Adidas AG (ADR) (OTCMKTS:ADDYY) has been one of the most impressive stocks in the entire market the past few years. ADDYY stock has soared, rising 183% over the past three years. And it’s done so in a reasonably tough time for its industry. Nike Inc (NYSE:NKE) has risen just 33% over the same period and has declined over the past year. Under Armour Inc (NYSE:UAA, NYSE:UA) is down by half in those three years.
One key reason for the strength in ADDYY stock has been the company’s ability to take market share in basketball shoes from its two main competitors. But those share gains were colored by the disclosure Tuesday morning of federal bribery charges against James Gatto, the company’s head of global sports marketing.
According to the indictments — which include charges against ten people — Gatto helped steer recruits to Adidas-sponsored colleges, with the hopes of then signing those recruits to individual deals as they entered the NBA. Adidas has said in a statement that it had no knowledge of the scheme.
ADDYY stock fell 2.5% on the news, following a 2.3% drop in the Frankfurt-listed issue. But, so far, it doesn’t look like the alleged actions helped Adidas’ strong performance over the past few years. Nor does the evidence suggest further pressure on the company going forward.
What Exactly Happened?
The indictments from the U.S. Attorney of the Southern District of New York center on two different schemes. One involved four NCAA assistant coaches, who allegedly took bribes to steer players to agents and managers as they began their professional careers.
The role of Adidas’ Gatto, however, was a bit different. Gatto allegedly bribed players, with the payments concealed via routing through businesses run by other defendants, to go to Adidas-sponsored universities. Using information from the complaints, multiple reports named a top recruit this year at the University of Louisville as receiving $100,000 to attend the school. The complaint cites another $150,000 bribe as well.
The plan by Gatto appears to have been to not only boost the profile of college teams sponsored by Adidas, but to give the company an inside track in recruiting those athletes once they moved on to the pros. So far, it’s unclear as to how many players Gatto targeted and if any current Adidas sponsors were part of the scheme.
So far, it’s unclear as to how many players Gatto targeted and if any current Adidas sponsors were part of the scheme.
Does It Matter for Adidas Stock?
ADDYY stock did take a hit on the news, as noted. But it’s too early to tell whether the selloff is justified. Early indications suggest the impact should be limited, at best.
The complaint itself cites only the two instances of the alleged illegal activity. While Gatto has worked for Adidas for 23 years, as reported by OregonLive.com, and is a senior executive, there’s still no evidence that key Adidas endorsers like James Harden or Joel Embiid were ever involved in an activity that was either illegal or against NCAA regulations.
More broadly, Adidas’ strength in basketball hasn’t necessarily come from sponsored athletes. The largest NBA stars almost uniformly are Nike and Brand Jordan endorsers. The most notable exception is Steph Curry, whose own teammate has said publicly kids don’t want to wear Under Armour shoes. Harden aside, Adidas doesn’t have a superstar in its stable.
Certainly, college sponsorships drive market demand to some extent. But pro sponsorships are far more important. Thus, it seems a huge stretch to suggest that Adidas’ performance over the past few years has come from the activity alleged by Gatto. Adidas simply has made, and sold, better products.
Nor should there be much in the way of repercussions for Adidas. In theory, the NCAA could ban the company from sponsoring teams in the future. But such an action seems highly unlikely if the activities here solely were the actions of a rogue employee.
Indeed, that’s what the information so far suggests. As such, there’s little reason to see pressure on Adidas sales, or difficulties in future sponsorship deals.
Still, Some Risk
All that said, there is some risk to ADDYY stock. The information made public so far is limited. Prosecutors may disclose more illegal activity and/or more charges going forward. (Today’s charges are the culmination of a two-year investigation.)
If there was knowledge of the scheme elsewhere in Adidas’ management ranks, the company itself could face liability. In the short term, more investors may “sell first and ask questions later,” pressuring ADDYY shares.
Those modest risks aside, however, the news shouldn’t impact Adidas stock. Nor should investors think that Adidas cheated its rivals to gain its share. The company’s run has been extraordinary, and well-earned as far as we know.
Until that changes, investors shouldn’t punish ADDYY stock for Gatto’s actions.
As of this writing, Vince Martin has no positions in any securities mentioned.
