The Adidas Group started the year in top shape. In terms of local currencies, group sales rose by 10 percent, in spite of a further drop at Reebok, with double-digit increases everywhere except in North America where they fell by 7 percent. The biggest sales increases were achieved in markets such as China and Russia, where total group sales went up by more than 70 and 50 percent, respectively.
Russia and the other CIS countries will become the single largest European market for the Adidas Group by 2010, said Herbert Hainer at a press conference in Moscow today, on the eve of tomorrow’s final match of the Champions League, to be played off between the Chelsea and Manchester United teams. Adidas sponsors Russian-owned Chelsea and supplies the official match ball of the tournament.
Without giving out a specific figure, Adidas claims that the group’s market share in Russia, including Reebok, is now more than twice the size of its nearest competitor, thought to be Nike, which sponsors Chelsea’s challenger in the final game. The group plans to take the number of Adidas and Reebok stores in the CIS region up from 460-plus at the end of 2007 to more than 750 by the end of 2008. The group also claims the leadership in the Ukrainian market and took over the distribution in Kazakhstan in 2007.
As a group, Adidas performed well in other segments and territories during the first quarter of this year. Because of the strength of the euro, reported group revenues increased by only 3 percent to €2,621 million for the quarter. The gross margin grew to a record of 49.1 percent, up by a full 2.3 percentage points, thanks to a combination of regional and product mix, the weak dollar, more direct retailing and new cost synergies. Gross margins improved to 49.0 percent for the Adidas brand, to 37.1 percent for the Reebok brand and 46.6 percent for TaylorMade-Adidas Golf.
The group’s operating margin reached 10.8 percent, the highest level since the acquisition of Reebok and 1.7 percentage points better than in the same quarter of last year, as operating costs rose by only 5 percent overall in spite of higher marketing expenses. Net borrowings were cut by €446 million to €2,073 million. Thanks to the resulting lower interest expenses, net profit jumped by 32 percent to €169 million, and the company used some of its extra cash to purchase more than 3.2 million of its own shares at an average price of €42.03.
With marketing expenses expected to grow further in the second and third quarters, in view of the UEFA football championships and the Olympics, the results are not expected to be as brilliant for the full year. The management confirms its expectation of a net profit increase of at least 15 percent and of a sales increase in the high single digits in 2008. The gross margin should range between 47.5 and 48.0 percent. The operating margin will be more like 9.5 percent at the minimum, but the group is still aiming for an operating margin of 11 percent in 2009.
The Adidas brand alone delivered currency-neutral sales growth of 14 percent and a record operating margin of 17.1 percent in the quarter. Double-digit sales growth was achieved in the football, training and running categories. In terms of euros, sales under the brand rose by 13 percent in the Sport Performance division, but they declined by 9 percent in Sport Style. Sales of Adidas Originals products were off by about 4 percent in local currencies.
Regionally speaking, the Adidas brand’s European revenues increased by 12.2 percent in euros, reaching €1.05 billion in the quarter, and by 15 percent on a currency-neutral basis, driven by Russia and other emerging markets, but also by more mature markets like Germany and the UK. The management mentioned among other actions in the region a month-long make-over of the brand in the Citadium superstore in central Paris. On a currency-neutral basis, sales declined by 4.7 percent in North America, by 24 percent in the Asia-Pacific area and by 21 percent in Latin America.
Adidas’ total brand revenues rose by 8.2 percent in euros, with 2.3 percentage points of this growth achieved through the brand’s expanding network of company-owned stores. Sales through these stores were up by 22.0 percent in euros and by 31 percent in local currencies, rising by double digits on a comparable store basis and growing from 14 to 16 percent of total brand revenues. Adidas had 1,073 stores, outlets and concession corners around the world at the end of the quarter, including 60 new shop-in-shops in JD stores in the UK. Own retailing is a cornerstone of Adidas’ development strategy and new retail initiatives are planned for the brand in the tough U.S. market in the future.
Globally, the already strong momentum is building up for the Adidas brand. Orders are up by 13 percent worldwide, with about one percentage point attributed to the upcoming Euro 2008 championships, where the brand is sponsoring five participating national teams. European orders show increases of 14 percent overall, 19 percent for footwear and 10 for apparel. Orders grew by 19 percent in Asia. In North America instead the order backlog is down by 2 percent overall, with decreases of 5 percent in footwear and 2 percent in clothing, but while sales are expected to remain negative for the year, the company hopes to regain some strength with the release of the iconic Superstar style in the USA during the 2nd quarter.
Including Rockport and its hockey operations, the group’s Reebok division posted a 6 percent sales drop on a currency-neutral basis, with drops of 7 percent in Europe, 12 percent in North America and 2 percent in Latin America, partly offset by a 30 percent jump in Asia. On the same basis, sales were off by 4 percent for the Reebok brand and by 8 percent for Rockport. They tumbled down by 20 percent for Reebok-CCM Hockey because of a shift in product launches and delivery schedules. In fact, equipment orders are up in double digits for the segment.
The Reebok brand posted double-digit declines in the USA and the UK, due to the weak economy in both countries and to a massive clean-up of the distribution. It performed satisfactorily in the rest of world, particularly in Russia and some other emerging markets where the group is investing heavily in company-owned stores, receiving positive feedback. These stores have come to represent 16 percent of total sales under the brand.
The gross margin improved slightly for the Reebok segment, but the operating margin declined to a loss of 2.8 percent of sales, largely due to the global "Your Move" marketing campaign and to investments in new single-brand stores in emerging markets. The management is budgeting growing profitability for Reebok over the balance of the year. In the first quarter, its integration into Adidas’ sourcing and sales apparatus generated synergies of €20 million in terms of cost savings and €50 million in extra revenues.
Blaming key retail partners in the USA and the UK for using more private label products, the company says Reebok’s total apparel backlog is down by 12 percent in constant currencies, but footwear orders are off by as much as 22 percent, including a 40 percent decline in North America. Total segment orders are off by 13 percent, with particularly strong declines in the USA, the UK and Japan, but they are up in the double digits in Italy, Central Europe and the emerging markets, and the management is confident that the turnaround is near.
A partial boost will come from the new joint venture with Vulcabras in Brazil. A pick-up in U.S. orders is expected with Reebok’s Spring/Summer 2009 collection, thanks in part to a new deal with Dick’s Sporting Goods and to the reappearance of the Reebok brand in Foot Locker stores from the 4th quarter of this year.
TaylorMade performed strongly in the quarter, with sales jumping by 17 percent in local currencies and by 21 percent in U.S. dollars. Sales grew by 48 percent in Europe in constant currencies, with strong growth in all the countries. They were up by 26 percent in the Asia-Pacific region and by 5 percent in North America, in spite of the divestiture of Maxfli, which eliminated $9.4 million from the total turnover.
Sales were particularly robust in the areas of balls and putters. The demand for TaylorMade’s new Noodle balls forced it to increase capacity. The segment contributed a high operating profit of €23 million, aided by operational efficiencies and a by €6 million gain from the sale of the Maxfli brand. Sales growth is expected to soften within this segment of the group’s business in the next few quarters and an increase in the mid-single digits is forecast for the full year.
