The FIFA World Cup is already whetting such an appetite for related products that Adidas has raised its forecast of football sales to €1.2 billion for the full year, up from the more conservative €1 billion. This would translate into dollar sales of $1.5 billion at current exchange rates, matching the projections recently made by Nike in the same segment.
The Teamgeist match ball for the tournament is stirring particular enthusiasm, leading Adidas to raise its sales projections for this item to 15 million units, 5 million more than originally planned. The Big a is envisaging sales of at least 750,000 pairs of the F50 Tunit, the modular football boot launched for the event, against an earlier projection of 500,000 pairs. The post-World Cup order book remains strong in Europe, making the brand confident that its football sales will remain above €1 billion in 2007.
The World Cup progress report came as the enlarged Adidas group outlined its first quarter results, for the first time combining Adidas and TaylorMade-adidas Golf with two months of sales at Reebok, which was consolidated from the beginning of February. Including Reebok’s new business and taking off Salomon, which is now a part of Amer Sports, Adidas’ group sales jumped by 46.9 percent to €2,459 billion, with a 40 percent increase in constant currencies.
Excluding both Reebok and Salomon, group sales still rose by 18.8 percent to €1,988 billion, and they were up by about 13 percent in constant currencies. Reebok’s sales didn’t decline as sharply as suggested by the dramatic fall in its order backlog at the end of last year, but they still slumped by 10 percent to €454 million, with a big 16 percent drop in constant currencies. The decline was mostly caused by lower sales of classics and music-related footwear, but while there is still some excess inventory in the pipeline, the new owners see some better products impacting Reebok’s backlogs from 2007 on.
Football products contributed to a sales increase of 17.4 percent to €1,776 billion for the Adidas brand in the latest quarter, but the gain in constant currencies was limited to 12 percent. Nearly all other Adidas sport performance categories saw their sales rise in the period, and the brand’s Sport Heritage division continued to expand at a double-digit rate. Sales through Adidas’ own stores shot up by 30 percent to nearly €200 million, and they posted double-digit gains on a comparable basis.
TaylorMade-adidas Golf came in with sales of €201 million for the quarter, up by 34.5 percent in euros and by 26 percent in constant currencies. Its revenues were inflated by the inclusion of Greg Norman, the golf apparel business that belonged to Reebok, but TaylorMade and adidas Golf alone still generated a sales increase of 16 percent for the 3 months, led by a whopping rise of more than 40 percent in the American market. On the other hand, TMaG’s sales fell by 18 percent in Europe in constant currencies, which was blamed on dropping sales in the UK. In euros, European sales of the golf business were down by 16 percent to €23 million.
Looking at the entire group, the largest sales increase came from North America, where sales soared by 112.8 percent to €759 million for the period, up by 94 percent in constant currencies. This is due to the fact that the newly-included Reebok brand makes most of its business in the region, but Adidas and TaylorMade sales also rose at double-digit rates in North America.
In Europe, Adidas’ sales were hit by declines in the UK and France, two of its largest markets, but they still increased by 5 percent to €905 million for the period in the region, buoyed by large sales rises in emerging markets. In constant currencies the increase amounted to 7 percent. Reebok’s sales in the region reached just €139 percent in the two months, and management indicated that they had suffered roughly on the same level as elsewhere.
Adidas and TaylorMade both achieved double-digit sales growth in Asia, lifting the group’s sales in this part of the world to €474 million for the 3 months including Reebok, up 34.1 percent in euros and by 28 percent in constant currencies.
As expected, gross margins declined sharply throughout the group, partly because of a nearly doubled business in North America, where margins are lower. The margins were also affected by the company’s cooperation agreement with Amer Sports after its acquisition of Salomon. Excluding Reebok, which had a gross margin of 35.7 percent, they declined by 0.9 percentage points to 47.2 percent for the period, mostly due to currency effects and to higher manufacturing costs for Adidas products this year, related to oil prices and labor costs.
Including Reebok, the group’s gross margin was off by 3.1 percentage points to 45 percent, and management indicates it should take at least 3 years to return to the levels that Adidas enjoyed before Reebok’s acquisition. Still, adding up the former Adidas group and Reebok, the enlarged company’s gross profit increased by 37.6 percent to €1,107 million for the quarter. Excluding Reebok the rise amounted to 16.6 percent, reaching €938 million. TMaG improved its margin slightly to 42.9 percent.
Likewise, operating margins decreased by 0.8 percentage points to 11.5 percent for the group excluding Reebok, partly owing to the extra expenses generated by the forthcoming FIFA World Cup. Including Reebok, the operating margins dipped further to 10.1 percent, down 2.1 percentage points, including a one-off hit of €26 million related to the acquisition – the first chunk of purchase price allocations that will amount to €80 million for the full year. Thanks to higher sales, operating profit jumped by 11.4 percent to €228 million excluding Reebok and by 21.1 percent to €248 million including Reebok.
Net income attributable to shareholders ended 36.9 percent higher at €144 million for the quarter. Part of the increase stems from the fact that Salomon suffered losses of €22 million in the first quarter of last year.
Herbert Hainer, Adidas’ chief executive, repeated that Reebok’s sales should decline at a mid-single-digit rate for the full year, in spite of declines in the brand’s order book of 14 percent in constant currencies and 10 percent in euros. The decline is again steepest in North America, where Reebok’s backlogs are down by 20 percent in dollars, combining a fall of 28 percent in footwear with another drop of 7 percent in apparel. On the other hand, Reebok’s European footwear backlogs have apparently stabilized, while apparel orders are off by 21 percent, dragging Reebok’s overall European orders down by 8 percent in actual and constant euros. Orders were particularly soft with British key accounts.
The picture is far brighter for the Adidas brand, with currency-neutral order backlogs up 12 percent at the end of March, or 15 percent in euros. In Europe, the brand’s order backlog increased by 7 percent in constant currencies, led by an 8 percent rise in apparel orders, compared with a smaller increase of 3 percent for footwear. Higher currency-neutral increases were recorded in North America, and in Asia, up 25 percent. As management sees it, these orders for the third quarter confirm that the Adidas brand is set to pursue its robust growth well beyond the FIFA World Cup.
