In this clip from THE PITCH, we give you an inside look at how a research analyst's high-conviction stock idea becomes a manager's winning position.
Watch below as Retail analyst Brian McGough pitches Hedgeye CEO Keith McCullough on Adidas (ADDYY), his new 'Best Idea' Long position.
Click HERE to learn more about Brian McGough's "Retail Pro" Product.
Click HERE to watch the entire hour long The Pitch, including 5 other analysts' Best Ideas.
. . .
McGough: "I want to take to you about Adidas (ADDYY). This is a name where, is it as sexy as the Playboy (PLBY) call I made last time on THE PITCH? I don't think so - $PLBY is a 10-bagger.
But Adidas is a name that's a 3-bagger; and that's actually a very, very big deal for a large cap company like this.
I'm no spring chicken here; I've been doing this job for 27 years and I have never liked this company. I didn't like it when I was on the sell-side, I didn't like it when I worked at Nike (NKE), and in the 13+ years we've been at Hedgeye, you've never heard me talk about it on the positive side Keith. But, I really thing they're changing their game.
Now this industry is a duopoly; you have Nike and you have Adidas. Over the past 20 years, Adidas has just been chasing Nike, trying to play their game. No one can play Nike's game better than Nike; that's like someone trying to play your game - they can't win. So Adidas finally changed their strategy about a month or two ago and laid out a 5-year model with very conservative targets.
They're very focused, moreso than I've ever seen them in my life.
They're finally getting rid of Reebok, which was one of the worst stock positions I've seen in Retail in my career. They bought it for $3.8 billion; they'll be lucky to get $1 billion for it from a private equity firm who wants to try to milk it for cash. Lo and behold, they'll probably IPO it again in 5 years; good luck with that one.
Adidas is now really getting focused on where the growth is coming from. Why this matters is that Adidas' growth has been all over the place and very volatile. Why does Nike have a huge multiple? Every quarter, every month, every year, just in-and-out, they plug away at a 10-12% top-line growth rate, with gross margin improvement, and SG&A leverage isn't a part of the story because they spend money in order to keep growing that top line.
In the case of Adidas, they've been chasing Nike but haven't been chasing that same kind of model; the one which has gotten Nike paid.
By 2025, this company is going to be 50% DTC (Direct-to-Consumer), so selling right to the consumer and going around the Foot Locker's of the world. As they do this, it's good for 100 basis points in gross margin per year, along with a more consistent ~10% top line growth.
What Adidas is doing is solidifying themselves as a very key player in a Global Duopoly.
LOOKING FOR MORE SECTOR PRO CONTENT?
Click here to for a free Retail Pro note on Dillard's (DDB): DDB | Holy Cow
. . .
The Call is our morning research call hosted by Hedgeye CEO Keith McCullough with our 40+ analyst research team. It helps small and large investors alike make better decisions via unique and investable stock/sector updates.
Click here to learn more.
