Camissa Asset Management Article
Adidas will earn back its stripes

Adidas will earn back its stripes

Dirk van Vlaanderen



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In 1919, German brothers Rudolf and Adolph (“Adi”) Dassler founded a shoe manufacturing company, which pioneered early innovation and design in the nascent sports footwear market. Following a feud between the brothers in 1948, they separated and created two ubiquitous sports brands – Adidas by Adi and Puma by Rudolph. Today, Adidas is the second largest global sportswear brand after Nike. We discuss the global sportswear market and how Adidas is well placed to benefit as one of the leaders.

The chart below maps the evolution of global athletic footwear market shares, dominated by Adidas and Nike since the 1990s. Adidas has evolved from its athletic footwear roots by utilising the brand to broaden its range beyond footwear (56% of revenue) to apparel products and other accessories (44% of revenue).

Adidas’ sportswear (or performance) products are branded with the iconic three stripes logo, while its casual offering uses the “Adidas Originals” brand logo (below bottom right). Adidas has successfully collaborated with celebrities to create more fashion-focused products, such as its partnerships with Stella McCartney (ongoing since 2015) and US rapper, Ye, that was very successful until they parted ways in late 2022.

A fitter future
The global sportswear industry generated revenues of around $400 billion in 2022 and has shown stellar growth over the last decade, averaging 9% per annum. This is the result of healthy demand in developed markets, particularly North America (accounts for over 45% of the global market), and robust growth from emerging markets, predominantly China. The growth outlook for sportswear over the next decade remains strong, with growth rates expected to continue at similarly high levels supported by an increased focus on health and wellness as the world leaves the COVID pandemic behind.

China is a key growth market
With China making up 17% of the total market, their sportswear spend outlook is bright due to:
o Government support: The Chinese government launched an updated national fitness plan in 2021, which introduced a wide range of policies that are supportive of an increase in the general awareness of fitness, sporting events and sports participation. These include the provision of more fitness facilities, integration sports and the introduction of fitness training at schools.
o Favourable demographics: A significant increase in incomes in urban households means increased spending power and millions of new consumers for aspirational and premium brands, including sportswear.

Adidas and Nike are the two dominant international sportswear brands in China, with around 17% and 20% market shares respectively. They are therefore well placed to benefit from the high Chinese growth outlook.

Getting closer to the consumer
Traditionally, global sportswear manufacturers have relied on retailers to promote and distribute their brands and products to consumers. While this wholesale strategy allowed the brands to reach consumers without having to invest in their own store network – a low-capital, high-return expansion approach – the downside is that the brands do not own the consumer relationship and accept lower margins.

There is now a big trend shift from the major sportswear manufacturers to a “direct to consumer” (DTC) strategy. These companies are rolling out their own stores (particularly in key major cities) and investing significantly in their online retail platforms. This allows the manufacturers to capture the full retail margin and to have a direct line of sight into consumer data and buying trends. It also gives the brand owners a better understanding of consumer needs and the opportunity to communicate with consumers directly. Indicated below (left), Nike’s huge DTC focus in recent years has proved to be a successful strategy (42% of sales from DTC in 2022, up from 32% in 2019) closely followed by Adidas, at 39% of sales in DTC in 2022. Adidas targets this to increase to 50% by 2025.

Adidas excels
Adidas is a well-diversified global business with a long track record as a leader in the athleisure apparel industry. It has generated 8% revenue growth per annum over the past 20 years alongside good average operating profit margins of 8.5% (charted below).

The business generated 37% of sales from Europe, 22% from China and 24% from North America in 2021 (above right). Adidas’ very successful five years (since 2015) leading up to the COVID pandemic was mostly due to solid growth from China and the US. Historically, China has been a much larger profit generator relative to its sales (accounted for 34% of group profit in 2019) but profits have been disproportionately negatively impacted by the severe Chinese COVID lockdowns.

Despite the maturity of the US athleisure market, Adidas has a relatively low market share and was, since 2015, able to grow well ahead of the market and gain market share – doubling its US revenues.

Adidas supplemented their strong topline growth with excellent cost control, resulting in significant improvements in group profitability in this period to 2019 (operating profit margins reached 11%). Earnings per share tripled from 3.4 euros in 2015 to 9.7 euros in 2019.

Recovering post-pandemic
The pandemic was a disruptive period for Adidas as retail outlets closed in most of their major markets. While many markets gradually reopened, the ongoing draconian zero-COVID policy adopted by China (Adidas’ largest profit contributor) has had a significantly negative impact on the business over the past three years. The outlook for the industry and Adidas in this key market should improve materially with the easing of these restrictions.

Positively, the pandemic has fueled strong demand for athleisure apparel given the resultant increased focus on health and wellness. The disruption to global supply chains from the pandemic, particularly COVID-induced factory closures in their key manufacturing country, Vietnam, hampered sportswear companies from timeously restocking their stores.

More recently, the marked increase in freight costs and the strength of the US dollar has resulted in high input-cost inflation for athleisure companies. The meaningful price increases required at a time when consumer discretionary incomes in key markets are constrained cause weakness in the sales of merchandise. Athleisure companies therefore sit with excess inventory that will need to be cleared through discounting, which is impacting profits negatively in the short term.

In addition, Adidas’s recent decision (December 2022) to terminate their relationship with the well-known US rapper, Ye, will mean a large profit hit for the business. This partnership produced products under the “Yeezy” brand, amounting to 8% of group sales at higher-than-average margins.

As a consequence of all this, after a period of very strong growth pre-COVID, Adidas faces some tough industry and company-specific challenges that will result in 2023 being a record year for all the wrong reasons. This does, however, also present the opportunity to reset and rebuild the business. Newly appointed CEO, Bjørn Gulden, has done a fantastic job at reviving rival, Puma. We expect he will bring a fresh perspective to Adidas’ business strategy to reinvigorate this iconic, global brand.

Refueled and ready for the marathon
We have long been admirers of Adidas given its solid positioning in the high-growth global athleisure market and its exceptional economic results, but the share has generally been too expensive. The recent earnings disappointments and subsequent derating of the share have given us an opportunity to add this great business to our global client portfolios at a very attractive price.

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