Adidas: Stumbling over Reebok?
Adidas Group's motto is "Impossible Is Nothing." But since the No. 2 sporting-goods maker announced in August, 2005, that it would snap up rival Reebok for $3.8 billion to gain a firmer footing in the U.S. and challenge market leader Nike (NKE), the company has yet to prove that the combo will work.
Even Adidas (ADDDY) seems to be admitting it's a slog. As the Herzogenaurach (Germany) company announced on Mar. 7 that profits increased 26%, to $636.6 million, in 2006, it admitted that Reebok "didn't deliver the earnings accretion it had anticipated." Adidas singled out Reebok as the primary cause for a 3.6-percentage-point dip in the group's gross margin, to 44.6%. Reebok brand sales fell 9% last year, to $3.3 billion, while sales of other units, including Adidas shoes and apparel and TaylorMade-Adidas Golf equipment, rose 14%, to $10 billion.
True to its mantra, however, Adidas says it's racing flat-out to make its tie-up with Reebok a winner. The company has closed factories in Indonesia and is repositioning the Reebok brand to widen its appeal. "Our focus this year will be on getting Reebok back onto a growth track," Adidas Chief Executive Herbert Hainer said in a statement. "It's going to take time, but we're moving in the right direction."
As part of that move, the company is ramping up its sales and marketing efforts. It's reducing reliance on low-traffic, shopping-mall-based outlets and placing Reebok apparel and footwear in higher-end department stores and larger sporting-goods ventures. Adidas has also enlisted star NFL quarterback and Super Bowl MVP Peyton Manning, actress Scarlett Johansson, and other famous faces to help launch a series of new products planned in the second quarter.
The company says it expects these efforts to increase sales of the Reebok brand this year in the "low-single-digit" range. Adidas expects its gross margin in 2007 to be between 45% and 47%, thanks to "improvements in all three brand segments." For the group, the company expects sales in 2007 to grow in the "mid-single-digit" range.
Promising stuff, but a successful result isn't a surefire bet. Consider Adidas' ill-fated purchase of the French-owned Salomon group a decade ago, which brought ski and golf gear into its stable of offerings. After numerous attempts to make the match work, Adidas jettisoned the Salomon ski business in October, 2005. The company made the right move by keeping Salomon's TaylorMade golf brand: Last year, sales of TaylorMade-Adidas Golf wares rose 22%, better growth than for either the Adidas or Reebok brands.
While many may still question the cultural fit of the American-German corporate tie-up, the Adidas-Reebok combo offers benefits the Salomon merger never could. For example, Reebok's products complement Adidas' traditional strength in sports such as soccer and give the German company some big-name basketball endorsements from the likes of Allen Iverson.
Reebok is also strong in women's and lifestyle fashions and has a strong nationwide distribution network. "Reebok is still a drag overall, but it seems management has a good strategy to get it back on track and the plan isn't out of reach," says David Meyer, an analyst as Susquehanna Finance in New York. Although Adidas this year will gain some synergies on the cost side, Meyer expects the first real benefits from the merger to come through next year. "That's a long time for investors [to wait]," he notes.
Archrival Nike sure hasn't waited for Adidas to score with Reebok. The Beaverton (Ore.) sneaker Goliath recently offered the German Soccer Federation nearly $700 million to sponsor its national soccer team for 10 years—an attempt to rattle Adidas, the longtime sponsor of the German team. Nike CEO Mark Parker upped the boldness quotient again on Feb. 6, when he outlined an ambitious plan to increase revenues by $8 billion in five years, to $23 billion. What's more, Nike executives have publicly stated they want to be the world's dominant soccer supplier by 2010 and have introduced a series of innovative moves, such as a partnership with Apple (AAPL) to connect Nike runners with iTunes.
Nike also has been trying to boost its presence in the low-cost sneaker market and among female shoppers. It recently featured soccer stars Brandi Chastain and Hope Solo, as well as world-renowned volleyball player Logan Tom, at a New York press event to help launch Tailwind, a women's performance footwear and accessories brand that will be sold exclusively at Payless ShoeSource (PSS).
Adidas may have upped the ante with its purchase of Reebok, but with shares down 10% since the merger was announced and Nike not standing still, the sportswear maker still has to show that the deal has legs.