adidas: Yeezy Drama offers long-term opportunity (OTCQX:ADDYY)

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jonathan leibson

Overview

adidas (OTCQX:ADDYY) has come as a bitter surprise to investors, with shares down 65% year-over-year, as the company has faced declining demand as a result of a challenging macro environment and its latest dilemma around Kanye West. based in Germany The company designs, develops and markets a range of fashion products for the athletic and sports lifestyle. With more than 2,500 owned retail stores, adidas is the second largest sportswear company in the world.

when adidas inserted its ‘Creating the New’ growth strategy in 2015 over the next 5 years, shareholders saw their investment grow by over 300% as the company reported record sales and earnings. Fast-forward, adidas has given up nearly all of its earnings and faces significant challenges as a result of weaker economic prospects in its biggest markets. However, adidas’ current low valuation and long-term outlook could reward patient investors.

deep value

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After falling 70% from all-time highs, adidas has now become a huge value stock, trading at 8x annualized earnings. While adidas has never traded cheap, the company is now trading at a 7-year low, similar to 2015. While there are many stocks trading at a P/E ratio of 8x or even much less, the leading companies in Sportswear is typically trading at 20 times earnings and more. For example, Nike (NKE) and Lululemon Athletica (LULU) trade at a P/E of 25x and 37x, respectively. This is even after the two companies sold more than 40% last year. In particular, Nike has never traded below 15 times earnings in the last 10 years, reflecting its competitive advantages related to its brand equity. Certainly, adidas deserves a valuation premium too, considering its size and reach in the sportswear industry.

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The company also has a healthy balance sheet with $6.8 billion in equity compared to just $2.6 billion in long-term debt. As a result, its debt-to-equity ratio is now trading at levels similar to those of 2010-2015. With its strong balance sheet, adidas should be able to weather even a severe and long-lasting recession.

In adidas Preliminary Q3 Profits, the company reported 6.4 billion euros, 11% more than last year and 4% more in constant currency terms. Excluding Greater China, non-FX revenue grew in double digits as a result of Covid-19 related restrictions. Overall, the company reported net income of €179 million, compared to €479 million in the third quarter of 2021. The drop in net income reflects one-time costs of almost €300 million related to its business in Russia and high inventory levels in Greater China, impacting net income of up to €500 million for the year. The company also expects to increase its marketing spending in the fourth quarter to offset declining demand in Western Europe. These measures are also likely to affect profitability. However, adidas sees headwinds from the 2022 FIFA World Cup in the fourth quarter, which will likely boost sales throughout 2023.

The long-term opportunity

In early 2021, adidas unveiled its ‘Own the Game’ growth strategy through 2025. The company’s strategy will focus on strengthening the brand, increasing the consumer experience and sustainability. According to the reportAbout 95% of your sales growth should come from your five strategic categories, which include Soccer, Running, Training, Outdoors, and Lifestyle. It also aims to grow its e-commerce business to $9 billion by 2025, focusing on greater China and Africa to drive further e-commerce growth. By 2025, adidas expects to invest more than $1 billion to drive its digital transformation.

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adidas growth strategy

Adidas

adidas is also driving to increase its sustainability efforts. The company aims to make nine out of ten products from sustainable materials by 2025. It will expand its production using fully recyclable materials and reduce its total CO2 footprint by 15% by 2025. adidas is also focusing on innovating its products through the integration of data and technology. on your products. For example, the adidas running app introduced several new features that allowed users to train more effectively. Adidas can also be expected to continue expanding its accessories portfolio to expand its target market.

adidas marketing strategy

Web content development

Despite losing a major sponsorship, adidas’ overall marketing strategy shouldn’t suffer too much. The company positions itself as a leading global sports brand by engaging with its customers and creating an emotional connection with the brand. While adidas may have lost Kanye West, adidas still harbors notable endorsements with celebrities like Beyonce, David Beckham, James Harden, and Lionel Messi. By partnering with top athletes, adidas has built a leading market share in major sports. For example, in football, 38% of the best European footballers are wearing adidas footwear, while 52% use Nike. That means Nike and adidas control almost the entire soccer shoe supply, while Puma accounts for just 8%. In North America, things look different, with Nike controller its local market through its popular Jordan brand. However, adidas will continue its efforts to gain market share in the region and expand its brand beyond football.

conclusion

The termination of the partnership with Kanye West certainly hurt adidas. After all, the company’s iconic Yeezy was a bestseller and a constant growth engine for its next generation of consumers. However, adidas’ business is about more than just sneakers and it too will survive this setback. adidas’ leading market share in sportswear is backed by a strong brand with powerful sponsorships. While adidas faces significant near-term uncertainties as a result of economic challenges weighing on demand and profit margins, adidas could come back stronger than ever in the future.

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