Over the past several years, the global athletic apparel industry has been defined by intense competition between the industry’s two heavyweights, Nike (NYSE:NKE) and Adidas (OTCMKTS:ADDYY).
Here’s a short history. From 2015 to 2018, Adidas leveraged unique celebrity endorsements (think Kanye West) to turn into a lifestyle brand. In doing so, they attracted non-athletes to their brand, became the king of the athleisure space and stole significant market share from Nike. Adidas’ revenue growth rates accelerated higher and Nike’s fell flat. Adidas stock surged and Nike stock didn’t.
Then Nike responded in 2018 with new stores, new marketing campaigns and new products. All of those efforts were a smashing hit. Ever since, Nike has regained lost share from Adidas and the company’s revenue growth rates have accelerated higher while Adidas’ growth rates have meaningfully slowed. Nike stock has popped, Adidas stock has lost some momentum.
Now I think it’s time for the tide to turn yet again.
Adidas has just debuted its collaborative apparel line with pop star Beyoncé’s Ivy Park activewear brand. For all intents and purposes, the Beyoncé Ivy Park line in 2020 has the potential to do exactly what the Kanye West Yeezy line did in 2015. That is, energize brand demand, re-accelerate sales growth and breathe life into Adidas stock. In short, make Adidas the coolest brand in athleisure again.
As such, I think it may be time to get bullish on ADDYY stock. The company’s growth trajectory is only going to get better from here.
Ivy Park Collaboration Has Huge Potential
There are two simple truths underlying the bull thesis on Adidas stock. First, Adidas is a lifestyle brand — not a performance brand — and they get their brand momentum from celebrity endorsements, not athlete endorsements. Second, the Beyoncé endorsement and Ivy Park line could be as big for Adidas as the Kanye West endorsement and Yeezy line.
A quick look at the past five years’ numbers proves that first truth. West and Adidas debuted their first Yeezy shoes in October 2015. Throughout the first half of 2015, Adidas was rattling off 5% to 9% sales growth rates. But following the launch, Adidas’ sales growth trajectory exploded. From the third quarter of 2015 to the second quarter of 2018, Adidas rattled off more than 10 consecutive quarters of 10%-plus constant-currency sales growth, with impressive 20%-plus growth in first half of 2016 (directly after the Yeezy launch). Adidas stock skyrocketed from $45 to $120.
That’s a pretty obvious correlation. And sure, correlation doesn’t equal causation. But considering that the Yeezy launch was the only considerable product development for Adidas in late 2015, one can reasonably conclude that the Yeezy line was the catalyst for this multi-year sales surge.
With respect to the second truth, it’s also pretty easy to see how Beyoncé’s Ivy Park line could as big as (if not bigger than) Kanye West’s Yeezy line. Kanye West is one of the most celebrated and followed male musicians in the world, especially among younger audiences. Beyoncé holds a similar position in pop culture, with arguably wider appeal and significantly less controversy. So, it stands to reason if Kanye West clothing was a huge hit with the athleisure crowd, Beyoncé clothing will be, too.
Adidas Stock Could Keep Surging
The Adidas growth narrative has fallen back to where it was in early 2015. That is, over the past four quarters, constant-currency sales growth at the company has slipped below 10%.
This won’t last long.
The launch of the Beyoncé Ivy Park line will re-energize brand demand globally. It’s true that Adidas won’t sell a bunch of Ivy Park stuff: the supply is deliberately constrained. But, Ivy Park buzz will drum up brand awareness, and consumers will up their spending on all Adidas products, as the brand once again becomes the “cool thing to wear” in the athleisure space.
Revenue growth rates will re-accelerate back above 10%. Considering the weak laps, they could even run to 20%-plus again, like they did in early 2016.
Back then, this significant revenue growth acceleration led to Adidas stock climbing from $45 to $90, essentially doubling, in a year. I doubt a rally that big will unfold this time, given valuation differences (in 2015, ADDYY stock was trading around 1-times trailing sales; today, it trades around 2.5-times trailing sales).
Still, revenue growth acceleration from single-digit territory to double-digit territory over the next few quarters should have a positive impact on Adidas stock. It may also have a negative impact on Nike stock (since the two compete for the same customer base). So if you’re looking for exposure to the athletic apparel space over the next two years, Adidas stock may be your best bet.
Bottom Line on ADDYY Stock
The Ivy Park line is a huge deal for Adidas. The last time the brand debuted a major celebrity collaboration like this was in 2015 with Kanye West. Over several subsequent quarters and years, the Adidas brand fired on all cylinders and Adidas stock roared higher.
A similar dynamic could play out this time, given the similar popularity and influence of Beyoncé. If it does, the big rally in Adidas stock is far from over.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
