Buoyant quarter at Adidas, cuts in golf business

The Adidas Group enjoyed an impressive sales increase for the third quarter, which encouraged the company to raise its guidance for the full year. Sales jumped by 17.7 percent to €4,758 million, amounting to a rise of 13 percent in constant currencies, with ample sales and profit gains in Western Europe.

The Adidas brand alone chalked up sales of €4,007 million, up by 19.1 percent in euros and 14.4 percent in constant currencies, driven by a sales hike of 33 percent for Originals and advances for Neo as well as the running and football categories. At Reebok, sales grew by 6.6 percent to €476 million, up by 3.4 percent in constant currencies, with expansion in all markets other than North America and Russia.

After a robust first half, the Adidas and Reebok brands remained buoyant in Western Europe, which brought in the largest sales hike in absolute terms for the quarter and the largest chunk in operating profit so far this year, as detailed in the next story.

China was another market where sales advanced briskly, rising by 35.4 percent to €691 million in the quarter, with a gain of 15.1 percent in constant currencies. Reebok's sales more than doubled in China, but in absolute terms that was almost insignificant compared with the extra sales brought in by Adidas.

The turnover for the two brands in North America moved up by 25.5 percent to €776 million, an increase of 6.5 percent in local currencies. The Adidas brand's sales were up at a double-digit rate in constant currencies, as the Three Stripes invested abundantly to regain ground and created a buzz with the Yeezy, launched with Kanye West. But Reebok was still on the slide in North America, as it continued to clean up its factory outlet business.

For the first nine months of this year, Adidas' sales climbed by 8 percent in dollars in North America, while Reebok's turnover shrank by 8 percent, despite growing demand in the fitness category. The group's operating profit margin in North America contracted by 1.9 percentage point for the nine-month period, down to 3.1 percent of sales.

On a currency-neutral basis, the quarterly revenues for the Adidas and Reebok brands moved up by 20.1 percent in Latin America, by 5.8 percent in Japan and by 13.5 percent in the Middle East, Africa and other Asian markets (MEAA). The only region where they declined was Russia and the CIS countries, where sales contracted by 6.7 percent in constant currencies, with declines of 10 percent for Adidas and 3 percent for Reebok.

The reported turnover in this region was down by 34.1 percent to €195 million for the three months and by 32.8 percent for the nine months. The number of the group's own Russian stores has been reduced by 150 since the start of the year, although it opened 29 stores with a focus on Moscow and St Petersburg, ending up with nearly 1,000 stores. The group's operating profit margin in Russia and CIS countries shrank by 5.3 percentage points to 9.8 percent for the nine months.

Recovering from its previous woes, Taylor Made Adidas Golf (TMAG) delivered a sales increase of 15.4 percent to €159 million for the quarter, up by 6.5 percent in constant currencies compared with a weak third quarter last year. For the first nine months of this year, TMAG sales crawled up by 0.7 percent but they were still off by 12.7 percent in constant currencies, with the sharpest declines in metalwoods and irons.

While studying a potential divestment of the Californian golf company, Adidas is continuing the reorganization of the business. Herbert Hainer, the group's chief executive, said that TMAG's staff, which consisted of about 1,600 employees at the start of this year, would be reduced by about 14 percent before the end of the year. The cuts will entail a low double-digit-million charge in the fourth quarter, but they should support a return to profits in 2016.

The golf company has started working on more than 40 initiatives to achieve operating efficiencies in manufacturing, assembly, margins and the marketing budget. Hainer indicated that the potential divestment of TaylorMade had attracted interest from several buyers but declined to provide a detailed update on the strategic review, which should be completed in the first quarter of next year.

The gross margin of the whole Adidas group was up by 1.0 percentage point to 48.4 percent for the quarter, owing to more favorable pricing and distribution, mitigated by increased input costs, currency exchange rate changes and a less favorable product mix. The operating margin rose by 0.7 percentage point to 10.6 percent. The group ended the quarter with net profit of €311 million, indicating an increase of 10.4 percent including losses from discontinued operations. Excluding these losses, the net profit was up by 20 percent to €337 million.

For the first nine months of the year, the entire group's sales were up by 16.7 percent to €12,748 million, or up by 9 percent in constant currencies, with rises of 11.4 percent for Adidas and 6.1 percent for Reebok, while TMAG was down by 12.7 percent. With 2,679 stores at the end of the period, down from 2,913 at the end of last year, retail sales climbed by 9 percent to €3,056 million, up by 10 percent in constant currencies.

The gross margin for the nine-month period inched up by 0.1 percentage point to 48.6 percent, while the operating margin was stable at 8.5 percent, including goodwill impairment charges of €18 million. Excluding them, the operating profit margin was up by 0.2 percentage points. Net income rose by 8 percent to €678 million and by 10 percent excluding goodwill impairment.

The group predicts that its revenues will increase at a high single-digit rate for the full year, up from a previous guidance of mid-single-digit rate growth, with faster than anticipated sales rises in Latin America and North America, as well as double-digit increases in Western Europe, China and MEAA. The gross margin is predicted to reach between 48.0 percent and 48.5 percent, up from a previously expected range of 47.5 percent to 48.5 percent.

The better-than-expected results have prompted the management to ramp up marketing and point-of-sale investments for the last quarter. It wants to take advantage of the current sales drive, aided by marketing assets acquired in the U.S. and new product launches ahead of the European football championships.

The company predicts that the operating margin excluding goodwill impairment will be in a range of 6.5 to 7.0 percent for the year and that net income from continuing operations excluding impairment charges will grow at a rate of about 10 percent, up from a previous guidance of 7 to 10 percent.

The group's financial performance in the latest quarter led to a rise in the price of Adidas' shares, which have been targeted by Nassef Sawiris, an Egyptian investor. It was disclosed last week, ahead of the announcement of the group's results, that his investment vehicle directly and indirectly owned more that 6 percent in the Adidas Group – apparently making it the group's largest shareholder, ahead of Black Rock and Southeastern Asset Management. The disclosure raised some eyebrows since Sawiris, who made his money in the construction industry, has been an active shareholder at other companies.

The company has been a rumored target of activist investors since repeated profit warnings last year. An important process in this context is finding the successor of Hainer, who is stepping down in 2017. Roland Auschel, the group's global sales director and one of the strongest internal options, has just seen his employment contract extended by three years until 2019.