Adidas' Profit Warning Weighs On Nike, No Need To Worry, Though

Aug. 4.14 | About: Nike Inc. (NKE)

Summary

Adidas lowered its full-year guidance this week due to poor sentiment and weak golf sales.

After the profit warning, Adidas' shares dropped 17% and Nike's shares dropped 4%.

Golf represents only $789 million or 3,3% of Nike's total revenue.

Adidas' poor sentiment probably reflects tough competition from Nike.

On July 31, 2014, Adidas (ADDYY) updated its full-year financial outlook and it was not pretty. According to this press release, Adidas now expects to earn 650 million euros (870 million USD), down from its previous forecast between 830 million (1,110 million USD) and 930 million euros (1,245 USD). Adidas named weaker than expected retail sentiment and poor golf sales in this first half year among the reasons for its lower full-year guidance. Not surprisingly, Adidas' shares plunged more than 15% on Thursday following the update.

Shares of Nike (NKE), Adidas' strongest competitor, dropped 4% as well, reflecting the bad news about retail sentiment and golf sales from Adidas. As I argued in this previous article, I favor Nike over Adidas, because of Nike's diversified marketing strategy, innovative power and strong performance in Europe. Further, I stated in my latest article that Nike should be able to grow revenue with double digit numbers in the upcoming years, supported by strong growth in soccer revenue. Now, should investors worry about Nike's growth prospects following Adidas' profit warning? In my opinion, investors should not worry.

First of all, the impact of slowing golf sales is very limited for Nike. In fact, Nike investors already noticed slowing golf sales in the fourth quarter earnings report, as Nike reported flat golf sales of $789 million for the year ended May 31, 2014. Despite the slowing golf sales, Nike managed to grow revenue by 10%. In terms of Nike brand revenue, golf only represented 3.3% of Nike's total brand revenue. Therefore, slowing demand for golf products is not material for Nike's top and bottom line performance.

Second, Adidas mentioned poor retail sentiment as one of the reasons for its profit warning. This is in contradiction to what Nike's CEO Mark Parker stated in their latest conference call on June 26, 2014 (see quotes below). Only several weeks ago Nike stated that the company expects low double-digit revenue growth in the current quarter. I find it unlikely that the market conditions have changed dramatically and that Nike will experience lower demand as well.

We expect Q1 reported revenue to grow at a low double-digit rate, driven by tremendous energy around the World Cup and continued growth in North America, Europe, China and the emerging markets.

For Q1, we expect demand creation to grow at approximately 30% as we continue to leverage the energy of the World Cup.

Therefore, I consider the profit warning from Adidas is another signal that Nike is very successful in competing with Adidas, especially in Adidas' home market Western Europe. Last year, several reports indicated that Nike gained market share from Adidas in Western Europe and that Adidas' leadership in the Western European markets is in real danger. According to Nike's latest earnings report, sales in Western Europe were up 14% (on a currency neutral basis) for the full fiscal year. Considering Nike's strong performance and Adidas' profit warning, Nike might take over the leadership position from Adidas in the upcoming year.

Overall, I believe Nike investors should not worry about the fact that Adidas named slowing golf sales and poor retail sentiment among the reasons for a disappointing full-year guidance, because golf revenue represents only 3.3% of Nike's total brand revenue and Nike mentioned no signs of slowing retail sentiment in their latest conference call on June 26, 2014. As a result, I am confident that Nike will continue to outperform Adidas and I still favor Nike over Adidas as my favorite large-cap sports apparel stock. Nike investors should take the opportunity to buy the recent dip as I expect shares to recover in anticipation of Nike's first quarter results.

Disclosure: The author is long NKE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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