Adidas strides ahead

The Adidas Group continued to zoom ahead in the first quarter of this year, with an ample sales rise and a sharp improvement in operating profit margin, despite pressure in the Russian market and a decline in football apparel sales.

The Adidas group's turnover was up by 18.9 percent to €5,671 million for the three months, which was a rise of 16 percent in constant currencies.

The group previously unveiled upgraded targets to deliver sales of €25 billion to €27 billion for the Adidas and Reebok brands by 2020, and an operating profit margin of 11 percent. The bullish upgrade in March came after Kasper Rorsted became chief executive of the Adidas group in October. The board was subsequently reshuffled with three new members this year, as reported above.

The buoyant quarterly demand was driven by an underlying sales jump of 17.6 percent for the Adidas brand, with double-digit increases in running, outdoor, Adidas Originals and Neo. Rorsted said in a conference call that Originals sales were up by 30 percent and Adidas reduced its reliance on the oldest franchises as the more contemporary ranges, such as the NMD and Tubular, expanded by 50 percent. Sales of women's products jumped by 28 percent to make up 25 percent of sales.

Then again, Adidas saw a decline in football and basketball. The latter relates to the group's exit from its partnership with the National Basketball Association, which will be finalized in the second quarter. The former chiefly relates to apparel and particularly the license business, which was affected by the termination of the Adidas partnership with Chelsea football club. Football footwear sales were up, driven by the Ace and X ranges, along with a relaunch of the Predator.

The Reebok brand's turnover firmed up by 13.3 percent in constant currencies, with increases in all regional markets other than North America. But Rorsted cautioned that sales were pushed up by several one-off factors, the rise should not be regarded as a turnaround and the most important target was to raise profit margins.

European markets were buoyant for both of the group's largest brands. Adidas raised its turnover by 8 percent in Western Europe, while Reebok managed a rise of 25 percent, driven by training products. Their joint sales were up by 7.7 percent to €1,523 million in the region, which amounted to a rise of 9.6 percent in constant currencies, after a 25 percent jump for the same three months in 2015.

Adidas and Reebok chalked up double-digit sales rises in the U.K., Spain, Italy and Poland, supported by a high single-digit advance in Germany. This came despite a tough comparison, since the year-ago period included sales of football replica jerseys ahead of the European football championships.

The sharp rise in demand for the Adidas brand in North America fueled a regional sales uptick of 35.8 percent to €988 million, up by 30.6 percent in constant currencies. Adidas brand sales shot up by 36 percent, with increases of 28 percent in Originals and 27 percent in running. Reebok's turnover in North America suffered an underlying decline of 2 percent for the quarter, mostly due to store closures.

The turnover of the Adidas and Reebok brand's soared by 30.3 percent in Greater China and by 15.3 percent in the Middle East, Africa and other Asian markets, both in constant currencies. Sales advanced by 8.7 percent in Latin America, driven by Mexico, Peru and Chile – and despite the economic sluggishness that caused declines in Brazil and Argentina. The rise of 21.1 percent in Japan came from a change in business model and full-year Japanese sales are still projected to rise at about 10 percent.

The only territory where the group retreated was in Russia and other CIS countries, where its sales shrank by 9.8 percent in constant currencies, against a targeted increase of 10 percent for the year. Rorsted said Adidas suffered from the severe impact of sanctions and a shift in demand toward lower-priced apparel. Adidas closed 80 stores in Russia in the quarter but has more than 800 outlets, mostly owned by the group, which saw their comparable sales slump by 7 percent.

However, the group was eager to dispel any comparisons with the issues that led to profit warnings in 2014 and a sharp decline in the Adidas group's share price until its impressive rebound last year. Rorsted said that the share of Russia's sales amounted to 3 percent of the entire group, and the downturn would not impact its guidance.

The number of the group's stores was reduced by 125 to 2,686 at the end of the quarter but comparable store sales were up by 5 percent and online sales soared by 53 percent, moving toward the target to quadruple them from about €1 billion in 2016 to €4 billion in 2020.

Affected by exchange rate changes, the group's gross margin slipped by 0.2 percentage points to 49.2 percent for the quarter. Its operating profit margin still improved by 0.9 percent to 11.1 percent, but Rorsted was quick to add that this should not be regarded as a structural achievement. It came with a decline in operating costs as a percentage of sales, which was due to a shift in timing and did not indicate any structural decline in marketing spend, Rorsted insisted. Adidas ended the quarter with net profit from continuing operations of €455 million, up by 29.9 percent.

Adidas reaffirmed its forecast that sales should rise at 11 to 13 percent in constant currencies for the year, with double-digit increases in Western Europe, North America and China. Its gross margin should rise by up to 0.5 percentage points to 49.1 percent, with an improved mix, and its operating profit margin should move up by 0.6 to 0.8 percentage points to between 8.3 percent and 8.5 percent. The forecast for net profit stands at an increase of 18 to 20 percent for the year, to reach €1,200 million to €1,225 million.