The Adidas Group has taken a goodwill impairment charge of €265 million, finally acknowledging the reduced scope of the Reebok brand. This raised yet more questions about the prospects of the American brand, although the Adidas Group's managers insisted that Reebok should return to sales expansion in the second quarter of this year.
During the conference call with financial analysts where it discussed the company's 2012 results, the management was faced with insistent queries about its intentions with Reebok. It explained that the charge mostly related to the prospects for Reebok in North America, Latin America and Brazil, as well as to increased discounts for the Rockport brand. The situation with Reebok in North America partly has to do with the transfer of the National Football League (NFL) contract to Nike.
With regard to Latin America, the company acknowledged that its relationship with Vulcabras, its Reebok licensee for Brazil, Argentina and Paraguay, was under pressure. Although the Reebok business continued to fare well in Argentina, the relationship has been marred by the troubles of Vulcabras and its own brands in Brazil. The licensing agreement has nearly three more years to run, until the end of 2015, and there was no talk of ending it early.
To be precise, the group assessed provisions of €106 million for its North American wholesale unit, €41 million for Latin America, €15 million for Brazil and €11 million for Iberia. Furthermore, goodwill of €68 million allocated to Reebok-CCM Hockey was completely written off, while goodwill of €24 million allocated to the Rockport brand was partially impaired.
Separately, the conundrum at Reebok India, where the Adidas Group has been investigating alleged irregularities, led to a restatement of figures for previous years: Net income attributable to shareholders was reduced by €58 million for 2011, and shareholders' equity in the group's opening balance sheet for 2011 was diminished by €153 million to account for the impact of alleged irregularities in previous years.
All these adjustments came as sales of the Reebok brand again dipped by 9.4 percent to €428 million for the fourth quarter of last year, amounting to a decline of 11.8 percent in constant currencies. For the full year, the turnover of the Reebok brand shrank by 14.0 percent to €1,667 million, off by 17.9 percent in constant currencies. Its gross margin dipped by 0.1 percentage point to a paltry 35.9 percent for the year, affected by discounts intended to move inventories of toning products.
Reebok's turnover was much lower than the level of nearly $3.2 billion achieved by the brand in 2004, the year before it was acquired by the Adidas Group. The entire Reebok Group's sales then reached nearly $3.8 billion, with a gross margin of 39.6 percent. The near-continuous slide since then makes the price tag of $3.8 billion paid at the time seem all the more expensive, and the prospects of rivaling the leading brands again appears to be fading away, as the Adidas Group has decided to position Reebok as a specialist fitness brand.
Still, Herbert Hainer, the company's chief executive, insisted that improvements were in sight. Sales apparently continued to suffer in the first quarter of this year, due to the fact that Reebok still had its deal with the NFL at the same time last year, but that unfavorable comparison will no longer apply from the second quarter.
Excluding the impact of the NFL contract and the shift of the contract related to the National Hockey League (NHL) to the Reebok-CCM Hockey segment, the Reebok brand's sales would have declined by a lesser 8 percent for the year – and the performance appears to be improving, because the brand's turnover would have increased by 3 percent without the two licenses in the fourth quarter. Reebok's retail sales were up by 12 percent in constant currencies for the year, with a rise of 7 percent in comparable store sales.
Hainer firmly denied any intention of divesting Reebok. Talks were held only a few months ago for the disposal of Reebok's hockey business, but they proved inconclusive in the absence of any suitable offers – the lockout of the NHL probably did not help.
The chief executive described a category offensive planned for Reebok this year, focusing on five fitness-related categories: fitness training; fitness running; studio categories such as yoga, dance and aerobics; walking; and Classics. Making up about 90 percent of Reebok's business, these categories expanded at a low-double-digit rate last year, with an increase of 30 percent for training and 6 percent for Classics.
As part of this new fitness drive, Reebok is to introduce three product platforms, including Sublite and ATV. The company is also preparing the introduction of the Reebok Delta apparel range, which is inspired by the Crossfit community. All of these investments are to be supported by a global marketing campaign under the “Live With Fire” tagline.