Adidas raised its guidance for full-year sales and earnings as revenue growth continued to accelerate in the second quarter despite the impact of Covid-19 lockdowns in the Asia-Pacific region, industry-wide supply chain challenges and the geopolitical situation. The more optimistic view came even though the company’s sales in China took a hit, declining by 16 percent in the quarter following a boycott by Chinese consumers in March against western brands, including Adidas, that had taken a stand against China’s treatment of the ethnic Uyghurs.
The group now expects that currency-neutral revenues from continuing operations will increase at a rate of up to 20 percent year-over-year in 2021, driven by double-digit improvements in all markets and up from previous expectations of a high teen percentage growth. Its new outlook reflects sales growth of up to 7 percent in the second half of the year, supported by a series of new product releases, including the re-introduction of the NMD sneaker, which Adidas said has been one of its most successful franchises in its recent history.
The management said the new guidance takes into account the fact that Adidas will probably lose some €500 million in sales during the second half due to the situation in China and a variety of supply chain challenges that are also hurting its competitors. It lost about as much in sales during the first half of the year.
In particular, the industry lockdown in Vietnam, which began on July 12, is now expected to last until at least Aug. 15. Adidas, which is sourcing 28 percent of its products in Vietnam in terms of volume, is trying to reallocate part of the production elsewhere. It has secured additional capacity for 30 million pieces through new long-term supply contracts.
To help mitigate these and other logistics problems, it is using air freight for the delivery of the most expensive items. It is also offering special sales packages to retailers that include some existing inventory to help avoid order cancellations.
Operating margin of 10.7% in the quarter on 55% higher sales
For the second quarter, the company reported net income from continuing operations of €387 million compared to a loss of €243 million in the year-earlier quarter. It was 25 percent lower than in the first quarter of 2019, however. Adidas’ quarterly gross margin increased by 0.5 percentage points to 51.8 percent, as positive effects from significantly higher full-price sales outweighed the negative impact from a less favorable market and channel mix as well as higher sourcing costs.
Improving by 18.5 percentage points from last year’s negative margin, the quarterly operating margin of 10.7 percent almost fully recovered to pre-pandemic levels, thanks in part to a decrease of 3.5 percentage points to 12.1 percent in the ratio of sales, marketing and point-of-sales expenses. Inventories declined by 22 percent year on year, a development the company said was driven by better inventory management.
Adidas’ revenues increased by a reported 51 percent to €5,077 million in the quarter, with growth at constant currency rates of 55 percent from the second quarter of 2020 and 5 percent from the second quarter of 2019. This reflects an acceleration as compared to the first quarter, when currency-neutral sales rose by 27 percent compared with the first quarter of 2020 and were up by one percent on the first quarter of 2019. The 7 percent increase budgeted for the second half of this year also indicates a further expected acceleration from a cumulative 3 percent increase in the first half.
Like at other companies in the sector, wholesale revenues grew faster than retail revenues at Adidas, in spite of its plans to boost the ratio of direct-to-consumer (DTC) sales in the longer term, as last year’s Covid-related retail lockdowns had cut back orders and reorders by its wholesale partners, leading also to order cancellations.
Adidas grew by 93 percent at wholesale and by 17 percent in DTC during the second quarter. A similar pattern could be observed for the first six months, with increases of 51 percent and 24 percent, respectively. On the other hand, e-commerce revenues declined by 14 percent in the quarter, due to strong comparables the year earlier, when digital revenues had almost doubled. E-commerce revenues were nonetheless 64 percent above their 2019 level, and excluding China, they were up by 86 percent.
Total DTC stood at 37 percent of sales in the quarter, down by 13 percentage points on the year earlier but up by 5 percentage points on 2019. Despite the dip in e-commerce, the number of members in Adidas’ digital ecosystem went up by some four million to over 200 million, and 80 percent of them bought products online. Traffic in Adidas stores was lower than before the pandemic, but conversion rates were higher.
