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Adidas Group, the parent company of adidas, Reebok and TaylorMade Golf, is the world's second largest maker of athletic footwear, apparel and equipment by sales (2009) after Nike (NKE). ^[1] Although the company makes most of its money by selling at wholesale rates to large retailers like Dick's Sporting Goods (DKS) , Foot Locker (FL) , and Sports Authority, adidas and Reebok have sought to increase profit margins by increasing retail sales as a percentage of total sales.^[2]

Within the last four years, the most critical issue facing adidas is its effort to turn around Reebok. The company bought Reebok for $3.8 billion in 2006, a move criticized by many analysts as being too expensive. The company is working to change customers' perception Reebok from that of a discount shoe brand to a premium brand. As part of these efforts, the company has switched the Reebok wholesale model from bulk pre-order to pay as you go. Wholesale customers like Footlocker now order Reebok shoes as they need them rather than ordering them in bulk. This makes it less likely that larger retailers will discount Reebok shoes in order to clear their inventories.

Adidas is, at its core, an international company with only 23.5% of its 2008 sales coming from North America.^[3] Moreover, it is rapidly expanding its presence in emerging markets like Asia and Latin America, which combined account for 33.1% of net sales.^[3] The company's "game plan" is to increase its exposure to emerging markets to over 35% of sales. ^[4] Because it targets the wealthiest segments of the market the company leads its competitors in sales in Japan, Korea, India, Thailand, Indonesia, and New Zealand; sales growth in its core emerging markets in Latin America and Asia have has topped 24% in the last several years.^[5] By 2010, management expects China to be its second biggest market.^[6].

2009 Third Quarter Results

In the third quarter of 2009, Adidas made $2.89 billion in net revenue, a 6.3% decrease from the year before. Its net income was $213 million, a decrease of 29.8% from the year before.^[7] Adidas attributed the fall to declining consumer confidence and increasing unemployment in many of the major markets in which the company operates.^[8] Further, the company expects sales to decline throughout fiscal 2009 and for earnings per share to decrease and for gross margin to decline at a level of between 45-45.5%.^[9]

Company Overview

Adidas Group generates revenue by selling its products to retail stores or directly to the customer via one of the brands' concept stores, factory outlets, concession corners, or online stores. Of this revenue, 46% is from footwear, 42% from apparel, and 12% from hardware. ^[10] In 2008 the company had €10.8 billion in revenue, up from €10.3 billion in 2007^[11] despite a drop of 14% in North American sales^[2]. Gross margin increased in 2008 by 1.3% to 48.7%, driven by own-retail expansion, emerging market sales, and a favorable product mix. ^[11]

While Europe continues to be this company's stronghold with 43% of overall sales,^[12] the developing economies in Asia (China, other emerging markets) and Latin America continued to benefit the adidas Group in the form of strong currency-neutral sales growth. In 2008, the adidas Group saw growth of 18% in Asia and 36% in Latin America, while North American sales fell 14%. ^[12]

adidas 2008 sales by segment and region^[12]

Business Segments

The Adidas Group organizes its business segments by brand:

• adidas (72.5% of 2008 net sales) ^[3]: The adidas brand is the ultimate profit driver for the adidas Group, accounting for 72.5% of all group sales in 2008.^[3] The brand, which was restructured during 2007, now consists of 2 segments: Sports Performance (80% of brand sales in 2008) and Sports Style (20%).^[13] The adidas segment has seen its revenues grow to €7.8 billion in 2008 from €7.1 billion in 2007.^[13] This brand, which employs a premium-price strategy, is the root of the group's strength in Europe, with the brand generating 50% of all its sales there in 2008. ^[2] In addition to selling its products to retailers, the brand has 1332 own-retail stores worldwide, included 329 new stores opened in 2008.^[2]

• Reebok (19.9% of 2008 net sales) ^[3]: Reebok has three different divisions: Reebok (80% of brand revenue in 2008), Reebok-CCM Hockey (9%), and Rockport (11%).^[14] The brand also contributes to the group's strength in Europe, where it makes 32% of its sales.^[14] Since being acquired in 2006, the group has been trying to reposition the Reebok brand image. Before its acquisition, Reebok had employed excessive discounting in an effort to drive volume sales, but the adidas Group has been raising prices. The group is also trying to position the brand as a specialist in the women's and running markets. Success has been limited. Reebok's sales have fallen from €2.33 billion in 2007 to €2.15 billion in 2008 and the segment recorded a loss of €7 million in 2008, from a profit of €109 million the year prior, due to clearance sales in the second half of the year and increased operating expenses.^[15] Overall, Reebok's brand image is still diluted because of its previously low prices. Most analysts believe that a Reebok integration and shift in brand image are significant opportunities for the adidas Group.

