Adidas managers must have gulped hard as they discovered a much sharper than expected downturn in Reebok sales and orders over the last months. However, the German company is confident that Reebok’s integration into the German group will yield visible improvements from the second half of this year.
Reebok’s group sales dropped by a little less than 5 percent to $930.4 million in the 4th quarter ended last Dec. 31, down 3 percent in currency-neutral terms. Excluding the effect of the sale of the Ralph Lauren footwear business, Reebok sales in the quarter were down by 1 percent in dollars and up 1 percent in constant currencies.
The picture appears much bleaker for the next months, as Reebok’s orders dropped by 22 percent at the end of the year in constant currencies, down by 24 percent in dollars. The decrease was worst in the USA, where orders declined by 28 percent in dollars, mixing a painful drop of 30 percent in footwear with another fall of 23 percent in apparel. Orders from other countries showed a decrease of 18 percent in dollars at the end of the year, down by 16 percent in footwear and 20 percent in apparel.
Paired with a small quarterly net loss for the balance of the Adidas group – net of Salomon and of Reebok – these figures still sent Adidas’ shares tumbling down by more than 6 percent in Frankfurt last week, and they added fuel to internal concerns about Reebok’s acquisition – particularly in the USA.
Herbert Hainer, Adidas’ chief executive, did not attempt to play down his disappointment last week, conceding that Reebok’s takeover, unveiled in August, was proving a little thornier than he would have liked. He predicted that Reebok’s sales would fall in the mid-single-digit range for this year, returning to growth in 2007. To this end, the Adidas chief promised that the group’s managers would devote most of their time to the revitalization of Reebok.
Adidas partly attributes Reebok’s nose-diving orders decline to the uncertainty and speculation that spread in the U.S. market about the future of the brand over the last months. Some retailers feared that, as part of the integration, the Reebok brand would be downgraded. Foot Locker apparently halted all Reebok orders until the situation became clearer. Since its formal acquisition of Reebok in January, Adidas has ardently spread the message that it has no intention of taking Reebok down-market, and it is confident that it has been heard.
Adidas is equally quick to dismiss the alarming order figures as unreliable. Managers are confident that the sales downturn will not be as dramatic as the fall in orders suggest, partly because Reebok is strong in at-once sales of licensed apparel. Adidas estimates that Reebok’s sales, which will be consolidated from the beginning of February, will reach about €2.8 billion for the remaining 11 months of the calendar year.
Adidas managers went out of their way to reassure the market that they would firmly handle the downturn. More exciting products are already in the pipeline for the second half of the year, they claim, adding that Reebok will fully benefit from Adidas’ development strengths and marketing insights by next year. One of the crucial measures highlighted by Adidas for the shake-up at Reebok is a more selective distribution strategy in the USA.
The results of The Hockey Company are still carried under the Reebok brand. In the USA, Reebok’s sales of footwear fell by 14 percent in dollars, partly offset by a 12 percent increase for apparel. On the other hand, sales of Reebok branded apparel in the rest of the world remained more or less flat in dollars for the quarter, while footwear grew by 3 percent, with respective gains of 4 percent and 8 percent in constant currencies. At Rockport sales were off by 2 percent in dollars globally, while the Greg Norman line saw its sales jump by 5 percent for the quarter.
The Reebok group’s gross margin rose by 1 percentage point to 39.5 percent in the fourth quarter, but this was mainly due to currency effects. Its margin is bound to remain lower than that of Adidas in the mid-term due to the predominant share of its sales in the USA, where margins are tighter. The American company’s net income remained more or less stable at $47.4 million for the quarter.
For the full year, Reebok’s sales slipped by 0.3 percent to nearly $3,772 billion, down by 1 percent in constant currencies. The sharp fall in quarterly footwear sales in the USA dragged the full-year tally down by 7 percent for the Reebok brand in dollars, but U.S. apparel sales rose by 9 percent. Then again, footwear was ahead abroad with a sales increase of 8 percent, while apparel inched up by 1 percent. Rockport’s sales were down 1 percent for the full year, against a 14 percent rise for Greg Norman. Gross margins crept up by 0.4 percentage points to 41 percent of the group’s sales for the year, and Reebok’s net income reached $245.4 million, up by more than 27 percent.
Reebok’s acquisition will obviously lift Adidas’ group sales by double-digit rates this year, to bring the group total above the sales threshold of $10 billion. However, Reebok’s lower gross and operating margins should push the combined group margins down to between 44 and 46 percent of sales, while operating margins should be around 9 percent.
On the profit side, Reebok’s acquisition will have some negative impact in the short term due to additional interest expenses and a one-off loss on accounting changes which caused a gap between the valuation of Reebok’s assets against the price paid. However, Reebok’s net earnings should still weigh more than these two factors, and therefore the Reebok deal should immediately add to the new group’s profits this year.
Details on the integration of Reebok will be unveiled at an analysts’ conference in London on April 11. Meanwhile, an Adidas executive, Thomas Vondran, has been appointed as vice president and general manager of Reebok Central Europe following the resignation of Hans-Hermann Deters who is leaving the German-based post after 13 years with the company for personal reasons. Vondran, former sales manager of Adidas’ Area Central, has been involved in the integration process for Reebok in Europe.
