Nike vs Adidas: Which is the Better Investment?
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If we take a look at Nike vs Adidas, two premier global brands in the sportswear industry, which is the better money investment? Without doing a super deep dive into these companies, we can quickly assess a comparison of the two companies on the surface.
Shortly before Christmas 2022, shares of Nike stock soared nearly 15% in one day! As a long-time shareholder in Nike stock, I was pleased but also wondered what was driving that. On the same day, Adidas stock also received a lift of 5.62% and the stock has since risen another 18.4%. I've never held stock in Adidas, but I've been very well pleased with my investment in Nike and the +368% total return it has generated for me. So, as two of the very top athletic brands which certainly compete strongly with one another in terms of sports apparel and workout gear, I began to wonder which is the better investment - Nike or Adidas?
Historical Performance: Nike vs Adidas
Nike took its stock public in December 1980. According to Motley Fool, a $1,000 investment in Nike's IPO in 1980 would have been worth a towering $900K as of February 2020. In contrast, Adidas stock didn't go public until November 1995. According to the New York Times, Adidas stock rose 12% in its first day of trading, and it has returned about +285% since 2005 and about +67% in the past 10 years. By comparison, Nike has generated a +368% return in the past 10 years. Similar results have also transpired over the past 5 years. Nike has generated a +94.6% ROI while Adidas has performed quite poorly, actually at a loss of -27.4%.
Growth and Profitability: Nike vs Adidas
These are two top-tier brand giants in the sportswear space, so high growth shouldn't be expected for either. But from 2012-2022 Nike's revenue CAGR was 6.80%, while Adidas' was 2%. Over the past 5 years, both companies seemed to have stumbled with respect to revenue growth, especially in year 2020 due to the COVID epidemic. But Nike's revenues ($47B in 2022) have been significantly higher than Adidas ($22B in 2022). The carryover of recent supply-chain issues has also adversely affected both companies. But while Nike has rebounded well in many respects from COVID and supply-chain issues, Adidas appears unable to regain its footing up to this point.
Nike actually operates at lower gross margins, with an average of 45% compared to an average of 50% for Adidas. So, that's one thing playing in Adidas' favor. But Nike stock rose nearly 15% last Dec 21st not only because they beat Wall St expectations for quarterly results but also because the company is making a concerted effort to tackle inventory problems that have created margin pressure. Nike also maintains higher operating margins and free cash flow margins. So, not only is Nike making significantly more in revenue, but for every dollar of revenue it is also generating more profit.
Over the past 5 years, revenue has grown 35% for Nike while revenue for Adidas has actually fallen -15% over the same period. Net income too has more than doubled for Nike while staying flat for Adidas during the same period.
Management Effectiveness: Nike vs Adidas
In some respects it can be difficult to assess how effective management is at overseeing a company's operations. However, we can conduct some basic financial analysis to make an evaluation. A company's growth and profitability are largely driven by how well management utilizes the company's assets and capital resources: equity and debt. So we can generally assess management's effectiveness at money management by evaluating these metrics.
Return on Equity
Levels of ROE for Nike have averaged about 36% over the past 5 years and have been as high as 45%. In contrast, ROE has averaged about 20% for Adidas, and the highest it's been is 28%. Currently, Return on Equity for Nike sits at 37%, and it stands at about 13% for Adidas. As such, Nike is generating effective use of its equity financing well in excess of the sector median, while Adidas is doing so below that level.
Return on Assets
Similarly, we see Adidas lagging behind Nike when we look at how management has deployed company assets. While the 5-year average return for Nike is 13%, Adidas has averaged an ROA of only 7.1%. Both have deployed assets to generate returns at higher levels than the sector median level of 4.42%, but Adidas fairs poorly compared to Nike. The same is true with respect to Returns on Total Capital, as reflected in the charts above and below.
