Adidas Results Spell Trouble for Nike

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Germany-based athletic apparel company Adidas announced earnings for its most recent quarter that show how successful it has become as a challenger to Nike Inc. (NYSE: NKE). The American company already has shown a slowing of growth.

Adidas, which owns U.S.-based Reebok, posted its numbers:

  • Currency-neutral revenues increase 12%
  • Gross margin improves 2.4pp to 50.4%
  • Operating margin increases 2.7pp to 14.0%
  • Net income from continuing operations grows 35% to € 549 million
  • Basic EPS from continuing operations increases 33% to € 2.70

A euro is worth 1.16 dollars.

Much of the growth came on Nike’s home turf, in addition to China, a market so huge that global apparel businesses have to do well there to post strong results. Adidas CEO Kasper Rorsted said:

The company’s strategic growth areas – North America, Greater China and eCommerce – were again the main drivers of our strong top-line performance during the third quarter. We are even more pleased with the quality of our growth, which is clearly reflected in the exceptional profitability improvement in Q3.

The long-term performance of Nike’s shares shows the extent to which Wall Street has become skeptical of its growth opportunities. Nike shares are off 8.5% to $55.75 over the past two years, compared to an advance of 28% for the S&P 500 over the same period.

Nike has been criticized for the massive endorsement packages it has given to some athletes, some of which range into the tens of millions of dollars. Investors question whether the returns on these are anywhere close to the expenses.

Nike’s latest quarterly results, reported September 26, showed how significant its challenge is as it attempts to compete with Adidas:

NIKE, Inc. today reported fiscal 2018 financial results for its first quarter ended August 31, 2017. For the quarter, sustained revenue growth in international geographies and NIKE Direct globally was offset by an expected decline in North America wholesale revenue. Diluted earnings per share for the quarter were $0.57, down 22 percent driven by a gross margin decline, a higher effective tax rate and higher other expense, net, partially offset by lower selling and administrative expense and a lower average share count.

Results in Nike’s own backyard speak volumes.