Adidas surges ahead of Nike, Under Armour

The companies have competed for a long time to sign the biggest global sports stars to their brands. Nike has the likes of footballer Cristiano Ronaldo, golf’s Rory McIlroy and Jason Day, and tennis players Roger Federer and Rafael Nadal on its roster, while Adidas can boast the likes of footballers Lionel Messi and Luis Suarez, golfers Jim Furyk and Justin Rose and tennis players including Jo-Wilfred Tsonga and Tomas Berdych.

But Adidas has gone beyond the traditional sports-focussed rivalry, increasingly signing up celebrities and picking fashion trends to drive US sales. The latest Yeezy Boost trainer, a collaboration between Adidas and Kayne West, is flying off the shelves, for example, and the company has struggled to get enough stock to meet the demand. Its retro Superstar and Stan Smith trainers are other best-sellers.

Critics say Adidas is becoming a fashion brand rather than a sports brand, an allegation dismissed by chief executive Kasper Rorsted. However, the truth is that both Nike and Adidas are fashion or leisure brands as much as sporting goods companies. Rorsted is mimicking the world’s best fashion retailers by pledging to speed up the time it takes to get new trends from drawing board to store and getting fresh stocks of best-selling items to stores. It’s also perceived to be a step ahead of its rivals in driving e-commerce sales and targeting the younger generation.

It’s not all rosy for the German company, which has further to go in restructuring its business. While it has shaken up its US business, its profitability lags Nike’s. ‘We are still in catch-up mode in North Americas says Rorsted. Adidas’ Reebok brand still needs turning around, while it is struggling to find a buyer for its Taylormade golf business. 

Still, Nike is struggling to keep pace. For now. Nike and Under Armour have both suffered from waning demand for basketball shoes and other more traditional sports goods, for example. It’s no wonder Adidas has a bullish outlook, and an ambitious set of growth targets through to 2020.

But fashion is fickle, and while Adidas is on the right side of the trend for now, the situation could flip at any time.

Nike’s most recent quarterly earnings beat forecasts, raising hopes that better times are coming. But it also faces major challenges. It makes most of its goods in the likes of China and Vietnam, and is threatened by president Donald Trump’s protectionist policies. That’s not going to help its position in the increasingly competitive US market.

And what of Under Armour? The US upstart posted 26 consecutive quarters of sales growth of more than 20% and signed up its own roster of sports stars including the likes of Major League Baseball, world number one tennis player Andy Murray and golfer Jordan Spieth. Its double-digit growth in the US, by far its biggest market, has slowed very suddenly. The company has blamed competition from the like of Adidas as well as a slowdown in the wider US retail market. The question now is whether the slowdown is a blip, or something more long-term.

Despite a steep drop in its shares, Under Armour still looks expensive compared with earnings. That’s not good news given the slowdown in sales. Adidas is also looking expensive compared with its historic valuations, while Nike suddenly looks relatively cheap.

However, the momentum is very much with Adidas. In trading terms, perhaps Adidas is the momentum play, Nike the value play, and Under Armour the outside bet.