Is Adidas losing its swing? Golf business obscures group’s FY16 outlook

The athletic apparel group released its full-year 2015 results and 2016 outlook earlier this week. The German sportswear giant happily shared its full-year 2015 figures: net income at the Adidas Group grew 29 percent year-on-year.

The group - which includes Adidas, Reebok, and TaylorMade brands - has enjoyed strong global sales rise for Adidas and Reebok brands (+16 percent and +5.4 percent respectively). But the best news – and probably the most awaited ones – was the improvement of sales for Adidas namesake brand in the US market, where it has grown by 12 percent compared to years of declining numbers.

Also good news on the trading floor, as the company’s stock has also fared well: Adidas (ADDYY) shares have added 36 percent of value in the past year, outperforming the German market and slightly surpassing as well its direct competitors: Nike (NKE) and Under Armour (UA), which are up 25 percent and 10 percent respectively.

For 2016, the group forecasts 10 percent to 12 percent sales growth, but gross profit decline of 1 percent as a result of rising production costs in China.

Adidas starts to recover from tough 2014 although TaylorMade remains a struggle

But as Morningstar apparel analyst Paul Swinand warns, “Great brands don’t get torn down in a year, and they don’t get built back up in a year.”

In fact, not only Adidas is now starting to recover from a tough 2014 when global revenue fell for the second straight year and net income hit its lowest point since 2009, but also has to make a difficult decision regarding its gold business.

TaylorMade, which Adidas Group bought in 1997, is the world’s largest golf equipment maker. It currently owns more than 60 percent U.S. market share, but has been struggling to keep sale afloat, with these dropping 26 percent in 2014.

Last fiscal year, sales at Adidas golf arm lost another 15 percent, forcing the parent group to cut its TaylorMade workforce by 14 percent and announced it was exploring a sale. Despite not having talked again about the latter, Adidas’ management has recognised they are still trying to work out a successful and effective turnaround plan. In this vein, the retail group says it is still reviewing the “further execution of TaylorMade-Adidas Golf’s restructuring programme aimed at resizing the golf business.”

CEO Herbert Hainer has also reiterated that Adidas will complete a review of its struggling golf business this month. Revenue of TaylorMade-Adidas Golf dropped 13 percent excluding currency shifts in 2015, declining to euro 902 million.

"We are considerably stronger and better today than we were 12 months ago," Hainer said at a press conference earlier this month.

TaylorMade has been a drag on Adidas, but, Morningstar apparel analyst Paul Swinand advances that “they’re going to hold onto it a little longer. They over-innovated, fatigued people with too much new product too fast, so now they’re resetting the market. If the economy picks up and the weather gets a little warmer, maybe it can do well again. I would hope they’re not desperate to get rid of it, and that they would sell it on a peak, not a valley. If the thing looks like it’s in a free fall, the bids are not going to be nice.”

So, what are next steps for Adidas’ ailing golf business?

In August 2015 Adidas announced they were lining their golf business up for a sale. Back then the company explained that the focus at first would be on finding a buyer for Adams, a sub-brand within the golf unit that makes clubs for beginners, and for Ashworth polos and cardigans.

Now, the golf business of Adidas will cut back on its product launches, parent company CEO Herbert Hainer wrote in a letter to shareholders as part of the company’s annual financial report.

“In light of management’s efforts to shift to longer product launch cycles, TaylorMade-Adidas Golf will further reduce the number of new product introductions, thus limiting the overall marketing activity,” the report said.