Adidas Shares — Introducing Adidas

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Adidas Shares — Introducing Adidas.

This month, we'd like to introduce a recent addition to our International portfolios, Adidas AG.

Adidas is a company that requires little introduction (not least because it sponsors the All Blacks). It is the largest manufacturer of sportswear and sporting equipment in Europe and the second largest globally with 12% market share, just behind Nike (15%) but well above the next tier of companies such as Under Armour and Puma which have less than 5% market share.

Its major brands include Adidas, Reebok and TaylorMade. The core Adidas brand includes Sports Performance which is focussed on football, basketball and running and whose key sponsorships include Lionel Messi and Manchester United. Reebok was acquired in 2006 by Adidas, who have subsequently focussed on refreshing and repositioning it as an American inspired fitness and training brand with particular focus on women, youth and casual sportswear. TaylorMade is a leading golf club manufacturer, specialising in metal woods and irons and encompassing apparel (includes Ashworth), footwear and accessories.

Why is Adidas an interesting opportunity?

Adidas is a global brand and well managed company with good underlying growth, but the share price has plummeted (down 37% in 2014) due to a perfect storm of factors which we believe are largely outside management's control.

Firstly, the Ukrainian conflict and subsequent sanctions on Russia have materially impacted their Eastern European operations, which make up 13% of revenue and 15% of operating profit. Secondly, simultaneous product launches in golfing equipment by TaylorMade and its peers caused temporary overstocking and subsequent price discounting. Finally, the strength of the Euro against the USD and emerging market currencies similarly provided a significant earnings headwind. Some of these factors have now started to reverse, while Adidas have signalled a more aggressive marketing approach in the lucrative US market.

A resolution in the Ukrainian conflict is unforecastable in our opinion but conditions are gradually improving in the golfing market and the recent Euro weakness will provide a meaningful boost to earnings. Despite Adidas' underlying business strengths, and a gradual reversal of the temporary headwinds we believe the current share price assumes no recovery in Adidas profitability. This is overly pessimistic. While Adidas still faces a number of challenges, at the current price it presents a compelling long-term investment opportunity and we have been very happy to initiate a holding on weakness.


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