Morgan Stanley: Adidas' Pain Is Nike's Gain

Nike Inc NKE may finally be stealing share back from Adidas AG (ADR) ADDYY, according to Morgan Stanley.

The Analyst

Morgan Stanley analyst Lauren Cassel maintains an Overweight rating on Nike with a $103 price target.

The Thesis

Morgan Stanley analysts believe the market is underestimating the cyclicality of Adidas’ business model and stronger competition from peers, which could lead to top-line pressure.

Nike is the most likely company to gain share at Adidas' expense, Cassel said in a Thursday note. 

“We believe Adidas’ recent slowdown has been directly linked in part to Nike’s aggressive comeback and impressive innovation pipeline, with some market share shifting back to Nike, particularly in Western Europe, the U.S., and China,” the analyst said. 

Nike’s direct-to-consumer channel is largely responsible for potential share gains, with e-commerce sales driving a 10-percent four-year revenue CAGR and accelerating margin expansion, Cassel said. 

“During NKE's fiscal Q2, Nike delivered accelerating revenue growth on a two-year constant currency basis across the globe, with EMEA and Greater China particular standouts," the analyst said. 

"In particular, footwear delivered strong results across all regions, delivering 33-percent constant currency growth in China and 15-percent in EMEA, implying NKE is taking share from Adidas in our view." 

Recent channel checks in Asia suggest footwear orders from Adidas have been volatile since Q2, suggesting weakening end demand — but Cassel said the checks suggest the opposite for Nike.

Adidas Downgraded 

As a result of Nike’s resurgence, Morgan Stanley European Brands analyst Elena Mariani downgraded Adidas to Underweight.

Although fashion is much bigger market than performance sportswear — a market that Adidas has impressively tapped in recent years — the fast-changing nature of fashion comes with its own unique challenges, the analyst said.

Adidas is a much better company than it was five years ago, but the company’s stronger push into lifestyle products has made it much more exposed to fashion risks, she said. 

Sport-inspired styles are now generating almost 50 percent of Adidas sales, up from just 20 percent a decade ago, according to Morgan Stanley.

With the current fashion cycle coming to an end, Mariani said she fears it will be hard for Adidas’ most successful products to be quickly replaced.

The Price Action

Nike shares were down 0.29 percent at $80.28 at the time of publication Thursday, while Adidas over-the-counter shares were down 3.11 percent at $114.35. 

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Photo courtesy of Nike.