Adidas toned down its expectations for full-year sales and earnings as the company’s growth slowed in the third quarter due to supply chain disruptions, Covid-related lockdowns in Asia-Pacific and a “challenging” market environment in Greater China.
In the quarter, Adidas saw its sales edge up by just 3.4 percent to €5,752 million as compared to a year earlier, or about the same on a constant-currency basis. The management said the turnover would have increased by 14 percent without a €600 million “drag” from supply chain bottlenecks, new lockdowns in Asia-Pacific and market headwinds in China, which was responsible for about half of the shortfall.
| Adidas Income Statement | ||||
|---|---|---|---|---|
| (Quarter ended on Sept. 30, € million) | ||||
| 2021 | 2020 | % Change | ||
| Net sales | 5,752 | 5,561 | 3.4 | |
| Cost of sales | 2,868 | 2,763 | 3.8 | |
| Gross profit | 2,884 | 2,798 | 3.1 | |
| Royalty & commission income | 22 | 19 | 15.8 | |
| Other operating income | 3 | 10 | -70.0 | |
| Other operating expenses | 2,237 | 2,092 | 6.9 | |
| Marketing and POS expenses | 674 | 538 | 25.3 | |
| Operating overhead expenses | 1,562 | 1,554 | 0.5 | |
| Operating profit | 672 | 735 | -8.6 | |
| Net financial income | 6 | 5 | 20.0 | |
| Net financial expenses | 49 | 42 | 16.7 | |
| Pre-tax | 629 | 698 | -9.9 | |
| Tax | 150 | 163 | -8.0 | |
| Net income from continuing operations | 479 | 535 | -10.5 | |
| Net gains/losses from discontinued operations | 504 | 41 | 1129.3 | |
| NET | 984 | 577 | 70.5 | |
| Euros/share (diluted) | 2.34 | 2.58 | -9.3 | |
| (Nine months ended on Sept. 30, € million) | ||||
| 2021 | 2020 | % Change | ||
| Net sales | 16,096 | 13,294 | 21.1 | |
| Cost of sales | 7,851 | 6,598 | 19.0 | |
| Gross profit | 8,245 | 6,696 | 23.1 | |
| Royalty & commission income | 53 | 43 | 23.3 | |
| Other operating income | 13 | 30 | -56.7 | |
| Other operating expenses | 6,391 | 6,249 | 2.3 | |
| Marketing and POS expenses | 1,831 | 1,712 | 7.0 | |
| Operating overhead expenses | 4,560 | 4,537 | 0.5 | |
| Operating profit | 1,920 | 520 | 269.2 | |
| Net financial income | 11 | 19 | -42.1 | |
| Net financial expenses | 123 | 121 | 1.7 | |
| Pre-tax | 1,808 | 418 | 332.5 | |
| Tax | 439 | 100 | 339.0 | |
| Net income from continuing operations | 1,369 | 318 | 330.5 | |
| Net gains/losses from discontinued operations | 576 | -33 | – | |
| NET | 1,945 | 286 | 580.1 | |
| Euros/share (diluted) | 6.87 | 1.61 | 326.7 | |
| Source: Adidas | ||||
The company is currently projecting a sales increase of between 8 and 10 percent for 2022. While the management remains optimistic about the longer term, the “drag” is expected to amount to an additional €400 million in the fourth quarter and €600 million in the first quarter of 2022.
The company estimates that it will have lost the delivery of about 100 million units of merchandise in the second half of 2021 due to the lockdown of factories in Vietnam and delays of between eight and ten weeks in their transportation from the factories to its distribution centers. In Vietnam, footwear production capacities are expected to grow gradually from 70 percent of their normal level now to 85 percent by the end of November and 100 percent at the end of the year. In the meantime, the production of about 30 million pairs has been re-allocated to factories in China and Indonesia.
Adidas previously guided for a currency-neutral increase in total revenues of up to 20 percent this year, but the management is now placing the forecast at somewhere between 17 and 20 percent, after a growth of 24 percent in the nine months that will likely be followed by a “flattish” fourth quarter.
The operating margin and net income for the year are seen landing at the lower end of previously announced ranges of 9.5 to 10.0 percent and €1.4 to €1.5 billion, respectively. At the same time, the gross margin for the full year is seen rising to a level of between 50.5 percent and 51.0 percent, below previous guidance of around 52.0 percent, in spite of €200 million higher freight costs.
