A significant recovery materialized for the Adidas Group in the last months, generating record quarterly sales as well as soaring profits – although this compares with a depressed quarter affected by restructuring costs last year.
The group ended the quarter with sales of €2,674 million, up by 3.7 percent in reported terms and by 4 percent in constant currencies. The rise was driven by the group’s retail business, a much better performance in North America and encouraging improvements at Reebok.
Reebok’s sales crawled up by 0.5 percent to €376 million for the quarter, an increase of 1.5 percent in constant currencies. This was driven by a sales hike of 6 percent in North America, in constant currencies, as the toning category continued to expand, making up for the weakness of Classics.
Herbert Hainer, the group’s chief executive, reiterated his forecast that Reebok will sell five million pairs of toning shoes in the U.S. market alone this year, and the demand is beginning to spread to other countries from Germany to Russia and the U.K. The company therefore expects that Reebok will sell up to 10 million pairs of toning shoes around the world this year. Reebok’s ZigTech technology launched in March also enjoyed strong sell-through, encouraging Hainer to predict sales of 1 million pairs of ZigTech shoes in the U.S. market this year.
While Reebok’s sales increase remains marginal for the quarter, and entirely supported by the brand’s own retail sales, the company indicates that Reebok’s growth will accelerate in the next quarters. This pick-up should be driven by sales in North America, which make up the bulk of the brand’s turnover and are expected to contribute to a double-digit sales rise for the brand in the full year.
Robust sales of toning and ZigTech shoes both contributed to a sharp increase in Reebok’s gross profit margin for the quarter. While it remains low compared with industry leaders, this margin jumped by a full 9.0 percentage points to 36.3 percent.
Meanwhile, the Adidas brand achieved a sales increase of 4.2 percent to €1,998 million for the quarter, a rise of 4.0 percent in constant currencies. In the run-up to the football World Cup in South Africa (read our analysis in the next issue of SGI Europe), football sales jumped by 26 percent in constant currencies. Another stand-out was the Sport Style unit, which lifted its sales to €518 million, up by 22 percent in constant currencies. Furthermore, the Adidas brand increased its gross margin by 0.7 percentage points to 47.7 percent.
The above figures for Adidas and Reebok encompass the turnover of their wholesale business and the sales of their own stores. But since the end of last year, Adidas has also been reporting figures by distribution channel, separating retail from wholesale and a third group of brands, described as other business, covering TaylorMade-Adidas Golf (TMAG), Rockport and others.
On the retail side, the group lifted its sales by 14.9 percent to €459 million, up by 16.2 percent in constant currencies. This amounts to a comparable store increase of 7 percent, comprising a comparable sales rise of 5 percent for Adidas and 15 percent for Reebok. The gross margin of the retail unit jumped by 3.7 percentage points to 58.2 percent and its operating margin by 7.6 percentage points to 11.3 percent, reflecting the realignment of the group’s entire retail unit.
The group’s wholesale revenues inched up by 1.3 percent to €1,898 million for the quarter, with marginal impact from exchange rates. This could be attributed entirely to sales of Adidas Sport Style products, while wholesale currency-neutral revenues of Adidas Sport Performance dipped by 6 percent and by 3 percent for Reebok. The gross margin for the wholesale unit increased by 0.5 percentage points to 43.1 percent, on account of lower sourcing costs and Reebok’s higher margin.
The group’s “other” business unit saw its sales jump by 7.0 percent to €316 million for the quarter, up by 7.8 percent in constant currencies. This performance was buoyed by sales growth of 14.9 percent to €223 million for TMAG, after exchange rates ate away 1 percentage point of growth. The company’s golf business is benefiting from many product launches, not only in North America. TaylorMade estimates that it roughly doubled its market share in golf balls compared with last year. On the other hand, Rockport’s sales dipped by 6.9 percent to €56 million and Reebok-CCM Hockey’s sales shrank by 14.4 percent to €21 million, a fall of 16.9 percent in constant currencies. The unit’s gross margin jumped by 5.7 percentage points to 45.0 percent.
Splitting the entire group sales by regions, Western Europe went up by 5.2 percent to €945 million, an increase of 3.7 percent in constant currencies. This was driven by fast-growing sales in Germany and the U.K., which the group’s managers attributed to the convincing results of their segmentation strategy. There were some much tougher markets for the group in Europe, such as Spain and Greece. European emerging markets just about managed a sales hike of 1.0 percent in constant currencies, but the group’s turnover in the region dipped by 1.0 percent in reported terms to €290 million.
North America was the brightest spot for the group, as sales increased by 10.0 percent to €585 million in euros and by 14.3 percent in local currencies. Sales increased in both the U.S. and Canada. Latin America also pursued its growth spurt with a quarterly sales increase of 24.5 percent to €271 million, up by 18.1 percent in constant currencies.
On the other hand, sales in Greater China contracted by 19.6 percent to €198 million, a drop of 14.9 percent in constant currencies. The group described this surprisingly steep fall drop as part of the continued efforts to clean up its inventories, which should be finalized by the end of the first half. It admitted that it was suffering more than Nike in China, since it had started its clean-up later, but pledged to come back all the more vigorously in the second half. Furthermore, Adidas added that sales in its own Chinese stores were still rising, up by 11 percent in comparable terms. In other Asian markets, Adidas Group’s sales inched up by 0.7 percent to €384 million, but they would have dropped by 2.9 percent in constant currencies.
Owing to the marked improvement at Reebok, the group’s gross margin increased by 3.5 percentage points to 48.6 percent for the quarter. This was due to the fact that supply costs could be lowered, while the ruble appreciated and the group achieved a higher rate of sales through its own stores, with fewer clearance sales. On the negative side, the group had to deal with higher import duties in Latin America.
The group’s operating margin landed at 9.7 percent, compared with just 2.2 percent at the same time last year. However, the comparison is distorted by many one-time expenses incurred last year, such as restructuring measures at Reebok and the integration of Ashworth.
Sales and marketing expenses did increase by 3 percent, chiefly relating to the Reebok brand, but they were slightly lower than last year as a percentage of sales, reaching 12.4 percentage of the group’s turnover.
The Adidas Group ended the quarter with a net profit of €168 million, compared with just €5 million for the same quarter last year, when the group’s profit was annihilated by one-time costs. Inventories were down by 20 percent in constant currencies, as the group implemented clearances for all of its brands in the last 12 months. Furthermore, the group’s debts were more than halved, due to lower working capital requirements and the conversion of a €400 million convertible bond.
The management lifted its forecast, predicting a mid-single-digit sales increase for the year in constant currencies, compared with the low- to mid-single-digit guidance it gave in March. This is motivated by the performance of the first quarter, the impact of the football World Cup, the group’s strong exposure to fast-growing emerging markets and the encouraging developments at Reebok.
Wholesale revenues are expected to expand at a mid-single-digit rate and retail sales should jump at a low-double-digit rate. On the other hand, the other business unit will likely fail to lift its sales by more than a low-single-digit rate in constant currencies.
The group’s forecast for the gross margin has also been raised to a level of between 46.5 percent and 47.5 percent, up from a range of 46.0 percent to 47.0 percent, for the same reasons as in the first quarter. Sales and marketing expenses as a percentage of sales should increase due to expenses around the World Cup and Reebok, but other operating expenses should decline. The group’s operating margin is therefore expected to end at around 7.0 percent, compared with a level of 4.9 percent in 2009 and an earlier forecast of around 6.5 percent for this year. In the end, earnings per share are expected to increase to a level between €2.05 and €2.30, compared with an earlier predicted range of €1.90 to €2.15.
