Sharp sales increases in China and North America bolstered the Adidas Group's turnover and profits in the second quarter, but it was affected by a faster than projected slowdown in Europe and declining sales for the Reebok brand.

The group reported a 4.4 percent sales increase to €5,261 million for the quarter, up by 10 percent in constant currencies. Its gross profit margin jumped by 2.2 percentage points to 52.3 percent and its operating profit margin reached 11.3 percent, up by 1.2 percentage points. An underlying sales hike of 10 percent led to a rise of 17.2 percent in operating profit, and net income from continuing operations surged by 20.5 percent to €418 million.

The Adidas brand's turnover moved up by 6.1 percent to €4,772 million, and by 11.9 percent in constant currencies. The brand raised its sales by 7 percent for sport fashion products and 16 percent for sport performance. Aided by the World Cup, it achieved a double-digit sales increase in football, as well as training and running.

Kasper Rorsted, chief executive of the Adidas Group, said in a conference call with journalists last week that the World Cup had led to sales of more than 10 million balls and more than the 8 million jerseys sold in 2014, even though several Adidas teams under-performed. The event inflated sales beyond Europe, with abundant sales of jerseys for teams such as Mexico and Russia, and stadium advertising led to an increase in downloads of the Adidas app.

In sports fashion, Rorsted said that the group has purposely reduced distribution of the Stan Smith and Superstar franchises. At the same time, it has seen a sales rise of nearly 50 percent for its Ultra Boost franchise for the quarter, and avid demand for the Continental 80. The Yeezy franchise created with Kanye West should be expanded, probably with more affordable prices, although the group declined to provide any details.

Adidas is projecting sales of about five million pairs of Parley shoes made from ocean plastic this year, up from one million in 2017. Despite constraints in terms of supply chain, the company is preparing to ship two million pieces of apparel made from Parley plastic as well. It already started with swimwear and football jerseys, and will expand with jackets. The Parley program was supported with efficient marketing, as the second Run for the Oceans activated more than one million runners.

The group's sales rise was diminished by a decline of 10.1 percent to €387 million for the Reebok brand. Sales were off by 3.0 percent in constant currencies, as growing demand for Classics could not fully make up for sluggish sales of training and running products. Reebok has returned to growth in North America, with a sales rise of 6 percent, despite continued store closures. But the brand's sales declined in other markets, from Europe to Latin America and Emerging Markets.

Rorsted remains upbeat about Reebok's turnaround plan, not least due to its growing margin. With an increase of 3.9 percent in the gross profit margin to 44.9 percentage points in the second quarter, Reebok is moving closer to its target of becoming profitable by 2020.

The group's wholesale business was up at a high single-digit rate, while retail sales advanced at a double-digit rate. They were pushed up by the World Cup held in Russia, where the Adidas group has many own stores. Online sales jumped by 26 percent, with double-digit growth in all regions. The Adidas app has been launched in 13 countries and downloaded more than 2.5 million times by the end of June. It should be launched in China by the end of the year.

Despite the World Cup, the turnover of the Adidas and Reebok brands in Western Europe dipped by 0.9 percent to €1,420 million for the quarter, off by 0.1 percent in constant currencies. Rorsted emphasized that the flattish sales came after three years of ample growth in this regional market, and that the group had anticipated a slowdown. But it was a little more pronounced than projected and led to a change in management, as detailed below.

Greater China was the engine for the sales hike of the Adidas and Reebok brands in the Asia-Pacific area, up by 15.4 percent to €1,726 million. This amounted to an increase of 18.8 percent in constant currencies, with a rise of 27 percent in Greater China.

Adidas Consolidated Income Statement

(Million Euros, Quarter ended June 30)

 

2018

2017

% Change

Net Sales

5,261

5,038

4.4

Cost of Sales

2,509

2,513

-0.2

Royalty/Comm. Income

32

29

10.3

Other Operating Income, (Expense)

(2,191)

(2,038)

7.5

Financial Income & Expense

(4)

(19)

-78.9

Pre-Tax

588

486

21.0

Tax

169

139

21.6

Net income from continuing operations

418

347

20.5

Losses from discontinued operations

21

189

-88.9

Net Income

396

159

149.1

Earnings/Share, Diluted

1.95

0.78

150.0

The company continued to power ahead in North America, where sales of the Adidas and Reebok brands moved up by 6.8 percent to €1,082 million, and by 15.6 percent in constant currencies. Along with the 6 percent sales rise for Reebok, Adidas raised its North American turnover by 17 percent, driven by training, running and football. Clearance activities due to an overhang of warehouse constraints last year put some pressure on the regional gross margin, but cost leverage allowed the operating margin to firm up by 3.8 percentage points to 16.7 percent.

While the Emerging Markets entity raised its sales by just 1.5 percent in constant currencies, Latin America delivered double-digit sales growth as well as Russia and the CIS countries. Russian sales were pushed up by the World Cup, which created traffic at Adidas retail locations. After 180 store closures in 2017 and another 50 this year, the group said it was getting close to the bottom in terms of Russian sales.

The improvement in the whole group's gross margin was due to an improved mix, and it was achieved despite higher input costs. This helped to make up for a 14 percent rise in marketing spend, driven by the World Cup and over-proportionate spend on the company's brands and sell-through. Other items of increased spending include IT and the transformation of the group's business in Latin America.

For the first half of this year, sales were up by 3.1 percent to €10,809 million, and by 10 percent in constant currencies. On the same basis, the Adidas brand's sales were up by 11.6 percent but Reebok dipped by 3.0 percent. The group's gross margin gained 1.8 percentage point to 51.7 percent and its operating margin advanced by 1.5 percentage points to 12.4 percent. It ended with net income from continuing operations of €960 million, up by 18.7 percent for the six months.

The group's guidance for the full year was unchanged, calling for a sales increase of about 10 percent in constant currencies. The gross margin is forecast to increase by up to 0.3 percentage points and to reach up to 50.7 percent. The operating margin should gain between 0.5 and 0.7 percentage points, to reach between 10.3 percent and 10.5 percent, while net income from continuing operations should rise by 13 percent to 17 percent, amounting to a range of €1,615 million to €1,675 million.

Adidas Group Net Sales

(Million Euros, Quarter ended June 30)

 

2018

2017

Change %

Change (currency-neutral) %

Western Europe

1,420

1,433

-0.9

-0.1

North America

1,082

1,014

6.7

15.6

Asia-Pacific

1,726

1,495

15.5

18.8

Latin America

416

441

-5.7

14.7

Emerging Markets

251

277

-9.4

1.5

Russia / CIS

177

181

-2.2

14.1

Other Businesses

188

198

-5.1

-1.5

         

Adidas

4,772

4,497

6.1

11.9

Reebok

387

431

-10.2

-3.0

         

Total

5,260

5,039

4.4

10.0

The Adidas group further reported an impairment charge on the value of the Reebok trademark for 2016, amounting to no less than €475 million after tax. The group explained that this occurred after a routine review by the German Financial Reporting Enforcement Panel. Rorsted insisted that this was a non-cash charge and that the group remained firmly on track to achieve its targets, both for this year and until 2020.