As football mania engulfs the entire planet with the FIFA World Cup drawing closer,adidas AG (ETR:ADS), as one of the six FIFA partner,s is hogging its share of limelight. However, the German sportswear retailer is not banking on the World Cup alone. It has a solid business model that makes the company a strong contender for long-term growth.
Nothing succeeds like success
adidas AG (ETR:ADS) has impressed with 8% y-o-y growth in operating profits to 442 million euros ($578 million) in the first quarter. And this was despite 2% lower sales, which was affected by Reebok’s loss of a 10-year National Football League contract.
What did the trick for the company was its gross margin, which improved by 2.4% over previous year to a record 50.1%. This is outstanding by industry standards, and it is only the second time in adidas AG (ETR:ADS)’ history that the gross margin exceeded 50%.
NIKE, Inc. (NYSE:NKE) also boosted its gross margin by 0.3%, but its 44.2% in the third quarter was no match for the German giant. In its recent quarter, the new kid on the block,
adidas AG (ETR:ADS) is gaining from its good pricing power and of course the success of its new products like Delta apparel, CrossFit ranges, etc, which carry higher margins. Regional and channel optimizations are also yielding results.
The margin momentum will continue throughout the year, and the company is likely to get to the higher end of its gross margin guidance of 48% to 48.5%.
Global business model
adidas AG (ETR:ADS) is a global company with international revenue of $11.5 billion annually. Its presence in emerging countries allows it to leverage their rapid growth. The company saw a sales increase of 12% in Latin America, 6% in Greater China, and 3% in emerging European markets.
To ensure maximum returns, adidas AG (ETR:ADS) is increasing its spending on sales and promotions. In the first quarter marketing expenses were up by 50 basis points to 11.6% of sales. It has also stepped up its global e-commerce activities by launching more than dozen sites spanning across Europe, Russia, Canada, and South Africa. No wonder online sales in the first quarter were up 68%.
In the global arena, Adidas is the only company that can pose a real threat to world’s number one – NIKE, Inc. (NYSE:NKE). The latter has around $15.3 billion of international revenue and deep pockets to support big sales efforts. Last year it spent $2.7 billion on marketing and promotions.
In the third quarter, NIKE, Inc. (NYSE:NKE) grew its sales from emerging markets by 8%. However things are moving a little slowly in China due to oversupply. The company is currently engaged in clearing off excess inventories and proactively cancelling some order backlogs.
There is an interesting market share battle going on between NIKE, Inc. (NYSE:NKE) and Adidas in China. The former has always dominated the Chinese international sportswear market and has a market share of 12.1%. But Adidas is inching closer with a market share of around 11.2%.
Under Armour Inc (NYSE:UA) had so far been content with its North American presence, but it has recently announced big global plans. The company is looking at international revenue of $640 million by 2016. This is of no immediate consequence to Adidas and NIKE, Inc. (NYSE:NKE) but Under Armour Inc (NYSE:UA) has a track record for springing surprises.
Key product areas
Adidas has identified three key product areas to fuel growth: running, basketball, and outdoor. All three areas are enjoying double-digit growth. During the first quarter they grew by 12%, 18%, and 21%, respectively.