Adidas/Nike 'Disaster Gap'

Results are still abysmal based on every metric I use, and it's an insult to Nike to stack the two against one another. But I think that Adidas finally hitting bottom is a net positive for both.

 

 

The ‘Disaster Gap’ between Nike and Adidas is narrowing. Let’s not mince words here…Adidas’ results are abysmal. Sales down 3%, EBIT –63% and EPS – 94%.  But a key takeaway is that it has narrowed the gap with Nike when looking at the rate of change from 13 weeks ago.

 

This is best evidenced by overlaying each company’s trajectory on our SIGMA chart (time series triangulation of sales, inventories and margins). Adi is still in the ‘death zone’ where inventories are growing too fast and margins are down. But it is clear that we’ve seen the bottom, as the rate of change is improving on the margin (sales-inventory spread going from -30% to -14%, and margins ONLY down 5 points instead of -8.5 pts).

 

Adidas/Nike 'Disaster Gap' - 8 5 2009 11 21 49 AM 

I’m mixed on this as it relates to Nike. Why? Ordinarily I’d like a desperate competitor as it would presumably give the stronger player the opportunity to step in, take it on the chin, and go on complete offense to crush the competition. Long term, that’d be ideal, and short term it would hurt. Understanding that is traditionally a great way to make money in this name. The problem is that as fiercely competitive as Nike is, it does not think about ‘crushing the competition’. It beats to its own drum. A weak competitor (i.e. Adi with an extra hundred million in inventory) acting desperately is problematic for Nike. A less desperate Adidas (which, mind you, at about $15bn vs. Nike at $18bn is larger than most US investors think) eases potential margin pressure from Nike.

 

As a sidenote, check out the quality gap between the two companies in the chart. Nike is so dang tight – managing a sales/inventory spread between a band of +5% and -5% and margins between +2 and -2pts yy. Adidas can’t even compare.


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