While the impairment charge badly hit the Adidas Group's profit last year, the company's underlying performance remained robust, in terms of both sales and margins, albeit with a relatively weak last quarter.

The group's turnover increased by 4.0 percent to €3,369 million for the quarter, a rise of just 1 percent in constant currencies. The decline at Reebok was compensated by sales increases of 2.4 percent for the Adidas brand and 14.6 percent for TaylorMade-Adidas Golf (TMAG), both in constant currencies.

Wholesale revenues were off by 3.6 percent in constant currencies for the quarter, but retail sales advanced by 9.2 percent. This was mostly due to store openings, since comparable store sales inched up by just 1 percent in constant currencies for the quarter.

Meanwhile, the turnover of the Other Businesses unit progressed by 6.8 percent in constant currencies. This was entirely due to TMAG, while Rockport's sales crept up by 0.1 percent and the turnover of Reebok-CCM Hockey contracted by 17.8 percent owing to the NHL lockout.

Sales advanced in all but two regions in constant currencies for the quarter. China led the way with an increase of 12.5 percent, driven by sports lifestyle products, while the rise reached 8.7 percent in European Emerging Markets.

One of the two exceptions was Western Europe, where sales were down by 4.1 percent in constant currencies, due to the fact that the company started to sell products for the European football championships and the London Olympics in the same quarter in 2011.

The other exception was North America, where sales dropped by 7.5 percent in dollars, entirely due to Reebok and the fact that it could no longer count on sales relating to its NFL license.

The group's quarterly gross margin was up by 2 percentage points to 47.6 percent. It ended the quarter with a net loss of €272 million, compared with net profit of €3 million for the same quarter in 2011, but the result would have been a loss of just €7 million without the €265 million impairment charge discussed in the previous article of this issue.

The company lifted its sales by 11.7 percent to €14,883 million for the full year, up by 6 percent in constant currencies. While Reebok continued to shrink, as described above, the Adidas brand enjoyed a sales rise of 15.0 percent to €11,344 million, which was still an increase of 9.9 percent in constant currencies.

Adidas Group Income Statement

(Million Euros, Year ended Dec. 31)

 

2012

2011

% Change

Net Sales

14,883

13,322

11.7

Cost of Sales

7,780

6,993

11.3

Other Operating Expense

6,150

5,567

10.5

Royalty & Commission Income

105

93

12.9

Other Operating Income

127

98

29.6

Goodwill Impairment Losses

265

0

-

Net Financial Expenses

69

84

-17.9

Pre-Tax

851

869

-2.1

Tax

327

261

25.3

Minority Interests

(2)

(5)

-60.0

NET

524

608

-13.8

Euro/Share (Diluted)

2.52

2.93

-14.0

The European football championship lifted football sales, but Hainer said that the Adidas brand achieved double-digit growth in other important sports performance categories, from running to basketball and outdoor.

At the same time, the turnover of the Sport Style unit soared by 21 percent to more than €3.2 billion, an increase of 16 percent in constant currencies. Hainer predicted that this Sport Style unit alone would surpass the sales of the third-largest player in the industry this year – referring to Puma, the Adidas Group's rival down the road in Herzogenaurach, which predicted flat sales for this year compared with a turnover of €3,271 million for 2012.

Meanwhile, TMAG saw its turnover leap by 28.7 percent to €1,344 million for the year, up by 19.5 percent in constant currencies. It was aided by double-digit sales increases in metalwoods and irons, as well as the consolidation of Adams Golf from the second quarter. Hainer gushed that TMAG had already swung past the targets set in the five-year strategic plan until 2015 and that it had reached twice the size of Callaway Golf in terms of sales.

The turnover of the group's wholesale division climbed by 6.5 percent to €9,533 million for the year. Mixing the growing Adidas brand and the sagging Reebok brand, wholesale sales inched up by 2.2 percent in constant currencies. Instead, retail sales inflated by 20.8 percent to €3,373 million, making up about 23 percent of the group's turnover, up from a share of 21 percent in 2011. This was a rise of 13.8 percent in constant currencies for the year, with a comparable store sales increase of 7 percent for both the Adidas and Reebok brands. The rest came from store openings: The group ended the year with 2,446 own stores, 62 more than at the end of 2011.

As for the Other Businesses unit, its sales were up by 25.1 percent to €1,977 million. This increase of 16.8 percent in constant currencies was chiefly attributed to the TMAG business, but Rockport still managed a sales rise of 1.9 percent and Reebok-CCM Hockey's sales were up by 8.9 percent for the year, both in constant currencies.

The company's annual turnover was up in all regions. Western Europe remained the largest market after a sales increase of 3.9 percent to €4,076 million for the entire group, up by 2.6 percent in constant currencies. The score was pushed up by double-digit increases in the U.K. and Poland, owing to the events that took place in these countries during the summer. The group also lifted its sales in Germany and in France.

Russia and the former CIS countries continued to propel growth in European emerging markets, where sales increased by 21.9 percent to €1,947 million, an improvement of 15.1 percent in constant currencies. Russia and the CIS countries alone delivered a sales rise of 17 percent in constant currencies, with a comparable sales increase of 8 percent. This is one of the few countries where Reebok did well, with sales increasing by 20 percent, and Adidas still managed a rise of 16 percent in spite of its already remarkable market leadership.

