Adidas Group’s sales dropped slightly and its earnings nearly evaporated in the first quarter of this year – although this collapse was caused to a large extent by one-off hits – and the management warned that its results were bound to deteriorate this year.
The Adidas group was hurt by slumping demand, which depressed the group’s sales by 6 percent in constant currencies, with declines in all regions except Latin America. In euros, the group’s turnover was off by 2 percent to €2.577 billion.
Sales of the Adidas brand were down by 6 percent in constant currencies, as it no longer enjoyed the strong sales of football products related to the European championships last year. Nearly all other categories were affected as well by the poor economy, but Adidas saw a double-digit sales rise in its Sportstyle unit. Overall, the brand’s sales fell by 3 percent in terms of euros to €1.917 billion.
The Reebok group’s sales retreated by another 4 percent in constant currencies, even though it enjoyed double-digit growth with its women’s category, which is at the center of its latest marketing moves. This was more than offset by declines in all other major categories. In euros, Reebok’s sales crept up by 1 percent to €458 million.
As for TaylorMade-Adidas Golf (TMAG), its sales declined in all categories. The unit’s sales dropped by 6 percent in constant currencies and they would have fallen by 13 percent without the acquisition of Ashworth. In euros, the golf unit’s sales were up by 2 percent to €194 million. Sales in Europe were off by 3 percent in euros and by 1 percent in local currencies. The Adidas group’s management is still upbeat about the business, noting that TMAG has increased its market shares for metalwoods and irons, and its sales in March were the highest ever for that month.
The group’s sales contracted in most large European markets, again largely due to the European championship held last year. European sales shrank by 6 percent to €1.175 million, equivalent to a drop of 5 percent in constant currencies, with drops of 6.1 percent to €986 million for the Adidas brand and of 18 percent to $252 million for the Reebok division, which includes its hockey operations and Rockport.
The company was hurt by the situation in Russia due to the depreciation of the ruble, but its Russian sales still increased in constant currencies. Germany was one of the few countries that held up in Europe, while Spain and France “suffered extremely.” Reebok saw “positive momentum” in Germany and Scandinavia, in addition to India and Japan.
Slack demand and retail discounts further affected the group in North America, where its sales fell by 17 percent in constant currencies. In euros, sales for the region slumped by 7 percent to €538 million.
Perhaps more tellingly, the group also suffered its first underlying sales decline in Asia for many years, as its sales fell in Japan and even in China. Asian sales were up by 6 percent in euros to €628 million, but they fell by 6 percent in constant currencies.
The group’s chief executive, Herbert Hainer, said the drop in Japan was caused by the economy, but the Chinese sales fall, in single digits in renminbi, could also be blamed on the excess inventory that was left over after disappointing sales around the Olympics. Adidas has taken some products back from its Chinese stores and has been very cautious in delivering new products, which should lead to a drop in sales for the full year while cleaning up the market. The group is also closing down many Reebok stores in China.
Latin America formed the only exception, as the group enjoyed a sales rise of 31 percent in the region, in constant currencies. In euros the group’s turnover was still up by 23 percent to €218 million, but this was largely due to the launch of Reebok’s own business for Brazil, Paraguay and Argentina.
The group’s gross margin decreased by 4.0 percentage points to 45.2 percent, about half of which was caused by a rise in sourcing costs. The depreciation of the ruble, which may not have been efficiently hedged, further depressed the gross margin, along with the many clearance sales in sports stores. Gross margins were off by 2.0 percentage points to 47.0 percent for Adidas and off by 7.7 percentage points to 29.4 percent for Reebok.
Furthermore, the group had to deal with increased operating expenses as a percentage of sales. Other operating expenses increased by 4.7 percentage points to 44.7 percent as a rate of sales, which was chiefly attributed to the investments required by the group’s growth in emerging markets.
The management pointed to several other costs that it described as one-off, and which together amounted to about €80 million. These included restructuring at Reebok, higher allowances for dubious debts and the integration of Ashworth. To make the comparison worse, Adidas benefited from a one-time gain last year for the sale of the Maxfli brand.
The company also suffered a book loss of about €6 million from the sale of the Gekko brand, a small label that came with the Ashworth package. Ashworth bought it for $24 million in 2004 to move into the U.S. college and Nascar logo apparel markets, under the names of The Game and Kudzu. It was sold again to Delta Apparel, a small company in Duluth.
Operating profit therefore decreased by 79 percent to €58 million. The company ended the quarter with net income of just €5 million, down by 97 percent compared with the €169 million it reported at the same time last year.
An increase of 39 percent in net borrowings was attributed to currency changes, as well as the group’s share buy-back plan and a shift in payment of inventories. The latter rose by 18 percent at the end of the quarter, in constant currencies.
Adidas reiterated that its sales were expected to decline at a low- to mid-single-digit rate in constant currencies for the full year – with a drop in the low to mid single digits for Adidas, at least stable sales for Reebok and a low-single-digit rise for TMAG, on the back of the Ashworth deal.
Group earnings should end up close to break-even in the first half and recover in the second half. The depreciation of the ruble and higher sourcing costs will continue to affect the company in the second quarter, contributing to a decline in its gross margin for the full year. Other operating expenses should also be up for the full year, with higher expenses for the retail business and restructuring costs. The group’s operating margin and earnings per share should therefore dip below last year’s level.