RTN - 01/26/2025
A nice blend of US Consumer Sentiment and Versatility; Puma and Adi preliminary earnings; The Mantz-Hammer; And some thoughts on Support, Patience, and Love
Welcome back, welcome back! Now that we have the first issue out of the way and I feel a lot less anxiety about the content we have to cover, we can home in on what has happened since last week’s issue. I haven't decided if this will come out weekly or bi-weekly or what day I’ll publish. This week worked well, and I stuck to my new writing habits, but transparently I'm stepping into a new role and I'm not sure how my schedule will look in the coming months. Either way, bi-weekly at a minimum and posting sometime Saturday - Monday, and I promise I'll land on a set plan in order to remain consistent. But back to why you're here. On the Macro front, there wasn't much this week other than Consumer Sentiment which I'll weave in a business strategy perspective with. We're also not seeing a ton of earnings releases in the running industry, but the German duo released preliminary results for Q4 and 2024 Full Year results which we will unpack as best we can. I'll share my thoughts on the Connor Mantz hammer that was dropped in Houston and then share an interesting article on the running business in South Korea. Lastly, like I promised, I wrote something more emotionally driven. I left some words to ponder on the state of our country and how to handle the next 4 years. They're last because I don't think many people want to hear them. This is running the numbers not running your mouth. However, I do feel strongly about what I said and would love to hear how you’re thinking about the same situation. Comment, DM, whatever. Let’s chat. Let's support one another. Let's spread some love!!! Now, onto them numbers...
The Macro
This week there was minimal economic data but next week we see things like Consumer Confidence, GDP, and the Fed's latest interest rate decision. Similar to the note last week, we can continue to speculate on the impacts of Trump's tariff proposals or what he said at the Davos conference (which he ironically did virtually...weird how efficient "working from home" can be🙂), but I vote we focus on the facts until there's something we can truly sink our teeth into like the block of Tillamook white cheddar I found in my fridge last night.
71.1 ... The one thing we did get this week was U.S. Consumer Sentiment, which weakened to 71.1 this month from a preliminary reading of 73.2 and from Decembers 74.0. This is the first time in six months we've seen Consumer Sentiment weaken and is largely driven by fears about the labor market and potential impacts on inflation from the planned tariffs from the Trump administration. Now, one might ask why we care about these numbers in running and I would say, fair question. I don't think we necessarily do, but the recent economic indicators tend to drive the direction businesses might take as they work through their scenario planning. The current landscape across things like consumer sentiment and consumer confidence show that the average consumer is getting pickier and pickier with where they spend their dollars. As footwear and apparel are discretionary goods, these tend to be items people cut out first. However, we still need shirts and shoes, at least when we leave the house. Don't get me wrong, I'm a huge fan of the underwear and slippers gang, but I'm probably not going to work like that anytime soon (and don't get me started on RTW...). All that to say, companies will continue to shift focus toward their price/value proposition, with value being very heavily driven by versatility. Instead of consumers buying a pair of running shoes AND a pair of brunch boots (I made that up), they want to be able to buy one pair of shoes that does both. I believe that is why On Running is absolutely killing it. Their shoes seem to meet the current trend standards of the young guns, soccer moms, and the people who actually know something about head-to-toe fashion (which I don't). Their shoes are also very performance forward. It's easy to go for a run and then wear the same pair straight to a coffee date with the Tinder match you met at run club.
Running Industry
-31 ... Basis points that is. First, a basis point (aka "bps) is .01%. An easier way to think about it is 100bps equals 1%. Basis points is generally how finance likes to speak to changes in percentages. When a company talks about margin improving and deteriorating, they usually say "gross margin expansion of +55bps". Ok, back to the story. Puma released preliminary Q4 and Full Year results on 01/22. While growth was healthy, showing Q4 sales +9.8% currency-adjusted (ca) and Full-Year sales +4.4% ca, the bottom-line tells a different story. While Puma is growing, it's coming at the cost of spending too much on happy hours and suing Tiger Woods. EBIT (Earnings Before Interest and Taxes; Generally a way to look at core operations and is also called Operating Profit) was flat for the year at €622M, meaning EBIT margin deteriorated because expenses grew at a faster rate than sales. They don't say how much, but some basic strat math lands me at -31bps. Where we can double-click a little more is that they also called out that gross margins for the Full Year actually improved +110bps, which is a measure of looking at how efficient a company is with their costs of goods sold (COGS). Because this area improved, we can assume there was an even greater increase in costs like Sports Marketing, Wage, Demand Creation, etc.. All that to say, the company is aware and is calling out "nextlevel", their way of "targeting cost optimization and operational improvements". There's not much else to note but their goal with this program is to get EBIT margin to 8.5% by 2027 instead of the previously communicated 2025 (for reference, 2024 EBIT margin is 7.1%). All that to say, investors are now turning a little bearish as the company seems to be hyper fixated on cost cutting, which generally means slowing growth and could turn a small problem into a bigger one in the coming quarters. We'll unpack this more in a couple weeks when Puma fully releases their earnings.
