Shrinking profit at Adidas Group despite robust demand

The Adidas Group enjoyed robust sales increases in all regions other than North America in the third quarter, where the clean-up of its golf business led to a sharp sales decline at Taylor Made Adidas Golf. Along with unfavorable exchange rates and Russian discounts, the weakness of the group's golf business pushed its margins and earnings down.

The entire group's sales were up by 6.2 percent to €4,118 million for the quarter, which was an increase of 9 percent in constant currencies. While retail sales expanded by 19.8 percent, the group achieved an 8.5 percent increase in wholesale turnover as well. The Adidas brand's turnover jumped by 9.5 percent to €3,364 million for the quarter. The rise of 12.4 percent in constant currencies was driven by the football and running categories, as well as Adidas Originals.

Meanwhile, Reebok enjoyed double-digit sales expansion in all regions other than North America and China. The company said that the Reebok brand remained vibrant in North America but sales had been hit by preparations to close factory outlets. North America still makes up about one third of the Reebok brand's turnover. Reebok's sales have become almost insignificant in China, where Reebok's license with the Pou Sheng was terminated from the start of this year and its distribution returned under the management of Adidas China.

The Reebok brand's turnover improved by 6.6 percent in constant currencies but currency exchange rates reduced the increase to just 1.7 percent in euros to €447 million for the quarter. Reebok's quarterly sales were up by 25 percent in the fitness training category, as well as 30 percent in walking and 52 percent in the studio category, which covers dance and yoga wear. Hainer said this trend should continue, as Reebok broadens its partnership network and product offering to new and upcoming fitness disciplines.

However, quarterly sales shrank by 34.3 percent to €138 million at Taylor Made Adidas Golf, which was a drop of 35.6 percent in constant currencies. The group blamed this on the weakness of the golf market and its own efforts to clean up inventories. The company's golf business was also impacted by a shift in the timing of product launches compared with the previous year.

Reebok CCM Hockey delivered a 14.9 percent sales increase in constant currencies, selling more skates and protective equipment, as well as more hockey apparel. As for Rockport, its sales increased by 4.9 percent in constant currencies.

North America remained the weak spot for the Adidas group. The Adidas brand delivered a mid-single-digit sales increase in constant currencies but that was not sufficient to make up for declines at both Taylor Made and Reebok. The group's North American sales dipped by 1.4 percent in constant currencies for the third quarter, down by 2.1 percent in euros to €801 million.

The group managed a sales increase of 10.5 percent to €1,265 million in Western Europe, amounting to a rise of 9.6 percent in constant currencies. Germany, France, Spain and the U.K. were described as the stand-out countries for the quarter. The Reebok brand's sales were up at a double-digit currency-neutral rate in Western Europe.

Double-digit sales growth in Russia and the CIS countries drove a sales increase of 18.6 percent in constant currencies in the European Emerging Markets region. The group's reported turnover expanded by 7.6 percent to €572 million in the region. Underlining the continued demand for the Adidas brand, its Russia/CIS sales jumped by 13 percent in constant currencies for the quarter and by 17 percent for the year so far. The Reebok brand did even better, with sales up by 24 percent for both the quarter and the nine months.

The group's investments in China continued to pay off, with a quarterly sales increase of 11.5 percent to €517 million, up by 12.7 percent in constant currencies. Most encouragingly, the group's quarterly sales in China jumped by 18 percent on a comparable basis in its own stores. The opening of such stores has been a part of the group's efforts to tighten its grip on sell-out in China and the number has risen to more than 100 stores at the end of quarter.

Double-digit sales rises in South Korea and India contributed most to the 6.0 percent sales increase in constant currencies in other Asian markets. Meanwhile, the group saw its sales rise by 2.4 percent to €429 million in Latin America, but this amounted to an increase of 15.8 percent in constant currencies. Argentina, Brazil and Mexico contributed most of the increase.

The group's gross margin shrank by 1.9 percentage points to 47.4 percent in the quarter, which was attributed to higher input costs and negative currency effects. But the margin was further affected by increased clearance activities, particularly in Russia and the CIS countries.

The gross margin for the Adidas brand dropped by 2.4 percentage points to 46.2 percent in the quarter. The Reebok brand's gross margin shrank even more, down by 3.0 percentage points to 37.4 percent. But the group said that this was all down to the issues in Russia and activities to sharpen the brand's focus on fitness in North America. This meant that the margin was reduced by old footwear closeouts and preparations to rationalize the brand's factory outlets in North America. The plan is to reduce them by 20 percent in the next 12 months.

After two tough quarters, the gross margin almost stabilized at the Other Businesses unit, comprising the Taylor Made brand – down by just 0.1 percentage points to 35.3 percent. The entire group's operating margin was down by 2.1 percentage points to 9.8 percent. Its net income slumped by 10.8 percent to €284 million for the quarter.

For the first nine months of the year, the group's sales inched up by 0.9 percent to €11,116 million, which was an increase of 6 percent in constant currencies, with underlying improvements in all regions other than North America. Currency exchange rates wiped about €550 million from the turnover. Taylor Made Adidas Golf sales were down by 28.9 percent for the nine months, compared with increases of 6.3 percent for Reebok and 10.6 percent for Adidas.

While the year started weakly for Adidas Originals, this product range lifted its sales by 9 percent in the third quarter in constant currencies, with fresh impetus for the Stan Smith as well as the start of collaborations with Pharrell Williams and Rita Ora, among others. Sales of the Neo label expanded by 33 percent in local currencies for the quarter, with more winter products in denim, jackets and footwear.

The group's sales in the football category has expanded by 31 percent in constant currencies so far this year, allowing it to reiterate that it would reach sales of more than €2 billion in football this year. Running was another buoyant category, with sales up by 14 percent in constant currencies for the nine months and even better in the third quarter alone, up by 20 percent. The brand has gained kudos in this category with the Boost technology – the Adizero Adios Boost alone claimed 27 major marathon wins since its launch, including both the male and female winner of the Nov. 2 New York Marathon.

The entire group's gross margin for the nine months was down by 1.3 percentage points to 48.5 percent. While the inventory issues at Taylor Made shrank the gross margin of the Other Businesses unit by 3.9 percentage points to 37.7 percent, the gross margin contracted by 1.4 percentage points to 47.0 percent for the Adidas brand and by 1.4 percentage points to just 38.4 percent for Reebok. The operating profit margin reached 8.3 percent, down by 2.2 percentage points, with an impact from exchange rates and less favorable hedging rates estimated at about €150 million. Net income was reduced by 20.5 percent to €635 million.

The company more or less upheld its guidance for the full year, predicting a sales increase in the mid- to high-single-digit range in constant currencies, driven by football and retail sales. The gross margin should land at about 48.0 to 48.5 percent, which is slightly below the previous forecast of 48.5 to 49 percent and under the margin achieved last year at 49.3 percent. The operating margin is still meant to reach from 6.5 to 7.0 percent, down from 8.7 percent in 2013 excluding goodwill impairment losses for Reebok, while net income should amount to about €650 million, down from €839 million last year, again excluding impairment losses.

Hainer added that he expected growth at a mid-single digit rate in constant currencies for 2015 and earnings growth surpassing the increase in sales. However, the volatility of the Russian ruble and other moving parts made it tricky to come up with any more detailed forecasts. Hainer also declined to comment on reports that it may consider a sale of the Reebok brand.