- By Sangara Narayanan
As if the slowdown in the sports apparel and footwear market in the United States was not enough, Adidas' (ADS) push into sector is bound to give Nike (NKE) and Under Armour (UA) an even bigger headache. Germany-based Adidas wrestled back its number two position in the U.S. footwear market from Under Armour last year, and the company has gotten even more aggressive since then.
The intrinsic value of NKE
"We are creating U.S. products in the U.S. so we have the right products for the right consumers," Adidas CEO Kasper Rorstead said. "We have grown 30% in the past year in the U.S., following a very strong year the previous year."
According to maket data firm NPD, Adidas more than doubled its U.S. athletic footwear market share to 10% in January this year. The German footwear maker says it will be investing heavily in the U.S., where Nike remains the dominant player.
Both Nike and Under Armour saw their U.S. revenues stay below 10% growth levels during the most recent quarter, and quick recovery seems to be out of sight as the market remains tight and competition with Adidas heats up.
While Nike and Under Armour are cutting down their growth targets, Adidas has gone the other way, raising market expectations for 2017. The company now expects revenues to grow between 11% and 13% in 2017. It is expecting the double-digit growth to continue until 2020. Considering the current state of the market, it is clear Adidas is betting on stealing Nike and Under Armour's sales, which will put all three companies under intense competitive pressure.
According to Matt Powell, vice president and sports industry analyst of The NPD Group, athletic footwear sales in the U.S. have averaged about 4% annual increases for more than a decade. Sales in 2016, however, were slightly below average due to the condition of the market.
"The Sports Authority and Sport Chalet bankruptcies certainly shook the industry, with the greatest impact hitting in the fourth quarter, when both retailers were fighting for their survival," Powell said. "It is likely that we will still see the impact continue through the first quarter, but after that, the drag should be over and trend should return to normal."
The market is big enough to accommodate three players, but the problem is strong growth rates are going to be hard to come by.
Under Armour was growing its revenue over 20% for several years only to see its numbers come down sharply during the last quarter. Nike plans to reach $50 billion in sales by 2020, which would require it to hit above the 10% growth rate each year.
Unfortunately, Under Armour only managed to grow its revenues by 11.7% in the past quarter, while Nike reported 6.2% growth. With the bulk of Under Armour and Nike's revenues coming from the U.S., a rising Adidas could mean more than a simple headache.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
The intrinsic value of NKE