To the company’s credit, Adidas (OTCMKTS:ADDYY) managed to convince investors that its disappointing 2019 outlook wasn’t quite as bad as it initially seemed, unwinding the stumble Adidas stock took in the middle of last week.
Still, the athletic apparel and footwear maker is fighting an uphill battle, including against rivals like Nike (NYSE:NKE) and Under Armour (NYSE:UAA, NYSE:UA), that investors may want to sidestep until there’s more certainty in its story. Its plans may or may not pan out as well as hoped, or take shape as soon as hoped.
Never even mind that ADDYY stock is still dancing with a turn out of 2018’s uptrend into a downtrend.
On Wednesday, Germany-based outfit Adidas reported its fourth quarter and full year results. Currency-neutral revenue grew 8% in 2018, boosting margins higher to the tune of 110 basis points, to 10.8%. Operating income was up 20%.
Investors, however, were less than thrilled with what the company said lies ahead.
For 2019, Adidas anticipated revenue growth of between 5% and 8%, held back by (among other things) supply chain woes.
The first half of the year now underway will see even slower growth before accelerating, as the company reconfigures capacity to accommodate solid demand in North America, where Adidas has doubled the size of its business in just three years.
Adidas CEO Kasper Rorsted put it like this:
“Right now there is no way of mitigating it [the impact of supply chain problems], but if you look at the overall outlook we’re still looking at a 10 to 14 percent net earnings growth which is very strong, (and) taking the margin to 11.5 (percent) in 2019, which was the original target for 2020… so we’re pretty much one-year ahead of our plan and our targets for 2020.”
Doubts Remain over Adidas Stock
Not all analysts are convinced the company will be able to snap out of its slowing growth trend, however.
Wedbush analyst Christopher Svezia noted following the posting of the Adidas’ 2019 outlook:
“Adidas is facing aggressive competition from brands small and large, including Nike, which is expanding the market [and] gaining share in the company’s home turf. Furthermore, positive reception of new merchandise is also not a given, particularly in the face of intense competition from the likes of Nike, Puma, Champion and more.”
Adidas CEO Kasper Rorsted even conceded, “There’s no doubt that the bigger competitor [Nike] has come back,” during the conference call, acknowledging that Nike’s 8.5% improvement in North American sales last quarter was a clue that the iconic Nike had reclaimed some of its past mojo.
Perhaps worse, European sales were off by 6% last quarter, while Nike mustered 8% growth in Europe, the Middle East and Africa. Adidas gets roughly one-third of its business from Europe.
Whatever Adidas is going to do, it must do more of it, and do it faster.
Adidas Stock to Drive Rhetoric
The data and outlooks paint a mixed picture for current and prospective owners of Adidas stock. This is a scenario, however, where the headlines may be guided more by the stock’s action than the stock is guided by headlines.
And, ADDYY stock has quietly been transitioning out of an uptrend and toying with the prospect of a sizable pullback.
For the past twelve months, Adidas shares have made no net progress. During that period though, the stock has logged its first lower low and lower high since 2014, officially ending a rally that’s coincided with the company’s North American rival. The stock’s slowdown preempts the headwind rooted in nearing its maximum potential in North America and its declining sales in Europe.
The waning pace of progress may also reflect the market’s perception that Adidas is losing an edge against Nike.
Cowen managing director John Kernan suggested that innovation could restore a more Nike-like valuation premium for Adidas stock. Kernan even thinks that could happen.
“We think (Adidas head of global brands) Eric Liedtke and team are ready to step up innovation, as Prophere, Deerupt, Solar Boost, POD and Pure Boost look promotional and less competitive to us,” he said.
If ADDYY shares end up making a lower low, however, it will be the market’s way of saying it believes Adidas continues to lose ground to its rivals. A breakdown could make the narrative turn decidedly bearish.
In other words, pay as much attention to the chart as the headlines themselves. The company raises more questions than it answers, and its revival efforts may or may not get the full traction they need.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can learn more about James at his site, jamesbrumley.com, or follow him on Twitter, at @jbrumley.