While Reebok’s sales continue to suffer from clean-up measures, the Adidas brand is displaying rude health, with sales increases in all regions for its latest quarter and an almost unprecedented rise in orders spanning all product categories.
Adidas ended the quarter with sales up by 3.7 percent to €2.012 million, a jump of 7 percent in constant currencies. They crept up by 1 percent in Europe compared with the same quarter last year, when Adidas enjoyed buoyant sales related to the World Cup. Driven by apparel and aided by its new business with the NBA, transferred from Reebok, the Adidas brand’s sales were up by 4 percent in North America, and they jumped by 13 percent in Asia, again in constant currencies.
There was even more robust growth in orders. At the end of September Adidas’ backlogs were up by 16 percent in constant currencies or 11 percent in euros, the highest rise in many years. This tally includes an impressive order increase of 20 percent in Europe, only partly due to next year’s football European Championships: It accounted for about 5 percent of the rise in European orders for Adidas, while the rest was spread over all categories.
Adidas has recently extended its sponsorship deals with the Greek and German football teams, which have already qualified for the tournament, to be held in Austria and Switzerland. Adidas sold about 1.5 million replica jerseys during the last European tournament, held in Portugal in 2004, along with 6 million Roteiro balls. For 2008, a new version of the Predator boot and updated jerseys are to be launched, while a new ball will be on the shelves starting in December.
Asian orders for the Adidas brand were up by 21 percent, and in constant currencies Adidas saw an increase in orders in North America. It was due to higher apparel orders in the region, up by 9 percent, while footwear orders dropped by 4 percent.
On the other hand, Reebok’s sales continued to slide, down by 2 percent in constant currencies to €728 million, a drop of 6.5 percent in euros for the quarter. The decrease was a result of continued distribution cleanup in North America as well as a 7 percent sales drop there in constant currencies. Herbert Hainer, the Adidas group’s chief executive, said this would continue to affect Reebok’s sales in the region through 2008, but that there should be a positive order backlog for Reebok in North America by the end of next year, with a sales increase to follow there in 2009.
Leaning on the infrastructure of Adidas, Reebok’s Asian sales progressed by 21 percent in constant currencies for the quarter. On the other hand they were roughly flat in Europe, as fast expansion in emerging markets made up for diminished sales in other countries. Among the stand-outs were Turkey and Greece, where Reebok took over its own distribution, as well as Poland and Russia. The weakest results for Reebok in Europe were still in the U.K., where the brand is going through the same tidying-up measures as in the USA.
Reebok’s orders haven’t picked up either, showing a decline of 2 percent in constant currencies at the end of the reporting period. Orders more than doubled in Asia but that didn’t make up for a drop of 5 percent in Europe and 11 percent in North America. North American apparel orders rose by 8 percent, but footwear was down 22 percent, both in dollars.
Efforts to improve Reebok’s distribution and cost synergies with Adidas have improved Reebok’s profitability. Operating profit was up by 45 percent for the quarter, which was partly due to one-off costs last year; excluding this effect the brand’s operating profit was still up by 15 percent.
The Adidas group is on track to achieve cost synergies of €87.5 million from the integration of Adidas and Reebok for the full year, to be offset with one-off costs of €70 million. For next year the cost synergies should reach €175 million, with another €70 million of one-off costs, resulting in net synergies of about €105 million for 2008.
Underlying sales at TaylorMade were on the rise again for the quarter, up by 14 percent in constant currencies. This increase was spread through all regions (11 percent in North America, 13 percent in Europe, 17 percent in Asia). However, these figures exclude Greg Norman, which was divested by Adidas in November 2006 and therefore distorts the comparison. In reported terms, TaylorMade’s sales dipped by 2.2 percent to €190 million.
Adding up the three brand units, the Adidas group’s sales were up by 3 percent in constant currencies, but down by 0.3 percent in euros to €2.941 million for the quarter. The group’s sales in Europe crept up by 0.3 percent to €1.339 million. Reebok and currency effects pushed the group’s sales down by 8.9 percent to €819 million in the North American market. On the other hand, it posted a robust sales increase of 9.2 percent to €579 million in Asia and it expanded even faster in Latin America, with a sales jump of 30.4 percent to €174 million for the quarter.
The group’s profitability was equally healthy, as its gross margin rose by 3.6 percentage points to 48.6 percent for the quarter. Last year’s gross margin was diminished by accounting effects relating to the acquisition of Reebok, which accounted for about one-third of the improvement this year. Another third was attributed to synergies achieved through the integration of Adidas and Reebok, while the final third came from heightened sales of more valuable products.
This increase in gross margin more than made up for a rise in operating expenses during the quarter, so that the operating margin climbed by 2.2 percentage points to 16 percent. The group’s operating profit rose by 15.2 percent to €471 million, and after lower expenses the group’s net income attributable to shareholders ended at €298 million for the quarter, up by 22.2 percent.
So far this year, the Adidas group’s sales were up by 5 percent in constant currencies, but only by 0.6 percent in euros to €7.879 million. The Adidas brand saw its sales rise by 4.1 percent to €5.465 for the first three quarters, up by 8 percent in constant currencies. TaylorMade’s sales fell by 7.5 percent to €609 million because of the divestment of Greg Norman.
Reebok’s sales increased by 2 percent in constant currencies, but in euros they dropped by 3.4 percent to €1.765 million, and this figure was inflated by the inclusion of January sales this year, while they hadn’t been consolidated in 2006. The most relevant comparison provided by the group in this respect, in constant currencies and excluding the effect of the transfer of Liverpool and NBA endorsement deals to Adidas, shows a sales decline of 4 percent for Reebok sales in the nine-month period.
The group’s gross margin climbed by 2.8 percentage points to 47.7 percent for the nine months. Adidas again led the pack with a gross margin of 47.7 for the period, followed by TaylorMade with 44.3 percent. Reebok had a gross margin of 38.9 percent, but it increased by 4.1 percentage points compared with the same period last year. The group’s operating profit for the three quarters was up by 7.1 percent to €889 million, while net income attributable to shareholders swelled by 12.9 percent to €530 million.
The latest quarter has prompted the group’s management to adjust its forecast for the full year, now predicting a high single-digit sales increase for the Adidas brand in constant currencies, as opposed to a mid-single-digit rise. Projections for the other brands are unchanged, while the group’s gross margin is expected to reach 45percent to 47 percent, and all other targets were reconfirmed.
Separately, Adidas announced the immediate resignation of its supervisory board chairman, Henri Filho. The Frenchman came into the fray in 1993 as chairman of Clinvest, the investment banking arm of Crédit Lyonnais, which financed the gradual takeover of Adidas by investors around Robert Louis-Dreyfus. The seat vacated by the 76-year-old Filho will be filled by Hans Friderichs, the former deputy chairman on the same board.
Friderichs will be backed up by Fritz Kammerer, chairman of the central works council at Adidas AG and a deputy chairman on the Adidas board; and Igor Landau, former chief executive of Aventis, already a board member but newly appointed as a deputy chairman. Stefan Jetzsch, a member of the executive board at Dresdner Bank, has been added to the Adidas board as an ordinary member.