• TaylorMade-adidas Golf (7.5% of 2008 net sales) ^[3]: TaylorMade-adidas Golf is comprised of TaylorMade (clubs and balls) and adidas Golf, (footwear and apparel). ^[16] Golf clubs and accessories accounted for 71% of the segment's sales in 2008, with the remaining 29% from footwear and apparel sales.^[17] TaylorMade-adidas Golf generated $812 million in 2008 net sales^[17], 50% of which came from the North American market.^[18] Revenues over the last three years have fluctuated. This can partly be attributed to the divestiture of the Greg Norman Collection (GNC) in November 2006. In 2006, GNC contributed $79 million of sales to TaylorMade-adidas Golf.^[19]

Trends and Forces

A successful repositioning of Reebok's brand image will boost the group's bottom line

If a successful repositioning is completed, the adidas Group will benefit in two ways. First, the group expects to benefit from synergy, which simply refers to financial benefits that a corporation expects to gain when it merges with or acquires another company.^[20] For example, projected 2008 benefits include over $390 million in additional revenue and $275 million in cost savings.^[21] Secondly, an integrated and repositioned Reebok will help increase profitability. However, in order to do this, the brand will have to overcome a diluted image due to the company's excessive discounting of its products before being bought. Additionally, Reebok still has significant exposure to Foot Locker (FL), which has a large amount of Reebok-related inventory. adidas Group is doing less business with the retailer as a result of its new supply strategy. Now, instead of selling in bulk, Reebok will use a "pay as you go" method, which will allow Footlocker to work through its excess inventory. Essentially, this stock is, in part, a bet on the turnaround of Reebok.

adidas group has relatively low US exposure and aggressive growth strategies in emerging markets

In 2008, the adidas Group saw overall sales in North America decrease by 14% in conjunction with the United States' economic downturn.^[12] However, adidas has relatively low US exposure overall, with 24% of 2008 sales coming from all of North America.^[12] In contrast, adidas Group's continuing expansion into the growing economies in Asia and Latin America led to significant sales growth in those regions. The company aims to have emerging markets represent over 35% of global sales. ^[4] The group has captured a majority of the premium athletic apparel market in several countries including India and Japan (it is tied with Nike in China).^[22] Latin America has had sales grow 53% and 38% the past two years.^[23][24] The company's strategy in these emerging markets is to target the wealthiest segments, establishing the group's output as premium products in the industry.

Competition

For comparison purposes, adidas Group generated €10.8 billion in revenue in 2008^[11]

• Nike (NKE): 2008 revenue - $18.6 billion.^[25] Nike competes with the adidas group on all fronts: footwear, apparel, accessories, and equipment and it has the most sales in the sporting goods industry. As mentioned, Nike has a sizable advantage when it comes to economies of scale. adidas Group is second only to this company in terms of sales and market share.

• Puma AG: 2008 revenue - €2.5 billion.^[26] Puma AG is a Germany-based competitor in the sporting goods market, designing and producing sports footwear, apparel, accessories, and equipment. It operates through two brands, Puma and Tretorn.^[27]

• Skechers U.S.A. (SKX): 2008 revenue - $1.44 billion.^[28] Skechers designs, markets, and sells contemporary footwear. It does so under a Skechers brand, as well as 8 other unique brands targeted at specific audiences. Skechers sells its products through traditional retail channels; it also owns over 180 retail stores worldwide. ^[29]

• Columbia Sportswear Company (COLM) 2008 revenue - $1.32 billion.^[30] Columbia Sportswear designs annk;nskdnvknssvbsd sells active outdoor apparel, footwear, accessories, and equipment. In 2007, Columbia distributed its products to over 14,000 retailers worldwide.^[31]

