Many footwear companies have struggled this year as the pandemic has disrupted supply chains and shut down brick-and-mortar retailers. But over the past 12 months, shares of Adidas (ADDYY 6.07%) advanced about 15% as shares of Skechers (SKX 2.28%) declined roughly 10%.
Let's see why the German footwear giant outperformed its smaller American peer, and why Adidas should remain a better overall investment than Skechers in 2021.
How did Adidas and Skechers fare during the crisis?
Adidas's revenue rose 8% (6% in constant currency) in 2019, led by its double-digit sales growth in its Asia-Pacific and emerging markets regions. Its earnings from continuing operations grew 15%.
In the first nine months of 2020, Adidas' revenue fell 20% year over year (18% in constant currency) due to store closures worldwide in the first half of the year. Its earnings from continuing operations plunged 83%.
Meanwhile, Skechers' revenue rose 12% in 2019, led by the 20% growth of its international business, and its diluted earnings grew 17%. In the first nine months of 2020, Skechers' revenue declined 16% year over year as its adjusted earnings plunged 78%.
At first glance, those headline numbers suggest that Skechers is weathering the crisis better than Adidas. But a closer look reveals that Adidas' core business remains stronger, for three simple reasons.
1. Higher gross and operating margins
Adidas' gross margin declined 300 basis points year over year to 50% in the first nine months of 2020. During the same period, Skechers' gross margin fell 60 basis points year over year to 47.1%.
Adidas aggressively reined in its spending during the crisis, but its operating margin still declined from 13.6% to 3.7% in the first nine months. But it still fared better than Skechers, which saw its operating margin drop from 10.9% to 2.3% during the same period.
It isn't surprising that Adidas generates higher margins than Skechers, since it generated over five times as much revenue last year and generally targets higher-end shoppers. However, that scale should also make Adidas more resistant to prolonged economic downturns than Skechers.
2. Stronger growth in direct-to-consumer channels
Adidas and Skechers are both increasingly dependent on direct-to-consumer (DTC) channels, which include their own e-commerce platforms and brick-and-mortar stores.
Adidas' DTC revenue rose 18% in 2019, led by 34% growth in its e-commerce channels, and accounted for a third of its top line. Skechers' DTC revenue rose 14% in 2019, accounting for 29% of its top line, but it didn't disclose its annual e-commerce growth. Skechers CFO John Vandemore admitted its global e-commerce business was still in a "very early stage" during its conference call in February.
Adidas didn't disclose its exact DTC revenue in the first three quarters of 2020. It only noted its DTC revenue fell in the first quarter, rose "slightly" in the second quarter, and grew 13% in the third quarter. Skechers' DTC revenue fell 24% year over year during those nine months, with steep declines during all three quarters.
Both companies generated robust e-commerce sales throughout the crisis, but Adidas' five-year turnaround plan -- which started in 2015 with a focus on expanding its direct-to-consumer channels -- created a larger digital ecosystem that was better-suited to offset a sudden brick-and-mortar slowdown.
3. More innovative products
Skechers carved out a defensible niche with its casual shoes, but it hasn't generated much buzz for new products beyond its new lines of Arch Fit and Max Cushioning shoes.
Meanwhile, Adidas continues to attract shoppers with its foam-based "Boost Technology" shoes, which prompted Nike and Under Armour to launch similar products; footwear and apparel designed by Kanye West, Beyoncé, and other celebrities with big social media followings; and big flagship stores in urban centers.
Those innovative changes enabled Adidas to remain the third-most-popular footwear brand in the U.S. among teen shoppers, according to Piper Sandler's latest survey, behind Nike and VF Corp's Vans. Skechers, which seemingly targets older shoppers, didn't crack the top five.
The key takeaways
Adidas and Skechers will both struggle over the next few quarters. Both companies are dealing with rising inventories and contracting margins, and they need the retail environment to stabilize before they can start growing again.
However, investors shouldn't ignore Adidas' higher margins, stronger DTC channels, its diverse portfolio of innovative products, and its popularity among younger shoppers. All those strengths could help Adidas outperform Skechers after the pandemic ends.