Adidas Looks for Better Post-Covid Footing. Why China Could Trip It Up.
In the past two years, the sneaker industry could be seen as a good metaphor for the global economy in the age of Covid—first hit by restrictions, then buoyed by vaccinations, and now crippled by supply disruptions.
But the leading sportswear makers haven’t been treated equally by financial markets. Compare Nike ’s stock (ticker: NKE), up 66% since January 2020 (before the pandemic began), to that of rival Adidas (ADS.Germany), down more than 2% over the same period.
Granted, the U.S. stock market, measured by the S&P 500 index, is up 45% in that time, whereas the German market, where Adidas trades, has gained only 22%, reflecting differences in the way the European and U.S. economies were hit and their different recovery paths. Still, the divergence between the sportswear makers’ stock prices seems to indicate that the industry’s common global problems—mostly in the form of supply-chain bottlenecks—aren’t the only issue.
Adidas unveiled last week the extent of its woes, due to major factory closures in Vietnam—where it sources nearly a third of its production—and a 15% decline of sales in the Chinese market.
Chief Financial Officer Harm Ohlmeyer at the time explained that the Vietnamese closures—due to renewed coronavirus restrictions—prevented the production of 100 million items in the second half of this year, leading to a one billion euro ($1.1 billion) revenue loss.
Sales in China fell due to renewed restrictions in the country’s regions and cities hit by a resurgence of the pandemic. There’s also a boycott by Chinese customers, often encouraged by authorities: Adidas is one of the companies that vowed not to source cotton from the Xinjiang province after reports of human-rights abuses against Uighur Muslims, which Beijing has steadfastly denied.
Other apparel and sports-shoe makers, such as Puma (PUM.Germany), have also warned that supply disruptions would hinder sales well into 2022.
But congested ports and shuttered factories at the end of 2021 don’t explain why Adidas sales fell by 14% in 2020 while Puma’s barely declined. That is in part what led Adidas to adopt in March a five-year turnaround plan designed to boost profitability. It included a pledge to sell Reebok, which happened in August when Authentic Brands snapped up the unit in a deal valuing it at €2.1 billion.
Looking ahead, it would be easy to distinguish between the problem that is beyond Adidas’ grasp—Vietnam—and the one it can address—China. The company is trying to tackle the first issue by relocating production to Indonesia and China, where it seems to think that, for now, it’s easier to produce its wares than to sell them.
Deutsche Bank analyst Adam Cochrane noted that the Chinese problem will be harder to address than Vietnam, which he deems largely transitory. It will require investment, he writes, because brands such as Nike and China’s own Li-Ning are progressing in consumer preferences. Adidas will have to “increase investment to regain its leading brand perception,” Cochrane adds.
But the idea that the Vietnamese factories will reopen soon should also be taken with caution, so “transitory” may last for some time. Bank of America analysts think that “expectations for a quick normalization risk being too optimistic,” because of complex rules for reopening, still-low vaccination rates in the country, and labor shortages.
Cochrane has a €345 to €350 target price on Adidas, implying a 20%-plus upside on the current price. With the short term looking challenging at best, the company will have to remain focused on the best ways to revive optimism over the medium-to-long term.