adidas

A little exercise can't hurt

As private investors in particular, we're always trying to put our money into high-growth, profitable companies. If you're looking for a new investment opportunity, it's hard to get around the sports industry. For several decades now, the big sporting goods manufacturers have been making a killing, because they benefit from the trend toward more physical activity. And the days when only elite athletes wore sneakers and tracksuits are long gone. Comfortable running shoes are worn everywhere in everyday life, and even fashion designer Karl Lagerfeld, who once said: "Sweatpants are a sign of defeat. You lost control of your life!" launched a pair of sweatpants under his own label. What I'm trying to say: sporting goods have long since become socially acceptable.

Nike is still the number 1 among sporting goods manufacturers. But with German customers in particular, adidas is more popular than its American competitor. How do I see things developing in the future, and is an investment worth it here too?

The history and business model of adidas AG

Adolf Dassler was born on November 3, 1900, in Herzogenaurach (Middle Franconia). His father Christoph was already a shoemaker and had his own workshop. Adi, as people liked to call him, initially opted for an apprenticeship as a baker, though. After returning from World War I, Adi remembered his old dream of making sports shoes for the best athletes in the world. So together with his brother Rudolf, he founded the Gebrüder Dassler Schuhfabrik (Dassler Brothers Shoe Factory) in their father's workshop. Since Adi was more of an introverted tinkerer and Rudolf the extroverted businessman, there were already frequent disagreements back then. Nevertheless, the two made very good sports shoes, which were already winning gold medals at the 1928 Olympic Games in Amsterdam.

From 1933 on, both brothers were members of the NSDAP. That didn't protect them from having to serve in the war, though. Fortunately, Adi was sent back to his company after a year. Rudolf wasn't so lucky and had to flee from the Red Army in January 1945. When he was caught by the Gestapo, they wanted to take him to the Dachau concentration camp. During the transport he was first freed by American soldiers - but then taken prisoner by them. During questioning he was told that he had been denounced by someone close to him. Rudolf immediately suspected Adi and his wife Käthe, since they surely wanted to push him out of the joint company. Rudolf then denounced Adi in turn - because the Americans couldn't decide who was lying and who wasn't, the investigation was eventually dropped. The brothers never recovered from this breach of trust and the feud that followed, and they went their separate ways both privately and in business. Rudolf founded the "Puma Rudolf Dassler Schuhfabrik" and Adi then founded the "Adi Dassler adidas Sportschuhfabrik".

adidas had its real breakthrough in 1954, when Germany became world champion in the "Miracle of Bern" - wearing the popular cleats with the 3 stripes, of course. Over the years the company expanded into new business areas; in 1967, for example, the first adidas tracksuit hit the market. The company also remained in family hands after Adi's death in 1978. But when Horst Dassler, Adolf's son, also died suddenly in 1987, adidas increasingly ran into financial trouble. In 1989 it lost its global market leadership to Nike, and in the same fiscal year it had to post a loss of a whopping 130 million Deutsche Marks. The company was eventually sold and, after passing through several investors, ended up in the hands of French entrepreneur Robert Louis-Dreyfus. He converted adidas into a stock corporation and took it public in 1995. Since then, things have been looking up again for the sporting goods maker. In 2006 the acquisition of Reebok was completed, and in all other areas adidas stands on very solid ground in the global market today. Besides various fashion designers, it also works with world-famous stars to release its own collections. Y-3 and YEEZY, to name just 2. With its many sports segments and fashion lines, it's well equipped for a crisis.

What can we expect from adidas in the future?

There's certainly no question that adidas has built a very strong brand. And that inevitably leads to a strong moat, of course. So it's no wonder that the company currently expects currency-neutral revenue growth of 5 to 8% per year. That said, you also have to admit that revenue in Europe is stagnating a bit at the moment. Compared to the previous year, it most recently grew by only 3%. Whereas in North America 16%, in Latin America 19% and in Russia even 20% revenue growth was achieved. Even though overall Europe still generated the largest revenue, at €1.69 billion in Q3 2019, I see it as very positive when the other regions pick up more strongly. That reduces the dependence on individual economic zones.

I find the revenue breakdown across the various business segments just as interesting. adidas currently earns around 55% from shoes, just under 41% from apparel and only a little more than 4% from accessories. This breakdown doesn't surprise me either; after all, sports and fashion shoes have always been adidas' core business. Collaborations in particular, such as the one with rapper Kanye West and the YEEZY shoes, are extremely successful. So once again, the adidas designers have their finger right on the pulse of the times.

adidas will also keep going full throttle on digitalization in the future. Especially when it comes to e-commerce, it will surely keep expanding its business. But topics like 3D printing won't fall by the wayside either. For instance, it recently developed the Alphaedge 4D, a running shoe fresh out of the 3D printer. In the future, adidas wants to use exactly this technology in sporting goods stores as well, to offer customers a perfectly fitting shoe. At some point it will be possible to get a personalized shoe within just a few minutes. adidas also wants to do something for sustainability and therefore developed a shoe made from 100% recycled plastic waste.

And what about the dividend going forward?

Since 1995, i.e. ever since it's been listed on the stock exchange, shareholders have received a share of the profits in the form of dividends. However, this dividend has not always been raised in the past. During the financial crises in 2001 and 2010, there were dividend cuts each time. The current dividend yield is around 1.2 percent - plus the dividend growth, which comes to roughly 22.2 percent looking at the last 10 years. And that with a payout ratio of a bit more than 36 percent. If the company maintains a more stable dividend policy in the future, investors here can benefit from some nice compounding over the long term.

Conclusion:
adidas is a superbly positioned sporting goods outfitter. With its broad and diverse product range, it can also sit out a period of economic weakness. But if you always want to go for the global market leader of each industry when picking stocks, you'll probably be better off with Nike - if, on the other hand, you'd like to have a German stock in your portfolio for a change, you should definitely take a closer look at adidas.