The Adidas Group blazes ahead

The Adidas Group blazed ahead in the opening quarter of this year, carried by soaring demand for its sneakers and the run-up to the European football championships.

Herbert Hainer, the group's chief executive, said in a conference call that Adidas “flew off the starting blocks.” The performance was supported by Creating the New, a five-year strategy that Adidas started implementing last year. Another change was the adoption of a harmonized business structure and strategy in Europe, which clearly started to pay off in 2015 and allows Adidas to take advantage fully of the increased demand through key accounts.

The group's sales jumped by 16.8 percent to €4,769 million for the quarter, up by 22 percent in constant currencies. Its turnover was up at double-digit rates in all markets other than Russia and the CIS countries.

The Adidas brand alone saw its sales soar by 20.4 percent to €4,036 million, which was a rise of 25.5 percent in constant currencies. Originals surged by 45 percent in constant currencies, driven by the Superstar, the Stan Smith and the NMD, which has been the focus franchise for the quarter.

But the group was eager to emphasize that sales soared in performance sports categories as well, starting with an increase of 25 percent for football. While the rise was buoyed by football shirts, the company said it achieved double-digit sales increases for football footwear, which is a stronger underlying factor and a rewarding improvement after the overhaul of its range in 2015.

The Adidas brand's running products delivered a sales increase of 19 percent, driven by the Boost products. Hainer said that this range, which has been at the center of legal quarrels with Puma, makes up about one third of the brand's running footwear business. Sales of training products jumped by 15 percent.

The quarter marked the takeoff of the Adidas brand's sales in North America, where sales of three-striped products were up by 31 percent in dollars for the quarter. While there has been much talk of Kanye West and Stan Smith, Hainer said the increase was driven by both fashion and performance products. The brand's U.S. sports business increased by more than 50 percent, while training and running brought in double-digit sales rises.

The Reebok brand's sales inched up by 1.0 percent to €416 million in reported terms but they were up by 6.5 percent in constant currencies, with increases in training and Classics.

Reebok's turnover advanced at double-digit rates in Western Europe, China, Latin America, Japan and the Middle East, Africa and other Asian markets. However, its sales tumbled by 13 percent in North America, where the brand remains under pressure and is busy cleaning up its outlet stores.

The Adidas and Reebok brands together raised their sales by 24.7 percent in Western Europe in constant currencies, driven by increases in the U.K., Germany, Italy, France and Poland. Along with a 26 percent rise at Adidas, Reebok's sales were up by 15 percent. Other outstanding rises came in at 21.6 percent in North America, 30.2 percent in China and 44.4 percent in Japan.

The growth of 18.7 percent in Latin America was driven by Argentina, Mexico, Chile and Brazil.  When it comes to the Middle East, Africa and other Asian markets, the underlying sales growth of 17.2 percent combined a high single-digit increase in Korea with double-digit improvements in Australia, Turkey and the United Arab Emirates. The two brands jointly managed to return to growth in Russia and the CIS countries, with sales up by 1.8 percent in constant currencies.

Hainer pointed out that the five key markets of the group's strategic plan delivered sales rises in the double-digit rates. He said that this expansion was sustainable and predicted double-digit growth for each of them for the full year.

Sales in the TaylorMade Adidas Golf (TMAG) segment slipped by 1.4 percent in constant currencies, but Hainer emphasized that the decline was entirely due to the Ashworth and Adams Golf brands, while TaylorMade and Adidas Golf raised their sales. The remark was particularly relevant in the context of the group's confirmed intention to focus its golf business on Adidas-branded apparel and footwear, as detailed below.

Reebok CCM Hockey's sales were also down for the quarter, but due to increased business with other centrally-managed brands, the Other Businesses segment still reported a sales increase of 5.5 percent in constant currencies.

The Adidas Group's gross margin was up by 0.3 percentage points to 49.4 percent for the quarter, owing to price increases and in spite of unfavorable currency exchange rate changes and lower margins in the golf business. Excluding goodwill impairment charge of €18 million taken in the first quarter of 2015, the operating profit margin advanced by 1.8 percentage point to 10.3 percent, thanks also to lower operating expenses as a percentage of sales.

Excluding goodwill impairment charges for the same quarter in 2015, the group's net income from continuing operations climbed by 37.6 percent to €350 million, and adding discontinued operations it moved up by 46.9 percent to €351 million.

As previously reported, the performance encouraged the group to raise its forecast for sales and profit in the full year. Hainer reiterated upon the presentation of the quarterly results that sales are projected to grow at about 15 percent in constant currencies, compared with a previous projection of 10 to 12 percent. The expansion should be supported by double-digit growth in all regions other than Russia and the CIS countries.

The group's gross margin should dip by about 0.5 percentage points to between 47.8 percent and 48.3 percent – compared with the initial forecast of a decline reaching 0.5 to 1.0 percentage points. While sourcing costs are affected by unfavorable exchange rates, their impact should be mitigated by a more favorable mix for the Adidas and Reebok brands, higher product margins for TMAG and the group's higher-margin retail business. Marketing expenses as a percentage of sales should be slightly below the 13.9 percent rate of 2015.

But the guidance for the group's operating margin in 2016 was again altered last week due to the early termination of the Adidas brand's endorsement deal with Chelsea football club. The Adidas group predicts an impact on its net income from continuing operations in the mid-double digit euro range. As compensation for the early termination, the group says it will receive a payment in 2017 that will already add to its profit in the second quarter of 2016. The latest guidance is that the group's operating margin should increase to a level of around 7.0 percent in 2016 and that net income from continuing operations should rise by about 25 percent to some €900 million.