Adidas Downgraded On Heightened Competition

Adidas Downgraded On Heightened Competition

Wells Fargo Securities downgraded shares of Adidas due to renewed growth in North America at Nike, continuing explosive growth at Vans and some lackluster results from the launch of new Adidas platforms.

In a note, Tom Nikic, the lead analyst on Adidas, said Adidas is “facing a two-pronged attack from their competitors globally, as NKE is gaining steam on the higher end of the sneaker market (likely to impact Adidas’s Ultra Boost and NMD silhouettes) and Vans is currently the ‘hot brand’ in the $60-$100 price range (where Adidas had previously been the brand-of-choice via the Superstar and Stan Smith styles).”

While Adidas has introduced new platforms to try to offset the maturing styles (Superstar and Stan Smith), results have been mixed, “whereas almost everything worked extremely well” from 2015 through 2017.

Nikic added, “Although some new silhouettes like Deerupt and Continental 80 have generated some excitement with consumers, we have not seen evidence that they have the sort of broad appeal that styles such as Ultra Boost and NMD possessed. Plus, with the brand now 60 percent larger than it was four years ago, they will likely need a multitude of powerful styles simultaneously in order to truly move the needle.”

Another newer risk is “surprisingly-rapid deceleration” in Western Europe where Adidas first began to re-accelerate the company’s growth in mid-2014. Western Europe’s 5 percent growth in the first quarter was the slowest in four years and Q2 is planned to be flat in the region. Nimic described the deceleration as “somewhat concerning given that the company’s home market has historically been a leading indicator for the brand.”

In North America, Nike has resumed growth and Nikic expects Nike to outperform the market’s growth over the next few quarters and “make it increasingly difficult for Adidas to maintain their recent growth trajectory” in the region.

Finally, Wells Fargo believes Q2 consensus estimates due not adequately reflect Adidas’ marketing investment, including the company’s sponsorship, of the World Cup as well as the impact of a Nike-sponsored team, France, winning the finals and benefiting from a post-tournament sales boost.

Wells Fargo expects €1.76 in the current quarter versus consensus of €1.87 and $1.70 earned a year ago.

The investment firm lowered estimate to €8.00 from €8.06 for the current year and to €9.04 from €9.58 for fiscal 2019. The 2019 target is predicated on a further top-line deceleration to +5 percent versus 7 percent previously. The rating on the stock was lowered to “Market Perform” and the price target to €180 from €220 previously.