The mitigated results at Reebok couldn’t overshadow the impressive performance of the Adidas brand in the fourth quarter of 2007. Its sales soared by 26 percent in constant currencies or by 19.6 percent in euros to €1,648 million for the period. The Adidas brand’s gross and operating margins each jumped by more than 3 percentage points.
The brand recorded an eye-popping sales increase of 28 percent in constant currencies in Europe, to €731 million, propelled by higher sales of football products ahead of the European football championships. Adidas’ quarterly sales in North America were flat in euros but they increased by 12 percent in constant currencies.
The Adidas brand therefore ended the year with a sales rise of 7.3 percent to €7,113 million. In constant currencies the increase amounted to 12 percent, which was well above the management target of mid single-digit growth, with positive contributions from each of the brand’s leading categories. Only about 1 percentage point of the increase could be attributed to the transfer of the NBA and Liverpool deals from Reebok to Adidas.
Sales in Adidas’ sports performance business rose by 14 percent in constant currencies or by 10 percent in euros to €5,608 million for the year, while the new Sport Style division chalked up a more modest sales rise of 3 percent in constant currencies. In euros, the revenues of this division declined by 1 percent to €1,455 million.
A currency-neutral sales increase of 8 percent for the Adidas brand in Europe during the year was driven by emerging markets, but many other European countries still performed robustly. For example, sales in Germany were almost stable, even though they had benefited strongly from the football World Cup held in the country the previous year. In reported terms, the European sales of the Adidas brand were up by 7 percent to €3,526 million.
Adidas brand sales in North America managed an underlying sales increase of 5 percent, in spite of the weakness of mall-based retailing in the USA. In reported terms this amounted to a sales decrease of 3 percent to €1,275 million.
Japan was the only Asian country that didn't report double-digit sales growth for the brand. Speedy expansion in China led a regional sales rise of 17 percent for the year in constant currencies, or by 11 percent in euros to €1,703 million.
The gross margin of the Adidas brand climbed by 1.2 percentage points to 47.4 percent, thanks to cost synergies with Reebok and more sales through company-owned stores. Revenues from retailing jumped by 28 percent in constant currencies to €1,229 million, as Adidas opened scores of new stores and enjoyed mid-single-digit sales increases in existing stores. Sales through all these doors made up about 17 percent of Adidas sales in 2007, compared with less than 10 percent in 2002. The brand’s operating margin reached 12.9 percent, up by 1.0 percentage point, which is an all-time high for the Three Stripes.
As for TaylorMade-Adidas Golf, its underlying sales grew beyond the management’s expectations as well. In reported terms they fell by 0.9 percent to €195 million for the quarter, but this was entirely due to the divestiture of the Greg Norman business in November 2006. Excluding this sell-off, the golf segment’s sales grew by 13 percent in constant currencies for the three months.
For the same reason, sales at TaylorMade-Adidas Golf declined by 6 percent for the full year to €804 million, but they increased by 1 percent in constant currencies and, more significantly, they rose by 9 percent on a comparable basis, excluding Greg Norman.
Equipment sales expanded, particularly in the metalwoods category, where the company lifted its market share to over 10 percentage points ahead of its closest competitor. Apparel and footwear stole the show with double-digit growth rates.
The impact of the Greg Norman sale was not so significant in Europe, where TaylorMade-Adidas Golf’s sales rose by 5 percent in constant currencies, fuelled by much higher sales in the UK. In euros this amounted to a sales rise of 3 percent to €95 million. The Greg Norman sell-off was felt a lot more in North America, where the golf segment’s sales fell by 9 percent in constant currencies and by 16 percent in euros to €422 million. Asia and Latin America both performed strongly, with respective sales increases of 20 percent and 32 percent in constant currencies.
The gross margin of the golf business also went up by 0.8 percentage points to 44.7 percent, owing to higher margins on the sales of metalwoods and irons. The sale of Greg Norman was also helpful in terms of margins. On the other end, higher operating expenses depressed TaylorMade Adidas Golf’s operating margin by 0.4 percentage points to 8.1 percent.
Taken all together, the Adidas group’s sales were up by 7.6 percent to €2,419 million for the quarter, equivalent to a rise of 14 percent in constant currencies. Europe put in a sales increase of 11.2 percent to €915 million and Asian sales jumped by 21.4 percent to €639 million, while North American sales dropped by 8.3 percent to €681 million.
