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Here's why the market likes Adidas' choice of new CEO

Daniel Roberts
Senior Writer

Adidas Group shareholders were starving for something to believe in, and this week they got it. The struggling German sportswear giant announced on Monday afternoon it had chosen Kasper Rorsted as its next CEO. He is the outgoing chief of Henkel, a German company with a $38.6 billion market cap that makes cleaning and beauty-care products, including Dial soap.

Adidas stock jumped more than 11% on the news, and closed up 6% on Monday. Since last Friday, its market cap is up nearly $2 billion to $20 billion.

In other words, investors are pleased. They were desperate to see a sign that the company can grow again—so desperate that after Adidas (ADDYY) initially announced last February that current CEO Herbert Hainer would retire in March 2017, it now says he will leave at the end of September. It is a bit of an unceremonious departure for a man who has lived and breathed Adidas since he joined the company's sales department in 1987.

Hainer became CEO in 2001 and was hailed in his first few years, as the company went on a hot streak. But the trend reversed after the recession and hasn't improved much since: Adidas had a nightmarish 2014, in which revenue fell for the second straight year and net income hit its lowest point since 2009. (Those are in U.S. dollars; Adidas reports its financials in euros and said that much of the reason for the negative statistics that year was currrency fluctuations.) It has not yet reported its full-year 2015 results.

Adidas Group's global footwear sales have fallen every year since 2012. But the lion's share of the company's troubles have come from the U.S., where Nike (NKE) continues to dominate in both apparel and footwear and Under Armour (UA), once a scrappy upstart, two years ago surpassed Adidas as the No. 2 by market share in U.S. sports apparel.

In golf, the company is now seeking to sell off TaylorMade, which it bought in 1997. The golf equipment maker is the largest in the world, with more than 60% U.S. market share, but sales plummeted 26% in 2014 and it cut its workforce 14% last year.

Turning to a complete outsider

All of this doom and gloom has left the company in turnaround mode, and it is why Adidas passed over three different internal executives who were seen as candidates for the top spot, in favor of a complete outsider who has never worked at Adidas or in the sports apparel business.

"I think they spoke to enough investors that said, 'Look, one of your ongoing problems is you're very insular,'" says Morningstar apparel analyst Paul Swinand. "They didn't want a guy that's been there 40 years. They wanted an outsider." Swinand says the appointment makes Adidas look serious about fixing what ails it; Rorsted, 53, is an operator who nearly tripled Henkel's stock price in his seven years as CEO. Bloomberg reports that the Danish executive had a "cult-like following" at Henkel.

But there's no quick fix for a flailing brand. Swinand, in fact, is surprised the stock has responded so well. "The stock performance is kind of ridiculous," he says. "I honestly wonder if people in Germany might think that sales are strong. Sporting goods in general are strong in Europe right now. It's like how customer perception of Adidas in America is that they’re still the dominant market leader in soccer, even though the actual point-of-sale data suggests Nike is beating them. So, is Rorsted really going to move the needle in the next year? He probably has to fire 20% of the people just to get rid of the institutional inertia."

Indeed, in interviews last spring at Adidas global headquarters in Herzogenaurach, Germany, and at its U.S. headquarters in Portland, Ore., two of the executives thought to be strong candidates for CEO described a sluggishness to innovate. They also noted a divide between the two headquarters. Both men had careful plans for how to fix these issues.

Eric Liedtke, global head of Adidas's brand, is an American who relocated from Adidas in Portland to its headquarters in Germany in 2006. When he relocated, he brought Adidas employees on a field trip to Google's offices in Zurich. He has restructured the chain of command in Herzogenaurach and reshaped the company's thinking on its brand image. "We need to reset," he told Fortune last spring. "As a German-born company, we can get sometimes a little hierarchical. So we did a massive reorganization to flatten that down. We want people to talk across streams, the Originals guys to talk to the football guys, the basketball guys to talk to the running guys. Before, it was more silo-driven. We're embarking on that journey."

Mark King, the former TaylorMade CEO, was brought over to Adidas in 2014 as its U.S. CEO. "From the minute I started talking to Herbert and Liedtke and Roland [Auschel], the number one priority for me was not that we execute what Germany says we should execute, but that we have one company strategy and we execute it in America," he told Fortune for the same story. "We all have to figure out together how to win in America. Look at it this way: What do athletes wear when they play sport, and what do they wear when they go out to a movie or go to school? You want to be in their closet for both."

In the end, Adidas went with neither King nor Liedtke, nor Auschel, who is head of global sales, a key member of the company's five-person executive board, and the third executive that many analysts had predicted would get Hainer's job.

As they continue to focus on fixing the U.S., the smartest thing might have been to choose an American or at least have the new chief spend an extended time based in Portland. But the company says Rorsted will occupy the same Herzogenaurach office as Hainer did.

The decision to tap Rorsted is not only about the optics of picking an outsider and welcoming change, but technology ambitions as well. Rorsted has past stints at Oracle (ORCL) and HP (HPQ), experience that Igor Landau, chairman of the Adidas supervisory board, specifically called out in his statement about the hire. Nike and Under Armour have both ramped up their tech products amidst the craze over health trackers, and Adidas is likely hoping to do the same.

For a brand trying to regain its cool, even innovating on the tech front won't be a cinch. Swinand is skeptical about Adidas's ability to catch up to its competitors in blending technology and fitness, without looking like it's merely following the fad.

"I don’t want to be too critical, but they love to skate to where the puck is," he says. "They’re not thinking outside the box. They try to play to what's cool right now. Nike says, 'What is going to be the next big thing? Even if you haven’t told me, I’m going to try and come up with it.' If it’s already here, it's not the next big thing."

--

Daniel Roberts is a writer at Yahoo Finance, covering sports business and technology. 

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