Despite a sprinkling of controversy (has Macron had his dip in the Seine yet?) the Olympic and Paralympic games were, as ever, a great success and a true spectacle of human endeavour.
It is hard to overstate the elite level at which Olympic athletes operate, and all too easy to become a temporary expert in sports on which we have no right to judge. Criticising a gymnast for an errant foot after landing a double backflip is easy work from the comfort of the couch.
In our day jobs here at Evenlode we do need to judge the performance of companies, and sometimes we can see their activities near the centre of the action.
Many of our portfolio companies were involved in sponsorship or partnership with the Olympics/Paralympics including P&G, Sanofi, Cisco and LVMH. Louis Vuitton was on show in every medal presentation.
The cost and benefit of these sponsorships may be revealed to us in financial statements over the coming months and years, although the causality between any one piece of promotion by a company and its subsequent sales success (or otherwise) is difficult to isolate.
Even more companies were visible at the Olympics via manufacturing the high-performance clothing worn by some of the athletes such as Nike and Adidas, or in the case of portfolio company Shimano, by manufacturing high-quality components used by Olympic cyclists.
Adidas and Nike both have strong intangible assets in the form of world-famous brands. Until the 2010’s, when it came to fitting out both professional and aspiring athletes, they were the only real runners in a two-horse race. However, they have had a tumultuous time in performance terms in more recent years.
Although the specific reasons in each case are not the same, we can take lessons to keep in mind when considering any consumer discretionary companies in the future.
Excluding a few pockets of positivity, the consumer discretionary sector, including luxury goods, has been trending downwards recently as global demand has been suppressed owing to consumer concerns over tightening disposable income.
Added into that mix, as noted above, China has been weak thanks to low confidence of the consumer amplified by President Xi’s regime being notoriously cautious over Western influence, including that of strong brands.
Simultaneously, the Chinese economy has been limping, a situation kickstarted by the Evergrande property company saga and fuelled by persistent real estate woes ever since. China represents 15% of revenue for both Nike and Adidas and was, until recently, seen as a strong growth driver for both.
We initiated a position in Adidas in early 2022, after which a trifecta of bad news in quick succession led to considerable stock volatility. In addition to the emerging issues in China, supply chain challenges hit the sector and for Adidas a lucrative collaboration with Kanye West was quickly jettisoned as he made a series of controversial public statements.
Changes in management and strategy promptly followed. We engaged with the company several times as the saga unfolded and this helped us to stay with the stock through the most difficult time. Once relative stability had resumed and the share price recovered, we exited the position having had limited impact on the portfolio but also having learned a lot.
Nike, on the other hand, has not featured in the portfolio. It was, however, in our investable universe and, on valuation grounds, on our watchlist as a potential new entrant to the portfolio throughout 2024.
The share price began a steady descent in early 2023. A particularly pronounced decline on the release of disappointing annual results in mid-2024 led us to dig a little deeper before making an investment decision.
Nike has experienced the same consumer caution and supply chain issues as its peers. However, it also made some missteps which have, in our estimation, weakened its position at the top of the sportswear podium.
Since the inception of the brand in 1971, Nike has thrived on being the big name in sportswear, built from a base of running expertise and innovation in sports footwear, where most of their revenue is generated.
Over time, that was strengthened by athlete sponsorship and savvy marketing, as well as expansion into the world of ‘athleisure’ and fashion. This latter element of the business ticked up to a point where today we estimate that 50% of revenue generated by the company comes from people buying the brand for fashion rather than for sport.
Simultaneously, innovation for the everyday runner seemed to falter. Whilst many top athletes still wear Nike footwear, the shoes they wear tend to retail in excess of £200.
For the casual, a £70 Nike Pegasus running shoe has barely changed over seven years. Meanwhile, challenger brands such as On and Hoka in running, and Crocs and Birkenstock in leisure, have filled the gap with innovative and/or more comfortable alternatives and made material gains in market share, particularly among younger demographics.
Distribution of products is critical to a global sportswear company, getting to the end touch point with customers and is an area where Nike perhaps over-innovated.
The past five years saw Nike reduce focus on wholesale distribution, favouring direct-to-consumer digital channels. On the face of it, that makes sense since Nike can then capture a greater share of the economics of selling its own products, built on the fact that it is the biggest sportswear brand out there.
However, it did this by cutting what it terms ‘non-differentiated retail’, which in plain English means smaller speciality sports stores. The issue is that those are the places where running enthusiasts go for advice, gait analysis and to try on new products.
Nike left a space where challenger brands were happy to land and expand, meaning that now, according to some estimates, Nike has essentially zero share in speciality running.
For us, the challenge of being both a scale fashion brand and an innovative sports company seems to have led to a misfiring on both sides of the business. It may well be surmountable but, on the balance of probability, we removed it from our watchlist until such time as we can see a demonstrable stabilisation in sportswear performance.
Despite the challenges, sports are a potentially attractive growth market globally. Our final sporting case study comes in the form of portfolio company Shimano.
It manufactures cycling components, which make up the lion's share of revenue (80%) with a sideline in fishing tackle making up the remainder. Angling was an Olympic event at the 1900 Games for the only time, but it is still a popular pastime globally.
On the other hand, cycling has become incredibly popular at the Olympics. At Paris 2024, there were 22 cycling events featuring 512 athletes, and it’s fair to assume that many of the bikes belonging to them will have been equipped with Shimano components.
For context, Shimano equips 15 of the 18 World Tour men’s cycling teams and 7 of the 15 women’s teams. The rest are equipped mainly by Shimano’s nearest rival, the US-based, privately owned SRAM in what is effectively another two-horse race.
We entered a position in Shimano in early 2023, with it having been in our investable universe since 2018. The pandemic was turbulent for Shimano and had some knock-on effects. Initially, lockdowns saw a pullback in consumer activity in cycling, which was quickly followed by unprecedented demand.
The pandemic demand caused bicycle manufacturers to rapidly increase production and led to excess inventories across the industry, which are only now starting to unwind.
On a recent call with the company, we learned that inventories are expected to be back to more normal levels by the end of the current year.
The inventory backlog caused a drop-off in the stellar performance seen through the pandemic, and the share price fell in line with that.
We took the opportunity to take a position at an attractive valuation, albeit with a conservative position size to reflect cyclical risks and the fact that it operates essentially in one niche.
In 2024 the share price of Shimano has been positive and in contrast to the other sporting names discussed here, a catalyst for that performance has derived from better-than-expected sales in China.
Despite falling consumer confidence, China has seen a surge in the popularity of cycling generally and in road bikes specifically. Drivers of that demand include government incentives, the formation of cycling clubs across the country and by Tik-Tok, where consumers can watch a bike advert and click directly through to purchase the bike there and then.
Crucially, whilst some low-end component manufacturers do exist in China, the quality and brand strength of Shimano is winning the day. According to the company, Chinese consumer preferences mirror their Western counterparts in the desire to own brand-named bikes with Shimano components and trade up as their hobby develops.
Ben Peters is a portfolio manager at Evenlode. The views expressed above should not be taken as investment advice.