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Sportswear Brand Wars - Half Year 2018 results and analysis for Nike, Adidas, Puma and Under Armour

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Sportswear Brand Wars - Half Year 2018 results and analysis for Nike, Adidas, Puma and Under Armour

  • 2018-08-29 15:23:52
  • David Braun



With the results of all 4 brands out for the first half of 2018, we found strong threads binding their strategies. So before we get to the performances of individual brands, here are some overarching themes and key drivers that deserve mention.


  • Strategy: A distinct move from topline growth to bottom line and all the improvements and nuances that go with it.
  • Who: We see a heightened focus on relearning the customer and his/her needs/preferences and buying behaviors - building new relevant product and relationships, integrating brand essence into an evolving and unfamiliar territory.
  • Where: An acceptance towards where the next wave of sales will come from and how the customer spending habits and connections are changing – read Digital Commerce, Enhanced Omnichannel and DTC experiences and Geographical focus.
  • What: Brands are recognizing that a tighter, more focused (and appropriate) assortment of right products will drive the bottom line, reduce inventory and improve working capital. Not to mention improved and concentrated storytelling of products, creating hype and the most coveted ‘pull’ model (but organically created- not manufactured).
  • How: Restructuring the existing businesses in relation to people optimization- teams, skills, and places of work. Adding technology blocks to improve speed, understand customers, capture opportunity, reduce costs and towards the creation of better, future-sustainable product. Doubling down on efforts to understand customer behavior and eventually to better optimize time, effort and money and create lasting brands and customer relationships.

Each of the 4 brands we compare here has taken steps and are in the midst of applying the above facets and have been working towards this so for the last 2 years or so. While most of this starts when the going gets tough (read Nike or UA in the past year and a half), we have brands that have recognized the global economic signs and have also pushed on some if not all of the above parameters to make brand growth more sustainable.

Now let's look at the summary of the top 4 brands in this first half of 2018:

Summary for the Lazy or Time Constrained:

Nike, bounced back with its best performance in over a year to lead the pack, with its push on younger and more millennial styles- finally saw over 10% growth in its footwear business and even stronger in apparel clocking almost 15% over the first half. With the ship being upgraded from the inside out, and the first season of fruit being borne on new plants, it looks like Nike will continue its direction for the rest of this year building on its recent new platform successes.

Adidas, on the other hand, seems to have finally slowed a bit and fallen into a similar product trap that Nike was in only 12-18 months ago. Overall Adidas did extremely well on financials concentrating on profitability (+20%) and improving everything non-product. Slow down on the Courts was as per expectation, as was the trend around the plateaued hype and overreach on the NMD and Ultrabooks. Adidas needed some real excitement. They found some in Deerupt and continued volume sales in styles like the X-plan, but overall these could not make a moral difference. The reception to the attempt to breathe some life in the Gazelles and older styles, and to create new platforms on the Boost base was lukewarm at best, and somewhere the brand seemed to miss out on creating a new working platform that will resonate with the customer in the long run and got wrapped up in their own hype and internal marketing that does not always translate into sales – An easy trap to fall into, but one that keeps repeating across brands and businesses, not constrained to the sporting goods industry.

Puma kept their engines revving and humming, steadily continuing to build and grow on their styles, each season reinventing a little more, trashing the old and trying the new. Instead of individual ripples, Puma continues to build its wave. It was a steady performance now 4 seasons on with womenswear in the lead. Puma was the one brand that won consistently on all fronts, be it revenues, profitability or product. (15% currency neutral revenues, Net earnings up 37.8%, and continuous new product - with margins higher by 1.6% in the first half)

Under Armour improved their Footwear mix in Q2 by close to 2 points over last year, with hope for more. A strong performance internationally at around 30% in the APAC, EMEA regions, they finally held steady on home turf. Burning through old merchandise and dropping on margins, still a long way to go with regard to all key metrics, but felt like the parting of clouds for a bit of sunlight. Q3 and Q4 look promising if we see this trend continuing, but currently only in its own context.

The Full Story for the Interested and Invested:

The Full Year 2017 Story:

Nike

Reversing all its negative trends between 2017 and 2016, Nike started and stayed strong across the first 2 quarters. It led on all counts in this first half: Number 1 on revenue (which was only natural), number 1 on income/revenue mix at 12% and it even grew its income in Q2 by 13% over last year matching its overall revenues in the same time period. Here are key factors that worked:

  • Product: The introduction and build-up of a list of new products and platforms- led by their Air franchise (the 270s and build-up of its vapourmax), supported by the latest React series and the refreshing Pegasus 35s brought youth and relevance to customers (A welcome move from the constant re-imagination of the older Air series- while relevant to the older Nike customer, may not have had relevance to the younger customers). Weaving and embracing the aesthetics of the new with the technology trove of Nike has begun paying dividends – faster, visible and more lifestyle footwear.
  • Place: Growth in international markets led by Greater China with a massive 35% growth (25% currency neutral), made this region the 3rd largest market for Nike with a continued massive opportunity in the region to keep pushing positive growth.
  • Place: Nike’s continued foray into Digital space (a remarkable 41% for the quarter) – be it on their own with additional investment and acquisitions (read Zodiac) and the Nike and SNKRS apps or via their online trade partners like TMall, Zalando, ASOS, and the Amazon experiment. The push is clearly on in the right direction and the seeds are well sown and should bear disproportionate fruit in the future 3-5 year horizon if not earlier.
  • Other noteworthy items on the list are some corrections from Nike in tightening of the Jordan franchise to rebuild as a pull model, their quickly growing apparel business and their excitement around the potential and steps towards capturing a larger share of the fabled women's market potential.


