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Adidas CEO to Bet on US For Ambitious Profit Targets

Much hinges on whether the German sportswear firm can keep up the momentum in the US market.
Source: Adidas Originals
By
  • Reuters

BERLIN, Germany — Adidas is expected to redouble its US efforts when Kaspar Rorsted spells out his strategy next week, potentially allowing the new CEO to set an ambitious profit margin target.

Much hinges on whether the German sportswear firm can keep up the momentum in the US market, where its Superstar sneaker was the top selling shoe in 2016, ahead of nine Nike styles, according to data from market intelligence firm NPD.

Top US sportswear retailers suggest that Adidas is doing a good job of lining up a pipeline of new styles, with Edward Stack, chief executive of Dicks Sporting Goods, saying that Adidas will get more space in his stores in 2017.

Dick Johnson, chief executive of Foot Locker , said last week that Adidas was leading growth of lifestyle running shoes, with its NMD, Boost, AlphaBounce, Tubular Shadow and Yeezy sneakers designed by singer Kanye West all selling well.

Helped by a big increase in marketing spending and the popularity of retro styles like Superstar, Adidas more than doubled its share of the US athletic footwear market to 10 percent in January, according to NPD, with Nike steady at 45 percent and Under Armour falling.

"The momentum is still there in the US. There is more room to grow," said Scilla Huang Sun, a fund manager at GAM, who has built up her position in Adidas and cut her stake in Nike.

German rival Puma has also been enjoying a revival in the US market, helped by a shift towards retro styles and away from basketball shoes which has hurt Under Armour and dampened Nike's success.

Although Adidas shares have almost tripled in two years as it has taken market share, that has yet to feed through into a significant improvement in its operating margin, which analysts expect to rise to 7.5 percent in 2016 from 6.3 percent in 2015, still half that of Nike, because it lags so much in the U.S.

"Scale and superior profitability go hand in hand," said Graham Renwick, an analyst at Exane BNP Paribas, who rates Adidas "outperform", predicting that Adidas can boost its margin by more than doubling its U.S. market share to 15 percent.

OPPORTUNITY TO SURPRISE

Rorsted, the former chief of consumer goods group Henkel who took over at Adidas in October, is expected to present highlights of his strategy review along with results on March 8, with more depth coming at an investor day on March 14.

He has already taken steps to overhaul the group's struggling Reebok fitness brand and has said that the US market and digitalisation will be top priorities as he seeks to build on a five-year plan launched in 2015 by his long-serving predecessor Herbert Hainer.

Investors hope Rorsted will give a formal medium-term target for the operating margin and detail concrete steps to help Adidas reach it. Hainer abandoned a long-standing goal to reach 11 percent in 2015 after Adidas sagged in the US market and was hit by a slowdown in Russia and its golf business.

Analysts expect Adidas to lift the EBIT margin to 9.4 percent by 2019, according to Thomson Reuters Smart Estimates.

"The new CEO is likely to strike an ambitious tone on margin," UBS analysts wrote in a note last week as they upgraded Adidas to "buy". "We see opportunity for Adidas to surprise on sales growth, gross margin and operating leverage."

Others are less bullish, noting that the shares are trading at 28 times forward earnings, a big premium to Nike at 22 times.

DZ Bank analyst Herbert Sturm, cut the stock to "sell" from "hold" in January, saying positive news expected at the investor day was already factored in.

Of the 35 analysts covering Adidas, 10 have a "buy" rating on the stock, 19 rate it "hold" and 6 have a "sell" or "strong sell" rating, according to Thomson Reuters data.

By Emma Thomasson; editor: Alexander Smith.

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