Adidas AG Investment

I would like to discuss my completed and successful investment in Adidas AG. I first bought it at Eur59.90 on 13 March 2012. I sold it at Eur116.00 on 26 May 2016. Including the dividend collection and dividend tax, the profit made is 100.91%.

About Adidas AG

It is a major sportswear manufacturer whose brand is widely recognized worldwide. In anyone's mind, the only direct competitor who can make for all kinds of sports like Adidas is Nike. It is No. 2 in worldwide sportswear market, lagging behind the market leader, Nike.

Rationale of Investing in Adidas AG

On 13 March 2012, the total market capitalization Nike Inc. is about 4 times more than that of Adidas AG. I found it puzzling for a given large gap because both are somewhat similar. The gap between two should be smaller in my view. I valued Adidas AG based on its brand and R&D ability. It is very close to the price I have sold.

No doubt, Nike gained a lot of shares in sportswear market when Adidas was slopping in the past decades in American-based sports like basketball. Tiger Woods, Michael Jordan and Brazil were the turning points for Nike to become No. 1 in the sportswear market. I was confident that Adidas can catch up to Nike for given its resources and brand.

Observation and Happenings During Holding Period

I went to USA in 2014. After window-shopping, I realized that most sport shops other than Adidas shops don’t sell a lot of Adidas products. It was clear sign that Adidas was losing the battle to Nike. Evidently, its share price went down from €90+ to €54+ in August 2014.

It woke up the 'sleepy' board of directors. To be fair, the current CEO, Herbert Hainer did a fine job from 2010 to 2013. (Adidas has 5 years corporate strategy plan aka Route 2015). Russia is one of countries where Adidas made a lot of sales. When Russia did military attack on central Europe, sanctions imposed on Adidas. It affected Adidas’ share price significantly. To compound that, Adidas produced bad result, worse than expected, for its golf division. Adidas lost No. 2 position of USA region to emerging sportswear competitor, Under Armour. Effectively, Adidas announced that it would not be able to meet its KPIs followed by reduced its forecasted figures. That was why there was bearish effect on its share price in late 2014. By then, a lot of shareholders are calling Hainer’s head. Hainer decided to pass his baton to new CEO (at that time, Adidas is still searching) by March 2015.

In 2015, Adidas made a lot of major fixes – Man Utd jersey, high school basketball jerseys production, work with celebrities to make fashionable shoes, new CEO for US division. In 2016, Adidas found the replacement for Group CEO. Adidas finally decides to sell most parts of Golf divisions except Golf footwear and apparel. These events evidently improve its share price over time.

I often read sports-related manga (Japanese comics). I noticed that Adidas logo is often found in many drawings of most sports-related manga. I wonder Adidas brand is more popular than Nike brand in Japan. In 2016, I verified myself by finding out how easy to find Adidas and Nike stuffs. It is far easier to find Adidas stores than Nike store, more Adidas products than Nike products in Japan.

I also visited USA in 2016. I found that there are more Adidas products on the shelves of sport shops than I could find in 2014. It pleased me as Adidas’ financial data of late 2015 matched as to what I see in Japan and USA. Because of these, I have no doubt that Adidas is on the way to recover.

Reebok’s turnaround yields little result. It is taking so long for Adidas’ strategy for Reebok to be realized. Adidas wants Reebok to be fitness centric brand. By early 2016, Adidas said Reebok division is making money. As of now, Adidas intends to keep Reebok, which is opposite act made by Nike on Umbro.

Rockport makes very good shoes. It is true. But, there is one problem. It has poor supply channels – not many shoe-related stores and department stores sell Rockport. It is really hard to find Rockport shoes in most parts of Singapore and USA. Adidas seems to know that it cannot resolve the issues of Rockport. Apparently, Rockport was sold in 2015.

However, I have no idea how the new CEO will run. That is why I sold it without attempting to see how new CEO hire pans out in next few years. Evidently, I have lost the faith on Adidas in hope to close the market capitalization gap between Adidas and Nike. It is because sportswear market is highly competitive.

Learning Point

I made a huge loss on Radioshack because I believed that there is good chance for turnaround. Simply put, I had a lot of success of turnaround investments. I started to reduce the exposure of turnaround investments. I wrote this article and I realised that it is tough to invest retail stocks.

On another article written by Hurriance Capital on Old School Value website, Warren Buffett said in the following:
"The Buffett grocery stores started in Omaha in 1869 and lasted for 100 years. There were two competitors. In 1950, one competitor went out of business. In 1960 the other closed. We had the whole town to ourselves and still didn’t make any money"

It confirms my suspicion that retail market is too tough to invest in. As we have seen what happen to JC Penny during the period when Bill Ackman invested in, it is still tough to do turnaround with the presence of activism.

The completion of Adidas AG investment taught me one thing. High brand recognition is essential but fast results of proper strategy implementation helps a lot. RadioShack has the former but failed the latter aspect - it took so many months and it still faced the blocking block imposed by debtors. It is already big achievement for Adidas AG to make big changes and improved the sales fast. Thus, one of the key aspects of making profitable investment in turnaround strategy is to have successful strategy implementation yielding growing and cumulative positive results over time.

I wrote a article with regards to forecasted financial figures. Adidas AG is one of them who release forecasted financial figures. It is no doubt that, on the internal level, it is excellent way to identify whether a firm as a whole perform better or worse. Showing these figures publicly is a way to improve transparency and communication between the management and shareholders. Is it worthwhile to show them? I would like to know your view.

My view is that there is no need to show forecasted financial figures publicly because it bring unnecessary pressure to management. Long-term stock price should be testament of how well the listed company is doing over time. On short term, things change out of sudden, pushing the company off the projected trajectory towards the completion of the corporate strategy. On long term, management should demonstrate its ability to re-align itself onto the projected trajectory. Thus, there is no need to make so much 'noise' to push its share price down for missing the targets. That is one side of the coin. On the other side of the coin, it is an opportunity to buy more shares.