Can This Shoe Company Outrun Its Competition?
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Sports Giant Adidas Group’s (NASDAQOTH: ADDYY) 2006 merger with Reebok Limited was a source of much controversy among fans and financers alike. While some treated it as a worthy response to the growing threat of Brand Leader Nike, others viewed it as a dubious proposal whose merit only time could tell. But, with Reebok’s performance on the wane, it seems as if the skeptics proved correct.
What it means
Adidas, the German-based world's second-largest sports apparel company behind Nike (NYSE: NKE), bought Reebok in August 2005 for $3.8 billion. Although it enjoyed initial success with a range of toning shoes, results have since struggled to find its feet. Reebok’s top line slumped 26 percent in the second quarter and annual revenue is expected to fall from 2011's €1.96 billion. Its performance contrasts sharply with the rest of the Adidas group, which expects overall sales to rise nearly 10 percent in 2012.
Reebok India’s most recent fraud case caused a further decline in the company’s revenue. In April, the company announced that it had uncovered commercial irregularities at Reebok India and replaced management there. Subsequent investigations revealed a fraudulent practice worth INR 870 Crore that sent the struggling brand further into the recesses of shame. Following the arrest of former Chief Operating Officer Vishnu Bhagat along with three others for their alleged involvement, Adidas group reportedly said that the fraud and a subsequent restructuring of Indian operations would cost Adidas almost €200 million. The company also expects a hit of €70 million in its global operating profit and as of September 21st, 2015 sales target has been lowered to €2 billion from €3 billion for the struggling brand.
With Reebok on the decline, the gap in the market has been quickly occupied by competitors like Nike, Puma, Under Armour and others, most of which reported a steady increase in their global earnings. Nike reported 4th quarter 2012 revenues of $6.5 billion. This was 12% above the prior year's 4th quarter results. Excluding the impact of changes in foreign currency, Nike Brand revenues rose 14 percent driven by growth in all geographies, key categories and product types.
Selling and administrative expenses grew at the same rate as revenue, up 12 percent to $2 billion. Revenues for Other Businesses grew 16 percent, with no significant impact from changes in currency exchange rates, as all businesses increased revenues during the quarter. Nike sales and revenues is estimated to continue up this steady incline, and the company isn't likely to disappoint.
In terms of growth, Puma was not far behind. The company’s second quarter consolidated sales grew by 11.8% in Euro terms and by 6.0% currency adjusted to €752.9 million. Whereas Footwear sales were flat currency adjusted at €370.9 million, with Teamsport and Running balancing the softening sales in the Motorsport and Fitness categories, Apparel sales increased by 7.9% to €256.4 million.
Even comparatively fledgling brand, Under Armour (NYSE: UA) reported a steady increase in profits. At the end of the Second Quarter, revenues increased 27% in the second quarter of 2012 to $369 million compared with net revenues of $291 million in the prior year's period. Net income increased 7% to $7 million compared with $6 million in the prior year's period.
The Company had previously anticipated 2012 net revenues in the range of $1.78 billion to $1.80 billion, representing growth of 21% to 22% over 2011. Based on current visibility, however the Company now has increased their net revenues expectation to be in the range of $1.80 billion to $1.82 billion, representing growth of 22% to 24% over 2011. Second quarter operating income grew 3% to $12 million. According to UA CEO Kevin Plank, the company is excited about "gaining momentum in the footwear space with game-changing products such as our $130 Highlight football cleat and the just-launched UA Spine running shoe."
All in all, it doesn’t bode well for Reebok.
Does this mark the downfall of Adidas?
Although Reebok’s subsequent deterioration has affected the Adidas Group, in no way means the end of this company. In the first half of 2012, currency-neutral Adidas' sales grew in all regions. Revenues in Western Europe increased 6%, primarily as a result of double-digit sales growth in the UK and Poland. In European Emerging Markets, sales increased 16% while in North America the figure grew 11%.
Recently Adidas said its performance was being helped by its sponsorship of the London 2012 Olympics and the Euro 2012 soccer tournament this summer, giving its three-stripe brand a visible presence on television screens all over the world for most of the summer. "Our clear victory in the summer of football, our increased operating margin and our excellent inventory management show we have the right formula to preserve and sustain our positive earnings," Chief Executive Officer Herbert Hainer said in a statement.
Adidas now expects 2012 earnings per share to be between €3.68 and €3.75 ($4.53-$4.61), compared to the previous target of €3.58 to €3.75. The company also kept a forecast for overall sales to grow by almost 10 percent.
Although the Reebok fiasco seemed to be taking the company on a dangerous path, the recent figures give investors the much needed assurance. Herbert Hainer has guaranteed the investors that Reebok will upgrade its products and come up with a better strategy. In the meanwhile, Adidas’ current standing provides much needed relief. Seems like the sports apparel giant will after all be able to tackle the situation and not turn out to be much of a disappointment for its investors.
Madhu60 has no positions in the stocks mentioned above. The Motley Fool owns shares of Under Armour. Motley Fool newsletter services recommend Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.