The Adidas Group's sales are forecast to expand at a high single-digit rate in constant currencies next year, as the company moves further toward its unchanged target to reach sales of €17 billion and a sustainable operating margin of 11 percent by 2015.
This was part of the updates provided by Herbert Hainer, the group's chief executive, at a two-day investor event in Herzogenaurach last week. Halfway through Route 2015, the group's five-year plan, Hainer admitted that it had not advanced toward the goals as far as he had hoped at this point, but he remained confident of reaching them on time.
The group expects higher sales for all the group's brands and in all the major markets next year, driven by football and running. Hainer said that the operating margin should improve by about one percentage point in 2014 as compared to this year's projected level of about 8.5 percent. This implies that the operating margin will land at about 9.5 percent in 2014, and that the group expects a further improvement of no less than 1.5 percentage points in 2015 to reach its target of 11 percent.
Hainer said that this would be achieved through the leverage of increased sales as well as through restructuring measures such as the consolidation of warehouses and a reduction in the number of SKUs. The group previously said it wanted to cut the number of its products by 25 percent by 2015, and Hainer said last week it had already implemented more than half of the cuts, while offering a more globalized product range.
On the warehousing front, as previously reported, the opening of a huge distribution center in Russia last July led to a logistical debacle and to profit warnings. Based in Chekhov, near Moscow, this facility covers 51,000 square meters and has a storage capacity of 12 million units, to be used by Adidas, Reebok, Rockport and CCM Hockey for their distribution around Russia and Kazakhstan. There are still some minor hick-ups at the center but the group is confident that they will be fully resolved early next year.
Other investments in distribution are proceeding more smoothly, such as the opening of the group's largest distribution center. Located near Osnabrück in Germany, the 55,000-square-meter facility is expected to reach a throughput of more than 100 million pieces by 2015.
The next warehousing improvements are to take place in China, where the group will open a huge distribution center in the second half of 2014. It is under construction in Tianjin, near Beijing, complementing the group's existing facility in Suzhou near Shanghai, and is set to reach full capacity by 2020.
Two other distribution centers already started operating in the second half of last year in Pyeong Taek, near Seoul, for the entire South Korean market, with a planned throughput of 20 million units by 2017; and in Tultilan in Mexico with a surface of 22,500 square meters. Another major distribution center is to open in Brant County in Canada in the second half of 2015 to cover the entire national market, and it should reach full capacity in 2017.
Analysts agreed that the Adidas group has yet to reap the benefits of such investments in terms of operating margins. The latest improvements in profitability have mostly inflated the gross margin. The operating margin has not yet benefitted much because the company has continued to invest in stores and has not reduced its spend on marketing, despite the lack of major international sports events this year. For these reasons, it seems plausible that the operating margin would enjoy a significant upswing in the next two years.
To back up his prediction of higher sales in 2014, Hainer said that they will strongly supported by the football World Cup in Brazil. The World Cup is also expected to contribute to a sales increase next year in Western Europe. Hainer pointed to the group's weakness in this part of Europe as one of the main reasons why the company had not moved toward its target as fast as expected. However, he said that the worst appears to be over in economic terms, and that Adidas will expand even in Southern Europe next year.
The chief executive faced more skeptical queries from financial analysts about the company's sales growth in 2015, a year that will not feature any major global sports events. Hainer pointed to many new product launches planned for that year, along with the continued roll-out of other technologies and sub-categories. The analysts who made it to Herzogenaurach for the investor day were broadly impressed by the flurry of product innovations presented at the head office.
The company will be expanding the exclusive Boost sole technology it launched earlier this year in the running sector. Based on proprietary technology and an exclusive agreement with BASF, Boost is to be integrated into all Adidas-branded performance running shoes from next year on, and widened to other categories like basketball. The company will also lower the recommended entry retail price level for some shoe models with Boost soles. Sales of footwear with Boost technology are expected to reach 15 million pairs in 2015. They amounted to about 1.5 million pairs this year, and Adidas could have sold more of them if it had not run out of inventories.
Neo, the group's teenage fashion label, is another projected source of future growth. As previously reported, its annual sales are expected to grow from around €700 million this year to €1 billion in the next few years. Neo is currently sold in more than 1,300 standalone stores in China alone, and it forms an important part of the group's strategy in Russia. But the brand should also start to expand in Europe in the coming months. The group is opening six more Neo stores in Germany, and five each in Poland and the Czech Republic next year.
The Adidas group will also invest in retailing with the launch of new store formats for both its performance and Originals ranges. Home Court, the company's new concept for the retailing of performance products, is to be showcased at the Adidas brand's store at Sanlitun in Beijing in January. Neighbourhood, the new concept for Originals, will be launched in Berlin in March, and then rolled out to 31 other cities around the world.
As for the Reebok brand, it is still expected to reach a turnover of €2 billion by 2015 under a revised target set last year, down from the earlier forecast of €3 billion. Reebok's sales should be supported by the spread of its new retail format, Fit Hub, as detailed previously. Most of the expansion should take place in Russia and the former CIS countries, North America and Latin America. The group plans to lift the Reebok brand's gross profit margin to more than 40 percent by 2015, compared with just 35.9 percent in 2012 and a more encouraging score of 39.8 percent for the first three quarters of this year.
Investors heard presentations by Hainer as well as Roland Auschel, another prominent member of the executive board; Matt O'Toole, chief marketing officer for Reebok; and Colin Currie, managing director of the Adidas Group in Greater China. The latter went into the brand's development in sports performance products and retailing in smaller cities in China. The group and its retail partners currently operate more than 7,600 stores in the country. Its objectives call for stores to be open in 1,400 Chinese cities by 2015, compared with 550 cities at the end of 2010.