23.7 ... Billion Euros. Adidas also released preliminary Q4 and Full Year results this week. Like Puma, Adi's growth in the past couple of quarters has been on a rocket ship, with Q4 of this year hitting €5.97B and jumping roughly +19% from Q4 a year ago. The shockingly strong Q4 also drove Adi's Full Year growth to +12% where they were guiding shareholders to a +10% increase. Similar to Puma, we'll have to wait until early March to get more details as Adi was even less forthcoming on details than their German brother. What is worth calling out that tempers these numbers a little bit is that in Q4 of last year, Adi saw sales decrease to the tune of -8% and Full Year sales dropped -5%. Still, Adi is trending in the right direction (despite comps softer than a newborn baby's hands) and where they differ from Puma is their ability to see strong sales growth trickle through their bottom line. EBIT for the Full Year grew over +€1B, supported by Q4 at €57M where a year ago they were operating at a loss of -€377M. They've also seen extremely strong gross margin expansion of +230bps for the year and +520bps for Q4. Hopefully when we hear the earnings release in a couple weeks, we'll get some more insight to how running is performing, as it seems the company's success is largely being driven by the Samba, Gazelle, and other lifestyle sneakers.
One caveat after I wrote this is them following a similar path as Puma, cutting costs. Adi's bottom line isn't nearly as strained as Puma's but they recently announced they're planning to layoff 500 employees to cut costs, clean up their operating model, and right size their organization. I would assume this might mean a very specific shift in their strategy, as in distancing themselves from a business they don't want to continue pursuing. It would seem odd to me to layoff nearly 10% of your headquarters workforce when shares are almost at all-time highs after coming off an extremely successful year across the entire P&L.
Interesting Reads and Data
18 ... That's how many years it's been since the American Men’s Half Marathon record had been broken. On Sunday, 01/19, Conner Mantz took down Ryan Hall's longstanding record with a blazing 59:17 and besting Hall's record of 59:43. Ironically, both records happened at the Houston Half Marathon which is known to be a faster course, and because it is so early in the season there is little risk to blowing up or dropping out and therefore runners tend to shoot their shot. Well, Connor shot his shot and hit the bullseye. Fresh off an 8th place finish in the Marathon at the 2024 Paris Olympics, Mantz is poised to make a ton of noise over the next decade. Given that many distance runners peak in their mid-to-late 30's, Mantz has at least two, if not three, Olympics cycles to try and best 8th and take down some records along the way. He's even recently mentioned that his goal is to perform at the highest level for the next 12 years, meaning the 2036 Games where he'll be 39. He's currently 2:09 off the American Marathon record, but with a 59:17 half marathon he's definitely setup well to shatter that if he can keep stacking bricks for the next 12 years. For context, Khalid Khannouchi's 2:05:38 American Marathon record came four and half years AFTER he set his half marathon PR, which was only (yes, "only"...) 1:00:27. If I could I'd invest in MantzCoin and ride it to the moon!
40% ... Here's an interesting read on the running footwear dynamics in South Korea. The article calls out that currently running shoes make up 25% of the total South Korea sneaker market but they predict that to get to 40% next year (WOW!). I'm interpreting this as their total footwear market and for context, in the US running is ~11% of the total footwear market. The article then goes to talk a lot about the downfall of Nike and Adi and the rise of Hoka, On, Asics, etc., as these younger brands are trendier and have better performance technology like max cushioning. Take peak!
That's all I have on the numbers front this week! Keep reading if you’re interested in my thoughts on the next four years and I'll be back in a week or two!
Thought of the Week
47 ... This week my brain keeps going back to where most peoples probably has been this week, our 47th (and 45th) President. I'm not one to share my political views but I will admit I'm not a Trump fan. As a numbers guy deep in the economical world, I don't think he's a bad president and was arguably the better candidate. But what I love more than numbers is people, something he does not seem capable of comprehending.
Where my thoughts have gone the most this week is how to navigate the next 4 years. After hours of running and some journaling I've landed on the best answer I can come up with. Support. Patience. Love.
Support for those who need it. There are too many people whose lives will be made worse in the next 4 years. That's a fact. As a straight white male with more privilege than I know what to do with, I feel that is my responsibility. To blend humility with courage. To stand up for what is wrong and give voice to those being talked over. That to me seems easy and is something I've never struggled to do. Here's to staying true to who've I been and who I want to be.
Patience on the other and is the tough one. I keep coming back to the word empathy. Empathy is often only thought of through the lens of negative emotion. Which makes sense because that's when people generally need our support the most. However, empathy is putting ourselves in someone else’s shoes and striving to understand their feelings, where they're coming from. If someone is happy or excited, there is a level of empathy required to support that person and meet them where they're at. We don't think of it this way because it's generally fairly easy to get along with someone who's in a good mood and wants to celebrate. I say all this as I've come to believe I need to empathize more with people who support 47. I used to be so confused by people who love Trump. Support is one thing, as I'm not saying the other side is much better. But the people who literally LOVE him. I guess transparently I still am confused, I just deal with it better by understanding I need to be more empathetic. That person who loves Trump has a feeling. It's not on me to tell them their feelings are wrong. That's unempathetic. Somewhere in their journey in this life they've had an experience or understanding that's shaped them to feel that way. It's not on me to judge, but to strive to understand where they're coming from. I may never figure it out, but I will not get anywhere by being impatient and unemphatic. So, patience it is unless it requires me to not be supportive of the marginalized. Then, well, impatient Derrick will show up very quickly.
Love is combining the two. Let's just all agree to love one another. There might not be much, if any, reciprocation from the other side. That's fine. We have each other. But the number one thing we can do each and every day, even beyond the next 4 years, is to leave a trail of love everywhere we go. I picture it like my 18-month-old carrying around her "spill proof" cup of melties. Just leaving a trail of sticky, pink, squishy, sweet, little melties. Be a toddler. Leave a trail of melties.
Much Love.
Derrick
[All views are my own and not that of my employer, Nike, Inc.]