Adidas Has the Hot Stuff, But Investors Need a Long Game: Gadfly

(Bloomberg Gadfly) -- After the Stan Smith, its time for the Reebok Classic to get cool.

According to mens' style bible GQ, the "old man" sneakers are so hot right now.

That's good news for Adidas AG, which may have pushed the retro styling of its Stan Smith and Superstar models about as far as they can go. As Bloomberg News has noted, it is looking to repeat the trick with other throwbacks. Its Reebok Classic might just be the one.

The Adidas label continued to lead growth, with revenue excluding currency movements up 18 percent in the first quarter, driven by North America.

But Reebok is catching up, with demand for training shoes and Classics driving a 13 percent sales gain. That's more than double the rate of growth for each of the past two years.

Some of the first-quarter improvement at Reebok came from the earlier launch of new products and store openings in China. And its sales in the U.S. remained negative as Adidas closed stores as part of a planned overhaul to ensure that sales expansion is matched by an increase in profits.

But it is encouraging to see the label finally making progress: that bodes well for Chief Executive Officer Kasper Rorsted's goal of improving the brand's profitability. And a healthier Reebok would be another weapon in his armory as he battles Nike Inc. in the U.S. He's made great progress there, but still has some way to go to catch up with his rival's domestic market share. He only has about 10 percent of that market, compared with Nike's 45 percent, according to analysts at RBC.

Adidas has had a terrific run, with the shares up 65 percent over the past year and its premium to Nike Inc. widening. But it will need the fastest sneakers to turn in another superstar performance this year.

It faces tough comparisons with 2016, when it upgraded its sales and profit forecasts four times. And the dollar's strength is a major headwind. The majority of its sneakers are made in Asia, where suppliers tend to be paid in the U.S. currency. In the first quarter, that lowered Adidas's gross margin by 0.2 percentage points to 49.2 percent.

Its a worry that stocks are growing. Inventories excluding the impact of currency movements rose 18 percent, although Adidas attributed this to the faster sales growth.

Rorsted has also still not achieved some elements of his strategy. One is to lift the operating margin closer to those of rivals, and while this improved in the first quarter it still lags behind Nike on a full-year basis.

And there was no update on his push to reshape the company's portfolio by offloading TaylorMade Golf and the ice hockey arm, CCM Hockey. Analysts at Mainfirst estimate that these businesses together could be worth more than 600 million euros ($655.9 million), although they expect a hefty goodwill write-down on TaylorMade. 

Whichever way you cut it, the risks are rising, including the danger that its key styles start to fall out of fashion. Plans to close stores in the U.S. will keep Reebok's sales there going backwards this year. With the shares at a 35 percent premium to Nike, there is little room for error.

A new retro style craze on the block won't alleviate these risks. But it's a useful cushion if millennials start looking beyond the Stan Smith for their next fashion footwear fix.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

To contact the author of this story: Andrea Felsted in London at afelsted@bloomberg.net.

To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.