Because of the Covid epidemic, different trends appeared in the eastern and western parts of the world. Sales in Asia-Pacific declined by 8.2 percent on a currency-neutral basis to €504 million in the quarter. Customer traffic is off by more than 30 percent in the region’s stores as around 50 percent of them are now closed, compared with 80 percent a year ago.
| Adidas | ||||
|---|---|---|---|---|
| Net Sales | ||||
| (Quarter ended on Sept. 30, € million) | ||||
| 2021 | 2020 | % Change (€ terms) | % Change (currency neutral) | |
| EMEA | 2,248 | 2,079 | 8.1 | 8.8 |
| North America | 1,396 | 1,309 | 6.6 | 8.6 |
| Greater China | 1,155 | 1,297 | -10.9 | -14.6 |
| Asia-Pacific | 504 | 557 | -9.5 | -8.2 |
| Latin America | 405 | 264 | 53.4 | 55.4 |
| Other Businesses | 45 | 55 | -18.2 | -18.0 |
| TOTAL | 5,753 | 5,561 | 3.5 | – |
| (Nine months ended on Sept. 30, € million) | ||||
| 2021 | 2020 | % Change (€ terms) | % Change (currency neutral) | |
| EMEA | 5,928 | 4,749 | 24.8 | 26.9 |
| North America | 3,802 | 3,202 | 18.7 | 25.7 |
| Greater China | 3,560 | 3,055 | 16.5 | 15.1 |
| Asia-Pacific | 1,639 | 1,496 | 9.6 | 13.1 |
| Latin America | 1,050 | 670 | 56.7 | 70.0 |
| Other Businesses | 118 | 123 | -4.1 | -3.3 |
| TOTAL | 16,097 | 13,295 | 21.1 | – |
| Source: Adidas | ||||
In Greater China, Adidas’ revenues fell by a stronger rate of 14.6 percent €1,155 million, as the top line was hit by new Covid-19 related restrictions as well as the impact of floods, while the geopolitical tension against Western brands softened. Adidas has reacted to the situation in China by re-routing products from China to other regions and by taking more action on the digital front by hiring 300 more digital experts and telling more than 1,000 locally relevant “stories.” In the physical channel, it is setting up more than 100 new Terrex, Y-3 and Stella McCartney points of sale in key cities. One-third of the new products being launched in the country are now made specifically for China.
On the other hand, sales in the EMEA region rose by 8.8 percent to €2,248 million, and they were up by 8.6 percent in North America to €1,396 million. One particularly bright spot was provided by Latin America, where sales jumped by 55.4 percent to €405 million on the brand’s strength in football and lifestyle in a more normalized environment.
In line with the evolution of sales, the regional operating margin grew by 2.0 percentage points to 23.7 percent in EMEA, by 0.5 points to 20.3 percent in North America and by 13.6 points to 20.2 percent in Latin America. Conversely, it fell by 4.9 percentage points to 26.6 percent in Greater China and by 5.5 percentage points to 17.5 percent in the Asia-Pacific region.
In its direct-to-consumer (DTC) channel, which represented about 35 percent of the total turnover – the same as a year ago and 5 percentage points up from 2019 - Adidas’ sales rose by 5 percent on a currency-neutral basis in the third quarter, led by double-digit growth in this channel in all the regions except China. Without quantifying the rate of increase, the management said that sales rose in the wholesale channel as well, mainly with big players such as JD Sports Fashion and Zalando.
Sales through the DTC channel were nearly 20 percent above their 2019 level, ahead of the pandemic. Revenues from the company’s own e-commerce revenues grew by 8 percent compared to the third quarter of 2020 and were 64 percent higher than the 2019 level, given the exceptionally strong growth experienced last year.
Among the various product categories, sales grew at a double-digit rate in football and outdoor. Adidas said that lifestyle products are “resonating well,” thanks to successful DTC-exclusive launches.
Adidas’ gross margin inched down by 0.2 percentage points in the quarter to 50.1 percent, with one full point attributed to exceptional costs of over €50 million intended to mitigate supply chain disruptions. Negative impacts came also from currency fluctuations and a less favorable market mix, outweighing the positive effect of significantly higher full-price sales. Price increases will be inevitable early next year. The management noted that changes in foreign currency rates have cut the gross margin by 2.5 percentage points in the last two years, but the trend is expected to go in the opposite direction from 2022 on.
The operating profit fell to €672 million from €735 million the year earlier, with the operating margin declining to 11.7 percent from 13.2 percent, a level that Adidas said it considers to be strong, particularly given a sharp increase in the marketing spend. The margin would have reached a level of 12.7 percent in the quarter without about €60 million in “stranded costs” related to Reebok, which is being still accounted as a discontinued business.
Marketing and point-of-sales expenses grew by 25 percent to €674 million as the company invested in stores and its digital platforms, supported the launch of new products and leveraged major sporting events “to drive brand heat.”
Net income from continuing operations declined to €479 million from €535 million in the third quarter of 2020.
Adidas noted that its inventories fell by 23 percent on a currency-neutral basis to €3,664 million at the end of the quarter as compared to a year earlier. While the reclassification of Reebok as a discontinued business supported this development, Adidas noted that inventories were still down by “strong” double-digits compared to the year earlier on a comparable basis.
Adidas said the planned sale of Reebok to Authentic Brands Group for a total consideration of up to €2.1 billion remains on track for closing in the first quarter of 2022. As a result of the deal, Adidas recorded a write-up of the previously impaired Reebok trademark in the amount of €402 million net of tax as part of its results from discontinued operations in the third quarter. The bulk of the gain will be returned to shareholders, the management said.
