Never shy of superlatives, the Adidas Group’s chief executive, Herbert Hainer, hailed a “fantastic” performance for the company since the start of the year – justifying a slightly improved forecast for the full year.
After an already robust first quarter, the Adidas Group’s sales jumped by 18.7 percent to €2,917 million for the second quarter, an increase of 11 percent in constant currencies. On the same basis, the group’s wholesale sales were up by 12.1 percent and retail sales jumped by 16.7 percent for the quarter, with a hike of 10 percent in comparable store sales.
The turnover of the Adidas brand climbed by 20.2 percent to €2,103 mi1lion for the quarter, a rise of 12.5 percent in constant currencies. It was predictably inflated by more abundant sales of football products around the World Cup, which surged by 60 percent for the quarter. However, the Adidas brand also enjoyed double-digit sales increases in running, outdoor and lifestyle products.
Meanwhile, Reebok’s quarterly sales climbed by 24.4 percent to €435 million, up by 15.8 percent in constant currencies, which the company regards as confirmation that it has finally managed to re-energize the Reebok brand. The revival has been strongly led by the toning phenomenon in North America, which led to a sales increase of about 30 percent for Reebok in the region.
Hainer emphasized that toning was spreading to other international markets, from the U.K. to Germany, Russia and Japan, with strong sell-through rates for Reebok. Furthermore, the EasyTone range has been expanded from walking to running and men’s products. Not to mention the fact that the brand’s growth has also leaned on other products, such as the ZigTech running range. The company now expects to sell up to 11 million pairs of toning products this year, as well as more than 2 million pairs of ZigTech shoes.
The “other” business unit, grouping TaylorMade-Adidas Golf, Rockport and CCM Reebok Hockey, pushed its sales up by 6.9 percent to €387 million for the quarter, but this amounted to a decline of 0.8 percent in constant currencies.
This turnover includes a sales rise of 5.6 percent to €269 million for TaylorMade-Adidas Golf, although its sales dipped by 2 percent in constant currencies. The decrease was attributed to a shift in the timing of product launches, along with the non-recurrence of apparel sales under the Callaway brand by Ashworth, after the termination of their licensing contract last year. The underlying growth of TMAG in the second quarter was driven by irons and balls, which both lifted their sales by more than 30 percent.
Rockport’s sales expanded by 5.4 percent to €58 million but they were down by 2.6 percent in constant currencies. Reebok CCM Hockey managed to lift its turnover by 18.1 percent to €52 million, but it enjoyed a lesser sales increase of 6.1 percent in constant currencies.
By region, strong growth in the football category propelled the Adidas group in Western Europe, where it achieved a quarterly sales increase of 13.0 percent in constant currencies. Germany and the U.K. were singled out as particularly strong markets. Spain was another market with outstanding growth for this particular quarter, supported by sales of nearly 1 million replica jerseys of the Spanish football team, the new World Champions.
European Emerging Markets rebounded strongly, with sales up by 25.5 percent in constant currencies for the region, whereas the group had just about managed a sales hike of 1.0 percent there in the first quarter. The surge in the second quarter was fueled by Russia, although sales increased robustly in all large East European markets.
In this context, Hainer confirmed that Adidas would quit supplying Sportmaster, one of its largest wholesale customers in Russia, from the start of next year. Sportmaster is the largest sporting goods retailer in Russia, but the management played down the issue by emphasizing that its own stores generate about 80 percent of its sales in the country.
In North America, the Adidas Group’s sales rose by 7.6 percent in dollars, with a rise of 7 percent for the Adidas brand and 30 percent for Reebok. In Latin America, the group’s sales were up by 27.4 percent in constant currencies, buoyed by growth in Brazil, Argentina and Mexico, where the group also sold nearly 1 million replica shirts around the World Cup.
When it comes to Asia, instead, the Adidas Group’s sales continued to tumble in Greater China, down by 17.9 percent for the quarter, as it had to clean up yet more inventories. As detailed further, this heavy drop was partly caused by the group’s strategy to accelerate the purge of its inventories in the second quarter, in order to resume growth as projected in the second half. However, Hainer admitted that the group’s Chinese sales would be slightly down for the full year, due to accelerated take-backs of products from retail partners in the second quarter.
Sales in other Asian markets climbed by 10.8 percent for the quarter in local currencies. Growth in this region was dampened by the weakness of the Japanese economy, but the Adidas group managed to achieve a double-digit sales increase in the country, with the Adidas brand recovering from the very low level of the year-ago period and Reebok posting growth of more than 20 percent in the country. The growth in the group’s turnover was more convincing in South Korea and India.
Fewer clearance sales accounted for about half of the group’s gross margin increase for the second quarter, up by 4.0 percentage points to 48.9 percent. Other factors behind this rise included lower input costs, a higher share of sales through own retail stores and positive currency effects, particularly with regard to the Russian ruble.