• Callaway Golf Company (ELY): 2008 revenue - $1.1 billion.^[32] Callaway Golf Company competes with TaylorMade-adidas Golf (2007 revenues of $1.1 billion) in the golf market. It designs and sells clubs and balls through its brands: Callaway Golf, Top-Flite, Ben Hogan, and Odyssey.^[33]

• Under Armour (UA): 2008 revenue - $0.725 billion.^[34] Under Armor is a fairly new company (incorporated in 1996) that designs and sells sports performance footwear, apparel, and accessories. Its products, which are designed with microfibers intended to wick away perspiration, extend across the sporting goods, outdoor, and active lifestyle markets. ^[35] Under Armor's sales are growing rapidly, with a 5 year growth rate of 65.03% (industry average is 16%). ^[36]

The two pie charts below outline the global athletic footwear and apparel markets. The combination of the Reebok and adidas brands gives the adidas Group roughly 22% of the global footwear market, and roughly 8% of the apparel market.

Commerzbank Equity Research^[37]

Commerzbank Equity Research^[38]

References

1. ↑ Shoesfact, "Adidas"
2. ↑ ^{2.0 2.1 2.2 2.3} Adidas Group Annual Report 2008, Business Performance by Segment, page 100
3. ↑ ^{3.0 3.1 3.2 3.3 3.4 3.5} Adidas Group segment information
4. ↑ ^{4.0 4.1} Adidas Annual Report 2008, page 6
5. ↑ adidas Group Online Annual Report 2007, "Group Strategy"
6. ↑ Michael Geiger, "Adidas AG," Equity Research, Credit Suisse, 04 September 2007.
7. ↑ 2009 Q3 Results
8. ↑ Google News: Adidas Q3 net income falls 30 pct
9. ↑ Reuters: ADDYY Key Developments
10. ↑ adidas Group Online Annual Report 2007, "Income Statement"
11. ↑ ^{11.0 11.1 11.2} Adidas Group 2008 Annual Report, Group Business Performance, page 80
12. ↑ ^{12.0 12.1 12.2 12.3 12.4} Adidas Group Annual Report 2008, Group Business Performance, page 83
13. ↑ ^{13.0 13.1} Adidas Group 2008 Annual Report, Business Performance by Segment, page 99
14. ↑ ^{14.0 14.1} Adidas Group 2008 Annual Report, Business Performance by Segment, page 103
15. ↑ Adidas Group 2008 Annual Report, Business Performance by Segment, page 102
16. ↑ adidas Group Online Annual Report 2007, "TaylorMade-adidas Golf Strategy"
17. ↑ ^{17.0 17.1} Adidas Group 2008 Annual Report, Business Performance by Segment, page 105
18. ↑ Adidas Group 2008 Annual Report, Business Performance by Segment, page 106
19. ↑ adidas Group Online Annual Report 2007, "TaylorMade-adidas Golf Business Peformance"
20. ↑ Wikipedia,"Synergy"
21. ↑ adidas Group Online Annual Report 2007,"Outlook"
22. ↑ adidas Group Online Annual Report 2007, "Group Strategy"
23. ↑ adidas Group Online Annual Report 2006, "Income Statement"
24. ↑ adidas Group Online Annual Report 2007,"Income Statement"
25. ↑ Nike Press Release, "Fiscal Year Revenue Up 14 Percent, Earnings Per Share Up 28 Percent Worldwide Futures Orders Up 11 Percent"
26. ↑ Puma Website, "About Puma"
27. ↑ Google Finance, "Puma AG Rudolf Dassler Sport"
28. ↑ Yahoo Finance, "Skechers USA"
29. ↑ Google Finance "Skechers USA, Inc."
30. ↑ Columbia Sportswear Press Release
31. ↑ Google Finance, "Columbia Sportswear Company"
32. ↑ Callaway Golf Press Release
33. ↑ Google Finance, "Callaway Golf Company"
34. ↑ Google Finance UA
35. ↑ Rueters.com, "Under Armor Full Description"
36. ↑ Reuters.com, "Under Armor Ratios"
37. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008
38. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008