Buoyed by impressive sales growth in the fourth quarter, Adidas has achieved another year of double-digit expansion. The surge in sales reflects on-going expansion in the American and Asian markets, but after several quarters of sluggishness Adidas also performed vigorously in Europe, partly owing to the launch of products related to the football World Cup.
Group sales for the last three months of the year jumped by 27.2 percent to €1.521 billion, up by 21 percent in constant currencies, with double-digit expansion in all regions. The comparison refers to continuing operations, excluding the Salomon business which Adidas divested last October. The Adidas brand raced ahead with a sales increase of 29.1 percent to €1.316 billion for the quarter, while TaylorMade-adidas Golf’s sales improved by 16.2 percent to €181 million.
The group’s performance on the European market was way above expectations in this ebullient quarter, with sales up by 16.7 percent to €629 million. The Adidas brand led the way with a whopping quarterly increase of more than 20 percent in European sales to €604 million, up 15 percent in constant currencies.
Managers attributed this mainly to strong sales of World Cup products, which pushed Adidas’ total sales of football products up by nearly 25 percent for the full year to a yet undisclosed level. This football phenomenon was compounded with double-digit sales increases for training apparel and tennis gear, while European sales of Sports Heritage products went up by more than 30 percent.
However, gross margins decreased by 0.6 percentage points at group level to 47.1 percent for the quarter, chiefly due to the company’s buy-out of its contract with Dunlop Slazenger for the production of golf balls. Adidas has set up its own production of premium golf balls under the TaylorMade brand, while shifting manufacturing to Asia for low-value items. For the Adidas brand the gross margin rose by 0.9 percentage points to 43.6 percent, but the figure was down by 6.2 percentage points to 39 percent at TaylorMade.
The higher overall turnover led to a 73.6 percent increase in operating profit to €35 million for the quarter. However, net income from continuing operations was down by 64 percent to €4 million, and adding discontinued operations Adidas actually posted a net loss of €4 million for the quarter, which took investors aback. While they were pleasantly surprised by the company’s rise in sales and operating profits, analysts had not anticipated a big one-off jump in financial expenses, attributed to the acquisition of Reebok and to accounting changes resulting from the switch to IFRS standards.
For the full year, the company’s sales from continuing operations rose by 13.2 percent to €6.636 billion, up 12 percent in constant currencies. The Adidas brand made the most impressive leap with a sales jump of 13.3 percent to €5.861 billion, up 12 percent in constant currencies, but TaylorMade-adidas Golf was not far behind, with a sales increase of 11.9 percent to €709 million, a rise of 11 percent in constant currencies. Including Salomon, sales increased by 8 percent to €6.996 billion.
In the mature European market, Adidas’ group sales expanded by only 3.2 percent for the year to €3.166 billion, stimulated by robust sales in Germany, Italy and France, where Adidas claims to have gained substantial market share. This more than made up for declining sales in Iberia and the UK, where Adidas suffered last year from the poor trading climate and ferocious competition among the country’s retailers, after expanding at a very brisk pace over a long period of time.
The Adidas brand itself lifted its European sales by about 2 percent in constant currencies and by 3 percent in euros, reaching a level of €3.042 billion. The strongest contributors were the emerging markets of Eastern Europe, particularly Russia where Adidas enjoyed growth of more than 40 percent last year.
In North America, the Adidas group continued to reap the benefits of the overhaul launched two years ago, leading to an extensive management reshuffle and a more thorough market approach. North American sales jumped by 17.2 percent to €1.561 billion, with improvements in all categories. For the Adidas brand alone, full-year North American sales climbed by 16 percent to €1.179 billion.
The Asian continent continued to bring much joy to the Adidas group, with sales up by 27.8 percent for the year to €1.523 billion, including a 27 percent increase in constant currencies. The growth was mostly driven by China, where Adidas’ sales nearly doubled. Adidas Japan enjoyed double-digit sales growth, turning it into the company’s second-largest market and the leading contributor in terms of profits. Looking at Adidas alone, Asia as a whole even zoomed past North America as the brand’s second-largest regional market, with sales up by 34 percent to €1.3 billion.
Latin America remained the company’s fastest-growing region, achieving a sales increase of 42.6 percent for the full year to €319 million, up by 32 percent in constant currencies. Improvements were achieved in all of the region’s five largest markets.
Overall, Adidas’ footwear sales expanded by 14 percent to €2.978, still making up about 45 percent of the company’s turnover. Apparel sales grew by 14 percent as well, reaching €2.798 billion, while sales of footballs and other equipment jumped by 11 percent to €860 million. Licensees’ sales reached €586 million, up 9 percent.
