Millennials love retro sneakers. They are not so keen on golf.
Adidas AG said late Wednesday that it had agreed to sell its golf equipment businesses TaylorMade, Adams Golf and Ashworth to U.S. private equity group KPS Capital Partners LP for $425 million. It is retaining its main clothing and footwear arm catering to the sport, Adidas Golf, not to mention that it will continue to make the hipsters' favorite Stan Smith sneaker.
The price will be paid half in cash, and is towards the lower end of analyst expectations. There will also be about 100 million euros of losses from the sale.
The shares are down slightly, but really, investors should not be overly concerned.
Firstly, the company's planned sale of its CCM hockey unit is yet to be concluded. John Guy, analyst at Mainfirst Bank AG, estimates that the company should reap about 600 million euros ($652.2 million) from backing away from both sports. Eliminating golf equipment -- which generated about 500 million euros of sales last year but still posted a loss -- should also be positive for margins, he noted.
Secondly, the golf units being offloaded are a distraction that Adidas can well do without. They're plagued by the decline in popularity in the sport, particularly among younger people. Their disposal frees the company to concentrate on its Adidas and Reebok brands, which both have bright futures, as Gadfly argued last week.
But the shares are up 58 percent over the past year, and trade at a forward price earnings ratio of about 27 times, a premium to Nike and well above Adidas's average over the past five years.
As Gadfly has argued, Adidas needs to keep up the momentum of sales growth and margin expansion to justify its stellar rating.
First-quarter results last week were reassuring. Adidas also said on Wednesday that it still expected to increase full-year net income from continuing operations by 18-20 percent, while its long-term target of net sales of 25-27 billion euros and an operating margin of 11 percent by 2020 remained intact.
But the risks are rising, with annual comparisons becoming progressively tougher, a strong dollar, and the possibility that shoppers who have snapped up Adidas's retro styles may start to look elsewhere.
Adidas's heady valuation means it can't afford to slip in its Superstar sneakers. At least the sale of the golf equipment businesses means one trip hazard has been avoided.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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