Adidas is about to profit from Nike’s struggles | kbnmart

The success of Adidas’ low-top, multi-colored Samba and Gazelle sneakers, coupled with weak sales at rival Nike, should help the German sportswear brand post strong second-quarter sales and its biggest profit margin in three years.

Nike Inc. forecast a surprise drop in annual sales by the end of June, adding to investor concerns that the sportswear giant is falling behind established peers and new competitors alike.

Nike shares fell about 20% on the news, but Adidas shares — which typically track the U.S. company’s moves — barely responded, suggesting investors are viewing Nike’s weakness as an opportunity for Adidas.

“Nike, in terms of product and message, is way off the mark, while Adidas is in a good moment,” said Simon Irwin, retail and sporting goods analyst at Tanyard Advisory.

Nike is less innovative than it was in the past, and competition has increased, giving retailers a wider range of brands to choose from, said Cedric Rossi, next-generation consumer analyst at Bryan Garnier.

“There is a huge discrepancy between what is happening at Nike and what is happening in the rest of the industry,” he added.
Nike said in late June it would release new sneakers priced at $100 or less worldwide as it aims to get sales back on track.

Meanwhile, Adidas has been fueling a new trend for its three-stripe shoes like the Samba and Gazelle, releasing new colorways and limited editions to keep shoppers interested.

Online searches for “Adidas Samba” have surged worldwide over the past 12 months, surpassing searches for “Nike Air Force 1” last December and peaking in early April, according to Google Trends data.

Analysts expect Adidas to post a profit margin of 51.4% in the second quarter, according to LSEG data. That would be its highest level in three years. Quarterly revenue is expected to rise 4.5% from a year earlier to 5.6 billion euros ($6.1 billion).

“The market is clearly expecting upgrades,” Irwin said. But he cautioned against assuming the “golden days of very high margins” would return anytime soon, given weak demand in China and increased competition.

Adidas still needs to be on its toes as smaller brands gain ground, especially in running and outerwear.
According to research conducted by RBC and published last month, emerging sportswear brands such as Hoka, Lululemon, New Balance and On Running will achieve a global market share of 35% in 2023, up from 20% during the period 2013-2020.

“The fragmentation was always going to happen, and Nike contributed to that,” Irwin said, by moving away from some of its wholesale partners to focus on direct-to-consumer sales, thus “opening the doors” for smaller brands.

The strategy contrasts with Adidas’ efforts to strengthen relationships with wholesalers under CEO Björn Gulden.

Some Wall Street analysts have raised the possibility of management changes at Nike before its investor day this fall.

The European Football Championship is also likely to boost demand for sportswear in Europe, according to analysts and investors.

“What Golden has brought back is the focus on sport,” said Simon Jaeger, investment manager at Flossbach von Storch, which owns Adidas shares.