The gross margin of the group’s wholesale business inched up by 1.4 percentage points to 41.0 percent, but the retail unit achieved an increase of 4.4 percentage points to a gross margin of 65.1 percent. The “other” business unit saw its gross margin rise by 5.9 percentage points to 44.2 percent.
The Adidas brand alone lifted its gross margin by 2.1 percentage points to 48.2 percent in the quarter. Reebok’s gross margin increased by 2.6 percentage points to 34.2 percent. This level is still low compared with other brands, but this is largely due to the fact that Reebok’s sales are heavily weighted toward North America, making up just under half of its sales.
The group’s operating margin increased by 3.8 percentage points to 6.7 percent in the latest quarter, and its net income reached a record level of €126 million, up from just €8 million last year.
For the first half, group sales were up by 11.0 percent to €5,590 million, equivalent to a rise of 7 percent in constant currencies. For much the same reasons as in the second quarter alone, the group’s gross margin increased by 3.7 percentage points to 48.8 percent for the half year. The Adidas brand’s gross margin amounted to 47.7 percent, up by 1.2 percentage points, while Reebok’s gross margin jumped by 4.7 percentage points to 35.1 percent, as its average selling price increased by 20 percent for the half-year.
The group’s operating profit margin was up by 5.6 percentage points to 8.1 percent. The group’s net income reached an unprecedented half-year level of €295 million. This compares with €13 million for the same period last year, which was marked by one-time restructuring and integration expenses worth about €90 million.
In spite of this performance, the group continues to predict a sales increase in the mid single-digit range in constant currencies for the full year. It expects mid-single-digit growth for its wholesale business and low-double-digit expansion for its own retail sales, with a mid-single-digit sales rise in comparable store sales and a further expansion of the group’s store network.
The Adidas Group’s gross margin is expected to reach about 47.5 percent, at the upper end of its previous forecast, compared with 45.4 percent last year. The group’s operating margin is expected to end the year at about 7.5 percent, compared with 4.9 percent last year and an earlier forecast of up to 7.0 percent for this year.
Among its three priorities for the second half of the year, the Adidas Group points to measures that would be taken to mitigate pressures on its gross margins – with rising costs for anything from labor to raw materials and transport.
Secondly, the company is focusing on China, where it has suffered from inventories ever since the Beijing Olympics. Paired with a few months of economic uncertainty in the country, this issue has prevented the group from reaching its sales target of €1 billion by 2010.
Hainer said that once the problem became apparent, the company held talks with Chinese retailers to try to share the burden – so that the overhang would be gradually cleared up. However, Adidas has apparently proven less astute in its negotiations than Nike, which has already resumed its growth in China.
While Adidas and Nike were neck and neck in China before the Olympics, Adidas is now lagging far behind Nike in this market: the American brand reported sales of $922 million in China for the six months until the end of May, and growing – compared with €403 for the Adidas group during the first six months of 2010.
Adidas Group’s managers have consistently said in the last months that they are confident about a return to growth in China in the second half. Their optimism about the appeal of the brand among Chinese consumers is supported by a double-digit comparable sales increase in the group’s own Chinese stores in the first half, while wholesale revenues in the country were off by 24 percent.
Furthermore, since the group’s old products were entirely cleared in the second quarter, July sales have started rising again with its retail partners. This could be partly attributed to adjustments in the Adidas brand’s offering for the Chinese market – such as the Neo range, formerly known as Style Essentials, which could be described as a cheaper version of the Originals range. This will be particularly useful for Adidas as it strives to accelerate the roll-out of its mono-brand stores in smaller cities, where most consumers have lower purchasing power.
Thirdly, Hainer said that the Adidas Group would continue to invest heavily in marketing in the second half, particularly for the Reebok brand. Expenses will rise year-on-year to support the global expansion of the toning category, including the launch of EasyTone apparel, and the ZigTech range, which will be expanded from running into basketball.
The company will also invest in the Adidas brand, for example in the build-up to the women’s football World Cup, to be held in Germany next year. It will also support the launch of its outdoor range in the U.S. market, to take place in 2011 in partnership with Agron (more details in the Outdoor Industry Compass).
Separately, the company has identified another area of strategic investment, with the launch of a dedicated unit for electronic sales. This unit is headed by Christophe Bezu, the Frenchman who formerly headed the group in Asia-Pacific and is still in charge in Greater China. He will be reporting directly to Hainer, like the managers of the retail and wholesale units.
Given Bezu’s involvement in this electronic sales unit, it might not be a coincidence that, among its strategic moves in China, Adidas has struck a deal with Taobao: Described as the largest online sales platform in China, it will host an electronic store for Adidas from September.