| Adidas Group Income Statement | ||||
|---|---|---|---|---|
| (Million euros, Quarter ended on June 30) | ||||
| 2021 | 2020 | % Change | ||
| Net sales | 5,077 | 3,352 | 51.5% | |
| Cost of sales | 2,446 | 1,631 | 49.4% | |
| Gross profit | 2,632 | 1,720 | 25.3 | |
| Royalty & commission income | 17 | 9 | 95.7% | |
| Other operating income | 2 | 18 | -86.1% | |
| Other operating expenses | 2,107 | 2,010 | 4.9% | |
| Marketing and POS expenses | 616 | 525 | 17.2% | |
| Operating overhead expenses | 1,492 | 1,484 | 0.5% | |
| Operating profit | 543 | -263 | n.a. | |
| Net financial income | 4 | 13 | -70.0% | |
| Net financial expenses | 37 | 42 | -11.0% | |
| Pre-tax income | 510 | -292 | n.a. | |
| Tax | 123 | -49 | n.a. | |
| Net income from continuing operations | 387 | -243 | n.a. | |
| Net gains/losses from discontinued operations | 20 | -74 | n.a | |
| Net income | 407 | -317 | n.a | |
| Euros/share (diluted) | 1.93 | -1.13 | n.a. | |
| Source: Adidas | ||||
Development by region
Geographically, second-quarter sales increased by 99 percent in the EMEA region and by 87 percent in North America on a currency-neutral basis, and they were up by 15 percent in both regions versus the 2019 pre-pandemic level. Sales in Latin America jumped by 230 percent, marking a 30 percent increase from the 2019 level. Excluding Greater China, revenues in the Asia-Pacific region climbed by 66 percent despite the negative impact from new lockdowns in the region, but they ended up 10 percent lower than in 2019.
The exception to the growth trend was Greater China, an important market where Adidas said the 16 percent year-on-year decline in the top line was also due in part to a big recovery from the pandemic in last year’s second quarter, with strong double-digit rates in May and June 2020. As compared to the second quarter of 2019, sales were off in China by 15 percent.
Nevertheless, the management said it was expecting an increase in Greater China for the full year. June e-commerce in the region inched up above the 2019 level after declining in both March and April.
Operating margins increased in all regions with the exception of China, where it declined by 7.2 percentage points to 30.4 percent but nevertheless remained higher than those in other regions.
| Adidas Group | ||||
|---|---|---|---|---|
| Net Sales | ||||
| (Million euros, Quarter ended on June 30) | ||||
| 2021 | 2020 | % Change (€ terms) | % Change (currency neutral) | |
| EMEA | 1,91 | 965 | 97.8% | 99.4% |
| North America | 1,249 | 726 | 72.0% | 86.6% |
| Greater China | 1,003 | 1,199 | -16.3% | -15.9% |
| Asia-Pacific | 533 | 337 | 58.1% | 66.3% |
| Latin America | 348 | 103 | 238% | 230.1% |
| Other Businesses | 34 | 21 | 61.9% | 64.1% |
In terms of products, performance styles outperformed lifestyle items, and apparel grew faster than footwear. One of the reasons was the resumption of football competitions including the UEFA Euro 2020 championships, where 35 percent of the players were dressed by the Three Stripes. Adidas’ sales of football products went up by more than 150 percent in the second quarter. Sales of outdoor products more than doubled. Running, too, grew overproportionately. Football and running went up by triple-digit rates in Europe.
Despite new lockdowns in Asia-Pacific during the quarter, 97 percent of the company’s global store network was already open at the end of June, up from 89 percent at the end of March. Adidas’ outlook for the full year assumes a global store opening rate of at least 95 percent, a largely operational sourcing network at the end of the third quarter and a continued steady recovery in Greater China.
The management is now guiding for an increase in net income to between €1.4 billion and €1.5 billion for the full financial year, compared with a previously projected range of €1.25 billion to €1.45 billion. The gross margin is still expected to be at a level of around 52.0 percent, but the operating margin from continuing operations should rise to between 9.5 and 10 percent, up from a previously expected range of 9 to 10 percent.
Reebok to be sold before summer’s end
All the figures exclude sales and profits at Reebok, which is now expected to find a buyer before the end of the summer. The brand raised its profitability strongly in the second quarter on sales that were 93 percent higher than in the second quarter of 2020 and 13 percent higher than in the corresponding period of 2019.
The company’s profit guidance continues to include temporary stranded costs related to the planned sale of Reebok. In 2021, these costs are expected to amount to around €250 million at the operating profit level and about €200 million for net income from continuing operations. Adidas’ medium-term growth outlook is not impacted by these costs as the company anticipates that only around 30 percent of the €250 million will reoccur in 2022 and that by 2023 the stranded costs will be fully eliminated.
