The Adidas Group ended the year with a small sales increase of one percent in local currencies in the fourth quarter, despite a challenging environment, especially in Europe, the only market that suffered a sales decline. As currency headwinds persisted, total sales were down by 5 percent to €5,548 million in reported terms, leading to net income of €157 million for the quarter, 5.4 percent below the level of a year earlier.

The modest progress was led by e-commerce, which grew by 43 percent across all regions during the period, and by 53 percent for the full year, reaching a level of more than €4 billion – or about 20 percent of the company’s turnover – as Covid-19 accelerated Adidas’ digital transformation.

Adidas Group Income Statement
(Million euros, quarter ended Dec. 31)
  2020 2019 % Change
Net sales 5,548 5,838 -5.0
Cost of sales 2,848 2,980 -4.4
Gross profit 2,699 2,858 -5.6
Royalty & commission income 25 43 -41.9
Other operating income 13 38 -65.8
Other operating expenses 2,512 2,694 -6.8
Marketing and POS expenses 730 842 -13.3
Operating overhead expenses 1,782 1,852 -3.8
Operating profit 225 245 -8.2
Net financial income 24 36 -33.3
Net financial expenses 92 53 73.6
Pre-tax 158 227 -30.4
Tax 20 46 -56.5
Net income from continuing operations 138 181 -23.8
Net gains/losses from discontinued operations 19 -15
NET   157 166 -5.4
Euros/share (diluted) 0.77 0.85 -9.4
Source: Adidas

E-commerce helped the company’s direct-to-consumer (DTC) business to grow by 14 percent overall during the quarter. It recorded double-digit growth in DTC in Greater China. Its stores in North America remained largely open, and while customer traffic remained below last year’s level, the company’s revenues increased in the region. In Europe, about half of the company’s stores were closed until year-end, negatively impacting the sales development in the region.

Furthermore, European sales faced a tough comparison base due to the launch of products related to the European Football Championship, which had led to a 14 percent sales growth in the previous year. As a result, revenues in Europe declined by 6 percent on a currency-neutral basis. Sales in both Latin America and Emerging markets progressed by 7 percent, while Russia/CIS surged by 21 percent.

As usual, the Adidas brand performed better than Reebok globally in the quarter, with respective sales declines of 4.5 percent and 12.3 percent in terms of euros. Having completed a month-long review of the brand, the management decided in February to start a “formal process” to divest Reebok.

Adidas Group Net Sales 
 (Million euros, quarter ended on Dec. 31)
  2020 2019 % Change (€ terms) % Change (currency neutral)
Europe  1,297 1,401 -7.4 -6.2
North America  1,409 1,475 -4.5 2.2
Asia-Pacific 1,918 1,930 -0.6 1.4
Russia/CIS 139 153 -9.2 21.0
Latin America  408 476 -14.3 7.1
Emerging Markets 283 303 -6.6 7.2
Other Businesses 93 101 -7.9 -2.8
Adidas brand 5,072 5,310 -4.5 1.0
Reebok brand 406 463 -12.3 -5.2
Source: Adidas

The gross margin of the group declined by 0.3 percentage points to 48.7 percent in the quarter, hampered by currency headwinds and, to a lesser extent than before, some promotional activity. These negative factors were largely offset by the benefits of a more favorable channel mix.

Operating expenses were reduced by 7 percent to €2,512 million, including a drop in marketing expenses to 13.2 percent of sales from 14.4 percent in the year-earlier quarter. Despite these costs savings, which were lower than in previous quarters in preparation for this year, the group’s operating margin inched down by 0.1 percentage points to 4.1 percent, weighed down by higher logistics costs related to the higher online sales.

Executing on its plan to arrive at a healthy inventory position at year-end, the group reduced its inventories by almost €300 million during the quarter. Inventories were 8 percent higher than a year earlier, but the increase stemmed primarily from evergreen and event-related products.

A tough financial year

For the full financial year, revenues decreased by 16 percent to €19,844 million, or by 14 percent in constant currencies, including drops of 17 percent in Asia-Pacific and 15 percent in Greater China. Currency-neutral sales declined by 9 percent in North America and 12 percent in Europe, and were down at double-digit rates in Latin America and Emerging Markets, while remaining flat in Russia/CIS.

