Adidas gathers growing sales and profit

Ending the year with another buoyant quarter, the Adidas Group has continued its growth spurt with a sales rise of 14.0 percent to €19,291 billion, up by 18 percent in constant currencies, and with improved profit margins.

Kasper Rorsted, the group's new chief executive, attributed much of the performance to Creating the New, the five-year strategic plan launched two years ago. At a press conference in Herzogenaurach last week, Rorsted made it clear that much had to be done to improve profit margins and Reebok's performance, but the group saw potential for the strategy to deliver more sales and profit than previously forecast (more details in the previous story).

The Adidas group's income surpassed the €1 billion mark as it managed to mitigate unfavorable exchange rate changes and obtained operating leverage. The gross margin was up by 0.3 percentage points to 48.6 percent, as price increases and an improved mix made up for the impact of exchange rate changes. One-off gains for the early termination of an endorsement deal with Chelsea football club and the divestment of Mitchell & Ness contributed to a rise of 1.3 percentage points to 7.7 percent in the group's operating profit margin excluding goodwill impairment charges in 2015. Net income from continuing operations thus jumped by 48.5 percent to €1,019 million, up 41 in underlying terms.

The sales rise was driven by a 21.7 percent sales jump for the Adidas brand in constant currencies, with double-digit rate increases in performance products as well as Adidas Originals and Adidas Neo. The brand's turnover reached €16,334 million, up by 17.2 percent for the year.

Footwear with Boost soles remained in such eager demand that the group suffered some product shortages. It has been driving demand in the Originals category by managing its franchises more efficiently. Sales of performance products were up by 13 percent, against 45 percent for sports fashion items.

The Reebok brand's sales improved by 1.1 percent to €1,770 million, up by 5.7 percent in constant currencies, but the group remains clearly unsatisfied with its performance in the U.S. and its lack of contribution to profits. Reebok's sales declined by 2 percent in North America to €514 million, down by 1 percent in constant currencies. But on the same basis, Reebok's sales advanced by 18 percent in Western Europe, by 17 percent in Greater China and by 12 percent in Japan, while increasing at single-digit rates in other markets.

Other group brands jointly raised their turnover by 0.5 percent to €1,475 million for the year. The TaylorMade and Adidas Golf brands managed to raise their turnover but this could not make up for declines at Ashworth and Adams Golf, leading to a sales dip of 0.8 percent in constant currencies for the TaylorMade Adidas Golf segment, down to €892 million. CCM Hockey's sales were down by 13.3 percent in constant currencies, hurt by a slump in sales of licensed apparel, and in the sticks and blades categories. As previously reported, TaylorMade, Ashworth and Adams Golf are up for sale, and Rorsted announced last week that the same applies to CCM Hockey. The operating margin for the business unit encompassing all these brands remained negative.

The Adidas brand's underlying sales soared by 20 percent in Western Europe, fueled by demand for running and outdoor products, Originals and Neo. The Adidas and Reebok brands generated sales of €5,291 million in Western Europe, up by 17 percent in reported terms and 20 percent in constant currencies, with double-digit increases in the U.K., Germany, Italy, France, Spain and Poland. However, the lower gross margin in Western Europe hurt the regional operating margin, which was down by 2.1 percentage points to 18.0 percent.

Underlying sales for the Adidas brand soared by 30 percent in North America, where the group decided to over-invest as part of Creating the New. The rise was driven by increases in the running, training and U.S. sports categories, Originals and Neo, leading to market share gains for the Adidas brand in the U.S. footwear market. Adidas and Reebok jointly produced a turnover of €3,412 million in North America, up by 24 percent in dollars and in euros. The operating profit margin remains paltry in North America, although it jumped by 3.8 percentage points to 6.3 percent.

Demand remained equally robust in China, where the Adidas brand's sales were up by 28 percent in constant currencies for the year, with sharp rises in football and running. With Reebok, sales in China reached €3,010 million and they continued to yield juicy profits, with an operating profit margin up by 0.1 percentage point to 35.2 percent.

Underlying sales for the Adidas brand were nearly flat in Russia and the CIS countries, up by 1 percent, but they advanced by 16 percent in Japan as well as Latin America and the Middle East, Africa and other Asian markets (MEAA). Sales were up in all major markets in Latin America for the Adidas and Reebok brands – apart from Brazil, where sales were up at a low-single-digit rate and the company decided to restructure its offering and distribution.

The last quarter confirmed abundant demand for the Adidas brand, which raised its turnover by 17.9 percent in constant currencies, while Reebok's sales were up by 2.5 percent in constant currencies.

The Adidas group predicts that its sales will expand at a rate of 11 to 13 percent in constant currencies for this year, with double-digit growth for the combination of the Adidas and Reebok brands in Western Europe, North America, Greater China and Russia, and high-single-digit rate advances in other regional markets. Sales decreases at CCM Hockey are forecast to drag down sales of the other businesses unit in constant currencies, while underlying sales at TaylorMade Adidas Golf are predicted to expand at a mid-single-digit rate.

The group wants to reinforce what it describes as market leadership in football, taking advantage of the build-up toward the 2018 World Cup around the end of this year and amplifying its football business in streetwear. Further market share gains are targeted in the running market, as well as advances in the women's market.

The group's gross margin for the year should increase by up to 0.5 percentage point to reach up to 49.1 percent. With a projected decline in expenses as a percentage of sales, the operating profit margin should rise to between 8.3 and 8.5 percent. Net income from continuing operations is projected to increase at a rate between 18 and 20 percent, to land at between €1,200 million and €1,225 million.

The press conference marked a change in leadership as well as the pending departure of Robin Stalker, the group's chief financial officer (CFO) for 16 years. He told the board he did not intend to extend his contract beyond March 2018 and agreed to relinquish his functions as CFO and executive board member in May, to make the transition easier. He is to be replaced by Harm Ohlmeyer, who has been leading the group's global e-commerce business. Ohlmeyer has been with the group since 1998, covering various functions in finance and sales as well. Stalker was warmly praised for a tenure under which the company's value soared from about €3 billion to more than €30 billion.