In North America, the group's sales reached €3,410 million, up by 9.9 percent in euros and by 1.7 percent in dollars. The increase would have been much more convincing without Reebok: The Adidas brand lifted its sales by 9 percent in North America for the year, which the group regards as an indication that its five-year strategic plan is working out. The brand is putting particular emphasis on conquering high-school consumers, and Adidas pointed out that its business with retail partners relevant to these consumers had jumped by 20 percent last year.

TMAG paid another strong contribution to the group's improvements in North America, with a sales increase of 25 percent in dollars. On the other hand, Reebok and the loss of the brand's deal with the NFL impacted the regional tally. Without that, the entire group's sales in North America would have progressed by 6 percent in dollars.

Perhaps most remarkably compared with its rivals, the Adidas Group managed a sales increase of 27.0 percent to €1,562 million in China, which was still a rise of 15.0 percent in constant currencies. Hainer pointed to the investments made by Adidas with its retail partners, which run more than 7,500 stores. This has enabled the Adidas brand to sharply increase its sell-through, as reported in detail by SGI Europe last April. The company further suggested that the Adidas brand had gained strongly in consumer preferences. Its managers thus predict that Adidas will continue to gain market share this year.

Double-digit sales expansion in South Korea fueled a rise of 14.5 percent to €2,407 million in the Other Asian Markets region, up by 7.3 percent in constant currencies. The regional performance was aided by a rebound in Japan, where sales jumped by 11 percent in yen for the year.

Sales in Latin America rose by 8.2 percent in reported terms and by 8.3 percent in constant currencies, to reach €1,481 million for the full year. The group lifted its turnover at a double-digit rate in the region's largest markets, with particular strength in Argentina. The Adidas brand alone contributed a sales jump of 13 percent, driven by football, running and a rise of more than 20 percent in own retail sales.

The Adidas Group's chief financial officer, Robin Stalker, was most enthused about an improvement of 0.2 percentage points in the company's consolidated gross margin to 47.7 percent, which ended up above the budgeted level of 47.5 percent. This was achieved in spite of consistent pressure on input costs, which was compensated by price increases and a higher proportion of sales through own stores. While the Reebok brand's margin was almost flat at 35.9 percent, the Adidas brand's margin was entirely unchanged at 46.1 percent.

Adidas Group Net Sales

(Million Euros, Year ended Dec. 31)

 

2012

2011

Change (€ terms)

Change (currency neutral)

Wholesale

9,533

8,949

6.5

2.2

Retail

3,373

2,793

20.8

13.8

Other Businesses

1,977

1,580

25.1

16.8

         

Western Europe

4,076

3,922

3.9

2.6

European Emerging Markets

1,947

1,597

21.9

15.1

North America

3,410

3,102

9.9

1.7

Greater China

1,562

1,229

27.0

15.0

Other Asian Markets

2,407

2,103

14.5

7.3

Latin America

1,481

1,369

8.2

8.3

         

Adidas

11,344

9,867

15.0

9.9

Reebok

1,667

1,940

-14.0

-17.9

TaylorMade-adidas Golf

1,344

1,044

28.7

19.5

Rockport

285

261

9.3

1.9

Reebok-CCM Hockey

243

210

15.5

8.9

         

Total

14,883

13,322

12.0

6.0

Excluding the impairment charge, the company's operating margin went up by 0.8 percentage points to 8.0 percent. In spite of the major sports events held last year, which pushed marketing expenses up by 10 percent to €1.4 billion for the Adidas brand, spending on marketing diminished as a percentage of sales for the entire group, down by 0.6 percentage points to 12.1 percent. The group's net profit shrank by 14.2 percent to €526 million, but it would have risen by 29 percent without the goodwill impairment charge.

The group further pointed to its healthy financial situation. Inventories were down by 0.6 percent at the end of the year in reported terms and up by 1 percent in constant currencies. The company had a net cash position of €448 million, up from €90 million at the end of the previous year. Yet Hainer said the group still had enough on its hands with Reebok and it was not considering any other large-scale acquisition. Instead, the group is suggesting a 35 percent higher dividend.

All figures reported by the group last year were based on adjustments made after the alleged irregularities uncovered at Reebok India, which affected profits and shareholders' equity for 2011.

The group said that its turnover should increase at a mid-single-digit rate in constant currencies for this year, pushed by emerging markets and the sales of directly managed stores. The largest share of the growth should come in the second half of the year, as Adidas starts to enjoy the build-up to the 2014 football World Cup, to be held in Brazil. The Confederations Cup is taking place in the same country this year.

Adidas is strongly banking on the launch of its Boost technology in running footwear – based on a sort of foam that could be used in footwear for other categories. Another innovation in running shoes, Spring Blade, is to hit the market this year as well. The group is also launching several large-scale marketing campaigns: My Girls, targeted at women; and Unite All Originals, a new global campaign for the Adidas Originals range.

The gross margin should improve further to 48.0-48.5 percent this year, with more sales in emerging markets and in the company's own stores; and with an improved margin at Reebok, which would more than make up for increasing labor costs. The group's operating margin should also advance to a level nearing 9.0 percent, and the company predicted that its net income would rise at a double-digit rate to reach between €890 million and €920 million.