The Adidas brand scored relatively well in the 3rd quarter, but the Reebok brand performed disappointingly, dragging down the group’s overall results and leading to group to forecast an increase of only about 15 percent in next year’s net profit, down from a previously anticipated 20 percent increase.
The previously set financial goals for 2006 are confirmed, the long-term outlook remains unchanged and the group is on target with the cost savings expected from the integration of Reebok, but the management is reacting to Reebok’s problems with a plan to invest an extra €50 million next year in additional product development, marketing, retailing and structural initiatives intended to achieve a sales turnaround for the Reebok brand in the 2nd half of 2007, coinciding with a big new advertising campaign.
Reebok’s currency-adjusted order backlog was off by 14 percent at the end of the quarter, marking an improvement from the previous quarter in every region except in North America, where the rate of decline hit 25 percent, but Adidas’ management is convinced that the brand has touched its bottom there and that it will start clocking in increased backlogs in 2007. North American footwear orders are down by 30 percent, mostly because of a pullout from family shoe stores, while apparel orders are off by 25 percent, partly because of the shift of the NBA business to the Adidas brand.
Reebok’s orders were off by 5 percent in Europe, with the biggest problems being encountered in the tough British market. Footwear orders were less affected than those for apparel, partly because the shift of Reebok’s Liverpool contract to Adidas.
One of the initiatives planned to sustain the Reebok brand is a plan to open 75 new single-brand stores in Russia and 400 in China in 2007 – mostly on a franchised basis, but no similar action is envisaged for the moment in the more mature markets. The company had previously set lower retail expansion targets for the newly acquired brand in these two fast-growing emerging markets. While Adidas has 140 stores now in Russia, due to grow to 200 in 2007, Reebok only has 10 of them in the country.
On the product side, the management is still optimistic about Reebok’s unexploited potential in apparel. It also wants to add more new styles to its Classics line, where 10 models currently generate 46 percent of sales. That ratio should be gradually reduced to 25 percent. The group will use Reebok’s association with the NFL and the NHL as centerpieces of the brand’s performance strategy in the USA, and its sports image in Europe will be enhanced by its contract with Andriy Shevchenko, the Ukrainian football star now playing for the Chelsea team in London.
In contrast with the Reebok brand, total orders for the Adidas brand are up by 2-3 percent on a currency-neutral basis, showing gains of 6 percent in North America and 18 percent in Asia, but European orders are down by 6 percent and the decline is likely to continue through the 2nd quarter of 2007 because of the absence of any major tournament like the World Cup of football. In terms of products, apparel orders were a little stronger than those for footwear. The Sport Heritage division and performance tennis and training products drove the growth in overall backlogs. The transfer of the NBA and Liverpool licenses from Reebok to Adidas boosted orders by one percentage point.
The actual sales performance is likely to turn out better than the order backlogs would suggest for both brands. Order cancellations are being reduced significantly at Reebok, and the brand’s at-once business is growing strongly. For Adidas, the continued strong development of its own retail business is boosting revenues. It has come to represent more than 13 percent of the brand’s total turnover.
The Adidas brand posted a 12.2 percent sales increase to €1,941 million in the latest quarter, with gains of 15 percent in Europe, 20 percent in the Asia-Pacific region, 22 percent in Latin America and only 4 percent in North America. While the UK remains a challenging market, Adidas scored well in Spain, in Scandinavia and in Russia. Sales in the USA would have been better without a shift in deliveries of Adidas’ new NBA apparel line to the month of October.
An expansion of the brand’s presence in the “sport fusion” lifestyle sector through more skate, canvas and low-profile shoes should give a new momentum to Adidas’ growth in the region.
For the nine months ended on Sept. 30, the Adidas group posted a 22 percent increase in net income on 53 percent higher revenues of €7,836 million, thanks largely to the integration of Reebok which contributed sales of €1,828 million. Geographically, group sales were up by 32 percent in Europe, by 107 percent in North America, by 35 percent in Asia and by 62 percent in Latin America.
In local currencies, revenues were up by 52 percent for the nine months, with the Adidas brand sporting a 15 percent increase globally and of 11 percent in Europe. On a pro forma basis, Reebok’s currency-neutral sales were down by 9 percent for the 9-month period and by 4 percent in the 3rd quarter. TaylorMade-adidas Golf posted 23 percent higher currency-neutral sales for the nine months and of 15 percent in the quarter, in spite of challenging market conditions.
The group had a gross margin of 44.9 percent over the 9-month period, down from 48.5 percent in the year-ago period because of Reebok and of its distribution contract with Amer Sports for Salomon in certain countries. Product mix improvements, particularly in North America, helped to lift the gross margin of the Adidas brand by 1.1 percentage points to 46.9 percent. Reebok’s gross margin remained lower at 34.8 percent. TaylorMade’s margin fell by 1.7 percentage points to 44.0 percent due to the low-margin Greg Norman Collection, which is being sold to MacGregor Golf, and to the negative impact of a major metalwoods promotion.
The operating margin declined by 2.6 percentage points to 10.6 percent percent, mainly due to the higher marketing expenditures endured by Adidas in connection with the FIFA World Cup, but it would have reached 12.6 percent without Reebok. The group’s pre-tax income rose by 10 percent to €709 million during the 9-month period and net income from continuing operations rose by 12 percent to €483 million due to lower taxes. Reebok continued to be profitable, contributing €71 million to the overall result. There will be no problem for Adidas to reach the previously set target of a net profit of €500 million on sales of €10 billion for the full year.