The dark days of Adidas may be over.
The German apparel giant released its full-year 2015 results and 2016 outlook on Thursday, and it had good news to share: net income at the Adidas Group (which includes Adidas, Reebok, and golf club maker TaylorMade) grew 29% over the year before; Adidas and Reebok brand global sales grew 16% and 5.4% respectively; and most promisingly, sales for Adidas brand grew 12% in the U.S., where it has struggled for years. For 2016, the group forecasts 10% to 12% sales growth, but gross profit decline of 1% as a result of rising production costs in China.
Its stock has also fared well: Adidas (ADDYY) is up 36% in the past year, which outperforms the larger German market and slightly outshines Nike (NKE) and Under Armour (UA), which are up 25% and 10% respectively.
But as Morningstar apparel analyst Paul Swinand puts it, “Great brands don’t get torn down in a year, and they don’t get built back up in a year.” Adidas is on a slow climb back from a hellish 2014, in which its global revenue fell for the second straight year and net income hit its lowest point since 2009 (in U.S. dollars; Adidas typically adjusts for currency fluctuations when it reports its financials). It will take time to achieve a turnaround, but the U.S. sales bump in 2015 is noteworthy because it’s U.S. footwear that has most dogged the three stripes in this decade. Adidas footwear has steadily lost market share in America to Nike and Skechers (surprise!). In apparel, Under Armour surpassed Adidas in 2014 as the No. 2.
Now the company is enjoying a buzzy boost thanks to stars like Pharrell Williams (Adidas redesigned its Superstar line around the singer and sold 15 million pairs of the sneaker in 2015) and Kanye West, whose Yeezy Boost line has been a major hit with sneakerheads. “The Yeezy is by far the hottest shoe and is selling for the largest premium above retail,” says Josh Luber, CEO of StockX, a stock market for sneakers. The Yeezy Boost 350, a lowtop sneaker, retailed for $200 at its release last year, and is now going for $1,200-$1,400 on the resale market. It didn’t hurt when West released a new single on New Year’s Eve, called “Facts,” that is essentially an anti-Nike rant, with lyrics like, “Nike, Nike treat employees just like slaves; gave LeBron a billi not to run away.”
The Yeezys, along with the fruits of other design collaborations with celebrities and hip-hop stars, fall under the category of Originals, which is Adidas’s street/lifestyle segment. The company doesn’t break out the numbers for Originals from the rest of Adidas brand, but analysts say the growth is there. That can be a double-edged sword: The company has always had success with street fashion, but risks consumers forgetting that it’s an athletic brand. And Adidas has spent big on its stars: marketing costs rose by 30% in the fourth quarter. Longtime CEO Herbert Hainer says it's all worth it: "Game-changing cooperations with Kanye West, Pharrell Williams or Rita Ora created buzz for the brand on an on-going basis," he said after the earnings.
The brand would do well to pump its sponsorships of global athletes more than its relationships with pop stars like West. “You hear them talk about [Argentinian soccer star Lionel] Messi winning his fifth Ballon d’Or, but then they’re talking about Kanye West in the very next breath, and it just kills me,” Swinand says. “One thing is indestructible and bulletproof and enduring, the other is inherently transitory and fickle.”
Golf equipment yips
One dark cloud in the earnings is golf brand TaylorMade, which Adidas Group bought in 1997. It is the largest golf equipment maker in the world, with more than 60% U.S. market share, but sales plummeted 26% in 2014 and, we now know, fell another 15% in 2015. Last year, Adidas cut its TaylorMade workforce by 14% and announced it was exploring a sale, but there has been no more news on that effort. The company now says it is still reviewing the “further execution of TaylorMade-Adidas Golf’s restructuring programme aimed at resizing the golf business.”
But what if it can’t find a buyer? The golf industry, writ large, has struggled for the past few years, with companies blaming overproduction (too much new product that sits on shelves) and weather (lower temperatures has meant that golf rounds played were down for many consecutive years, though they were finally up in 2015, according to the National Golf Foundation).
TaylorMade has been a drag on Adidas, but, Swinand predicts, “I think they’re going to hold onto it a little longer. They over-innovated, fatigued people with too much new product too fast, so now they’re resetting the market. If the economy picks up and the weather gets a little warmer, maybe it can do well again. I would hope they’re not desperate to get rid of it, and that they would sell it on a peak, not a valley. If the thing looks like it’s in a freefall, the bids are not going to be nice.”
Gearing up for the new chief
That decision—as well as the decision of what to do with still-ailing Reebok—will likely be made by Kasper Rorsted, the next CEO. The company announced his appointment in January, and the market responded well. Rorsted is an apparel outsider, and that may be just what it takes to chug forward with the turnaround. He takes the reins, replacing Hainer, in March 2017.
Analysts say Rorsted is well-suited to decide what to sell off, because he won’t carry the emotional baggage that an internal executive who had been promoted to CEO would have. “The timing is favorable,” says Reuben Scherzer, who covers German companies for Victory Capital Management. “He’s a little younger than [previous CEO Herbert] Hainer, he comes from a blue-chip, German-listed company with a long history, he’s got a good corporate history. What’s beneficial in these kinds of marriages is you have someone bringing outside-the-industry knowledge.”
Rorsted may settle in and quickly decide that both TaylorMade and Reebok need to go; there is an old adage, in some industries, that if a division isn’t the No. 1 or No. 2 in its space, it isn’t working, period. For TaylorMade, at least, “You could definitely argue that peak golf is in the rearview mirror,” says Scherzer. “At the end of the day, I would say it’s not core for them. Nike has their own Nike Golf brand, and maybe that was the motivation for Adidas back in the day with acquiring Taylormade, but they don’t need to have it.”
Regardless, the mostly-sunny 2015 results for Adidas Group mean that Hainer’s final year at Herzogenaurach headquarters will be a good one, paving the way for Rorsted to come in and continue a turnaround. That’s the implication in U.S. CEO Mark King’s statement: “Today’s results are evidence that we’re on the right track,” he said. “We are challenging everything old and moving with speed… This momentum takes us into an exciting 2016.” Now the group will aim to keep climbing in 2016 and carry the momentum to 2017, too, and to Kasper Rorsted’s arrival.
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Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology.
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