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Adidas AG (ADDYY)Stock (Apparel - Footwear & Accessories Industry, Consumer Products Industry, Fashion Industry Industry, Retail Industry)
 The most critical issue facing adidas is its effort to turn around Reebok. The company bought Reebok for $3.8 billion 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 30% of its 2007 sales coming from North America. Moreover, it is rapidly expanding its presence in emerging markets like Asia and Latin America. 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.[3] By 2010, management expects China to be its second biggest market.[4].
[edit] Company OverviewAdidas 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. [5] In 2007 the company had €10.3 billion in revenue ($13.7 billion based on the average 2007 exchange rate), which was a 7% currency-neutral increase over 2006's revenues of €10.084 billion ($12.557 billion). While operating margin has dropped overall since 2005, this can be attributed to the costs associated with integrating Reebok, which has resulted in extra operating expenses of over $30 million during the past two years.[6] While Europe continues to be this company's stronghold with 43% of overall sales, 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 2007, the adidas Group saw overall growth of 18% in Asia and 38% in Latin America, compared to 35% and 53%, respectively, the year before.[7][8]   
[edit] adidasThe adidas brand is the ultimate profit driver for the adidas Group, accounting for 69% of all group sales in 2007. The brand, which was restructured during 2007, now consists of 2 segments: Sports Performance (80% of brand sales) and Sports Style (20%). Over the past three years, adidas has seen its revenues grow from roughly $7 billion to over $9 billion in 2007. [12][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 2007. [14] In addition to selling its products to retailers, the brand has more than 1,000 own-retail stores worldwide.[15] In 2007, as a result of cost synergies from integrating Reebok and increased own-retail activities, the adidas brand was able to raise its gross margin to 47.4%, which helped drive operating profit up 17% to $1.26 billion. [edit] ReebokReebok accounted for 23% of the adidas Group sales in 2007. Reebok has three different divisions: Reebok (79% of brand revenue in 2007), Reebok-CCM Hockey (9%), and Rockport (12%). The brand also contributes to the group's strength in Europe, where it makes 32% of its sales.[16] Since being acquired in 2006, the group has been trying to reposition the Reebok brand image. Before being acquired, Reebok used excessive discounting, 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. Although Reebok's sales have fallen from $3.3 billion in 2005 to $3.19 billion in 2007, it has increased profitability. It has done so through an increase in own-retail stores by 150 in 2007, strong sales growth in emerging markets (24% in Asia and 32% in Latin America), and cost savings from synergies with the adidas Group. [17] Despite this increase in profitability, 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. [edit] TaylorMade-adidas GolfTaylorMade-adidas Golf is comprised of TaylorMade (clubs and balls) and adidas Golf, (footwear and apparel). [18] TaylorMade, the leading seller of metalwood golf clubs, accounted for 73% of sales in 2007, while adidas Golf made up the remaining 23%. TaylorMade-adidas Golf generated $1.1 billion in sales, 52% of which came from the North American market.[19] 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.[20] [edit] Trends and Forces[edit] A successful repositioning of Reebok's brand image will boost the group's bottom lineIf 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.[21] For example, projected 2008 benefits include over $390 million in additional revenue and $275 million in cost savings.[22] 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. [edit] adidas group has relatively low US exposure and aggressive growth strategies in emerging marketsIn 2007, the adidas Group saw overall sales in North America decrease by 2% in conjunction with the United States' economic downturn.[23] However, adidas has relatively low US exposure overall, with less than 30% of 2007 sales coming from all of North America. 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 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).[24] Latin America has had sales grow 53% and 38% the past two years.[25][26] 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. [edit] CompetitionFor comparison purposes, adidas Group generated roughly $13.7 billion in revenues in 2007.
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.  
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