Bayern Munich thumped Arsenal (again) in the Champions League on Tuesday night. On Wednesday, their kit supplier Adidas unveiled strong results and upgraded its forecasts. But the key to hitting those targets is not European football stars, but US basketball and football players.
This is why Adidas may be willing to pay New York Knicks forward Kristaps Porzingis more in fees than it pays its own chief executive Kasper Rorsted in basic salary. It also explains why the group has been busy signing up fashion bloggers followed by millennial consumers.
Mr Rorsted says that by 2020, the company expects to generate €26bn of annual sales at an 11 per cent operating margin. Much of the heavy lifting to achieve that will have to be done in the US, where Adidas concedes it has underperformed for a long time. Its sales in North America grew 24 per cent last year, but they would have to grow at that rate for another six years just to reach the level Nike has attained now. Getting even halfway there will require substantial investment; a good chunk of the €1bn capital spending expected in 2017 (up from €650m last year) will be in the US. For all the positive vibes from sportswear retailers in the US, Adidas has to spend heavily because it needs more market share before it can raise its margins. At the operating level they were 6.3 per cent in North America last year, less than half those its bigger rival commands.
Assume that the impressive Mr Rorsted achieves his targets. Apply the stock’s current elevated ratio of enterprise value to those expected earnings before interest and tax, back out the end-2016 debt and an implied share price of €323 emerges — almost double the €171 price on Wednesday. At its average multiple for the past five years, the price comes out at a more realistic €225. Assuming debt above the current level (or applying a discount rate) would cut it further.
There is more self-help to come. Adidas is restructuring Reebok and selling its golf and hockey brands. Online sales (at higher margins) will quadruple from the €1bn seen in 2016. But a lot still needs to go right if Mr Rorsted and his expensive roster of stars are to justify the hype.
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