Adidas: Time To Dust Off The Short File

I'm getting more cautious on Adidas. Yes, it is a great global brand, and overall a reasonably well-run company. CEO Hainer reaffirmed guidance again today, the same guidance he said in the past that he would hit 'come hell or high water.' To his credit, it appears that he's hitting it. But I think they're pulling out all the stops this year, and with margins at peak, I wonder how much gas is left in the tank in '09. Here's what concerns me...

1) The German consumer confidence number came out today. Not good. -53% vs. expectations of -42%. While Germany is not its biggest European market despite its domicile, Europe overall accounts for 45% of sales and 75% of operating assets. Weaker German confidence, higher UK inflation (+3.3%) and a downturn in UK retail sales will not help this story - especially if the dollar strengthens.

2) The Euro Champs (going on right now) are boosting the athletic space. Then we deal with the hangover.

3) Same goes for the Olympics - for which Adidas is the sole apparel sponsor. 2Q and 3Q09 will be tough to anniversary.

4) US will not get any easier. The Reebok brand is seemingly going away. Retailers don't want it, consumers could care less, and market share for both Adidas and Reebok combined in the US is about in line with New Balance. That's sad. With Under Armour aggressively pushing into the footwear space, this should put pressure on the incumbents (especially Reebok). Let me know if you want any specific market share numbers.

5) Did I mention that cost pressures in the industry are exploding? Check out my early posts outlining the emerging secular margin challenges. Bottom line is that capacity growth in Asia is slowing, pricing is headed higher, and the supply chain is being stress-tested to a greater degree than we've seen in 10 years.

There's got to be some really powerful bull case out there to justify 9x EBITDA. I'm having a tough time finding it. This is officially a name where I need to dust off the short file.

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