Adidas sees shares drop due to China and supply chain issues

Bank of America (BofA) downgraded Adidas’ rating from “Underperforming” to “Neutral” due to uncertainty surrounding China’s recovery and supply chain issues, associated with losing shares in current market.

“The visibility of China’s recovery is poor as sportswear brands navigate cotton-related boycotts and a macroeconomic slowdown,” Bank of America analyst David Roux wrote in a research note. “Although the problems are known, we believe the headwinds are lasting longer than expected.”

Regarding China, he noted that Adidas’ greater reliance on the region as a growth engine “leaves it the most exposed” compared to its peers. China accounted for 61% of Adidas’ growth from 2017 to 2019 compared to a third for its peers, Nike and Puma. China also contributes 22% of Adidas revenue compared to around 15% for Puma and Nike.

Part of the uncertainty surrounding China’s recovery is linked to cotton-related boycotts. International brands have underperformed local brands since March 2021 due to Chinese social media calls to boycott certain Western brands in response to their stance against cotton sourcing from Xinjiang, home to many ethnic minority groups, including the Turkish Uyghur people.

The analyst said the story and discussions with Topsport, Anta and a major Nike distributor in China suggested that the direct fallout from the boycott would be short-lived; however, the boycott presented an opportunity for local Chinese brands. The three biggest Chinese brands, Anta, Li Ning and 361, now hold a larger market share for the first time than Adidas, Puma and Nike on Tmall.

Roux wrote: “We still don’t know how competition from national brands will develop. We believe that the share of opinion of domestic brands has increased relative to international brands as a result of this year’s experience and the competitive landscape has changed.

BofA’s China Economic Team also recently lowered its GDP forecast for China due to the COVID Delta Variant outbreaks, tightening credit and decarbonization policies reducing commodity production. Recent power outages also add downside risks to China’s industrial activity and economic growth.

“Adidas China recovery expectations may be unrealistic,” Roux said. “In light of the uncertainty surrounding a recovery in consumer confidence for international brands, coupled with broader macroeconomic weakness, we see a more gradual recovery slope for the Greater China region from Adidas to 2023E than expected. “

Regarding supply chain hurdles, Roux said sportswear supply chains have been under pressure since the start of the year due to high demand, tight freight markets and COVID-related disruptions.

The BofA team recently organized a call with an Asian sourcing expert from New Balance who estimated that 100-150 million pairs of sneakers in the industry were lost due to a two-month shutdown in Vietnam and of the delivery time of products from Asia to the United States. was extended for at least two to three weeks. Roux noted that the challenges were confirmed by recent Nike results in which Nike officials pointed to the loss of ten weeks of production due to plant closures in Vietnam and transit times to the United States. doubled from 40 days to 80 days.

BofA has reduced its revenue and gross margin estimates for Adidas to a level slightly below the Wall Street consensus for the current year and is now even further out of the consensus for 2022 due to a higher caution due to the potential impact of supply chain issues. Roux said, “We believe the full impact of production delays will start to materialize in 4Q21 and early 2022E, as product delivery times from order to shelf typically take ten weeks. We believe that the United States could be particularly affected by this given that it is a major end market for products made in Vietnam. “

Finally, Roux noted that Adidas has experienced slower growth compared to Nike and Puma since mid-2018, and this has been noticeable in all regions of operation. Analysis of Baidu and Google search data and website traffic for six global sports brands – Nike, Adidas, Puma, Reebok, Under Armor, and Asics – shows Adidas’s momentum is consistently below that of Puma and Nike since the third quarter of 2019.

Roux wrote: “While showing green shoots in 3Q21 so far, we note that this is not a general rally as only one of the four entry factors has shifted. We would rather see further signs of stabilization before considering a rebound in growth relative to our peers. “

Photo courtesy of Reuters


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