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Nike to Benefit from Adidas’ Slowdown, Says Morgan Stanley Analyst

Morgan Stanley analysts believe Adidas AG and Nike Inc. are at crossroads, with Adidas continuing to slowdown and Nike starting to regain market share.

The research group’s analysts, one in the U.K. and the other in New York, each issued separate company reports that together show how one company’s market share loss is expected to result in the other brand’s gain.

Analyst Elena Mariani in the U.K. has downgraded Adidas to “Underweight,” noting that the market is underestimating both the cyclicality of the company’s business model and stronger competition from peers. She said both could lead to topline pressure for Adidas. And while the company is better now than it was five years ago, Mariani reasoned that Adidas’ topline profile is more exposed to fashion risks given what has been a stronger push into lifestyle products.

With growth normalizing over the last two quarters and growth in footwear down to the single digits after three years of double-digit growth, the analyst believes the current product cycle might be coming to an end for the company. And with the current sport-inspired styles contributing almost 50 percent of sales versus just 20 percent 10 years ago, Mariani said the company might find it hard to easily replace what have been the brand’s most successful styles.

In contrast, any market share loss from Adidas is likely to benefit Nike, according to analyst Lauren Cassel in New York. That’s why she has an “Overweight” on shares of Nike. “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,” Cassel said.

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Her thesis is that Nike’s new product pipeline continues to resonate with consumers, and that a Nike bull case can be made via its capture of Adidas’ lost share through Nike’s direct-to-consumer channel.  She also cited channel checks by Morgan Stanley’s apparel and footwear analyst in Asia, Terence Cheng. Those channel checks along the supply chain with major manufacturers suggest that footwear orders from Adidas have been volatile since the second quarter of 2018, Cassel noted. In comparison, Cheng’s checks suggest the opposite for Nike, which suggest strong, consistent orders from the major manufacturers, including positive commentary on end-demand and innovation.

Cassel has a price target of $103 on shares of Nike. In her view, Nike is also in the “early innings of transitioning from a traditional wholesale business to an emerging retail technology company.” She also reasoned that Nike could be one of the few to benefit from the consumer shift to e-commerce, given its “consumer direct offense” that’s led by its direct-to-consumer business. That strategy could ignite the company’s next phase of margin accretive revenue growth, she concluded.