Recent share price weakness in Adidas has created an attractive buying opportunity in one of the world’s leading sportswear brands.

The German trainer and sports apparel maker trades at a substantial discount to its main rival Nike.

Its US counterpart has a larger share of the market and has stolen a march on Adidas in certain areas but the gap between the latter’s forward price to earnings ratio of 28 times and Nike’s 40 times
(based on consensus forecasts) looks too large.

We see scope for two of the key issues which have dogged Adidas’ shares in recent months to ease, namely a Chinese boycott and Covid-related production issues in Vietnam. This should allow the market to focus on its growth strategy and some specific near-term catalysts.

Along with Nike, Adidas is part of a duopoly in the global sportswear market. These companies’ brand strength and distribution capacity are in a league of their own, creating very strong barriers to entry and helping to protect their profitability.

‘ATTRACTIVE LONG-TERM GROWTH’

While the two businesses are often compared with each other, investment bank Berenberg says ‘market share is not a zero-sum game, and both Adidas and Nike continue to take share, underpinning attractive long-term growth’.

For Adidas, Berenberg forecasts a compound annual growth rate in earnings per share between 2021 and 2025 of 20%. It sees this being driven by improved profitability as Adidas sells more of its products direct to consumers.

In December Adidas completed its second share buyback of 2021 – with returns to shareholders through buybacks and dividends highlighted by the company as a key component of its ‘Own the Game’ investment strategy. This was unveiled in March 2021 and sets the agenda out to 2025.

The ‘Own the Game’ strategy includes targets to double e-commerce sales to as much as €9 billion and increase revenue by up to 10% a year. Also, by 2025 direct to consumer sales are expected to account for half of all sales, compared with 41% in 2020.

NEAR-TERM CATALYSTS

As well as this exciting medium-term growth potential there are some obvious catalysts in the coming 12 months which we think could help get Adidas’ shares running in the right direction.

An ‘Innovation Day’, delayed thanks to Covid considerations from December 2021 to March 2022, should help boost investor confidence in the company’s product pipeline as it will be a chance for Adidas to go into detail about its growth plans.

Also happening in the first quarter of next year, Adidas expects to complete the $2.5 billion sale of Reebok to Authentic Brands Group with a decent chunk of the proceeds being returned to investors.

Finally, the winter World Cup in Qatar at the end of 2022 should provide a shop window for the brand, given it is the kit manufacturer for several of the top teams due to compete at the tournament.

Qatar’s human rights record makes this a somewhat controversial event and Adidas is also having to balance human rights concerns in China with an aspiration to capitalise on what is one of its fastest growing and most substantial markets.

CHINA BOYCOTT

Adidas has been boycotted in mainland China along with other Western brands after raising concerns about forced-labour allegations involving Uighur Muslims in the Xinjiang region.

The company faces a difficult balancing act of not damaging its brand by being soft on human rights issues while also not alienating Chinese consumers. The Beijing Winter Olympics in February, where Adidas is kit manufacturer for the German and British teams, is a potential flashpoint.

Covid-linked manufacturing problems in Vietnam look like they are starting to alleviate, reflected in Lego’s recent announcement of plans for a new $1 billion facility in the country.

Investors buying the shares need to understand that market sentiment is weak towards Adidas for the above reasons, and for recent downgrades to earnings forecasts. However, some of the best returns can be made from buying shares when others have lost interest. We think it’s worth taking the plunge with this company now.

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