Why Nike and Adidas are down but not out

Both companies have booked large losses, but pent-up demand for sport could work in their favour.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Life has been pretty aggravating for fitness fanatics so far this year. Just when they had most opportunity - and need - to work off the frustrations of lockdowns in various countries, the sports shops and gyms were closed. The gradual, if sometimes stuttering, return to normality in many parts of the globe could release pent-up demand for sports goods.

If so, that will be great news for the likes of Nike (NYSE:NKE) and Adidas (XETRA:ADS), the top two sportswear manufacturers.

Nike, based in Oregon in the United States, is the larger of the two. It designs, manufactures, and sells sports footwear, apparel, equipment and accessories including a range for children. Its products cover a wide spectrum of sports including American football, baseball, cricket, golf, lacrosse, skateboarding, tennis and volleyball. 

Adidas is based in Germany and owns the Reebok brand name. It also designs, produces and markets sports and leisure products worldwide. Those products include footwear, clothing and hardware such as bags, balls, and fitness equipment.

This wide range for both companies should help during the rest of 2020 but offered little comfort in the first half of this year. The cancellation of major sporting events, such as the Olympic games and the European football championships, which normally spur sales of sports equipment, was a serious blow.

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Nike reported an unexpectedly large loss of $790 million (£597.3 million) in the three months to 31 May, the fourth quarter of its financial year. The loss of 51 cents per share was far worse than the 9 cents loss that analysts had expected. With higher online sales failing to make up for store shutdowns, revenue fell 38% to $6.3 billion.

Source:  interactive investor. Past performance is not a guide to future performance.

Adidas turned in a second quarter (April-June) operating loss of €333 million (£300 million) which was also more than analysts had forecast, although it did include one-off charges of €250 million related to the virus. As at Nike, sales were well down but the fall of 40% in Europe, 38% in North America and 35% overall was greeted with some relief. The online sales leap of 93% saved the day and it is particularly encouraging to note that online sales have continued to hold up even as stores have gradually reopened. 

Both companies will be seeking to sell more over the internet if shopping habits have changed irrevocably. Nike has been particularly keen to automate its factories so that it can fulfil orders more quickly, a policy that will help enormously if there is a second wave of Covid-19.

Source:  interactive investor. Past performance is not a guide to future performance.

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The big question for investors is whether the pent-up demand from frustrated amateur sportsmen and women will manifest itself now that restrictions have been eased. At least sales are not particularly dependent on travel retail shops at airports and railway stations, where outlets are likely to be affected by loss of passengers for many months.

Adidas is confident sales and profits will bounce back in the third quarter, assuming there are no more major lockdowns, and growth has already resumed in its home market of Germany. Chief executive Kasper Rorsted expects an operating profit of €600-700 million between July and September. He says half the 18-34 age group plan to exercise more as a result of the pandemic, although these plans may not translate into action.

Hobson’s choice: I argued last November that both companies had further to run. Nike then stood at $82, compared with $106 now, a profit of 30%. Stay in, or, if you missed the chance to buy earlier, look to ‘buy’ on weakness. Adidas at that stage traded just below €270 and I forecast the shares would crack through €300, which they did easily. They are now back to November’s level and the advice to ‘buy’ up to €285 still stands.