Under the Spotlight Wall St (OTC): Adidas AG (ADDYY)
One of the world's biggest sportswear brands, Adidas’ three stripes are recognised all across the globe, but how profitable is the company? Let's put it Under the Spotlight.
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Founded in the wash kitchen of Adolf “Adi” Dassler’s mother, Adidas ($ADDYY) quickly became a major player in European sportswear. In fact, the brand took some momentum from the company that Adi ran previously with his brother Rudolf, Dassler Brothers Shoe Factory. However, the two brothers had a falling out and decided to go their separate ways, with Adi starting Adidas and Rudolf starting Puma, creating one of the biggest rivalries in the industry.
The brand’s first major success came in the 1950s, when the company introduced the first pair of shoes with screw-in studs, designed for football players. Known as the "Adidas Samba”, the shoes were a hit and helped to establish the company as a major player in the football market. In the 1960s, Adidas expanded its product line to include other sports, such as track and field, and also began sponsoring major sporting events, such as the Olympic Games.
One of the key drivers of Adidas' success has been its focus on innovation and sustainability. The company has made significant investments in research and development (R&D) in order to bring new, innovative products to market.
In 1970, the brand created the first official World Cup football, the iconic black and white Telstar. From then on, Adidas would create a new football for every FIFA World Cup. Throughout the 70s, the brand continued to grow and expand, with the introduction of new lines of shoes and apparel for a wide range of sports.
The company also began to focus on marketing and advertising, with the famous "Three Stripes" logo becoming a well-known symbol of the brand. In the 1980s, Adidas became one of the first companies to enter the fitness and athleisure market, with the introduction of its "Freizeit" line of casual clothing and footwear, which would remain the company’s focus for the next decades.
In 2013, the retailer would begin a partnership with the rapper Kanye West, effectively poaching him from its competitor Nike ($NKE) and giving birth to the Adidas Yeezy, one of the brand’s most iconic sneakers. The shoes would become one of Adidas’ staples, eventually accounting for more than €2b, almost 10% of the company’s revenue. However, even though the design was a hit, Adidas terminated the partnership in October 2022 after Ye made a series of unapologetic antisemitic statements which the company could not condone.
This wasn’t their only commitment to ESG goals: the company has made a commitment to sustainability, with a goal of becoming carbon-neutral by 2050. This has helped to differentiate Adidas from its competitors and has resonated with consumers who are increasingly focused on environmental and social issues.
Getting up to speed
2020 was a terrible year for retailers, especially for footwear: as people stayed home during the pandemic, the need for shoes dropped sharply. Adidas’ revenue fell from €23.6b in 2019 to €19.8b in 2020. Even though it rose to €21.2b in 2021, the company’s revenue still failed to reach new all-time highs, as its competitors Nike and Puma did.
Despite the fall in revenue, profits continued to hit such highs, totalling €2.1b in 2021, as the company gained efficiency and improved its margins by lowering the production of footwear to 340 million pairs, down from 379 million in 2020 and thus reducing their unsold inventory.
For FY22, which should be reported in March 2023, the company expects revenues to reach between €23.7b and €24.1b, with margins improving as supply chain issues wind down and the brand’s efforts to focus on EMEA, its biggest and fastest growing market, starts to pay off. The three stripes might have been down, but it’s still the runner-up favourite.