Adidas ends in the red, sees upside

The German sportswear giant posted an operating loss of €333 million, compared with an operating profit of €643 million a year earlier, due to several coronavirus-related charges. These were mainly due to increased inventory and bad debt allowances, as well as impairment charges for retail stores and the Reebok trademark, with a combined negative impact of around €250 million.

The impact of store closures during the pandemic led to a 35 percent drop in the Adidas Group’s overall turnover to €3,579 billion, or by 34 percent in constant currencies, which was actually better than the €3,240 million that was forecast by analysts. The Adidas brand saw sales fall by 33 percent, while Reebok dropped by 42 percent, reflecting the brand’s higher exposure to the U.S. market, where lockdowns lasted longer than in Europe or Asia.

At the high point of the worldwide lockdown measures in April, almost all stores outside of Asia-Pacific, or more than 70 percent of the company’s global store fleet, were closed. Starting in May, Adidas began reopening stores, with 83 percent of units being operational at the end of June, although with reduced hours in some locations.

On the bright side, Adidas recorded exceptional growth online, with sales up by 93 percent during the quarter. Combined with third-party e-commerce, they accounted for more than a third of its total business. To support e-commerce, Adidas increased targeted consumer marketing, exclusive product launches and prioritized supply chain management.

The management took measures to preserve cash, reducing marketing and point-of-sale expenses by 25 percent to €560 million, while at the same time accelerating digital marketing investments to support its e-commerce business and prioritizing China and other open markets.

The company’s gross margin decreased by 2.4 percentage points to 51.0 percent. The more favorable channel and market mix and lower sourcing costs were not enough to offset a less favorable pricing mix due to increased promotional activity, as well as negative currency fluctuations and an increase in inventory allowances.

The net loss from continuing operations stood at €306 million, compared with net income of €462 million for the year-ago quarter.

During the quarter, sales in Greater China were flat, but with double-digit growth in May and June, which was better than what Adidas expected. As a result, sales in Asia-Pacific decreased by “only” 16 percent in constant currencies. Overall, Asia-Pacific suffered a reduction of 3.9 percentage points in the operating margin to 31.0 percent.

Sales fell by 38 percent in North America in constant currencies, while the operating margin tumbled there by 13.2 percentage points to a negative 1.8 percent. The region recorded the strongest e-commerce growth of all markets, up at a triple-digit rate. However, the store fleet there is not yet fully operational due to ongoing restrictions.

In Russia and the other CIS countries, sales went down by 34 percent on a constant-currency basis, and the operating margin lost 2.3 percentage points, down to 24.0 percent.

In Europe, sales declined by 40 percent and the operating margin tumbled by 22.5 percentage points to 2.7 percent.

Latin America recorded a negative operating margin of 10.5 percent on sales that fell by 64 percent. At a negative 21.2 percent, the operating margin in other emerging markets was among the lowest, with sales down by 60 percent.

The broad-based store closures caused inventories to swell by 49 percent on a currency-neutral basis during the quarter, partly offset by lower accounts receivable and higher accounts payable.

To help return to a reasonable level of profits by year-end, the group has worked with partners to cancel orders in the past quarters. It is working closely with suppliers and retailers to mitigate the impact of the process by reviewing payment terms and discussing long-term cooperation.

To reduce inventories further, the group has been making use of its chain of around 1,000 factory outlets around the world. A smaller portion of inventory moved through select retail partners as their stores reopened. Adidas said that inventories reached peak levels in the quarter but should normalize by year-end.

Adidas is starting to “see the light at the end of the tunnel,” as the normalization of physical retail activities continues.

About 92 percent of the points of sale are now open, but despite lower footfall than usual, the management said it is experiencing an increase in conversion rates, as consumers that visit stores tend to have a clearer buying intent.

Other sports brands have noted a similar development in post-confinement consumption trends. Adidas’ management is also optimistic about the market, noting that the pandemic has led people in the 18-35-year age group to practice more fitness activities. It expects the demand for casual styles to increase as more people will likely work remotely from their homes.

The group ended the quarter with a strong cash position of around €2 billion, remains stable compared with March 31. As reported, the group has received financial support from the German government through its participation in a 15-month syndicated loan of €3 billion. The management stressed that it’s not a subsidy and that it will be subject to normal interest rates.

Adidas will open fewer stores in the future and try to move more products through its apps, including special releases. It will also focus more intensely on sustainability, highlighting products such as the Terrex Two Ultra Parley, made with intercepted marine plastic. It has also relaunched eco-friendly versions of its classic Stan Smith and Superstar silhouettes, as part of The Clean Classics collection. Some 70 percent of the uppers are made using recycled materials.

Like many other brands, Adidas did not release any guidance for the full year due to the uncertain evolution of the pandemic. The management expects the recovery to continue sequentially  in the third quarter, noting that consumer demand is high both in physical stores and in the digital space. It forecasts a mid- to high-single-digit decline in sales, and the gross margin should also be lower than a year ago. The operating profit should reach a level of between 600 to 700 million euros, which would compare with an operating profit of €897 million in the same quarter of 2019.