Adidas AG reported revenue growth accelerated in the fourth quarter, led by China and North America, prompting the company to upgrade its profitability target for 2020.

Major Developments in FY 2017:

  • Currency-neutral revenues increased 16 percent
  • Operating margin increased 1.2pp to 9.8 percent
  • Net income from continuing operations grew 32 percent to €1.430 billion
  • Basic EPS from continuing operations increased 31 percent to €7.05
  • Management proposed dividend of €2.60 per share

Outlook:

  • Currency-neutral sales to increase by around 10 percent
  • Operating margin to increase to between 10.3 percent and 10.5 percent
  • Net income from continuing operations to increase between 13 percent and 17 percent
  • 2020 profitability target upgraded: Net income from continuing operations now expected to increase between 22 percent and 24 percent on average per year (2015-2020)

“2017 was a strong year–financially and operationally. We made great progress toward achieving our mission to be the best sports company in the world. Our strategic growth areas–North America, Greater China and Digital Commerce–were the main drivers of our performance,” said adidas CEO Kasper Rorsted. “2018 is a key milestone on the road to achieving our long-term targets for 2020. We expect quality growth, with over-proportionate bottom-line improvements. This will enable an even stronger increase in profitability by 2020 and allows us to upgrade our long-term target yet again.”

Financial Performance in 2017

Currency-Neutral Sales Increase 16 Percent in 2017

In 2017, asdidas delivered another year of strong performance, increasing currency-neutral revenues by 16 percent. This development mainly reflects an 18 percent increase at brand adidas, which was mainly driven by double-digit sales increases in the running category as well as at adidas Originals and adidas neo. In addition, high-single-digit sales increases in the training category also contributed to this development. Revenues at the Reebok brand grew 4 percent, driven by double-digit sales increases in Classics as well as low-single-digit growth in the running category. While the brand’s international revenues grew at a double-digit rate in 2017, sales in the U.S. declined, reflecting the significant amount of store closures in the market. From a channel perspective, the company’s revenue growth was driven by double-digit increases in all distribution channels, with particularly strong support from e-commerce, where revenues grew 57 percent. In euro terms, sales for the company were up 15 percent to €21.218 billion in 2017 (2016: €18.483 billion).

Double-Digit Growth in Almost All Regions

On a currency-neutral basis, the combined sales of the adidas and Reebok brands grew at double-digit rates in nearly all regions. Growth in the company’s key regions, Greater China and North America, was particularly strong, with currency-neutral sales increases of 29 percent and 27 percent, respectively. While currency-neutral revenues in Western Europe increased 13 percent, sales in Latin America were up 12 percent. Currency-neutral revenues in MEAA and Japan increased 10 percent each. Sales in Russia/CIS declined 13 percent, reflecting the ongoing challenging consumer sentiment, as well as additional store closures during the year.

Operating Margin Increases 1.2 Percentage Points to 9.8 Percent

The company’s gross margin increased 1.2 percentage points to 50.4 percent (2016: 49.2 percent). This development was due to the positive effects from a better pricing and product mix, which more than offset negative currency effects as well as higher input costs. While other operating income declined 49 percent to €133 million (2016: €262 million), reflecting the non-recurrence of two one-time gains in 2016, other operating expenses were up 13 percent to €8.882 billion (2016: €7.885 billion). This development reflects an increase in marketing expenditure as well as higher operating overhead expenditure.

As a percentage of sales, however, other operating expenses decreased 0.8 percentage points to 41.9 percent (2016: 42.7 percent). The company’s operating profit grew 31 percent to €2.070 billion (2016: €1.582 billion), representing an operating margin increase of 1.2 percentage points to 9.8 percent (2016: 8.6 percent). The company’s tax rate in 2017 reached a level of 33.0 percent, representing an increase of 3.5 percentage points compared to the prior year level of 29.6 percent. This development was solely driven by a negative one-time tax impact in the amount of €76 million, reflecting a revaluation of the company’s U.S.-deferred tax assets, which became necessary following the implementation of the US tax reform.

