Adidas’ chairman and chief executive, Herbert Hainer, admits that his group still has a lot of work to do with Reebok, especially in the USA and the UK, where it is limiting sales of the brand to certain retailers, but says it is “doing OK” in Germany, France, Spain and Italy, and improving in Asia and other emerging markets. However, considering that the brand was consolidated into Adidas’ accounts for only 11 months last year, Reebok’s sales will increase in 2007 and make a positive contribution to the group’s results.
In reporting its results for the 2nd quarter, the group said it is forecasting an increase of about 15 percent in net income and a slightly higher operating margin of around 9 percent, with total sales growing at a mid-single-digit rate on a currency-neutral basis. While Reebok should go up in the low single digits on a reported basis, it will likely post a decline on a comparable basis. Adidas and TaylorMade-adidas Golf should both go up in the mid-single digits on a comparable basis, but TM will drop on a reported basis due to the divestiture of its Greg Norman apparel business last November.
For the 2nd quarter, Adidas reports an overall sales decline of 1.2 percent to €2,400 million, mainly due to a tough comparison with last year’s World Cup of football. Even so, sales were up by 3 percent in local currencies worldwide, in spite of declines at Reebok of 13.7 percent in euros and 10 percent in constant currencies. The gross margin rose by 2.8 percentage points to 47.4 percent, thanks largely to synergies between the Adidas and Reebok brands. The operating margin improved by 0.7 percentage points to 7.8 percent and group net income rose by 27 percent to €104 million.
For the full first half of the year, however, the operating profit was slightly down and net income rose by only 2.8 percent to €232 million on 1 percent higher sales of €4,938 million. In local currencies, group sales went up by 6 percent during the 6-month period.
The group is still expecting net cost savings of €17.5 million this year from the integration of Adidas and Reebok, in spite of €83 million in related operating costs. The net savings amounted to €3 million in the first half of the year, after exceptional operating costs of €11 million. While the group did not incur the kind of marketing expenses that it had last year because of the World Cup, it spent €35 million on Reebok’s “Run Easy” campaign during the period, and it will cause an additional €15 million charge during the balance of the year.
For the full first half of the year, Adidas’ group sales rose by 4 percent on a comparable pro forma basis, using the same structure for Reebok and TM. In terms of local currencies and on a comparable basis, the Adidas brand was up by 9 percent, Reebok was down by 6 percent and TM was up by 5 percent. In euro terms, the Adidas brand went up by 4 percent to €3,454 million, Reebok went down by 1 percent to €1,038 million, and TM declined by 10 percent to €419 million.
Adidas’ progress was remarkable, considering that it did not benefit from a major tournament like the World Cup this time. Its sales of running shoes jumped by 30 percent. The brand also reported a currency-neutral increase in orders of 9 percent, including a double-digit gain in Germany and an 11 percent improvement in apparel. The overall backlog was driven by Adidas Originals and by training and football products. First orders for the UEFA Euro 2008 football tournament contributed to the progress in Europe, where total footwear and apparel orders were up by 7 and 8 percent, respectively.
In local currencies, the order book of the Adidas brand showed a 5 percent increase in North America, with a 3 percent drop in footwear more than offset by a 15 percent increase in apparel. Orders were up in the Asia-Pacific region by 7 percent for footwear and by 11 percent for clothing.
At Reebok, orders were reported to be stable on a currency-neutral basis overall, but down by 17 percent in footwear and up by 21 percent in apparel. They were stable in Europe overall, but here again, footwear is down by 8 percent while apparel is up by 10 percent. Asia is showing a quantum leap of 50 percent, with increases of 16 percent in shoes and 155 percent in clothing.
Instead, Reebok booked a 4 percent drop in orders in North America at the end of the latest quarter, with a 22 percent gain in apparel more than offset by a 27 percent drop in footwear. According to the management, the order book was positive, however, excluding Reebok’s declining sales to Foot Locker.
As it is mainly interested in raising average prices and margins, the group will continue to restrict deliveries to Foot Locker for least six more months, limiting them to products in high demand that will not be promotionally discounted. The launch of new products for the Spring/Summer 2008 season should help to win back the retailers’ confidence in the brand, but it will not happen overnight
