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June 27, 2018

Adidas vs. Nike – Their World Cup Challenge

by Jharonne Martis.

The FIFA World Cup has arrived and sponsors’ retail sales tend to benefit from the exposure. The Adidas logo appears on the game balls and much of the equipment used in the tournament. Such global exposure can’t be bad, since Adidas earnings are expected to see a 140.8% jump in earnings this quarter. Adidas is the main sponsor of the competition, but Nike is also dominating the soccer play field … so who will score the golden goal?

Who dominates in the U.S.?

Although this is a worldwide event, here’s a snapshot of the brands’ sales performance in the United States regarding World Cup merchandise:

Nike has had a much higher sell-out rate than Adidas for the past seven days (Exhibit 1). They sold out of 28% of their World Cup merchandise within a week vs. 6% at Adidas. Among the countries whose merchandise are selling out: Russia, Mexico, England, Germany, Portugal and Brazil. Thomson Reuters discovered this in a collaboration with StyleSage Co., which analyzes retailers, brands and products across the globe.

As expected, not much of the World Cup merchandise is discounted. Nike has a higher average price point for its shirts and jerseys – which are the primary product category for the games: $75.09 vs. $56.32. Also, it has a lower average discount rate compared to Adidas: 11% vs. 26%.

Nike has 187 products listed in its “national teams” section from 20 soccer teams – not all playing in World Cup.

Exhibit 1: Adidas vs. Nike in the U.S.

Source: StyleSage Co.

The inventory lineup

Neither company discounts much of its World Cup merchandise, because the tournament’s popularity means they don’t have to. Yet Adidas has been offering a bigger average discount of 26% in order to avoid inventory obsolescence. Accordingly, its inventory days have been declining from the previous quarter (from 130 to 121 days) – a positive sign that inventory is moving (Exhibit 2).

Exhibit 2: Adidas Inventory Days 2016 – 2018

Source: Eikon

Meanwhile, Nike’s inventory days are lower than Adidas’ and are down slightly from the previous quarter, while maintaining a stable level of inventory days. Both companies also have healthy operating profit margins, above the industry standard. Our research shows that companies with high returns tend to have a higher probability of sustaining earnings in the future.

Exhibit 3: Nike Inventory Days 2016 – 2018

Source: Eikon

Market is referee

As an equity investment, Adidas’ stock price looks as expensive as its Yeezy Boost sneakers. After adjusting long term growth (LTG) estimates for optimism bias, the StarMine IV model places fair value at $167.52 per share. In contrast, the market price is $189.15 per share. Additionally, plugging in today’s price and solving for growth further suggests that investors are optimistic. Adidas market expectations are high with an implied 5-yr compound annual growth rate (CAGR) of 19.0%, above the 14.1% industry average.

Research has shown that sell-side analyst estimates include significant systematic errors and biases. Our StarMine Intrinsic Valuation (IV) model has identified and systematically removed three forms of analyst error and bias to improve the accuracy of longer-term estimates and enhance their ranking and sorting abilities.

Similarly to Adidas, after adjusting Nike’s LTG estimates for optimism bias, the StarMine IV model places fair value at $47.40 per share. In contrast, the market price is $74.72 per share. Nike market expectations are also high with an implied 5-yr CAGR of 13.7%.

Exhibit 4: Adidas vs. Nike StarMine Models Scores

Source: Eikon

Earnings quality

According to the StarMine Earnings Quality Model, both Adidas and Nike score in the top decile: 98 and 95 out of a possible 100. Its high scores suggest that earnings are derived from sustainable sources. The company’s operating efficiency component suggests that both companies are top performers in these areas. What’s more, Nike is sitting on a lot of cash, as indicated by the strong cash flow component score (Exhibit 5).

Exhibit 5: Nike Earnings Quality

Source: Eikon

Combined Credit Risk model

Both these companies are also top performers when it comes to the StarMine Combined Credit Risk (CCR) model scores, the most comprehensive StarMine credit model. Their scores correspond to implied credit ratings of AA- or better, suggesting they are financially stable and the probability of default is significantly small (<= 0.03%).

Exhibit 6: Peer Comparison – StarMine Combined Credit Risk Model Scores

Source: Eikon

Benchmark performance

The market seems to like Adidas’ prospects. The stock has over performed its benchmark by nearly 17 points, year to date (Exhibit 7).

Exhibit 7: Adidas Year-to-Date Stock Return vs. Benchmark

Source: Eikon

Still, the StarMine Price Momentum Model is highly predictive of the future stock price. Nike scores 89 out of 100, and scores relatively well on the mid-term and long term components of the model. Its industry component is also very strong, as the retailer’s sales are getting a boost from the strength of consumer spending in the U.S.  The stock has been trending up for the past six months and it’s expected to continue to do so in the near future.

Exhibit 8: Adidas vs. Nike Year-to-Date Stock Returns

Source: Eikon

Stats recap

The FIFA World Cup is definitely boosting Adidas’ and Nike’s earnings. Both brands have good credit, earnings are coming from sustainable sources, and their stocks are richly valued.  Still, Nike is selling out of World Cup merchandise faster, and at higher price point in the U.S. Nike also has positive price stock momentum in its favor, suggesting that perhaps it is going to score the winning retail goal.

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