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This Brand Could Benefit From Nike's and Adidas' Missteps

By Steve Symington - Jul 3, 2019 at 4:57PM

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A smaller industry player could be poised to win, given embarrassing branding mistakes from its enormous competitors.

It's been a rough week for two of the world's largest athletic footwear and apparel leaders -- at least from a brand-rapport perspective. Take Adidas (ADDYY -0.71%), for example, which started the week with an embarrassing social media debacle.

A marketing campaign from the Germany-based company's U.K. Twitter account started innocently enough, prompting consumers to use the hashtag #DareToCreate to receive a reply with pictures of virtual Arsenal jerseys available for order featuring their Twitter handles. But racist users quickly capitalized on the system's automated responses, imprinting usernames such as @InnocentHitler and @GasAllJ*** on their jerseys.

Adidas promptly removed the offending tweets, and company representatives said they were "in contact with Twitter, the innovation provider, to establish the cause and ensure they continue to monitor and action violating content as a matter of urgency." But rather than truly accepting responsibility for the situation -- which was somewhat predictable given similar abuses on Twitter involving other companies in recent months -- many consumers saw the statement as an apparent attempt by Adidas to deflect the blame, however well-deserved, to the social media platform.

Frustrated investor sitting at computer.

IMAGE SOURCE: GETTY IMAGES

Then, Nike (NKE -0.36%) simultaneously stoked controversy just ahead of this week's July 4 holiday, pulling an American flag-themed shoe, dubbed the "Air Max 1 Quick Strike Fourth of July" edition, from circulation. In particular, multiple athletes, including NFL quarterback Colin Kaepernick, expressed concern that the shoe's "Betsy Ross flag" -- which features 13 stars in a circle representing America's original 13 colonies -- was a racist symbol being used by various hate groups to support white nationalism.

In this case, Nike reportedly began quietly removing the shoes from stores nearly two weeks ago but was only forced to publicly acknowledge the misstep after anonymous sources leaked the news a few days ago. Whether Nike made the right move at this point feels increasingly irrelevant. The company has found itself under fire from consumers who claim the company is unpatriotic for recalling the shoe, but other groups are criticizing Nike for naively using a divisive symbol in the first place.

Nike's Air Max Quick Strike Fourth of July Edition shoe.

IMAGE SOURCE: NIKE

Quietly gaining momentum

Meanwhile, another much smaller athletic footwear and performance apparel company could benefit from Nike's and Adidas' brand hiccups: Under Armour (UA -1.48%)(UAA -1.09%).

With its shares up more than 50% from their December 2018 lows, Under Armour already has momentum on its side. In its most recent quarter, those signs included a slightly narrower-than-expected 3% decline in sales from its core North American market, which could easily turn positive as consumers shift away from Nike (which grew North American Nike brand sales 7% last quarter) during its patriotic dilemma. And though Under Armour raised its full-year earnings targets on the back of stronger-than-expected profits in Q1, it also announced plans to more aggressively invest future outsize profits toward global growth and brand-building initiatives -- a move that could ultimately help it seize market share from both Adidas and Nike in the overseas markets they currently dominate.

Of course, that's not to say Under Armour's history is free from controversy. Recall that in 2017, CEO Kevin Plank backtracked on his vocal support of U.S. President Trump, even stepping down from Trump's manufacturing council after several of Under Armour's most prominent sponsored athletes expressed their discontent. Plank later insisted his company "promotes unity, diversification and inclusion," adding that Under Armour "engages in innovation and sports, not politics."

But if Under Armour's recent results are any indication, the company's brand seems to have recovered -- and the company learned its lesson, for that matter, from that political misstep. The much fresher mistakes made by Nike and Adidas could be just the opportunity Under Armour needs to accelerate that recovery.

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Stocks Mentioned

NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$112.60 (-0.36%) $0.41
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UAA
$10.92 (-1.09%) $0.12
adidas AG Stock Quote
adidas AG
ADDYY
$94.10 (-0.71%) $0.67
Under Armour, Inc. Stock Quote
Under Armour, Inc.
UA
$9.99 (-1.48%) $0.15
Twitter, Inc. Stock Quote
Twitter, Inc.
TWTR
$37.39 (-8.18%) $-3.33
adidas AG Stock Quote
adidas AG
ADS
$183.28 (1.79%) $3.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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