Is It Time to Worry About Adidas?

Adidas posted weak results in its first-quarter report as it suffered from currency volatility, increased competition from Nike, and slowing sales in North America.

May 16, 2014 at 10:15AM

Generally, earnings season wasn't too hard on footwear and athletic-apparel companies. A number of chains posted decent numbers, with some even beating expectations. Thus, it came as something of a surprise that Adidas (NASDAQOTH:ADDYY) posted such weak results in its first-quarter report. Several things weighed on the company's results, including emerging-market currency volatility, a weak sales performance in North America, and increasing competition from major rival Nike (NYSE:NKE). However, the company left its outlook unchanged. What can we expect from the German athletics giant?

Adidas F

Source: Adidas.

Weak golf business, currency headwinds
Adidas reported that its first-quarter profit plummeted 34% to around $283.2 million, while overall sales dipped by 6%. The business was hit particularly hard in North America, where its sales were down some 20%. Excluding currency effects, overall sales remained more or less flat for the period. Still, management did not seem too worried, as it held on to its forecast of high-single-digit sales growth for the group on a currency-neutral basis.

Much of the weakness in North America was attributed to the company's TaylorMade golf division, which accounts for nearly 9% of the group's sales. For the period, TaylorMade saw sales drop by 38% and management said this partly resulted from increased discounting. However, this poor performance also stemmed from a shrinking U.S. market for golf equipment, which Adidas has responded to by altering shipping and product-release schedules.

A strong euro and increased volatility in emerging-market currencies aren't helping, either. In particular, a weakened ruble weighed on the company's results. The company estimates that currency effects shaved some 50 million euros off its profits. Yet there were some bright spots. The company's own retail network saw sales rise an impressive 22% on a currency-neutral basis. Looking ahead, the upcoming World Cup in Brazil is expected to provide a huge boost to sales.

To some degree, analysts had expected a weak quarter from the world's second-largest sportswear maker, with first quarters generally showing slowdowns before major sporting events such as the World Cup. As such, the company's performance is expected to improve in the remainder of the year, but the company's profit and revenue goals are considered ambitious.

Nike running away with it?
What may be of more concern to Adidas' shareholders than a poor first quarter is the fact that Nike is increasing its market share at the expense of Adidas. Nike has increasingly been trying to poach Adidas' business on its home turf of Western Europe, and is also taking on the German company in the soccer market, where it is still dominant. According to recent data from research firm Euromonitor, Nike increased its lead in the global sportswear market to a market share of 15% in 2013, versus Adidas' 10.8% share.

Nike's market share increase is also visible in its quarterly results. In its most recent report, earnings per share were up to $0.76 from $0.73 in the year-ago quarter, beating the consensus by $0.04. Revenue also beat analysts' projections, rising 12.7% to $6.97 billion. However, Nike suffers from the same emerging-market currency headwinds as does Adidas, and uncertainty over the company's performance in China led the board to slightly lower its profit expectations for the fiscal year. Still, if Nike can manage to keep pinching market share from Adidas in its developed and emerging markets, it should be looking forward to a good year.

The bottom line
Adidas' most recent results point out that the company will be facing significant challenges going into the rest of the fiscal year. While this quarter's results were affected by currency volatility and certain scheduling changes, the rise of Nike in Adidas' backyard market of Western Europe and its soccer business are worrying. Nevertheless, Adidas has reiterated its full-year guidance, and is optimistic on its prospects going into the World Cup.

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