest ever” marketing campaign in 2015, boosting its marketing spend from 13% to 14% of sales.
It’s questionable whether this marketing spend will have the desired effect. Adidas has a disadvantage in branding: While Nike can focus on one logo and slogan, the German firm has to spread its marketing budget across a range of different brands (like Reebok or TaylorMade).
What to look out for: Will Adidas be able to gain back market share from Nike in Western Europe and North America? Will the sales growth be enough to offset the increased marketing expenses?
The golf business should stabilize, but structural challenges remain
The golf industry is facing structural problems. According to The Economist, 18% less people played golf in North America — the largest golf market — in 2013 compared to 2006. Especially among young people, there is growing disinterest for the sport. As The Economist put it, “[Golf’s] calm, meditative quality does not suit the frenetic pace of modern life.” Also, no golfer has managed to replace Tiger Woods’ broad appeal.
As a result, golf clothing and equipment manufacturers and retailers have been squeezed. As an example, Dick’s Sporting Goods (NYSE:DKS) reported a 9.6% decrease of sales in its Golf Galaxy stores in the first three quarters of 2014. Adidas was no exception: In the first nine months of 2014, sales at TaylorMade-adidas Golf dropped by 29% and operating profits were €150 million below 2013 levels.
Adidas is restructuring the golf unit to the new reality: It is shutting down a factory in Texas, reducing workforce in the segment by 15% and focusing on excess inventory clean-up. This should stabilize the business, but at reduced profit levels; and since the segment represented 9% of sales in 2013, the structural decline of the industry will continue to represent a strategic challenge.
What to look out for: Will Adidas be able to stop the bleeding in the golf segment? If yes, how much sales and profit bounce will this mean?
Business in Russia is expected to suffer further
Russian consumer sentiment — partly due to the geopolitical tensions — is negatively impacted by multiple factors. The Russian ruble is falling, interest rates are rising, and the economy is suffering from a drop in oil prices. Rising nationalism makes business even more difficult for Western companies. All of these elements have sharply deteriorated in recent months and there is no reason to assume that the situation will get any better in 2015.
Adidas — which has a strong network of 1,100 stores in the country — is responding by reducing its footprint. This should help with costs and cash flow; however, the pressures on the top line and margin are expected to remain.
The Russian market will probably bounce back in the mid- or long-term. At that point, but not before, Adidas will be able to benefit again from its strong position.
What to look out for: Will Adidas further reduce its footprint? How will consumer sentiment develop?
Currency developments are unpredictable
The depreciation of currencies in Asia, Latin America and Russia caused significant headwinds in 2014. What will the impact be in 2015? I have no idea — and I would be cautious about anyone telling me they do.
Companies can reduce the short-term uncertainty from currency fluctuations through hedging activities. Some are even able to reduce the long-term impact by matching the amount of cash inflows with cash outflows for each currency (so-called “natural hedging”). However, no company will be able to fully eliminate the impact of currency fluctuation from their financial results.
Adidas is no exception. With its products sold globally, the company will always be impacted by currency developments — sometimes positively, sometimes negatively.
In 2015, Adidas should be able to stabilize some of the areas that plagued it last year. However, neither the golf business nor Russia is expected to bounce back to earlier levels of profitability. Furthermore, it’s unclear whether Adidas will be able to stop losing market share in its core markets — which, remains its biggest strategic challenge.
The company is updating its strategic outlook in March 2015. It will be interesting to see what their plans are for the coming years.
The above clearly shows the challenges in front of Adidas. However, a good company under pressure, with a beaten down stock, could still be a good investment. So stay tuned to fool.de because next we will be tackling whether investors should buy or sell Adidas shares.
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Miklos Szekely does not own any of the stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour.