The Adidas Group has delivered a vigorous sales and profit increase for the first quarter, with improvements in all markets other than Russia and the golf business. The group's sales jumped by 17.3 percent to €4,083 million, which was an increase of 9 percent in constant currencies, and its underlying net profit increased by 21.9 percent.

Herbert Hainer, the group's chief executive, said in a conference call that its increased investments were paying off and it had rapidly returned to shape. The performance is relieving some pressure on management, which came in for criticism after several profit warnings last year and is preparing to face shareholders at its annual meeting on Thursday, after the presentation of a new five-year strategic plan until 2020 in March.

Large-scale marketing investments yielded a North American sales increase of 6.7 percent for the Adidas and Reebok brands in constant currencies. The Adidas brand's sales were up by 9 percent in North America, driven by football, Originals and Neo, while Reebok's sales shrank by 3 percent.

The company explained that Reebok's sales had been affected by a clean-up in its retail business, with the closure of factory outlets leading to a reduction of 5 percent in its North American store base. The brand's business is continuing to shift to more profitable products in the fitness and Classics market. Probably due to much-inflated investments in marketing, the Adidas and Reebok brands returned an operating loss of €9 million in North America, against a profit of €13 million for the same quarter last year.

As indicated when Adidas unveiled “Creating the New” a few weeks ago, it achieved sizeable gains in Western Europe, with a sales increase of 11.5 percent in constant currencies. The Adidas brand's sales in Western Europe jumped by 11 percent, compared with 16 percent for Reebok. The company said the rise had been driven by double-digit sales increases in the U.K., France, Italy and Spain. Its operating margin for Adidas and Reebok in Western Europe advanced by 2.1 percentage points to 24.5 percent.

Adidas Consolidated Income Statement

(Million Euros, Quarter ended March 31)

 

2015

2014

%
Change

Net Sales

4 083

3 480

17,3

Cost of Sales

2 074

1 769

17,2

Royalty/Comm. Income

27

24

12,5

Other Operating Income (Expenses)

(1,673)

(1,428)

17,2

Goodwill Impairment

18

-

-

EBIT

345

307

12,4

Net Financial

0

(13)

-

Pre-Tax

345

294

17,3

Tax

108

85

27,1

Net Income from continuing operations

237

209

13,4

Net Income

223

206

8,3

Diluted Euro/Share

1,08

0,96

12,5

As detailed in the attached table, sales remained buoyant in China. They increased in Latin America despite the tough comparison with the same quarter the previous year, ahead of the football World Cup. The new geographic segment of Middle East, Africa and other Asian markets (MEAA) delivered a 9.6 percent sales jump in constant currencies, including a double-digit rise in South Korea.

The group predictably remained under pressure in Russia and the CIS countries, where it sales declined by 3.4 percent in constant currencies and by 33.6 percent to €162 million in euros. The Adidas brand's sales were down by 6 percent but Reebok's turnover moved up by 6 percent in constant currencies. Their operating margin for Russia shrank by 8.4 percentage points to 1.5 percent. The group said that it had closed down another 30 under-performing stores in Russia and consumer confidence remained shaky, but the longer term prospects for the market remained buoyant.

The Adidas brand alone delivered a sales increase of 18.6 percent to €3,352 million for the quarter, which amounted to an increase of 10.9 percent in constant currencies. Among the strong points was a 13 percent sales hike for running products. Adidas Originals sales soared by 29 percent, with a spike in sales for the Superstar and much hype around the group's partnership with Kanye West. Sales of the Neo range inflated by 18 percent in constant currencies.

Reebok's sales reached €411 million for the quarter, which was a rise of 14.9 percent in euros and 9.0 percent in constant currencies. The brand expanded across all markets other than North America, which was attributed to its distribution changes. Sales were up at double-digit rates in Western Europe, Latin America, China and Japan. Double-digit sales increases in the training and studio categories accounted for much of the expansion.

After a decline of 27.7 percent last year, the turnover of TaylorMade Adidas Golf (TMAG) slipped by another 8.6 percent in constant currencies for the quarter, down to €280 million. This was caused by shrinking sales of woods and irons, while sales of golf apparel climbed at a double-digit rate.

TMAG is projected to return to expansion in the second half of the year, when it will be faced with weaker comparable sales. Hainer said he was unfazed by any shifts in market share but more worried about a lack of growth in the golf market. Yet the group again emphasized that it had learned from its mistakes and would only slowly increase the volume of products brought into the market.

The golf business dragged down the Other Businesses segment, which saw its turnover declined by 1.0 percent in constant currencies. Double-digit sales increases for Reebok-CCM Hockey and other centrally managed business could not compensate for the drop in golf. The operating loss for this segment was reduced from €21 million to €5 million.

The entire group's retail sales climbed by 14 percent in constant currencies, including a jump of 56 percent for online sales. They reached €895 million, up by 13 percent in reported terms. Comparable store sales advanced by 4 percent with increases across all store formats and most markets.

The company's gross margin remained stable at 49.2 percent and its operating margin excluding goodwill impairment inched up by 0.1 percentage point to 8.9 percent despite a hike of 26 percent in its sales and marketing budget to support the growth of the Adidas and Reebok brands. This was compensated for by cost reductions through the integration of warehouses and back office functions in Europe, among others.

The group's net income from continuing operations excluding goodwill impairment improved by 21.9 percent to €237 million. The company ended the quarter with net profit of €221 million, which was an increase of 8.2 percent. This includes a loss of €14 million from discontinued operations, relating to The Rockport Company, which the group has agreed to sell. It further encompasses a goodwill impairment charge of €18 million, some €15 million due to accounting changes in Latin America relating to the group's new segmental reporting, and the other €3 million for Russia.

Adidas Group Net Sales

(Million Euros, Quarter ended March 31)

 

2015

2014

%
Change
(€ terms)

%
Change
(currency
neutral)

Western Europe

1 143

1 011

13,1

11,5

North America

591

462

27,9

6,7

Greater China

597

414

44,2

21,4

Russia/CIS

162

245

-33,9

-3,4

Latin America

423

374

13,1

6,0

Japan

155

139

11,5

6,5

MEEA

635

503

26,2

9,6

Other Businesses

377

333

13,2

-1,0

         

Adidas

3 352

2 826

18,6

10,9

Reebok

411

358

14,8

9,0

Taylormade-Adidas Golf

280

264

6,1

-8,6

Reebok-CCM Hockey

39

32

21,9

8,8

The performance encouraged Adidas to reaffirm its forecast of a mid-single-digit sales increase for the full year in constant currencies. Sales are predicted to significantly improve at TMAG after its weak performance last year, while the Adidas and Reebok brands should both continue to expand robustly.

Hainer was enthused about the latest and upcoming product launches, such as the new ranges of football boots to hit the market this summer; the striking performance tennis garments by Y-3 that were launched last month and are to be worn by some players at the French Open; and the introduction of Bounce running footwear later this year.

The forecast calls for the group's gross margin to reach between 47.5 and 48.5 percent for the full year, compared with 47.6 percent in 2014. The group points to an improved mix for Adidas and Reebok, as well as fewer clearance sales in the golf market, mitigated by unfavorable currency exchange rates.

Marketing spend should be on the rise again in the second quarter but it should flatten in the second half, when the group started to invest more forcefully last year. However, the company wants to drive faster market share gains through continued investment in marketing and point of sales, all the more so in Western Europe and North America.

The group's operating margin is predicted to land at between 6.5 percent and 7.0 percent for the full year, compared with 6.6 percent in 2014, all excluding goodwill impairment. Net income from continuing operations excluding this impairment is projected to rise at 7 to 10 percent, compared with €642 million in 2014.