Resilience: Nike vs Adidas
It can be said that Adidas is struggling for at least 3 bona fide reasons. There are the issues with Kanye West and the cancellation of the Yeezy contract first of all. While a collaboration with the likes of the volatile Kanye West was probably ill-advised in hindsight, according to USA Today the Yeezy line made up an estimated $1.8B in annual revenue for Adidas. This equates to about 7% of total revenue, so the collaboration was apparently successful. The company is now currently scrambling to offload about $530M in Yeezy inventory as a result of the cancellation though. In contrast, Nike scored huge wins with winning collaborations of more reputable celebrities like Michael Jordan, Kobe Bryant, and Lebron James. Nike and Jordan have been enormously successful partnerships. Nike currently generates about $2.6B - $3B in annual sales from the Jordan brand alone. It also earns over $600M a year from the Lebron brand according to Essentially Sports.
Secondly, there's also the downturn in business in China due to recent lockdowns. However, those lockdowns are poised to be lifted so both Nike and Adidas may also experience lifts in that market.
And lastly, of course, there are also talks of a recession looming. I think both companies would suffer declines in the event of a recession. It's pretty clear when evaluating historical performance though that Nike is the more reliable of the two to weather the storm of a potential recession. Over the past 5 to 10 years, we see a stark divergence in revenue between the two companies, and the same is true of stock performance. During this period at least, Adidas has simply not been managed very well.
Both companies have strong competitive advantages within the sportswear industry. While Nike is the clear market leader, Adidas is a heavy hitter in the industry as well. In large part, these competitive advantages are driven by their respective brands. According to Interbrand, Nike possess the #10 ranked global brand and Adidas holds #42. The quality of products for both companies is exceptional, but consumer sentiment leans much more toward Nike as the stronger brand.
Sports League Partnerships
Nike has also positioned itself well for ongoing brand awareness as the exclusive uniform supplier to the NFL and NBA. These are two widely popular sports leagues in the USA. Adidas has similar such arrangements with the NHL and Major League Soccer, leagues which aren't quite as popular. Soccer is worldwide sport, however. And with more buzz and popularity being generated around soccer in the states, Adidas' partnership with Major League Soccer should prove to be a great long-term investment strategy.
In addition to brand power, both companies also clearly have strong cost advantages. This is evident when assessing their margins. But while maintaining similar business models, there is significant difference in profitability between the two. Gross margins and operating margins for both companies exist well above the sector median but when comparing Nike vs Adidas, Nike fairs better in all profitability metrics outside of gross margin. Both companies also hold strong pricing power. Customers are more than willing to pay premium prices for sneakers and other products created by both companies.
Another key point is Nike's move to capitalize on the move to direct-to-consumer. The COVID epidemic forced many companies to make a harder push in the direction of e-commerce, and Nike has adapted in that regard very well. It's Nike Direct channel has grown at a compounded annual rate of 16.8%. Nike Direct revenue has increased from $11.75B in 2019 to $18.7B more recently in 2022. Placing greater emphasis on a shift to this growing channel will also generate improved margins and thereby greater profits. There is also still greater upside with respect to revenue.
If you're looking for true wealth creation, you need to buy and hold exceptionally performing stocks for a long period of time. With respect to the athletic apparel space, it really doesn't get any bigger or better than Nike. There are also a couple of other solid footwear and athletic apparel companies that present themselves as even better investments, such as Lulu Lemon and Crox. Those companies, however, have differentiated niches and I wouldn't consider either to be direct competitors of Nike or Adidas per se.
Comparing Nike vs Adidas though, it's pretty clear from the numbers that Nike is, and continues to be, the reigning champ. Adidas stock is down -47% in the past year. It has a very strong brand and the long-term outlook is possibly bright, but current management doesn't seem suited to properly leveraging this. Nike has much greater long-term prospects, but it's currently trading at high multiples relative to historical pricing and relative to peers. It's one to keep an eye on though. Buying opportunities will include a recession in the sportswear business, a general economic recession, and a correction or panic sell-off.
Both Nike and Adidas brands remain strong, demand remains high, and China's announcement to reopen from lockdowns will certainly provide a lift for each. With similar business models, we see stark differences in revenue, profitability, and performance. I think this boils down to two things: consumer sentiment and management. Nike generates far greater revenue, has higher and more consistent operating profit margins, and it has lower levels of debt. Adidas may afford a decent long-term return on investment, but Nike is a better way to invest money. It offers more stability and higher returns. When it comes to Nike vs Adidas, the numbers are clearly on Nike's side.
The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website. I also may own stock in all of the aforementioned companies.