Beyoncé’s collaboration could catalyze big Adidas stock rally

In recent years, the global sportswear industry has been defined by intense competition between the two industry heavyweights, Nike (NYSE:NKE) and Adidas (OTCMKTS:ADDYY).

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Here is a short story. From 2015 to 2018, Adidas leveraged unique celebrity mentions (think Kanye West) to transform into a lifestyle brand. In doing so, they attracted non-athletes to their brand, became the king of the athleisure space, and stole a significant market share from Nike. Adidas’ revenue growth rates accelerated and Nike’s fell flat. Adidas stock has jumped and Nike stock has not.

Then Nike responded in 2018 with new stores, new marketing campaigns, and new products. All of these efforts have been a resounding success. Since then, Nike has regained the lost share of Adidas, and the company’s revenue growth rates have accelerated, while Adidas’ growth rates have slowed significantly. The Nike stock has burst, the Adidas stock has lost momentum.

Now I think it’s time for the tide to turn again.

Adidas has just launched its clothing line in collaboration with pop star Beyoncé’s Ivy Park sportswear brand. For all intents and purposes, the Beyoncé Ivy Park line in 2020 has the potential to do exactly what the Kanye West Yeezy Line did so in 2015. In other words, boosting demand for the brand, re-accelerating sales growth and bringing the Adidas action back to life. In short, make Adidas the coolest brand in sports again.

As such, I think it may be time to turn bullish on ADDYY stock. The company’s growth trajectory will only improve from there.

Collaboration with Ivy Park has enormous potential

There are two simple truths behind the bull’s thesis on Adidas stocks. First of all, Adidas is a lifestyle brand – not a performance brand – and they get their branding momentum from celebrity endorsement, not athlete endorsement. Second, Beyoncé’s endorsement and the Ivy Park line could be as important to Adidas as Kanye West’s endorsement and the Yeezy line.

A quick glance at the figures for the past five years proves this first truth. West and Adidas launched their first Yeezy shoes in October 2015. Throughout the first half of 2015, Adidas recorded sales growth rates of 5-9%. But after the launch, Adidas’ sales growth trajectory exploded. From the third quarter of 2015 to the second quarter of 2018, Adidas recorded more than 10 consecutive quarters of constant currency sales growth of more than 10%, with an impressive growth of more than 20% in the first half of 2016 (directly after the launch of Yeezy ). Adidas’ stock went from $ 45 to $ 120.

It’s a pretty obvious correlation. And of course, correlation is not synonymous with causation. But given that the Yeezy launch was the only significant product development for Adidas in late 2015, it can be reasonably concluded that the Yeezy line was the catalyst for this multi-year sales increase.

As for the second truth, it’s also pretty easy to see how Beyoncé’s Ivy Park line could be as tall (if not taller) than Kanye West’s Yeezy line. Kanye West is one of the world’s most celebrated and followed male musicians, especially with younger audiences. Beyoncé holds a similar position in pop culture, with arguably wider appeal and much less controversy. So it stands to reason that if Kanye West’s clothes have been a huge hit with sporting audiences, so will Beyoncé’s clothes.

Adidas stock could continue to rise

Adidas’ growth rhetoric has returned to what it was at the start of 2015. That is, over the past four quarters, the company’s constant-rate sales growth has fallen into below 10%.

It won’t last long.

The launch of the Beyoncé Ivy Park line will revitalize demand for the brand globally. It’s true that Adidas won’t sell a bunch of Ivy Park stuff: the supply is purposely limited. But the Ivy Park buzz will increase brand awareness and consumers will increase their spending on all Adidas products as the brand once again becomes the “cool thing to wear” in the athleisure space.

Income growth rates will accelerate again above 10%. Considering the weak rounds, they might even hit 20% and above again, as they did in early 2016.

At the time, this significant acceleration in revenue growth caused Adidas stock to jump from $ 45 to $ 90, essentially doubling, in a year. I doubt such a big rally will happen this time around, given the valuation differences (in 2015 ADDYY stock was trading around 1 times sliding sells; today it is trading around 2.5 times selling slippery).

Nonetheless, accelerating revenue growth from single-digit to double-digit territory over the next few quarters should have a positive impact on Adidas stock. It can also negatively impact Nike’s stock (since the two compete for the same customer base). So, if you are looking for exposure to the sportswear space over the next couple of years, the Adidas stock may be your best bet.

Final result on the ADDYY action

The Ivy Park line is a huge deal for Adidas. The last time the brand launched a major celebrity collaboration like this was in 2015 with Kanye West. Over the following quarters and years, the Adidas brand pulled all cylinders and Adidas shares soared.

A similar dynamic could play out this time around, given Beyoncé’s similar popularity and influence. If so, the great rally in Adidas action is far from over.

As of this writing, Luke Lango does not hold a position in any of the aforementioned securities.

James T. Quintero