Golf drags down the Adidas Group

The Adidas Group has hired an investment advisor, understood to be Gugenheim Partners, to consider options for the sale of two non-core golf brands, Adams Golf and Ashworth, or perhaps even the whole TaylorMade-Adidas Golf (TMAG) segment, whose performance continued to drag down that of the group during the second quarter. Adams and Ashworth represent about 10 percent of TMAG's sales.

Thanks to the weak euro, the Adidas Group's total revenues went up by 15 percent to €3,907 million in the second quarter. They were up by 5 percent on a currency-neutral basis, with the Adidas and Reebok brands rising by 8 percent and 6 percent, respectively. TMAG's sales fell by 26 percent in local currencies, in spite of higher sales of golf shoes and apparel. This significant drop led to a 14 percent currency-neutral decline in the group's Other Businesses, notwithstanding a 17 percent increase for Reebok-CCM Hockey.

Herbert Hainer, the group's chief executive, admitted that TMAG's two spring releases, the R15 and the AeroBurner, did not fare as well as expected, leading to price promotions, but pointed to the imminent launch of a very innovative driver in October. He also admitted that the competition has been catching up with TMAG, which is still no. 1 in metalwoods and close to no. 1 in irons. He also complained that there is still too much inventory in the market. The management had budgeted a return to profitability for TMAG this year, but Hainer said the segment will post a loss again in 2015, albeit lower than the €100 million taken in 2014.

Independently of a possible divestiture, the group will make further cuts in TMAG's overheads and try to optimize gross margins by eliminating airfreight costs and through other efficiencies. Marketing will focus on fewer golf champions and the more important markets.

TMAG's lower margins were responsible for nearly half of the decline of 0.9 percentage points to 48.3 percent in the quarterly gross margin of the group. The balance came mainly through currencies, which pulled down the gross margin by 1.9 percentage points. Offsetting the negative currency effect, the group managed to raise the average selling prices of its products, especially on new releases in Western Europe and Russia.

Geographically, Western Europe and China were the standouts for the group in the quarter, considering especially the fact that these two regions had already delivered double-digit growth in the year-ago period. In Western Europe, sales increased by 12 percent in local currencies, although Reebok grew at a slower high single-digit rate. The management mentioned a strong performance in France, where Adidas still has the leadership, the U.K., Spain and Italy. The company did well in Germany, despite a tough comparison with the second quarter of 2014, when it sold a lot of football replica jerseys in the country.

Sales jumped by 19 percent on a currency-neutral basis in Greater China, rising at a double-digit rate for both Adidas and Reebok. They declined by 14 percent in Russia and the other CIS countries, due in part to additional store closures, but the gross margin did not drop as much there. In Latin America, Reebok posted a double-digit sales increase in local currencies, while Adidas rose by a high single digit, leading to an overall currency-neutral increase of 9 percent in the region. Sales declined by 6 percent at constant exchange rates in Japan. They grew by 16 percent in the Middle East and Africa.

Even excluding TMAG, North America remained a trouble spot for the group. The turnover remained stable there as 2 percent higher sales of Adidas products, driven by Originals and Neo, were offset by a 9 percent decline at Reebok following the closure of several factory outlets. North America was the only region where Reebok recorded lower sales.

With sales increases of 37 percent and 43 percent, respectively, Originals and Neo were also the drivers behind the Adidas brand's global growth in the quarter. The management declined to put a figure on Adidas' performance business, but mentioned below-average increases of 2 percent in running and 6 percent in training.

Hainer said the group wanted to bring inventories of running shoes down and distribute Boost selectively. Sales of football shoes went up by 17 percent following the introduction of the new Ace and X lines. The basketball business was down by 7 percent. At Reebok, Classics continued to show robust momentum.

The group's operating margin declined by 0.4 percentage points to 6.0 percent of sales in the second quarter, after a 9 percent increase in the marketing budget. The bottom line showed a 2 percent increase in net profit from continuing operations to €146 million. Adidas has just completed the sale of Rockport to Berkshire Partners and New Balance, incurring a loss from discontinued operations of €13 million for the first half of the year.

The effect of the World Cup was mentioned as a primary reason why the group's sales grew at a slower rate than in the first quarter of this year across the world. For the full first half of this year, group sales rose by 7 percent in constant currencies, with increases of 10 and 8 percent for the Adidas and Reebok brands, respectively. Retail sales were up by 5 percent on a comparable store basis excluding Russia.

In spite of more favorable pricing at Adidas and Reebok, the gross margin declined by 0.4 percentage points to 48.8 percent. Excluding a €18 million impairment charge related to the group's operations in Russia and Latin America, the group's operating margin declined by 0.2 percentage points to 7.5 percent in the first half, leading to a 14 percent increase in net profit to €401 million.

The company confirmed its guidance for the full financial year, predicting a mid-single-digit sales increase in terms of local currencies, driven by double-digit growth for both Adidas and Reebok in Western Europe, Greater China, the Middle East and Africa. The upcoming Euro 2016 football championship in France should start boosting the turnover in the fourth quarter.