Sports Heritage outshone other categories with a sales increase of 42 percent to €1.290, making up about 22 percent of Adidas’ brand sales. Sports Performance, which remains by far the largest chunk with 78 percent of Adidas’ turnover, lifted its sales by 8 percent to €4.545 billion, while Sport Style inched up by 2 percent to €19 million.
For the full year, the group’s gross margin was up by 0.2 percentage points to a record 48.2 percent of sales. This was mostly attributed to the expansion of Adidas’ own retail activities, which made up about 13 of sales last year at €757 million, growing by 37 percent. Adidas’ gross margin rose by 1.1 percentage points to 45.3 percent, while TaylorMade’s gross margin was down by 3 full points for the year, to 44 percent of sales.
Operating profits increased by 21.1 percent to €707 million for the group, driving the operating margin up by 0.7 percentage points to 10.7 percent. The Adidas brand generated an operating margin of 11.8 percent, up by 0.9 percentage points. Adidas managers went out of their way to stress that Europe performed strongly in terms of profitability, with a 25 percent increase in operating profit to €365 million for the year, or 11.5 percent of sales. North American operating profits improved sharply but remained insignificant at €13 million. The juiciest business came from Latin America, where the group achieved an operating margin of 12.8 percent.
Including income from Salomon until its formal divestment, the group’s net income rose by 21.8 percent to €383 million for the year. Salomon’s contribution to this tally was a widened loss of €44 million, compared with €11 million last year, partly due to the fact it did not include the more positive results usually achieved by the French company in the 4th quarter.
Adidas managers are upbeat about the company’s prospects for this year, in view of the World Cup and of product launches in the Stella McCartney range and other categories. Overall order backlogs were up by 15 percent in euros at the end of last year, or 8 percent up in constant currencies. However, Adidas believes that the actual sales increase might be higher still, as many at-once orders can be expected in the run-up to the World Cup. Furthermore, the backlogs fail to reflect rising sales in Adidas’ own stores.
Footwear orders were up by 4 percent in currency-neutral terms and 11 percent in euros at year-end, with the strongest increases in football and sport heritage. These same two categories, plus basketball, drove apparel orders up by 9 percent in constant currencies, or 16 percent in euros.
European order backlogs were up 3 percent in constant currencies at the end of last year, combining flat backlogs in footwear with a 2 percent increase in apparel and a much sharper double-digit rise in hardware, mostly attributed to footballs. However, the most impressive backlogs came from North America, with orders up by 17 percent in constant currencies, or 35 percent in euros. American footwear orders are up by 15 percent, against 19 percent for apparel. Asian orders were ahead by 13 percent in constant currencies, up by just 2 percent for footwear and by 18 percent for apparel.
Excluding Reebok, Adidas expects its own sales to grow at high single-digit rates during the current eventful year, combining mid-single digit growth in Europe with double-digit growth in Asia and North America. The growth curve is expected to flatten a little in Latin America, where sales should rise at a high single-digit rate.
Gross margins for both Adidas and TaylorMade are expected to increase, but then again the group’s gross margin will be affected by the promised cooperation with Amer Sports, which took over Salomon last year. It was agreed at the time that, for the sake of continuity, some Adidas subsidiaries would continue to sell Salomon products in the short term – which adds a little net income but produces gross margins below the group average. Gross margins excluding Reebok should therefore end up at between 47 percent and 48 percent.
When it comes to the operating margins, they are projected at between 10 and 10.5 percent for the group, due to higher operating expenses at Adidas in relation with higher marketing expenses for the World Cup and the growth of own retail activities. All in all, the group’s net income excluding Reebok should still go up at double-digit rates.
Adidas managers used the opportunity to hit back at Nike’s claims regarding its supposed leadership in the worldwide football market. The latest findings from NPD Sports Tracking Europe indicate that Nike’s sales of football boots declined by 19 percent in Europe last year, while Adidas’ sales in this segment rose by 2 percent. Consequently, while Nike briefly grabbed the leadership in European cleated and non-cleated football boot sales in 2004, with an estimated share of 36.7 percent against 31.6 percent for Adidas, the German brand is back in the lead with a share of 35.6 percent against 32.4 percent for Nike.
Adidas points out again that, on top of its European leadership, it commands a market share of 48 percent in the USA, which is nearly double the share of its nearest competitor. Hoping to put an end to the recent wave of claims and counter-claims, the company coolly estimated its global football market share at about 35 percent, against roughly 25 percent for Nike.
Nike contends that its alleged leadership is due to its larger sales in Latin America, on the back of its deal with the inspiring Brazil team, and of football replica apparel. However, football sales in the whole of Latin America are estimated at less than 5 percent of the worldwide market. Therefore, Adidas officials believe that the $1.5 billion figure which Nike is projecting for this year in sales of football-related products, against more than €1 billion for Adidas, includes a much wider range of apparel.
