Adidas plans to deepen its ties with West, who will lend his name to athletic shoes, clothes and accessories, plus a line of stores. That’s part of a trend for sports brands to target high-profile individual stars, rather than entire teams – though Nike’s announcement yesterday that it will stop selling golf equipment, years after Tiger Woods’ star flamed out, shows the perils of these links.
Adidas has long traded at a discount to Nike, but that trend reversed earlier this year. The company has done a lot right, and it deserved to have a big boost to its shares, which hit an all-time high on Wednesday.
However, the share price is factoring in a continuation of the current strong performance – and more. The close to 30 percent premium to Nike looks hard to justify, particularly given that, even after the latest guidance, Adidas’s operating margin is still only around half of Nike’s.
The strategic initiatives are welcome, but they will take time to lift Adidas’s performance up another notch – and that’s needed given the punchy premium to Nike. Becoming more like a fashion retailer raises its own risks. Being in vogue has driven demand for its trainers.
But fashion is notoriously fickle, and if it were to lose its edge, then it could be left with unsold stock, which it would have to sell at a discount, damaging profits. That looks far off for now, but with such a high valuation, it can’t afford any style slip ups.