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Adidas AG ADS, +1.48% announced on Monday that it is exploring strategic alternatives for its Reebok brand, including the possibility of a sale.
A decision will be announced on March 10, 2021, which is when the company is scheduled to announce its fiscal fourth-quarter earnings and host its investor day event.
Adidas acquired Reebok in 2006 for U.S. $3.8 billion.
Adidas launched a Reebok turnaround program, Muscle Up, in 2016. The brand returned to profitability in 2018, two years earlier than originally planned. Reebok returned to growth in 2019.
The brand launched a collection in collaboration with rapper Cardi B in November.
And it unveiled its latest collaboration with fashion designer Victoria Beckham earlier this month.
In its third-quarter earnings announced in November, Adidas said Reebok brand revenue was down 7%, with the Adidas brand down 2%.
“Reebok has a lower exposure to the running or outdoor category, which is predominantly where we’ve seen our growth coming in the sporting category,” said Adidas Chief Executive Kasper Rorsted on the earnings call, according to FactSet.
“Reebok also has higher exposure to North America, a market that so far has recovered more slowly than Europe.”
Cowen analysts added Adidas to it “Best Ideas of 2021” list on Monday. Cowen rates the stock outperform and raised its price target to €325 from €310.
“Adidas is undervalued on a relative basis given the company’s growth potential,” analysts led by John Kernan wrote.
“The sale of Reebok and the investor day in March 2021 are positive catalysts.”
Analysts also note that Adidas has gained “preference share” among Gen Zers and millennials. Among Gen Z, Adidas is second in preference to Nike Inc. NKE, -0.31%
Cowen says the Yeezy brand, created in collaboration with Kanye West, could reach $2 billion in revenue by fiscal 2022.
“Kanye West’s creative genius aside, the future of the license is somewhat uncertain but the growth potential remains significant globally,” the note said.
Adidas also has a collaboration with Beyoncé and her Ivy Park brand.
Baird analysts think investors would applaud a sale, which would give Adidas the chance to focus on the core brand.
“Reebok has chronically underperformed, falling from an estimated low-double-digit share of U.S. athletic footwear in the early 2000s to closer to ~1% today leading to consistent investor questions of whether adidas should sell the brand (adidas has sold off CCM Hockey, TaylorMade Golf, others in recent years),” wrote analysts led by Jonathan Komp.
“With VFC announcing the planned $2.1 billion acquisition of Supreme last month (VFC was once rumored by unsubstantiated media reports as having interest in Reebok), other strategic buyers with a global brand portfolio and/or private equity firms could make sense as potential acquirers for Reebok based on brand recognition/ heritage, along with relatively low assumed valuation (likely to be sold for <1.0X sales) and likely low-hanging fruit to improve profitability if given greater internal focus.”
Baird rates Adidas stock neutral with a €280 price target.
Adidas shares rose 1.5% in Monday trading, and have gained 3.2% over the last year. The benchmark S&P 500 index SPX, +0.03% is up 15.5% for the last 12 months.
