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Adidas AG (ADSGn) - Introduction

Adidas AG is a leading global sporting goods company. It designs, develops and markets sportswear and related accessories. Adidas grows its business both organically and through acquisitions. Its most prominent acquisitions include Taylor Made (in 1997) and Reebok (in 2006). Its revenues are well spread across the globe i.e. Western Europe 27%, Asia 27% (of which 11% are in Greater China), North America 23%, Emerging Europe 13%, and Latin America 10%. Its historic EBIT Margins are at around 8%, while the EBIT margin for 2015 is projected to be 10.5% and in 2020, 17.5%.

The sportswear industry is expected to benefit from positive structural and demographic tailwinds. In DM , people are tending to spend more money on healthier living and healthy activities while in EM , a growing number of people are trying to mimic a “western” style of living. It can be assumed that the two major players in the field, Adidas and Nike, will continue to have the ability to influence consumer behavior in the years ahead. The key issue for these two global competitors, is to control the cost of inflation. To offset such factors and get ahead of the competition, companies have to implement a greater degree of advanced technologies and robotics, and Adidas is leading the way in this field.

Recently Adidas has underperformed the overall market because of a profit warning and lower projections for its 2015 figures. While this announcement is highly disappointing in a positive environment, the longer-term outlook for Adidas remains intact. Through structural improvements (i.e. the increased use of advanced technologies and robotics), the company is aiming to achieve 20% earnings growth by the end of 2020 This target should be achievable as:

1. Adidas is transforming its current distribution network into a direct distribution network to fully maximize its e-commerce potential. E-commerce activity which currently represents only about €160 million or 1% of its present sales, is projected to grow to €2.8 billion by 2020,
2. Global secular growth drivers are strong. These include a) an increasing focus on health and wellness, b) a growing number of middle class, and
3. Market share gain through acquisitions and increased focus on organic store growth.

At present, Adidas is valued at an 8 year low compared to its most important rival, Nike. Furthermore, the company trades at about a 10% discount to its discretionary peer group on a lease-adjusted EV/EBITDA.

Strengths and weaknesses analysis / Fundamental analysis:
Strengths: 

• Brand recognition is extremely strong,
• Rising raw material costs are absorbed by higher operating efficiencies such as advanced technology and robotics in the design and development of its products,
• Adidas is part of a strong secular growth trend with consumers focusing on living healthier and more active lives,- It’s expected the dividend payout will be increased towards the top of the 20% to 40% range,
• Complementary to its store based sales model, Adidas is developing a highly efficient e-commerce based distribution model. 

Weaknesses:

• Adidas is heavily exposed to global consumer confidence. Slower than expected revenue growth would generate further delays in the company’s growth strategy,
• Sales growth is highly dependent on the successful introduction of its e-commerce application and organic store growth. Both objectives are difficult to achieve together,
• As about 50% of the company’s sales originate in EM, the company is heavily exposed to EM FX fluctuations. With US QE tapering potentially taking place between 2014 and 2015, further strong FX impacts should be expected,
• Sluggish sales development, due to ongoing economic weakness, could hurt the company’s valuation by about 15%. 

Company profile, investment opportunity and asset management integration:

Price ranges: