Commenting on the Adidas Group's latest results just after a much-criticized, temporary drop in the value of the yuan renmimbi, the company's chief executive, Kasper Rorsted, warned last Thursday that “everybody will lose” if the trade dispute between the U.S. and China escalates into a currency war, as it will inevitably lead to a slowdown in the world economy.
It would certainly hurt the Adidas Group, which derived about 45 percent of its total revenues of €11.4 billion from the U.S. and China in the first half of this year, compared with only 6 percent from Germany. Furthermore, China continues to be the most profitable region for the group, delivering 52 percent of the group's operating earnings of €1.47 billion in the first half. Other big sports brands are in the same boat.
The currency issue looks more threatening for companies like Adidas than the possible effect of new U.S. import duties from China, where the Big a is currently sourcing only about 20 percent of its products. Like others, it has been moving production to other countries, facing potential price pressure, but it has been investing heavily in a so-called “f.o.b. mitigation” program by automating processes, using more professional purchasing teams, and consolidating ranges to make them more consumer-relevant through its global ERP system and artificial intelligence for consumer analytics.
These measures contributed to improving the company's profit margins in the first quarter and the first half of 2019, where total revenues went up by only 4.7 percent and 5.4 percent, respectively - still within the guidance of a 3-4 percent rise given at the beginning of this year in view of temporary supply chain shortages. Rorsted confirmed that these problems should be more or less resolved by the end of this year and confirmed his previous forecast of an increase of 5 to 8 percent for the full year, indicating an acceleration in the growth rate during the second half.
In the first half ended on June 30, the gross margin increased by 1.8 percentage points to a relatively comfortable level of 53.5 percent, with a gain of 1.2 percentage points in the second quarter. Lower sourcing costs as well as significantly positive currency developments, combined with a better product and channel mix, more than offset a less favorable pricing mix and exceptional air freight costs incurred in response to the demand for mid-priced apparel in North America.
The operating margin increased by 0.9 percent to 13.3 percent in the first half, with a smaller improvement of 0.4 percentage points in the second quarter, where marketing and point-of-sale expenses were raised by 0.1 percentage points to 13.5 percent of sales. Furthermore, overheads increased by 7 percent in the quarter due to further investments in the scalability of the group's business model and higher costs related to the strong growth of the direct-to-consumer channel. Revenues from e-commerce jumped by 37 percent in the quarter.
Net earnings grew by 33.8 percent to €532 million in the quarter and by 24.2 percent to €1,146 million for the first half. Net income from continuing operations increased by 10.3 percent in the quarter, but earnings per share were up by 13 percent. The management expects net earnings from continuing operations to improve by between 10 and 14 percent for the full financial year.
In terms of currency-neutral sales, the European market registered a small uptick in the second quarter with a nominal currency-neutral gain of 0.1 percent against a decline in the first quarter, and Rorsted predicted a sequential acceleration during the balance of the year. One negative factor was the non-recurrence of the Fifa World Cup, which had an even higher negative impact on the group's performance in Russia and the CIS countries, where the quarterly sales actually declined by 4.1 percent. For the full first half, the two regions showed a decline of 1.7 percent to €2.97 billion and an increase of 3.5 percent to €307 million, respectively.
Similarly, the group's sales in North America advanced by 4.6 percent in constant currencies in the first half, reaching a level of €2,370 million, but they were up by 5.8 percent in the second quarter.
Sales grew in constant currencies by 0.6 percent in Latin America and by 11.3 percent in other emerging markets during the first half. The company's income statement showed a drop of 11.8 percent for Other Businesses, but this was due to changes in accounting for close-out sales, with no impact on the bottom line.
As usual, the Adidas brand performed better than Reebok, but Rorsted appeared confident that the latter will start delivering sustainable and profitable growth from next year. In the latest quarter, the two brands showed increases of 4 and 3 percent, respectively. Reebok, which had recorded a decline in the first quarter, turned around this quarter, driven by Classics and by double-digit increases in North and Latin America, and it continued to generate a profit.
At Adidas, a high-single-digit increase in the Sport Inspired segment was partly offset by a decline of about 2 percent in Sport Performance, where a big drop in football more than offset double-digit growth in training and basketball.
