Adidas thrives in Europe

The buzz around the Three Stripes remained vibrant in the last months, and the Adidas Group reported a few days ago buoyant quarterly sales, with rapid expansion in Europe – albeit aided by outsized marketing investments that hit profits.

The company's sales in the fourth quarter of 2015 were up 15.4 percent to €4,167 million, which was a rise of 12 percent in constant currencies. The Adidas brand's sales jumped by 18.4 percent to €3,399 million, up by 15.5 percent in constant currencies, with increases of 31 percent in Western Europe and 12 percent in North America.

Herbert Hainer, the group's departing chief executive, acknowledged at the annual results conference that a large share of the increase came from Adidas Originals, as their sales surged by 45 percent for the quarter. But he added that underlying sales of performance ranges advanced at a high single-digit rate in the quarter, with double-digit increases in Western Europe and North America, among others.

The Reebok brand's sales were up by 5.4 percent in constant currencies, despite a decline of 5 percent in North America. Sales for the Taylor Made Adidas Golf (TMAG) entity slipped by 14.6 percent in constant currencies, which the group blamed on issues in the market as well as its restructuring program. While the launch of M1 driver met robust demand, the group decided not to push more product into the market in the quarter – to avoid the sort of inventory issues that plagued the market two years ago.

The Adidas group thrived in Western Europe, where it sales soared by 29.9 percent in constant currencies for the quarter. They advanced at a double-digit rate in the five largest European markets. As detailed in the tables, sales were up in all regional markets other than Russia and Japan for the quarter.

The group's gross margin was up by 2.3 percentage points to 47.2 percent for the quarter, as it made up for unfavorable currency exchange rates and increasing input costs with improvements in prices, channel and product mix. However, sales were pushed up by abundant marketing investments, raising other operating expenses to 48.6 percent of sales, up by 3.1 percentage points.

Without goodwill impairment losses, the group's operating profit margin was down by 1.2 percentage point to a negative margin of 0.2 percent and net income from continuing operations amounted to a loss of €17 million, down from a profit of €10 million. The group ended the quarter with a net loss of €44 million – against a loss of €139 million for the prior-year period, which included a loss of €71 million from discontinued operations.

The growth spurt in the last quarter led the Adidas group to report a sales increase of 16.4 percent to €16,915 million for the full year, up by 10 percent in constant currencies.

The Adidas brand led the way, with sales advancing by 18.4 percent to €13,939 million. This was a rise of 12.4 percent in constant currencies, driven by increases of 18 percent in Western Europe and 17 percent in China, while sales amplified by 9 percent in North America and declined by 13 percent in Russia.

Hainer said that the Adidas brand gained momentum in the U.S. market with investments focusing on American sports, as indicated by the brand's 12 percent sales rise in the last quarter. He claimed that the company achieved significant increase in shelf space with U.S. retailers.

The Reebok brand's sales amplified by 11.0 percent to €1,751 million for the year. That was an increase of 5.9 percent in constant currencies, with rises of 11 percent in Western Europe and 16 percent in Latin America, but a decline of 7 percent in North America and 1 percent in Russia.

The decline in North America was attributed to the closure of factory outlets. Hainer said these adjustments would continue this year, but at the same time Reebok is investing in more controlled retail space.

TMAG saw its sales decline by 13.2 percent in constant currencies, down in all markets other than Latin America and the Middle East, Africa and other Asian markets (MEAA). It reached a turnover of €902 million, down by 1.3 percent for the year. The group has been implementing a restructuring program at TMAG and the strategic review for the golf business should be finalized by the end of the current quarter.

The turnover of the whole group jumped by 19.7 percent to €4,539 million in Western Europe. It amounted to an increase of 17.4 percent in constant currencies, with sales advancing at double-digit rates in the U.K., Italy, France and Spain.

Even more impressively, operating profit in Western Europe surged by 36 percent for the year, amounting to an operating margin of 20.0 percent, up by 2.5 percentage points.

With a sizable increase for Adidas but declines at Reebok and TMAG, the entire group's North American sales moved up by 5.3 percent in constant currencies. But this came with an increase of more than 50 percent in marketing spend, jacking up operating expenses by 39 percent to €977 million. The group's operating margin in North America decreased by 2.9 percentage points to just 2.5 percent.

China delivered the fastest expansion, up by 17.7 percent in constant currencies, and it remained the group's most profitable market with an operating margin of 35.1 percent, up by 0.5 percentage points.

The group's sales advanced by 11.9 percent in constant currencies in Latin America, driven by double-digit growth in Argentina, Mexico, Chile, Peru and Colombia. Standouts in MEAA were South Korea, the United Arab Emirates, Turkey, Israel and Australia, which all delivered double-digit sales increases and helped to lift regional sales by 13.6 percent in constant currencies.

For the whole year, the group's sales were flat in Japan and decreased by 10.6 percent in Russia and CIS countries. The group cleaned up its Russian distribution, resulting in 167 net store closures for the year. The company emphasized that it remained profitable in Russia, with an operating profit margin of 11.4 percent for the year, as it mitigated the decline in sales and gross margin with a 30 percent cut in operating expenses.

The Other businesses segment ended the year up by 8.1 percent at €1,467 million, but that was a decline of 2.9 percent in constant currencies. A high single-digit sales increase for Reebok CCM Hockey and double-digit growth for other centrally-managed companies could not make up for the decline at TMAG. This segment suffered an operating loss of €89 million last year, after a loss of €57 million in 2014.

Revenues from the group's retail business improved by 11 percent in constant currencies for the year, with double-digit growth for the Adidas brand. Comparable store sales were up by 3 percent for the year, and the group's own online sales soared by 42 percent to reach more than €600 million. The operating margin of this retail business reached 20.3 percent, up by 2.8 percentage points. The company ended the year with 2,722 stores, down from 2,913 at the end of 2014.

The gross margin of the entire group for the year climbed by 0.6 percentage points to 48.3 percent, as a more favorable mix for the Adidas and Reebok brands made up for the lower margin at TMAG, along with the impact of currency exchange rates and increased input costs.

The group's operating margin reached just 6.3 percent, up by 0.2 percentage points. Excluding goodwill impairment losses, the operating margin amounted to 6.5 percent, down by 0.1 percentage point.

The company ended the year with net income from continuing operations of €720 million excluding impairment charges, up by 12.2 percent. Adding losses from discontinued operations, profit was up by 17.5 percent. Adding these losses and the impairment charges, the group's net income advanced by 29.0 percent to €640 million.