Adidas Group delivers higher profits despite flat sales

The Adidas Group said that it would focus on profit margins this year, and so far it has delivered. While its sales were flat in terms of local currencies in the first quarter, the company achieved a gross margin of 50.1 percent, up by 2.4 percentage points from the same period one year ago. This is a record level for the group, slightly above the margin it gained in the second quarter of 2008, the first time the company's gross margin reached more than 50 percent.

The expansion of the gross margin was attributed to an evermore judicious product, regional and distribution mix. In other words, the group has been selling more valuable products such as the Energy Boost running footwear launched in February; it is making a larger share of its sales in higher-margin emerging markets like Russia; and the share of its sales through its own retailing has increased to about 19.2 percent in the quarter.

This share expanded as the Adidas Group's retail sales jumped by 4.2 percent, while its wholesale revenues slid by 5.1 percent. The gross margin of the group's retail business did decline by 0.8 percentage points to 60.7 percent, but that was still much more than the gross margin of 44.3 percent for the wholesale business – even after an increase of 2.6 percentage points for the quarter.

The Adidas brand's gross margin improved by 1.8 percentage points to 48.1 percent, but it also jumped by 1.5 percentage points to 39.3 percent for the Reebok brand. The Other Businesses unit, with TaylorMade Adidas Golf, lifted its gross margin by 0.9 percentage points to 44.6 percent.

The Adidas Group's operating margin was up by 1.1 percentage points to 11.8 percent, in line with the target set in its Route 2015 plan to achieve a sustainable operating margin of 11 percent. The company ended the quarter with net profit of €308 million, up by 6 percent.

The group's total revenues of €3,751 million for the quarter were flat in constant currencies but off by 1.9 percent in euros. Speaking in a conference call to discuss the results earlier this month, Herbert Hainer, the group's chief executive, said that this was a robust performance given the sales increase of 14 percent enjoyed by the group for the same quarter last year, ahead of the European football championships and the London Olympics. He added that sales inched up by 1 percent excluding the impact of exiting a contract with the National Football League (NFL).

The Adidas brand's sales amounted to €2,858 million, which was a drop of 1.0 percent in reported terms but an increase of 0.9 percent in constant currencies. Its turnover in running products jumped by 12 percent, spurred on by the Energy Boost, which sold out in many markets within four weeks. Sales climbed by 18 percent for basketball and by 21 percent for outdoor. Sport Style lifted its sales by 4 percent, driven by increases of 9 percent for action sports and more than 50 percent for the Neo sub-brand. However, the ample gains in all of these categories were offset by a sharp decline in sales of football and merchandising products, which had significant sales in the same quarter last year ahead of the summer's events.

The Reebok brand's sales slid by 16.2 percent to €378 million, contracting by 14.2 percent in constant currencies. Hainer was eager to add that the decline only amounted to 2 percent when excluding the termination of the NFL deal and the drastic sales reductions at Reebok India, on the back of alleged irregularities uncovered last year and a subsequent reorganization of the business.

These two issues meant that Reebok's sales were down in North America and in Other Asian Markets, which includes India. They also declined in Latin America, as Reebok's sales appear to be suffering from the strain at Vulcabras, the brand's joint venture partner in Brazil, Argentina and Paraguay until 2015. Since the end of the joint venture is in sight with apparently little prospect of a renewal, Vulcabras could be forgiven for focusing investments on its own Olympikus brand.

However, Reebok's sales did increase in Western Europe as well as in European Emerging Markets - particularly in Russia, where Reebok is the second-largest sports brand after Adidas. This is the last quarter when the end of the NFL deal will affect comparisons and Hainer was adamant that the brand would return to sales expansion in the third quarter. He was upbeat about a sales increase in the quarter of 33 percent for Reebok's Classics and 13 percent hikes for Delta apparel and the Cross Fit ranges.

Taylor Made Adidas Golf continued to expand rapidly with a sales rise of 9.4 percent to €423 million for the quarter, up by 12.6 percent in constant currencies. Without the acquisition of Adams Golf, sales of the group's golf business would have increased by 5 percent. The Other Businesses unit as a whole reached a turnover of €548 million, which was up by 6.1 percent in euros and by 8.7 percent in constant currencies, in spite of a sharp decline at Reebok-CCM Hockey.

As detailed in the attached table, the entire group's underlying sales shrank by 6.1 percent in Western Europe, mostly due to the uneasy comparison with last year and its summer events. The group's turnover was up in France, Poland and most of the Nordic countries, but it was off in Spain, Italy and the U.K. However, the company said it held its market share in the U.K., where it is still aiming for market leadership by 2015.

A sales increase of 3.1 percent in European Emerging Markets was driven by Russia, the Middle East and South Africa. Hainer mentioned the tough retail environment in Russia for the quarter, due to the disappointing development of the economy and the very cold weather until April. However, the group is continuing to expand and its targets remain unchanged in Russia.

Latin America was a standout for the quarter, with sales up by 11.5 percent in constant currencies – and by 19 percent for the Adidas brand alone. Sales in North America advanced by 3.2 percent while they moved up by 5.9 percent in China but they declined by 4 percent in Other Asian Markets, due to the Reebok situation in India and tough comparisons in Japan. On the other hand, the company's business is still buoyant in South Korea, as described exclusively in SGI Europe last November.

After this opening quarter, the Adidas Group still expects its sales to expand at a mid-single digit rate for the entire year in constant currencies. The improvement of the gross margin for the quarter also convinced the company that it would end the year at the higher end of its predicted range of 48.0 to 48.5 percent. This should make it easier to reach its target of an operating margin approaching 9 percent for the year.