Adidas outperforms in North America

The Adidas Group's expansion has been hampered by weakening retail trends in Europe and infrastructure bottlenecks in North America in the third quarter, leading to a sales increase at the lower end of its projection, but the company still delivered ample rises in sales and profits.

The German group's turnover jumped by 8.7 percent to €5,677 million for the three months, with a rise of 12 percent in constant currencies. Kasper Rorsted, the group's chief executive, told analysts in a conference call last week that it was faced with sluggishness in France and a shortage of warehousing capacity in North America, meaning it could not satisfy all the demand. But Rorsted added that sales growth should be faster in the last quarter, due to product launches and the start of sell-in around the football World Cup in Russia next year.

The Adidas brand led the way with a sales increase of 9.7 percent to €5,091 million for the quarter, up by 13.2 percent in constant currencies with over-proportional demand from women. Among the strongest categories was running, with an underlying sales uptick of 16 percent for the quarter. The ending of partnerships with the NBA and Chelsea football clubs contributed to declines in basketball and football. So the relatively sluggish underlying sales increase of 3 percent for the Adidas brand's sport performance ranges was caused chiefly by weakness in apparel. The Originals and Neo ranges raised their turnover by 25 percent, driven by a 40 percent rise for the brand's contemporary franchises, NMD, Tubular and EQT, which have come to represent over half of Originals footwear sales.

The Reebok brand's underlying sales moved up by just 0.6 percent for the quarter, compared with 9.2 percent in the first half, and they dipped by 1.6 percent in reported terms to €485 million. The turnover was hurt by the ongoing clean-up of the brand's retail business in the U.S. market, but it has been expanding in other markets and Reebok is making progress in terms of profit margins. The group reiterated its commitment to Reebok through a partnership unveiled last week with Victoria Beckham.

After rapid growth in the last years, the Adidas group saw its sales in Western Europe move up by 6.3 percent to €1,656 million, a rise of 7.4 percent in constant currencies. Apart from the retail trend and French weakness, Rorsted mentioned promotional activity by Nike. Another factor was the decline in football product sales, caused in part by the termination of the Chelsea deal and the unfavorable comparison with a quarter that included the European football championships last year. The Adidas brand's sales were up by 6 percent in constant currencies in the region, compared with a rise of 21 percent for Reebok, and the group's operating margin in Western Europe firmed up by 1.8 percentage point to 23.2 percent.

The group's expansion was unimpeded in China, where its sales jumped by 23.1 percent to €1,012 million for the quarter, with a rise of 28.3 percent in constant currencies. The Adidas brand is sold through nearly 10,000 stores around the country, getting closer to the target of 12,000 stores by 2020, but Rorsted said another part of the expansion will be driven by online sales. They more than doubled in the quarter but account for a single-digit percentage rate of sales in China so far. The Adidas chief added that online retailing is particularly advanced in China, where retailers have become early adopters of technology such as mobile payment and facial recognition.

While Nike and Under Armour have both been affected by sluggishness in the North American market, the Adidas group is continuing to gain market share with a sales increase of 18.5 percent to €1,099 million for the quarter. Sales of the Adidas brand surged by 31 percent in constant currencies despite the bottleneck at the warehouse and other constraints. Harm Ohlmeyer, the group's chief financial officer, said the growth even led to a permanent shortage in parking spots at the group's head office in Portland, due to the growth in staff.

Rorsted went out of his way to discuss allegations of wrongdoing by an Adidas executive in the U.S. basketball operations, saying that the group immediately put the relevant people on leave and is fully cooperating with the authorities. However, he added that the issue should not have any impact on the group, since basketball makes up 1.7 percent of its turnover and less than 1 percent of its U.S. business.

Reebok's sales contracted by another 22 percent in constant currencies in North America. The brand has already closed down 36 outlets out of a program of 52 closures, amounting to roughly half of Reebok's U.S. stores. Another six will be shuttered in the fourth quarter, and ten more next year, when the group anticipates that Reebok North America will return to growth.

The group's business in Russia continued to be affected by the economic situation, particularly the weak oil prices and economic sanctions. Adidas had previously decided to shut down about 150 Russian stores but it had already shuttered 141 by the end of the quarter and intends to close down another 50 in the last quarter. Russian sales shrank by another 11.1 percent to €173 million, down by 16.7 percent in constant currencies.

The Adidas group's underlying sales increases in other markets ranged from 8.4 percent in Latin America to 2.7 percent in Japan and 5.5 percent in the Middle East, Africa and other Asian markets. Other businesses, which include Adidas Golf and Runtastic, raised their sales by 13.7 percent in comparable terms, after the divestment of TaylorMade and CCM Hockey.

The group's gross margin firmed up by 2.4 percentage points to 50.4 percent for the quarter, due to a more favorable mix of products and selling prices. The operating margin moved up by 2.7 percentage points to 14.0 percent and the group ended the quarter with net income from continuing operations of €549 million, up by 34.8 percent.

For the first nine months of this year, the group's sales jumped by 15.6 percent to €16,162 million. The rise of 16 percent in constant currencies included increases of 16.9 percent for the Adidas brand and 6.1 percent for Reebok. The operating profit margin amounted to 12.0 percent, up by 1.0 percentage point, and the group's net income from continuing operations advanced by 26.0 percent to €1,358 million.

The group reiterated the upgraded forecast issued in July, predicting that sales will rise at between 17 and 19 percent in constant currencies for the full year. Its operating profit margin is anticipated to reach 9.2 percent and income from continuing operations is projected to increase at a rate of 26 percent to 28 percent.

Adidas already launched jerseys for eight national teams last week, along with the football for the tournament. Launched in Moscow with Lionel Messi, the Telstar 2018 pays homage to the ball used in the 1970 World Cup but it includes microchip technology that allows the speed and trajectory of the ball to be tracked and analyzed.