Excluding this negative, non-cash-relevant tax impact, the company’s tax rate decreased 0.3 percentage points to 29.3 percent. Excluding the negative one-time tax impact, net income from continuing operations increased 32 percent to €1.430 billion (2016: €1.082 billion). Basic EPS from continuing operations increased 31 percent to €7.05 from €5.39 in 2016. Losses from discontinued operations, mainly related to the divestiture of the TaylorMade and CCM Hockey businesses, amounted to €254 million (2016: €62 million). As a result, net income attributable to shareholders, excluding the negative one-time tax impact, grew 15 percent to €1.173 billion (2016: €1.017 billion), resulting in basic EPS from continuing and discontinued operations of €5.79, up 14 percent compared to €5.08 in 2016.

Average Operating Working Capital as a Percentage of Sales Decreases

At the end of December 2017, inventories decreased 2 percent to €3.692 billion (2016: €3.763 billion). On a currency-neutral basis, inventories grew 4 percent. Inventories from continuing operations increased 2 percent (+8 percent currency-neutral). Average operating working capital as a percentage of sales from continuing operations decreased 0.7 percentage points to 20.4 percent (2016: 21.1 percent), reflecting the strong top-line development during the last twelve months as well as the company’s continued focus on tight working capital management.

Net cash Position of €484 Million

Net cash amounted to €484 million, representing an improvement of €587 million compared to the prior year (2016: net borrowings of €103 million). This development was driven by the increase in cash generated from operating activities as well as proceeds arising from the disposal of TaylorMade and CCM Hockey, partly offset by the utilization of cash for the purchase of fixed assets as well as the dividend paid to shareholders and the repurchase of adidas AG shares. In addition, the conversion of convertible bonds into adidas AG shares also contributed to this improvement.

Strong Focus on Driving Shareholder Return

As a result of the strong operational and financial performance in 2017, the company’s strong financial position, as well as management’s confidence in adidas’ short- and long-term growth aspirations, the executive and supervisory boards will recommend paying a dividend of €2.60 per dividend-entitled share to shareholders at the Annual General Meeting on May 9, 2018. This represents an increase of 30 percent compared to the prior year dividend (2016: €2.00) and a payout ratio of 37.1 percent (2016: 37.4 percent) of net income from continuing operations excluding the negative one-time tax impact in 2017. This is within the target range of between 30 percent and 50 percent of net income from continuing operations as defined in the company’s dividend policy. In addition, adidas decided to launch a multi-year share buyback program of up to €3.0 billion in total until May 11, 2021. Starting on March 22, the company plans to buy back shares worth up to €1.0 billion in 2018. Both the company’s dividend policy as well as the share buyback program reflect adidas’ commitment to sustainably creating long-term value for its shareholders.

Financial Performance in the Fourth Quarter of 2017 

Currency-Neutral Sales Increase 19 Percent in the Fourth Quarter of 2017

During the fourth quarter, adidas revenues increased 19 percent on a currency-neutral basis, driven by a 22 percent increase at brand adidas. This development reflects strong double-digit sales growth in the running, football and outdoor categories as well as at adidas Originals and adidas neo. In addition, a mid-single-digit sales increase in the training category also contributed to this development. Revenues at the Reebok brand declined 1 percent, as double-digit increases in the running category as well as in Classics were more than offset by declines in the training category. In euro terms, sales for the company were up 12 percent to €5.056 billion in 2017 (2016: €4.500 billion).

Strong Double-Digit Growth in Key Regions

On a currency-neutral basis, the combined sales of the adidas and Reebok brands grew at particularly strong rates in Greater China (+32 percent) and North America (+31 percent). In addition, currency-neutral revenues in Western Europe (+17 percent) and Latin America (+19 percent) also increased at double-digit rates. While currency-neutral revenues in MEAA increased 7 percent, sales in Japan were up 4 percent. Currency-neutral sales in Russia/CIS declined 14 percent.

