Narrow-Moat Adidas Is Dealing with the Pandemic and Other Challenges, but Its Brand Power Remains

Business Strategy and Outlook Adidas is a leader in athletic and “athleisure” apparel with a narrow-moat rating based on an intangible brand asset. While sales declined in 2020 due to COVID-19 and the recovery has been rocky, Adidas is poised to meet many of the goals of its five-year Own the Game plan. For example, its e-commerce, now available in nearly 60 countries, generated EUR 3.9 billion in sales in 2021, accounting for 19% of its total. Adidas expects its e-commerce to rise to EUR 8 billion-EUR 9 billion in 2025, which is achievable. Further, the firm’s new sportswear offerings and plans to improve its position in key categories like running and outdoor will be successful. However, because of heavy competition and pandemic-related disruption, the estimates are below or at the low end of Adidas’ five-year targets of compound average sales growth of 8%-10%, average net income growth of 16%-18%, and 2025 gross and operating margins of 53%-55% and12%-14%, respectively.

There is a continuing growth for Adidas in North America, which accounted for 24% of 2021 sales. Although impacted by the pandemic and supply issues, the firm has overcome weakness in U.S. physical retail in the last few years by introducing innovative and fashionable products. It is believed it has gained North America market share through fashion products and performance-sports innovations, and these products will allow it to maintain share even if the recent athleisure and retro trends, which have helped the brand, cool off. Although it has recently had difficulties in the country, it is believed that Adidas has a strong opportunity in the athletic apparel market in China, now the second-largest in the world after the U.S. The firm’s sponsorship of international football (soccer) puts it in position to benefit from heavy investment in the sport in China. Its sales in Greater China will rise to EUR 6.1 billion in 2025 from EUR 4.6 billion in 2021.

Financial Strength

Adidas is in good financial shape coming out of the COVID-19 crisis. After having paid down EUR 600 million in debt in 2021 and closing its EUR 2.1 billion Reebok sale, it closed March 2022 in a net cash position with EUR 3.1 billion in cash and EUR 2.5 billion in long-term debt. Adidas recently closed its revolving credit facility with a state-owned bank in Germany and replaced it with a EUR 1.5 billion facility with a group of banks. Unlike the prior facility, this new credit line allows the firm to pay its typical annual dividend. The firm does have significant commitments for marketing and overhead operating expenses which totalled EUR 2.5 billion and EUR 6.3 billion, respectively, in 2021. Adidas has a publicly stated target ratio of net debt/EBITDA of less than 2.0 and has been well below this level for at least a decade. Adidas will return significant cash to shareholders. In 2021, the firm generated EUR 2.4 billion in free cash flow/equity (11% of sales), repurchased about EUR 1 billion worth of stock, and paid about EUR 600 million in dividends. Adidas will generate about EUR 12.5 billion in cumulative free cash flow/equity over the next five years and use this to issue EUR 3.7 billion in dividends and repurchase EUR 7.1 billion in shares. It is believed that an average dividend payout ratio of 32% in this period, within the stated target range of 30% to 50%. However, it is believed Adidas reduces shareholder value if it repurchases shares above the fair value estimate, as has typically been the case over the past few years.

Bulls Say’s

Adidas’ e-commerce gives the company greater control over its brand and pricing. The firm has increased its digital capabilities and cut wholesale accounts. Adidas’ e-commerce sales were nearly EUR 4 billion in 2021, or about 19% of total sales.
Adidas’ partnerships with celebrities like Beyonce provide an edge over other athletic apparel firms. The firm has greatly expanded its Yeezy brand with no apparent loss of consumer interest.
Adidas has about 15% market share in China, the fastest-growing athletic apparel market, and will benefit from the growth of athletics in the country.

Company Profile

Adidas designs, develops, produces, and markets athletic and leisure apparel, footwear, accessories, and sports equipment. Under its eponymous brand, it produces apparel for competitive athletics, casual activewear, and casual fashion. Its fashion brands include Yeezy, Ivy Park, and Y-3. Adidas sells its products in more than 160 countries through more than 2,100 owned retail stores, 15,000 mono-branded franchise stores, 150,000 wholesale doors, and more than 50 e-commerce sites. The company was founded in 1949 in Germany.

(Source: MorningStar)

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