The persistent decline in sales at Reebok remains a drag for the Adidas Group. The American brand's sales shrank by another 25.3 percent in constant currencies for the third quarter, which spoiled part of the 10 percent sales jump achieved by the Adidas brand. However, the entire group still recorded a sales rise of 4 percent in constant currencies and a hefty profit increase for the quarter.

With exchange rate changes, the group's sales landed at €4,173 million for the quarter, driven by double-digit expansion in own retail sales. The figures included a sales jump of 17.1 percent to €3,271 million for the Adidas brand and a drop of 19.7 percent to €453 million for Reebok. TaylorMade-Adidas Golf (TMAG) saw its sales increase by 16.1 percent to €283 million, but this was a rise of just 3.5 percent in constant currencies.

The decline in sales at Reebok was blamed to a large extent on the end of its licensing deal with the National Football League (NFL) in the U.S.

Another factor was a shift in the reporting of sales related to the National Hockey League (NHL): Its sponsorship generates annual sales of licensed products in the range of €100 million, spread almost equally between the U.S. and Canadian markets, but since the start of this year the group started reporting the U.S. half of these sales under its Reebok-CCM Hockey unit (amounting to an annualized shift of €50 million), while the Canadian half was already reported under Reebok-CCM Hockey, which is run from Canada.

Then there is the issue of Reebok India, where the Adidas Group found alleged large-scale irregularities earlier this year and launched a radical cleanup (read our update below). Excluding the impact of all three of these factors, Reebok's sales dropped by 6 percent for the quarter in constant currencies, compared with a slide of 10 percent in the second quarter.

Herbert Hainer, the group's chief executive, said that this was still by no means satisfactory, but he was convinced that Reebok would return to growth next year. At an investor conference in California a few weeks ago, the group outlined a new positioning for the brand focusing entirely on fitness and training, which is meant to drive its expansion for the coming years.

At the end of August, Reebok opened its first Fitness Hub in New York, just above a Cross Fit training studio, drawing throngs of buyers on the opening day. Matt O'Toole, in charge of global marketing for the Reebok brand, told the Wirtschaftswoche magazine last month that these categories already made up about 90 percent of Reebok's turnover, compared with just half five years ago.

The group's chief executive also pointed to a double-digit sales increase in Reebok Classics for the quarter, which was regarded as the confirmation of a sustainable upward trend for the range. The Reebok brand performs most strongly in markets where it has its own retail space, as suggested by an increase of 11 percent in comparable store sales for the brand in the quarter.

The entire group's sales inched up by 1.1 percent in constant currencies in Western Europe, driven by the Adidas brand, but they expanded much faster in European Emerging Markets, up by 18.6 percent. The group continued to reap the benefits of its investments around the European football championships and the London Olympics, with sales increases of 27 percent in Poland and 19 percent in the U.K. for the quarter, both in constant currencies.

Among the group's more disappointing quarterly results, its sales declined by 4.7 percent in North America in constant currencies. However, this was entirely attributed to Reebok, while Adidas and TMAG both lifted their sales at double-digit rates.

China is one of the few countries where Reebok did increase its sales, albeit less so than the Adidas brand, which again achieved double-digit sales expansion in the country. The entire group saw its Chinese sales increase by 10.5 percent in constant currencies.

The Other Asian Markets region was hurt by the conundrum at Reebok India, which caused a strong decline in the brand's regional sales, while the Adidas brand continued to advance, leading to a slight rise of 1.0 percent for the group. When it comes to Latin America, the group's turnover was up by 15.7 percent in constant currencies, aided by Adidas, TMAG and Rockport.

Hainer was most enthusiastic about the group's ability to lift its gross margin by 0.3 percentage points to 47.4 percent for the quarter - in contrast with Nike and Puma lately. The group did suffer from higher input costs, but this could be compensated by higher product price increases, a more judicious regional mix and a larger share of sales through the company's own retail stores. The Adidas brand's gross margin was up by 0.7 percentage points to 46.7 percent for the quarter, while Reebok's gross margin dipped by 3.1 percentage points to 34.5 percent – still a far cry from the target of more than 40 percent set for 2015, as stated by O'Toole in Wirtschaftswoche.