Adidas

Shifting gears, moving from an F1 race to Drift-mode, concentration moved from topline to profitability with revenues slowing down to a mere 4% (10% currency neutral), primarily slowed by Western Europe. However, profitability improved by 20% YoY in Q2. And here were the key drivers leading up to this:

  • Product: With newer iterations of the old, and a lot of innovations not yet scale-able or in developmental stages, the brand has definitely felt the brunt in the first half of the year, something that may well continue into Q3 if not further. As customers search for the new, they find it in competing brands and something we definitely saw this season with minimal growth in footwear with 2.4% in Q2 and a negative half point for the first half – and this with a year that should have had additional sales with the Football World Cup. Fortunately for Adidas, the World Cup may have arrested the significantly negative turn on its footwear business for the first half. And only by Creating the New in the second half will their fortunes change again to a more sustainable growth. As the old adage goes- the product is king.
  • Place: Greater China was the bright spot against the glum Western Europe news, that saw a 27% growth leading the charge for Adidas in international business, and a strong North America business also kept the business growing (7% actual, 16% currency neutral) in the homeland of Nike and Under Armour. Overall, Adidas kept its growth ticking across the International landscape except at home and in the emerging markets ensure a strong performance overall.
  • Place: The digital story continued with Adidas as well, with a robust 26% growth, with the Adidas App seeing over 2.4 Million downloads partially thanks to the marketing around the World Cup, and the app is launched in 13 countries. The potential here, however, is not incremental but exponential and this would a spot to really double down on for Adidas.
  • Profitability: The Kohinoor of the first half for Adidas. A lot of behind the scenes work saw reflections in the business profitability. Inventories shrunk by 6% while revenues grew by 6%, Margins increased 2.2% over last year to 52.3%, by far the leading best across brands overall and profitability over last year increased by 20%! All said and done if there was one thing that I would see as a shareholder,(against all the critique on the product) this would be it and Adidas performed on all fronts here – a remarkable set of numbers by Kasper’s team. The only number that I would love to see improve would be the revenue to net income percentage, one that is still over 4 points off Nike.


Puma

The original fashion friendly sports brand chugged away quietly not causing ripples but continuing to build its larger wave. A continuing strong and consistent performance with 10.5% (15% currency neutral) growth for the first half, the brand stayed true to its plan around its focus around its super powerful and young brand ambassadors in the women. They built on the World Cup and had the number 2 and 3 goal scorers in Griesmann and Lukaku. They kept the engines revving with Lewis Hamilton and they found a new voice in basketball (hopefully a good one- only time will tell) in Jay-Z turning Creative Director for their renewed foray in the basketball arena. They built on the Muse, Defy and Phenom platforms and brought some ‘Thunder’ in fashion staying a step ahead of the competition that reportedly sold out in hours.

  • Product: In the brand's strength, the women's arena, they built on their Phenom, Muse and Defy platforms deftly moving from the older best sellers into the new, something most other brands struggled with. They brought out the ‘Thunder’ to beat the competition at the fashion game and tried a few more silhouettes in running with limited success. With a load of new/improved platforms expected very soon and running through the second half of 2018, across men and women, we should see a firm build up of product going forward as well.
  • People: A continued build on their brand ambassadors, by means of promotion or now with the addition of Jay-Z as the new creative director for their foray into Basketball after almost 20 odd years! Puma seems to have a laser focus on the people area. Let's hope this keep working as has in the past - but a comeback into a sport after 20 years will always be an uphill task regardless of if we had a J in the name or K.
  • Place: While growth rates were moderate at 8.3%, currency adjusted they registered the strongest growth in the Americas and APAC region averaging 26% in the APAC region over the half (currency adjusted) and the Americas with 17%! Again, super strong growth across international.
  • Organization: Team Puma also expanded and upgraded their headquarters in Herzog to have more people on the team together with a capacity of over a 1000 people. More people working seamlessly together should, in theory, mean better and faster progress.


Under Armour

Every sporting goods business has a similar economic condition to face regardless of if they are the newest kid on the block or the oldest, and Under Armour is still struggling on profitability. But this first half has seen them improve on most fronts following the same mantra as shared at the start of this article.

