Adidas (OTC: ADDY.Y) (OTC: ADDDF) may not get as much attention from U.S. investors as Nike or Under Armour, but it deserves to be on your radar. The company is a dominant force in the global athletic apparel industry. Over the last five years, Adidas stock climbed 260%, more than tripling the return of Nike, even after the recent sell-off over COVID-19.
Here's why investors should consider buying shares of the German sportswear brand.
Stellar growth track record
In 2015, Adidas laid out a five-year plan to increase revenue while driving strong growth in profits. The goal was to simplify operations to drive better performance at its two apparel brands (adidas and Reebok), extend its presence in North America, and strengthen its digital capabilities.
The company was delivering well on those plans before COVID-19, but worldwide store closures intended to stop the spread of the virus caused a mess for its financial performance in the first quarter. Sales collapsed 19% year over year, and profits were wiped out.
Heading into the year, management was targeting currency-neutral sales growth of 6% to 8% in 2020, which along with an improvement in operating margin, would have put Adidas on track to meet its five-year goals.
If Adidas had been able to meet its 2020 guidance, the annualized growth in revenue since 2015 would have been approximately 11%, and net income would have increased at a compound rate of 24% to 25%. That would have been stellar, and it's indicative of what Adidas is capable of once the economy recovers from COVID-19.
Adidas knows how to execute
Adidas has made it a priority to improve the speed at which a product moves from creation to the consumer. Net sales from speed-enabled products reached 47% of total sales in 2019, up from 37% in 2018. This is crucial as it allows Adidas to respond to customer demand very quickly, before a competitor beats it to the punch.
The company is also targeting six global cities to take advantage of the urbanization that management sees as a megatrend. Sales from these cities -- London, Los Angeles, New York, Paris, Shanghai, and Tokyo -- totaled 7% of revenue in 2019. Before the pandemic, Adidas was on track to double revenue in these cities by the end of 2020 from 2015 levels.
E-commerce has also been an area of focus. Online sales grew 34% in 2019 and 35% in the first quarter with growth accelerating to 55% in March as the shelter-in-place period began.
Important relationships with high-profile celebrities
Nike dominates the top-selling sneakers charts with its Air footwear platform and the popularity of the Jordan Brand. But that doesn't mean Adidas lacks the brand strength to compete effectively.
Last year, Adidas signed a deal with pop star Beyonce to create the exclusive Ivy Park line of apparel and footwear. Adidas also launched a partnership with one of the most popular video game streamers, Tyler "Ninja" Blevins, which extends Adidas' influence to the fast-growing esports market. Beyonce and Ninja join an already impressive roster of high-profile collaborations, including music artists Kanye West and Pharrell Williams, along with NBA star James Harden and NFL quarterback Patrick Mahomes, among many others.
West's Yeezy line has been one of the best-selling sneakers in the industry and continues to show staying power, despite competing in the fashion-lifestyle spectrum of the market. A pair of Yeezys typically retails between $200 to $300 with many styles commanding even higher premiums on the secondary market. The Yeezy brand, owned by West, was recently estimated to be worth as much as $3 billion. The ability for Adidas to maintain relationships with top influencers like West is a major plus for the three stripes.
Adidas should remain a good investment
Any investor should feel comfortable owning shares of Adidas. The trend toward active lifestyles is not going away and should fuel long-term growth in the athletic apparel market. Adidas' investments in speed-to-market initiatives and e-commerce, along with its exclusive deals with celebrities, should also support its momentum in this space. And let's not forget that Adidas has one of the most popular performance shoes on the market, UltraBoost, which has given Nike a run for its money in recent years.
Although its share repurchase program was suspended due to the economic uncertainty around the coronavirus, Adidas has historically returned most of its annual free cash flow to shareholders via dividends and buybacks.
This year will see sales and earnings crater as a result of the store closures and challenging economic environment. But once COVID-19 has passed, the business can recover and resume its growth trend.
The stock trades at a P/E ratio of 36 times trailing earnings, and a forward P/E of 27 based on 2021 earnings estimates. The stock has rebounded off the lows in March, but it's down over 15% year to date. There is still upside for investors looking for a potentially undervalued stock in the growing athletic apparel industry.
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