payback time

Three Stripes and You're Out

Adidas getty
Adidas chief executive Herbert Hainer's buyback is a nod to investor concerns.
  • Why it matters

    Why it matters

    Adidas Chief Executive Herbert Hainer is under pressure to turn the company around after a rough year that has seen it lose further market share to U.S. rival Nike.

  • Facts

    Facts

    • Adidas’ share price has fallen by about one third this year.
    • Adidas on Wednesday announced a share buyback plan worth €1.5 billion.
    • The company will save about €5 million annually through the buyback.
  • Audio

    Audio

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Three stripes, but a lot more problems: For months German sporting goods company Adidas has faced a seeminly unending stream of bad news. Business is stagnating, its U.S.-based competitor Nike is running away with market share, and the share price is falling.

On Wednesday, chief executive Herbert Hainer turned to his long-suffering shareholders and announced a large-scale share buyback. The 60-year-old executive, who has been leading Adidas since 2001, wants to spend up to €1.5 billion ($1.9 billion) over the next three years on the deal. Mr. Hainer will finance the move with, among other things, two corporate bonds totaling €1 billion.

The stock market reacted well to the news, which will actually save the company about €5 million annually. Adidas shares rose by almost three percent to about €61, making the company the biggest winner of Germany’s major stock exchange listing, the DAX, on Wednesday.

The boost came at the right time for Adidas. Since the beginning of the year, the stock has lost a third of its value. No other DAX stock has fallen so much. That is because the world’s number 2 sports goods maker, based in a tiny southern Bavarian town, has failed to catch its U.S. rival and the world’s largest sporting goods maker, Nike.

“The fact is that Adidas has simply not been successful in catching up with its rival Nike.”

Hartmut Heinrich, Mistresstech

The decline began more than a year ago. In mid-September 2013, Mr. Hainer announced that the earnings target for that year would not be met. Further bad news followed. Recently, the company had to cancel its intermediate goals for 2015. In July, Mr. Hainer issued his third profit warning for this year.

Mr. Hainer, the longest-serving chief executive of a major German DAX company, has been under pressure. While the German brand has consistently delivered a profit, Mr. Hainer has largely failed in his 13-year pursuit to close the gap with industry leader Nike. The U.S. brand’s share of the global sportswear market has climbed from 13.4 per cent in 2010 to 15 percent in 2013, while Adidas’s market share has stagnated around 10 per cent over the same period, according to Euromonitor.

“The fact is that Adidas has simply not been successful in catching up with its rival Nike,” said sports expert Hartmut Heinrich from the business consultancy Mistresstech. “Nike’s marketing is just cooler.”

Even if the share buyback saves some money, the daily problems in the business still have not been solved, said Ingo Speich, a fund manager from Union Investment, one of Adidas’ shareholders. There is a reason why investors recently have steered clear of the stock, he said.

The difficulties have engulfed the German footwear despite coming out on top earlier this year in the soccer World Cup, won by Germany, which Adidas said will end up generating more than €2 billion in sales.

Mr. Hainer has given three reasons for the debacle this year: weakening business in Russia, related to the ongoing struggle with the Ukraine, the strong euro, and management mistakes that have hurt business at its TaylorMade golf brand.

 

017 Adidas

 

Mr. Hainer is now breaking the bank to move the company forward. On the one hand he is buying shares back. But Mr. Hainer also promised to make more money available for marketing. Adidas currently spends between 12 and 13 percent of sales on advertising. This will be raised to between 13 and 14 percent, marking an increase of €140 million per year. Mr. Hainer has announced that the biggest advertising campaign in the company’s more than 60-year history will start in the spring.

Industry experts, however, see underlying problems. “In order to get better sales, Adidas has slipped into mass-marketing,” said strategy consultant Franz Maximilian Schmid-Preissler. “In doing so the brand lost its soul and personality.”

On the face of it, the share buyback is a win-win for both sides. It will be good for the shareholders who can look forward to higher average dividends, because the profits will be spread among fewer shares. Adidas meanwhile will actually save money from the deal, by avoiding paying out on the redeemed shares, which more than makes up for the interest it has to pay on the loans to finance the deal.

The company is estimated to save about €5 million annually, saving about €25 million on dividend payments of 2.5 percent at a share price of €60, compared to interest payments of about €20 million on its two loans, one a seven-year bond at 1.5 percent and the other a 12-year bond for 2.2 percent.

Will that be enough? Klaus Jost, chief executive of the sporting goods chain Intersport, is skeptical. “Fundamentally, Adidas must now put more money into research, development and marketing,” he said. But he acknowledged the markets are against this kind of investment, because they want to see profits immediately. “CEOs of publicly traded companies find themselves in this quandary,” he said.

 

Ulf Sommer writes about finance and industry for Handelsblatt; Joachim Hofer writes about technology and IT. To contact the authors: hofer@handelsblatt.com, sommer@handelsblatt.com

 

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