This week, Adidas (OTC:ADDYY) -- the world's second largest sporting-goods manufacturer, falling short of only Nike (NYSE:NKE) in size -- announced that its 2013 profit estimate was going to be lower than it had previously predicted. On the news, shares dropped almost 6% to hit a new three-month low. The company cited three major issues in its forecast, and analysts are worried that the problems could spill over into the long-term plan.
Trouble at every turn
The biggest issue Adidas called out was the strength of the euro. The company makes close to three-quarters of its revenue outside Europe, and the strong euro is driving up costs for international buyers. The increase in the euro is compounded by the falls that have been seen in the local currencies of Russia, Japan, and South American countries.
Adidas is having unforeseen distribution issues in Russia that are going to affect the company's ability to distribute to that area. Adidas opened a new distribution center near Moscow, and it's not working out as planned. While the hope is that things will be righted in the fourth quarter, there will have an impact on full-year earnings.
Finally, TaylorMade -- a golf brand owned by Adidas -- has had a weak start to the year. Adidas blamed that shortfall on weakness in the global golf market, but Nike didn't seem to have the same issue, and golf revenue grew by double digits during its last quarter.
Back in 2010, Adidas released a five-year plan to hit 17 billion euros -- about $23 billion -- in 2015, increasing revenue by 15% a year. The company is also hoping to hit an 11% operating margin. By comparison, Nike did $25.3 billion in revenue last year, with an operating margin of 12.9%. Kaboom.
The long-term plan for Adidas looks like it's in real jeopardy. That's not a claim about the business -- Adidas is going to make money and grow and be good. But by drawing a line in the sand for 2015, Adidas put its business reputation on the line. The shortfall this year is going to make next year an even bigger deal than it already was.
Chasing Nike looks like it's wearing the business a bit thin, and the additional, growing competition from businesses such as Under Armour (NYSE:UAA) can't help. Under Armour's current size pales in comparison -- the business is forecasting just $2.2 billion in revenue this year -- but it's growing quickly. Last year, revenue grew 25% and earnings per share grew 31%.
The big competition is going to come down to the footwear fight. Under Armour has recently come out on the offensive, claiming that it's a $10 billion company trapped in the body of a $2 billion company. If the company can manage to hit that level, it's going to take market share from both Nike and Adidas. While I like all three brands, the innovation and growth potential at Under Armour make it a standout.