Adidas Group Income Statement
(Million euros, year ended Dec. 31)
  2020 2019 % Change
Net sales 19,844 23,640 -16.1
Cost of sales 9,990 11,347 -12.0
Gross profit 9,855 12,293 -19.8
Royalty & commission income 83 154 -46.1
Other operating income 42 56 -25.0
Other operating expenses 9,229 9,843 -6.2
Marketing and POS expenses 2,573 3,042 -15.4
Operating overhead expenses 6,656 6,801 -2.1
Operating profit 751 2,660 -71.8
Net financial income 29 64 -54.7
Net financial expenses 204 166 22.9
Pre-tax 575 2,558 -77.5
Tax 146 640 -77.2
Net income from continuing operations 429 1,918 -77.6
Net gains/losses from discontinued operations 13 59
NET   443 1,977 -77.6
Euros/share (diluted) 2.21 10.00 -77.9
Source: Adidas

After a strong start into the year, Europe and North America faced the most significant impact from the coronavirus pandemic in the second quarter of 2020. The total DTC business went up by 7 percent.

In constant currencies, the Adidas and Reebok brands declined by 13.3 percent and 16.1 percent last year, respectively. In reported euros, the were off by 15.9 percent to €18,095 million and by 19.4 percent to €1,409 million.

Footwear sales fell by 18 percent to €11, 128 million, apparel was down by 14 percent to €7,687 million and equipment by 11 percent to €1,028 million.

The number of shoe pairs produced declined to 379 million from 448 million in 2019, with 42 percent of the volume coming from Vietnam, 29 percent from Indonesia and just 15 percent from China. Apparel was almost evenly sourced from Camboadia, Vietnam and China. One-third of the equipment and accessories came from China, while Turkey and Pakistan supplied 21 percent and 16 percent of the items, respectively.

The group’s gross margin decreased by 2.3 percentage points to 49.7 percent, despite a more favorable channel mix and lower sourcing costs, which were offset by adverse foreign currencies and bigger promotions.

The operating margin dropped by 7.5 percentage points to 3.8 percent because of the lower turnover and a variety of exceptional costs and charges. Marketing expenses were only cut by 0.1 percentage points to 12.9 percent of sales, but the group incurred many coronavirus-related charges for such items as product takebacks in China, purchase order cancellations, bad debt allowances and the impairment of retail stores. Adding the impairment charge for the Reebok trademark, extraordinary charges had a negative impact of €500 million.

As a result, net earnings from continuing operations fell last year to €429 million, down from €1,918 million in the previous year.

New regional structure and positive outlook

Reebok contributed a small, unspecified profit on sales of €1,748 million in 2020, with decreases of 19.4 percent in euros and 16.1 percent in local currencies. Without disclosing the brand’s actual profitability, the group’s management indicated that it is still in an early stage in the discussions about its divestiture, which has attracted a lot of interest from both financial and strategic investors.

Adidas Group Net Sales 
 (Million euros, year ended on Dec. 31)
  2020 2019 % Change (€ terms) % Change (currency neutral)
Europe  5,320 6,071 -12.4 -11.9
North America  4,762 5,313 -10.4 -8.6
Asia-Pacific 6,546 8,032 -18.5 -17.3
Russia/CIS 584 658 -11.2 0.1
Latin America  1,158 1,660 -30.2 -16.1
Emerging Markets 998 1,302 -23.3 -17.8
Other Businesses 476 605 -21.3 -20.5
Adidas brand 18,095 21,505 -15.9 -13.3
Reebok brand 1,409 1,748 -19.4 -16.1
Source: Adidas

Adidas is going to report the Reebok business as discontinued operations from the first quarter 2021 onward and adjust prior-year periods accordingly. As a result, the company released an outlook that excludes Reebok, planning for currency-neutral sales to increase at a mid-to-high-teens rate in 2021. Strong double-digit growth is forecast for the first quarter.

Adidas has also changed its organizational structure on a regional basis. Since Jan. 1, 2021, it is managing Greater China as a separate market to reflect its growing importance. The remaining Asia-Pacific region now comprises Japan, South Korea, Southeast Asia and the Pacific region. In addition, the company has integrated the former regions of Europe, Russia/CIS and Emerging Markets into the newly formed EMEA market to better leverage economies of scale. The North America and Latin America regions remain unchanged.

For the whole financial year, Adidas’ sales are expected to increase at a mid-to-high-teens rate on a currency-neutral basis, with gains in all markets with Greater China, Asia-Pacific and Latin America all projected to raise currency-neutral sales in a range of between 20 and 30 percent. Sales in EMEA are anticipated to record growth in the mid-to-high-teens, while North America is forecast to expand revenues at a high-single-digit rate.

The operating margin should rebound sharply to a level of between 9 and 10 percent, while the gross margin is expected to recover and reach a level of around 52 percent in 2021. Net income from continuing operations is projected to rise to a level of between €1.25 billion and €1.45 billion.

With Reebok leaving the group, Adidas will have to bear “stranded costs” related to the management of both brands that will reduce its operating profit by about €250 million and net earnings by around $200 million this year. About 30 percent of those costs will be eliminated in 2022, with none left thereafter.