  • Product: The HOVR franchise alongside Project Rock and the lower priced footwear franchises kept Under Armour going for the moment with there being moderate heat around this in their footwear, however small the actual dollar business was, with their footwear beating their apparel business in terms of growth percentage in Q2, growing to 23% of Business vs a 21.7% same time LY.
  • Place: International growth on both quarters, with a massive 28% and +30% in both APAC and EMEA for Q2 ensured Under Armour stayed positively on the growth path in sales. In terms of income, the APAC region was the only one in the green with a +12% and $39 Million (outside of the $4 Mil on connected fitness) in the overall -$133 Mil for the first half of the year 2018.
  • Inventory: This has been a year of righting wrongs and UA has been busy trying to clean up the inventory overhang from 2017, driving the Gross Margins down overall. While better than before, it still stays the worst of the lot at over 12 weeks cover – twice as much as its significantly larger competition.
  • Other noteworthy items on the list were other corrections and updates, namely, the ongoing restructuring costs that continue to add that may have an upside only 3 years down the line and the technology investment in areas like the SAP. A step in the right direction, but like changing sails in the middle of a storm. Then again, with a tattered set of sails, there is the little option, and one hopes that as the storm slows or parts, we will see true brand potential emerge.


World Mix:

All brands worked superbly across their international markets and were flat across their home markets. Greater China was the biggest driver of growth by the APAC region as a whole. With currency neutral numbers looking a lot better for all brands with regard to their international markets, all brands clocked between 17% and 28%, but in absolute terms Nike came up on tops, managing to hold their own in their home market of North America and even eking out a 3% growth in it where others stumbled on home turf.

Moving to non Brick and Mortar spaces, we saw some stellar movement here as well, with Nike growing at 41%, Adidas at 26% and one may derive over 20% growth each on Puma and UA as well. With extremely tangible steps being outlined in the conference calls for Nike on the build up on their Digital expansion plans, the 3 other brands remained a bit shy in terms of tangible steps - perhaps a space they want to double down on - with Ecom and Omni the future - only - the future is now, and I am confident no one wants to be caught in the Nokia trap.

Product Mix

An interesting metric to look at is the Product mixes across the Footwear and Apparel sections, with Nike being a smidgen under 30% on apparel. While not seen in this table, UA grew by 1.5% over LY in Q2 in its Footwear Mix giving that category a boost. The Flat performance of Adidas for H1 (despite WC18), shows the potential loss of sales given how well competition did. All the relevant newness in Nike (against the recycled and renewed in the past), bore fruit. And as in real life, the first season of a plant bearing fruit is not optimum. So the expectation would be for these plants to bear serious fruit in the seasons to come. Nike is back warming all its cylinders - running, sport-style and basketball.

Inventory and Gross margins

Given the overall economic conditions and revert of businesses to check costs and profitability, we saw all brands take steps to improve Inventory. Adidas dazzled in the first 6 months of 2018 as did Nike. Both moved their Sales to Inventory ratio by 12% each. But in absolute terms, Adidas actually dropped inventory by 6% even as it grew sales by as much as 15% currency neutral.

Even Gross margins improved as Adidas pulled off the inventory piece, which means it managed to minimize non-working inventory, as margins improved by 2% to a massive 52.3% - something all brands need to take into account. A lot of money in there to drive bottom line- but this only works if all the ducks are in a row.

Puma also quietly improved on all counts, staying steady and a quiet second, improving on inventory cover and have the second-best margins on the block at 48.4%, improving 1.6% over the half.

Under Armour, continued burning old inventory, the only one to do so as it needed to free cash. That said, despite what was shared on the conference calls, it looks like with the current cover, inventory, and margins, there is still a lot of work to be done here! (especially when we look at the competition and how far behind UA is on all counts).

Final Thoughts

  • All brands were firmly positive in outlook this first half despite troubles at home. The overall macroeconomic conditions with trade, oil, and overall strife will keep things interesting, but the IMF projections for 2018 and 2019 stay at a firm 3.9%. With the sportswear industry growing 7.2%, almost twice the overall projections, things still look good.
  • In the developed economies, North America will be key at (2.7% vs 2.2% avg) with a stronger dollar by 5%, this will be the difference for the brands. And within this market, the buildup of Basketball will continue to be key. As Nike doubles down on ensuring it stays on top, Puma recognizes it and is trying out a new fashion angle to it. Adidas and Under Amour continue to wander a little aimlessly here.
  • In developing markets, China and India will be key (6.6% and 7.3% respectively vs 5.5% avg). And given the massive potential and growth saw here, the brand that captures the market first will see the biggest upside.
  • Brands will need to ensure they tap into real customer excitement and demand vs internal marketing excitement. (Or alternatively, find a way to translate their excitement in the real world). It is a fine line to tread and the Achilles heel we notice time and time again. Then again, in hindsight, it is all 20-20.
  • The DTC and Digital revenue channel will be a key indicator of growth over the next 2-6 seasons, as brands transition, and find the new right balance between revenue streams, and as we have seen with Amazon, only the strongest and quickest will survive.
  • Overall a very positive first half across the sportswear industry clocking almost 2 times the forecasted world economic growth, with all brands taking both, reactive and proactive steps to evolve and ensure their sustained growth and survival in a time where we have seen businesses struggle in the retail industry. The second half looks to be just as strong and potentially even stronger given positive early signs of individual brands in the first half.


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