Operating Margin Increases 1.7 Percentage Points to 2.6 Percent

The company’s gross margin increased 2.2 percentage points to 51.7 percent (2016: 49.5 percent), mainly due to the positive effects from a better pricing and channel mix. Other operating expenses were up 13 percent to €2.559 billion (2016: €2.265 billion). This development reflects a significant increase in marketing expenditure as well as higher operating overhead expenditure. As a percentage of sales, other operating expenses increased 0.3 percentage points to 50.6 percent (2016: 50.3 percent).

The company’s operating profit increased strongly to €132 million from €41 million in 2016, representing an operating margin increase of 1.7 percentage points to 2.6 percent (2016: 0.9 percent). Excluding the negative one-time tax impact of €76 million, net income from continuing operations increased to €72 million (2016: €4 million). Basic EPS from continuing operations increased to €0.35 from €0.02 in 2016. Losses from discontinued operations amounted to €38 million (2016: €14 million). As a result, net income attributable to shareholders, excluding the negative one-time tax impact, grew to €34 million (2016: net loss of €10 million), resulting in basic EPS from continuing and discontinued operations of €0.17, compared to a loss of €0.05 per share in 2016.

Outlook

Changes to Segmental Reporting

To sustainably win the consumer in the dynamic Asian business environment and to provide consumers with a consistent best-in-class brand experience across all channels and markets, the company aims at further driving simplicity and consistency across Asia. In this context, effective January 1, 2018, adidas has consolidated its former four Asia/Pacific markets Greater China, Japan, South Korea and Southeast Asia/Pacific to one operating segment, Asia/Pacific. As a consequence and from the first quarter of 2018 onwards, in the company’s financial reporting, the combined operating activities of the adidas and Reebok brands are divided into the six market segments, North America, Asia/Pacific, Western Europe, Latin America, Emerging Markets and Russia/CIS.

Adidas Expects Strong Top- and Bottom-Line Expansion in 2018

The company expects sales to increase at a rate of around 10 percent on a currency-neutral basis in 2018. Currency-neutral revenues are projected to grow at double-digit rates in North America and Asia/Pacific, while currency-neutral sales in Western Europe and Latin America are forecast to improve at a mid-single-digit rate each. In addition, currency-neutral revenues in Emerging Markets are expected to grow at a low-single-digit rate. Currency-neutral sales in Russia/CIS are projected to be around the prior year level.

The company’s gross margin is forecast to increase up to 0.3 percentage points, to a level of up to 50.7 percent (2017: 50.4 percent). This, together with a forecast decline in other operating expenses as a percentage of sales, is expected to drive an increase in operating profit of between 9 percent and 13 percent. Consequently, the company projects the operating margin to increase between 0.5 and 0.7 percentage points to a level between 10.3 percent and 10.5 percent (2017: 9.8 percent). Net income from continuing operations is projected to increase to a level between €1.615 billion and €1.675 billion. This development reflects an increase of between 13 percent and 17 percent compared to the prior year level of €1.430 billion, excluding the negative one-time tax impact recorded in 2017. Basic EPS from continuing operations is expected to increase at a rate between 12 percent and 16 percent compared to the prior year level of €7.05, excluding the negative one-time tax impact in 2017.

Long-term profitability target upgraded

Following the strong operational and financial performance in 2017, the company has also upgraded its 2020 profitability target. While adidas continues to forecast currency-neutral revenues to grow between 10 percent and 12 percent on average per year between 2015 and 2020, the company now projects net income from continuing operations to grow by an average of 22 percent to 24 percent per year (previously: 20 percent to 22 percent) between 2015 and 2020. As a result, the company now expects to reach an operating margin of up to 11.5 percent by 2020 (previously: 11 percent).

The full release is here.

Photo courtesy Adidas