Sales decline at Adidas, but margins improve

Struggling against soft market conditions in Europe, a declining golf market in the U.S., adverse currency fluctuations and tough comparisons with the pre-Olympic and pre-Uefa period of a year ago, the Adidas Group saw its total revenues decline by 4 percent to €3,383 million in the second quarter ended June 30.

However, sales remained stable overall on a currency-neutral basis for the company, with higher retail sales offsetting lower wholesale revenues. E-commerce sales jumped by 79 percent, topping €100 million for the first time in a six-month period. The group opened 248 stores and closed 152 stores during the first half, ending up with a total of 2,542 stores and 749 factory outlets.

More importantly, the group was able to raise its gross margin by 1.8 percentage points to 50.1 percent in the quarter, with retail margins rising by 2.5 percent to 65.4 percent. The operating margin improved marginally from 7.3 to 7.4 percent and net income went up by 4 percent to €172 million for the quarter. The operating margin was an even better 9.7 percent for the first half of the year, in spite of higher sales and marketing expenses, helping to boost net profit by 6 percent to €480 million for the period. Net debt wa down by 70 percent to only €94 million as compared to a year ago.

For the first half of the year, sales were down by 3 percent in reported terms, but the gross margin was up by 2.1 percentage points to the same level of 50.1 percent. Herbert Hainer, chief executive of the group, said the improvement in gross margins was the financial highlight of the period. It was due to better inventory management, the addition of new stores and higher prices charged for new products, among other factors.

The rise of the euro against many important currencies and an unfavorable hedging rate for the U.S. dollar had a negative double-digit effect on the group's results in the first half, and the currency situation may even get worse in the second half, said the company's chief financial officer, Robin Stalker.

On the back of better prospects for the gross margin, which is now budgeted in a range from 48.5 and 49.0 percent for the full year, the management maintains its forecast that the net profit will increase by between 12 and 16 percent this year, up to a range of $890 million to $920 million, even though sales will likely grow less than expected, mainly due to the market situation in Europe.

The operating margin should improve to 9.0 percent for year as compared to 8.0 percent in 2012, excluding goodwill impairment charges. The new sales guidance for the year is a low to mid-single-digit increase on a currency-neutral basis, and the fourth quarter should end up stronger than the third one. The company had previously gone for a mid-single-digit improvement.

As Western Europe benefitted the most from the mega sports events of last year, it was not surprising to see sales fall there by 9 percent in local currencies for the first half of 2013 and by 11 percent in the second quarter. Three percentage points were probably lost because of the absence of the Olympics this year. Double-digit decreases were recorded in the U.K., Spain and Italy, but there were some bright spots such as France, Poland and the Nordic countries. Things have been improving in Western Europe during the second quarter as same-store sales went up by 2 percent after a decline of 4 percent in the first quarter.

Margins improved in Russia and other CIS countries, but sales were down in that region for the quarter and the first half. They were stable in most of the countries in the region on a currency-neutral basis, but they fell by a double-digit rate in Ukraine in comparison last year with the European football championships.

Hainer said that comparative store sales declined in the region because of a cooler consumer environment and the creation of new shopping malls, but the situation began to stabilize in recent weeks, and the roll-out of new products should drive growth there again in the second half. A recently opened 49,000-square-meter distribution center near Moscow will help boost operations.

In North America, sales increased by 1 percent in the first half but were off by 2 percent in the second quarter. The main reason for the decline was the poor performance of TaylorMade-Adidas Golf, due to a more challenging golf market.

In contrast with other brands, the group reported a 6 percent increase in Greater China for the quarter, with comparable store sales up by 11 percent for the second quarter and by 9 percent for the first half. Quoting a recent survey of more than 60,000 consumers in China by Millward Brown, Hainer said that Adidas ranked the highest of all clothing and footwear brands among the 20 international majors.

In other Asian markets, sales increased by 7 percent in the second quarter, after a decline in the first one, thanks to strong growth in South Korea, India and Australia.

Regionally, the best performance occurred in Latin America, where the growth rate accelerated to 21 percent in the second quarter, supported by the Fifa Confederation Cup and investments made in the region ahead of next year's World Cup and the 2016 Olympic Games in Brazil.