Less Kanye Drama, More Dad Dancing
Adidas AG needed to pull out some go-faster stripes, and it has delivered.
On Wednesday it announced an uptick in sales growth excluding currency movements in the final three months of 2017. A sluggish third quarter and fears that the company was getting more promotional had contributed to a 10 percent drop in the shares since the end of January. Now that this poor performance looks like an aberration -- and the company's planning a 3 billion-euro ($3.7 billion) buy-back -- the shares are up more than 8 percent.
Adidas has had a phenomenal run since Kasper Rorsted became CEO in Oct. 2016 -- just look at the buzz from its tie-up with Kanye West, and millennials snapping up its Stan Smith and Superstar styles. As Gadfly warned a year ago, fashion is notoriously fickle, and it was inevitable that the retro sneaker craze would start to wane.
Rorsted now has to navigate a phase of sales growth that's solid instead of spectacular. But given that Adidas guided to a still pretty decent rate of sales growth this year -- 10 percent excluding currency movements -- its discount to Nike Inc., its much-bigger rival, looks harsh. The CEO has a couple of tricks up the sleeve of his Adidas hoodie.
Though the group's profitability still lags that of Nike, it is making progress in narrowing that gap. In 2017, the operating margin rose to 9.8 percent, the highest level in a decade. On Wednesday Rorsted upgraded his margin target to a range of 11 percent to 11.5 percent by 2020.
This goal looks feasible. With Adidas taking a leaf out of fast-fashion retailers and getting its products to market more quickly, it should be able to react to consumer demand and reduce markdowns. A more favorable sourcing environment from a weaker dollar, together with efficiency gains, will also help.
And while Reebok remains underdeveloped, that could change. The Reebok Classic is popping up on the feet of fashion conscious millennials on both sides of the Atlantic. Indeed, the company said sales of the range rose by a figure in the double digits in 2017. What's more, Reebok's profitability is improving. While there is still much work to do at the division, that looks promising.
Adidas should resist any pressure from investors to sell the unit. It has the potential to be the next hot sneaker brand. Offloading it risks creating another muscular competitor on top of its traditional sporting apparel rivals, althleisure brands and the possibility of a revitalized Puma when it is spun off from Kering.
That should all bode well for this year. But as any athlete knows, there is always the risk of an unexpected slip or sprain. To close the discount to Nike, Rorsted must prove he is as adept at managing Adidas at a jog as a sprint.
--Gadfly's Elaine He helped with charts.
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