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Morningstar | Narrow-Moat Adidas Continues to Capitalize on Fashion Trends as Evidenced by Strong 2018 Results

Adidas is the number-two player in the global athletic market with a deep branded portfolio and a long history of product innovation, operating for almost 70 years. The company sells its Adidas and Reebok brands globally, including in Europe (27% of sales), North America (21%), Asia-Pacific (33%), and many emerging markets (15%), indicating that the brands resonate widely with different consumer cohorts. We foresee Adidas benefiting most significantly from China’s middle class, which is expected to double by the mid-2020s (according to Brookings) and has shown an affinity for soccer (half of the world’s top soccer players reside in that market). With only 18% of the Chinese sporting goods market, this is a key growth area for Adidas, in our view, although the company will have to go head to head with leader Nike, which has 19% share.North America has also remained a growth opportunity over the past few years as Adidas has focused on aggressive marketing to tout its differentiated products and has partnered with athletes and social influencers to increase awareness. On-trend products have resonated with consumers, with a push to launches focused on lifestyle wear as opposed to the active wear focus at Nike and Under Armour. Successful straddling of sport and lifestyle segments through product innovation has led to rising product demand, supporting our thesis that the company should garner excess economic profits over the next 10 years, despite our view that its wins from fashion trends are likely to moderate. Looking forward, cyclicality in fashion, which tends to falter every five to seven years, making the achievement of continued improvement tricky, could affect profitability. However, we think the company's strong association with the expansive global soccer market should continue to aid its brand equity, providing stability to its revenue and profit stream, offsetting any fashion volatility. Additionally, overall profitability has risen with Adidas’ divestitures of underperforming brands TaylorMade and CCM (6% of 2017 sales), which should reduce complexities and narrow the company’s focus--both supporting brand equity over time.