The worst is over, said Herbert Hainer, chief executive of the Adidas Group, in commenting yesterday on the financial results for the third quarter. While he would not discuss order backlogs, he said he was confident that the group would report a profit for the fourth quarter, albeit below the level of last year, and that it will definitely be more profitable in 2010. Analysts are predicting a doubling in net profit for next year.
For the current financial year, the company expects sales to drop by low to mid-single digits on a currency-neutral basis, with similar results for its three major brands, hurt by low demand stemming from low consumer confidence and rising unemployment. The gross margin is forecast to fall to 45.0-45.5 percent, because of higher sourcing costs, a promotional environment and currency devaluation effects, especially with regard to the Russian ruble. The operating margin for the full year is expected to fall to around 5.0 percent.
On the other hand, the financial position of the group is getting much better, with inventories down by 8 percent from a year ago and net debt reduced by 12 percent, helping the group to recover from the steep drops in profits endured in the first half. Overall, sales were down by 7 percent on a currency-neutral basis in the third quarter as well as in the first nine months of this year, but net income was down by only 30 percent to €213 million in the latest quarter, after a drop of 93 percent in the first half.
At constant currencies, the Adidas brand had a sales drop of 6 percent in the quarter as double-digit growth in the Sport Style division and in performance running couldn’t offset declines in other major sports categories. For the first nine months of the year, Adidas’ currency-neutral sales were off by 7 percent, with declines of 8 percent in Europe and Asia-Pacific, and 12 percent in North America, with drops in both the U.S. and Canada, while Latin America was up by 17 percent. Adidas Originals’ revenues were up by 11 percent over the period, thanks in particular to the new Essentials line.
For Reebok, sales were down by 12 percent in constant currencies in the quarter in spite of the acquisition of its distribution in Brazil, Argentina and Paraguay, which boosted brand sales in Latin America by 25 percent for the nine months, in contrast with declines of 9 percent in Europe, 8 percent in Asia and 15 percent in North America.
Reebok has reduced its inventories by 15 percent. While the clean-up efforts are still in progress for Reebok in Spain, China and the U.S., affecting sales results, positive signals were registered in the latest quarter in countries such as Germany, Italy and Japan. The Reebok division contributed an operating profit of €17 million in the quarter, down from €25 million in the same period a year ago, but much better than the losses of €97 million in the first quarter and €51 million in the second one.
Restructuring charges have been lower than expected and more positive results are expected in 2010 from the launch of a wider range of high-margin products on which Reebok has gotten very encouraging feedback from the trade. The brand has expanded its Easytone range, which it is expecting to sell millions of pairs next year. A major advertising initiative has been launched to this effect in the U.S., ahead of a wider brand-building campaign.
Revenues fell by 12 percent on a constant-currency basis at TaylorMade-Adidas Golf in the quarter, due to the difficult market situation and the effect of many new product launches made one year ago. For the nine months, segment sales were down by only 5 percent, with drops of 2 percent in North America and 16 percent in Asia-Pacific partly offset by increases of 19 percent in Europe and 22 percent in Latin America.
Hainer was proud to report that TM reached the No. 1 position in irons in the U.S. for the first time in the latest quarter. He was quite bullish about 2010, considering the fact that the brand’s inventories have been trimmed by more than 30 percent, preparing TM for some major new product launches.
In reported terms, the Adidas Group’s sales dropped by 6 percent to €2.89 billion in the third quarter. The gross margin fell by 3.7 percentage points to 45.3 percent because of higher clearance sales, higher input costs and currency devaluations, especially with the Russian ruble. The operating margin decreased by 3.7 percentage points to 11.6 percent.
Sales in Russia have been positive on a comparable store basis so far this year, but they have been down sharply once they are translated into euros. Large close-out sales in China in the aftermath of the Olympic bubble had only a limited effect on Adidas’ sales in the country, due in part to local competition. They fell below Nike’s recently reported level, but the group is determined to make a strong new statement in China.
The group suffered a comparable sales decline for the quarter in China, contributing to a currency-neutral sales drop of 8 percent for the group in Asia for the quarter. Among its most radical moves, the group will have closed down about 700 under-performing stores in China by the end of the year, most of them trading under the Reebok banner. On the other hand, it will have opened about 500 stores, leading to a net loss of 200 stores, with the count rising slightly for Adidas stores. The opening of a network of factory outlets has helped Adidas to clean up some of its inventories in China, but throughout the market, inventory levels are still unhealthy. The company expects to return to growth in China next year, sticking to its target of reaching group sales of €1 billion by 2010.
An Adidas veteran, Christophe Bézu, is going to move from Hong Kong to Shanghai next January to act as managing director of the Adidas Group for Greater China, reporting directly to Hainer. He will succeed Wolfgang Bentheimer, whose next assignment will be announced in due course. Bézu was most recently head of Adidas Asia, an entity that does not exist anymore, and then he became managing director of Adidas Southeast Asia, a position that is now filled by Ralph Kotterer.
Softened by a sequential improvement from one quarter to the next, the drop in Adidas’ European sales was partly attributable to a comparison with a year marked by the Euro 2008 football championships. Adidas is anticipating a highly positive sales contribution from next year’s World Cup in South Africa, which should already begin to be felt in the current quarter. Six teams sponsored by the Three Stripes participated in the 2006 World Cup in Germany, but this time there will be at least 10.
The situation continued to be rough during the third quarter in North America, where the Adidas group saw its sales decline by 13 percent in constant currencies for the quarter. The back-to-school period did not provide badly needed impetus to the business, and retailers continued to keep a tight rein on their inventories.
In the year to date, the Adidas Group’s gross margin fell by 4.3 percentage points to 45.1 percent. Clearance activity accounted for about 40 percent of the drop. Another 30 percent was attributed to higher sourcing costs, although this effect was weaker in the third quarter and should lessen again in the last quarter. The remaining 30 percent was due to changes in currency exchange rates.
The operating margin was off by 5.8 percentage points to 5.9 percent for the first nine months of this year, due in part to higher expenses to support the group’s development in emerging markets. Net income fell by 62 percent to €226 million.
The group managed to generate €488 million in net cash from operations in the third quarter alone. With net borrowings down to €2.29 billion, the financial leverage has declined to 70.2 percent, and it should fall below 50 percent after the planned early redemption of a €400 million convertible bond next week.
Inventories at the end of September were down by 9 percent to €1.65 billion compared with 2008; on a currency-neutral basis this was a drop of 8 percent. This resulted mainly from reduced production volumes as well as clearance of excess inventories across all brands, though inventories in Latin America did increase.