In spite of higher marketing expenses, the Adidas Group's operating margin grew by 0.1 percentage points to 11.8 percent. Its operating income reached €494 million, up by 12 percent for the quarter, and its net income expanded by 13.5 percent to €344 million. The group also pointed out that its inventories were down by 1 percent in constant currencies at the end of the quarter compared with the same time last year.

Adding up the first three quarters of the year, the Adidas Group's sales were up by 14.2 percent to €11,514 million, an increase of 8 percent in constant currencies. On the same basis, sales of the Adidas brand climbed by 12.2 percent, with double-digit advances in all regions except Western Europe, where the rise reached 7 percent. Sales jumped by 20.9 percent for TMAG, while they shrank by 19.9 percent at Reebok.

The group's turnover was up in all regions in constant currencies. Despite economic jitters, the group's sales expanded by 4.2 percent in Western Europe, pushed by the U.K. and Poland. They climbed by 17.3 percent in European Emerging Markets, with an increase of 17 percent in Russia alone. In spite of the dip in the third quarter, sales in North America were still up by 4.8 percent in dollars for the nine months. Retail sales shot up by 15.6 percent, compared with an increase of 3.9 percent for wholesale revenues, all still in constant currencies.

The group's gross margin was down by 0.4 percentage points to 47.8 percent for the nine months but its operating profit margin was up by 0.4 percentage points to 10.1 percent. The company ended the period with net income of €798 million, an increase of 22.4 percent.

Adidas Group Net Sales

(Million Euros, Quarter ended Sept. 30)

 

2012

2011

% Change

% Change (currency neutral)

Wholesale

2,743

2,577

6.4

0.4

Retail

944

757

24.7

14.6

Other Businesses

486

411

18.2

7.0

         

Western Europe

1,244

1,211

2.7

1.1

European Emerging Markets

569

438

29.9

18.6

North America

913

855

6.8

-4.7

Greater China

437

348

25.6

10.5

Other Asian Markets

579

527

9.9

1.0

Latin America

431

365

18.1

15.7

         

Adidas

3,271

2,794

17.1

10.0

Reebok

453

564

-19.7

-25.3

TaylorMade-adidas Golf

283

244

16.0

3.5

Rockport

79

72

9.7

-0.7

Reebok-CCM Hockey

87

70

24.3

13.9

However, Reebok's shrinking sales prompted the group to slightly adjust its forecast for the full year. While it previously predicted that its turnover would increase at a rate approaching 10 percent, it now forecasts a high-single-digit sales increase. Along with the sharp sales drop at Reebok, the group points to lower-than-expected sales at Rockport. The lockout at the NHL, which has led to the cancellation of all games until the end of November, is not helpful either.

Furthermore, the group said that its gross margin should remain stable at 47.5 percent and its operating margin would inflate to about 8.0 percent, up from 7.6 percent last year. Meanwhile, net income would increase by 15 to 17 percent for the full year, which implies a loss in the fourth quarter. This was partly explained by charges relating to the cleanup at Reebok: The group previously said that they would amount to €70 million, and about €10 million would be booked in the last quarter. This has even more of an impact in the last quarter since it is generally small in terms of income for the Adidas Group.

Apart from the negative factors outlined above, relating to the NHL, the NFL and Reebok India, the company's sales in the last quarter will be impacted by the lack of high-margin products relating to the European football championships and the London Olympics, for which the sell-in started in the last quarter of 2011.

Adidas Consolidated Income Statement

(Million Euros, Quarter ended Sept. 30)

 

2012

2011

% Change

Net Sales

4,173

3,744

11.5

Cost of Sales

2,195

1,982

10.7

Royalty/Comm. Income

27

23

17.4

Other Operating Expenses

33

14

135.7

Net Financial Expenses

15

23

-34.8

Pre-Tax

479

418

14.6

Tax

136

114

19.3

NET

343

304

12.8

Minority Interest

(1)

1

-

Euro/Share (Diluted)

1.64

1.45

13.1

Hainer was quick to add that the Adidas Group was preparing to deliver more excitement next year, with the introduction of a range that is meant to shake up the running market. The company predicts that it will achieve another year of record financial performance in 2013, driven by expanding sales and a rise of the group's operating margin to about 9 percent. The combination is expected to yield double-digit earnings growth.