The group’s gross margin firmed up, rising by 3.2 percentage points to 46.6 percent for the quarter, with improvements from all sides. One of the specific factors is that the gross margin of 2006 had been depressed by purchase price allocation at Reebok, and that the group is benefiting from cost synergies. They were higher than expected, reaching more than €90 million for the year.
Operating expenses rose to a lesser extent, so that the group’s operating margin increased by 0.2 percentage points to 2.5 percent. Net income landed at €21 million, up by 63 percent compared with the last quarter of 2006.
For the full year, sales increased by 7 percent in constant currencies, ending at €10,299 million, up by 2.1 percent in reported terms. In spite of a very tough comparison for the Adidas brand, Europe still managed a sales increase of 5 percent to €4,369 million, or 7 percent in constant currencies.
Asian sales again grew at double-digit rates, up by 18 percent in constant currencies and by 12 percent in euros to €2,254 million. The Adidas group is adamant that it has become the largest player in the Chinese market if Reebok and Adidas are combined, and that it is progressing toward its target of moving into the lead with Adidas alone in 2008.
Hainer is most upbeat about the group’s partnership with the organizing committee of the Beijing Olympics, and unfazed by recent controversy about the lack of progress in the country’s attitude toward human rights. Steven Spielberg, the acclaimed American film director, stepped down as an adviser to the organizing committee last month because he felt that his collaboration was not contributing to any improvements, and activists have warned that they would target other official partners. Hainer countered that he preferred dialogue to confrontation, and that the Olympics would be instrumental in achieving Adidas’ targeted market leadership in China this year.
The only region that suffered a sales decline at group level was North America, where sales slid by 2 percent in constant currencies and by 9.2 percent in euros to €2,929 million. As outlined above, this could be attributed to the ongoing squeeze at Reebok, as well the overall sluggishness of the market.
Still, the combined business of Adidas and Reebok in North America has not benefited from the relationship between the two brands in any significant way. At the time of the acquisition, in 2005, Adidas and Reebok had a joint US market share estimated at about 20 percent. By the end of 2007 the share stood at about 17.5 percent, with 12.5 percent for Adidas and 5 percent for Reebok.
For roughly the same reasons as in the last quarter, the group’s gross margin climbed by 2.8 percentage points to 47.4 percent for the year. Again, operating expenses rose, due to higher marketing at Reebok and investments in company-owned retail space. Yet this increase only partially offset the higher gross margin, so the group’s operating margin ended at 9.2 percent, up by 0.5 percentage points. The bottom line showed a rise of 14.2 percent in the company’s net income to €551 million. The company will spend some of the money on its own shares, as part of a buy-back program launched earlier this year, and it is suggesting lifting dividends to shareholders by 19 percent.
The current year will be more eventful, and Adidas has already seen benefits from the European football championships in terms of orders. For the full year, it expects overall group sales to rise at a high-single-digit rate in constant currencies, while the gross margin should remain in the range of 47.5 to 48 percent. The operating margin should reach at least 9.5 percent. Net income should grow by at least 15 percent.
Remarkably, the global orders for the Adidas brand were up by a whopping 17 percent in constant currencies at the end of the year, with double-digit increases in all regions except North America. In constant currencies, apparel orders were up by 20 percent, compared with an increase of 13 percent for footwear.
European orders were up by 18 percent, partly on the back of the European football championships, and they jumped by 28 percent in Asia. Orders in North America were off by 2 percent, but this was still better than the scores of many competitors and was entirely due to a somewhat artificial drop of 5 percent in footwear orders. Hainer indicated that this decline could be attributed solely to the company’s decision to tighten the distribution of its best-selling Superstar shoes, by halting deliveries for the first quarter of 2008. Without this effect, Adidas’ orders in North America would have increased. The Superstar will return to American shelves next month, but in a smaller number of stores and at higher price points.
After a promising start, Adidas is expected to lift its sales at a high single-digit rate in constant currencies in 2008, and to continue growth in North America. The company then expects to reap the results of the initiatives taken over the last months by the new chief of Adidas America, Patrik Nilsson, to segment its offering and work more closely with retailers. The strategy implemented for the Superstar will be applied to several other key products.
