Hainer delivers a “fantastic” last quarter at Adidas

Herbert Hainer, departing chief executive of the Adidas Group, said that he “saved the best for last” as he outlined the company's outstanding performance for the second quarter. As previously announced, ample gains in sales and profits for the three months led to another upgrade in the group's forecast for the full year.

The entire group's turnover jumped by 13.2 percent to €4,422 million for the quarter, which was a rise of 21 percent in constant currencies. Its gross profit margin moved up by 0.5 percentage point to 48.8 percent, as a more favorable product mix made up for unfavorable currency exchange rate changes. Another part of the improvement came from Taylormade Adidas Golf, as described in the next article.

The operating profit margin climbed by 3.4 percentage points to 9.4 percent, but this was supported by two one-off gains that lifted other operating income to €159 million, compared with €33 million. About €80 million of the added other operating income came from the early termination of the Adidas brand's partnership with Chelsea football club, and the remainder from the divestment of Mitchell & Ness. However, only the money earned from the end of the Chelsea deal inflated the group's operating profit, while proceeds from the sale of Mitchell & Ness were reinvested. The group ended the quarter with net income from continuing operations of €291 million, nearly twice the €146 million income for the prior-year quarter.

The upturn will enable Hainer to leave the group on a high note at the end of September. It has hushed disquiet among investors, sending shares up more than 70 percent since the start of this year. Hainer will be handing over to Kasper Rorsted, who already joined the management board at the start of this month. Hainer said in a conference call from Rio de Janeiro that the strategic changes implemented over the last two years formed the basis for sustainable expansion under Rorsted's leadership.

The Adidas brand alone saw its sales jump by 16.5 percent to €3,705 million for the quarter, an increase of 24.6 percent in constant currencies, and Hainer was eager to emphasize that it was generated by fashion as well as performance categories.

The group's turnover in the football category shot up by 17 percent in constant currencies for the quarter. The performance encouraged Adidas to raise its projection for the category in June, to sales of more than €2.5 billion for the year.

The running category's underlying sales soared by 30 percent for the quarter. They were driven by a 35 percent rise in footwear sales, with standouts such as the launch of the Ultraboost Uncaged. Women buoyed sales in the training category, up 11 percent in constant currencies.

Yet the uptick was most impressive in the Adidas brand's lifestyle business, with increases of 50 percent for Adidas Originals and 31 percent for Adidas Neo in constant currencies. The rise at Originals included the latest drops around the NMD and Yeezy Boost, along with continued demand for Stan Smith, Superstar and ZX Flux. The quarter also saw the relaunch of the Gazelle and an expanded partnership with Kanye West. In another angle of development for its lifestyle business, the group launched an off-pitch version of a football shoe at the start of the second half.

Over-investment is paying off in North America, where the Adidas brand's turnover surged by 32 percent in constant currencies. While there has been avid demand for some of the brand's fashion products, Hainer claimed that Adidas was gaining market share in nearly all sports categories. Its sales of running shoes were up by more than 60 percent in North America for the quarter. The three stripes continue to be on a roll in Western Europe, where sales leapt by 30 percent in constant currencies, and the same applies to Greater China.

The Reebok brand's turnover slumped by 2.1 percent to €399 million but they moved up by 6.9 percent in constant currencies, with a double-digit sales rise in Classics and single-digit increases in training and running. The brand remained under pressure in North America, where it has been cleaning up its distribution. But sales in constant currencies were up at double-digit rates in Western Europe, China, Russia and Japan.

Sales for Adidas and Reebok soared by 26.3 percent to €1,214 million for the quarter in Western Europe, up by 29.2 percent in constant currencies. The rise was driven by the U.K., Germany, Italy, Poland, France and Spain, where sales moved up at double-digit rates.

With a sharp increase for Adidas and a decline for Reebok, sales were up by 25.6 percent in constant currencies in North America. Robin Stalker, the group's chief financial officer, explained on the same call that demand for the Adidas brand was pushing up average prices and reducing discounts, leading to a gross margin improvement of 2.1 percentage points to 38.8 percent. The demand is giving Adidas more leverage in North America at last, which enabled it to reach a regional operating profit of €74 million for the Adidas and Reebok brands.

Yet the growth in Greater China trumped all other regions with a sales rise of 30.1 percent in yuan. Sales picked up in Russia and CIS countries, advancing by 7.2 percent in constant currencies. They climbed by 7.9 percent in Latin America, with double-digit increases in Mexico, Peru, Colombia and Uruguay. The Japanese market generated a sales rise of 20.9 percent in yen, and sales were up by 14.2 percent in the Middle East, Africa and other Asian markets (MEAA), with double-digit growth rates in South Korea, Turkey, Australia, South Africa and Thailand.

For the first half of the year, the Adidas group's climbed by 15.0 percent to €9,191 million. The rise of 21 percent in constant currencies was driven by a jump of 25.1 percent in the Adidas brand's turnover. This compares with a rise of 6.7 percent for the Reebok brand, which would have done much better without the ongoing clean-up of distribution in North America. Reebok's turnover was down by 9 percent to €221 million for the six months in North America, but Hainer told analysts that it should rise again in the second half.

With much the same dynamics as in the quarter, the whole company raised its gross margin by 0.4 percentage points to 49.1 percent and the operating margin reached 9.8 percent, up by 2.4 percentage points compared with the prior-year period without goodwill impairment losses.

As previously reported, the upgraded forecast calls for sales to rise at a high-teens rate in constant currencies for the full year. Sales in Russia should climb at a mid-single-digit rate, while all other regions are predicted to deliver double-digit growth in constant currencies. The gross margin is predicted to reach 48.0 to 48.3 percent for the year, compared with 48.3 percent in 2015, and the operating margin should increase to up to 7.5 percent, compared with 6.5 percent in 2015. Net income from continuing operations is set to reach between €975 million and €1.0 billion, up from €720 million.