Adidas Group Positive While Posting Q3 Declines

Company chairman and CEO Herbert Hainer pointed to the generation of almost €740 million in net cash from operations over the last six months as a key indicator — and promised that they weren’t done for the year.  Despite the weak outlook for the top-line and bottom-line, the results helped push adidas shares up nearly 5% for the week.

Third quarter currency-neutral sales for the adidas Group decreased 7%, or a 6.3% decrease in euro terms. Europe currency-neutral revenues were down 7% in the quarter, which management called a “strong sequential improvement versus the second quarter decline of 12%.” The improvement was said to be mainly driven by sequentially improving sales declines in the Brand adidas business, and continued growth in the TaylorMade-adidas Golf segment. Retail markets in Western Europe were said to “remain very tough.”  In Russia, the Group saw sales in Russian ruble terms decelerate in the third quarter and currency effects from the devaluation of the Russian ruble were again a drag on reported revenues — and profitability.

adidas Group North American revenues declined 13% in currency-neutral terms in the third quarter as the back-to-school season failed to “provide any positive stimulus to an already fragile market.” 

 

Management said the focus in America this year has been on “maintaining and improving brand equity, while limiting the adverse effect of promotional market conditions.” Management pointed to double-digit inventory declines for all brands in the region as evidence of their new discipline there.

In Asia, Group third quarter sales declined 8% in currency-neutral terms as growth in India, South Korea, and Australasia was not enough to offset declines in Japan and China.                                       

In China, Pump store sales were said to be under pressure as “consumer demand has not yet really picked up.”  Management said the Asian market “continues to suffer from high levels of inventory” and the Group has made “good progress in clearing excess inventory of retail” with an “extensive factory outlet network” now in place. By the end of this year, several hundred unproductive adidas and Reebok franchisee stores will be closed.  Still, the adidas store base in China will still increase slightly year-over-year.

Latin America currency-neutral revenue growth was pegged at 11% on a currency-neutral basis for the quarter.

adidas Group revenues are still expected to decline at a low- to mid single-digit rate on a currency-neutral basis for the full year, which would be an improvement from the 7% currency-neutral decline for the first half and nine-month year-to-date periods.  In explaining the rationale for the decrease management pointed to weaker consumer spending for to low levels of consumer confidence and rising unemployment in many major markets. 

 

Europe is expected to be impacted by the lack of a major sporting event this year to offset the gains in 2008, while rising unemployment and tighter credit markets were highlighted when discussing the weaker North American market.  The Group is also expecting a decline In Asia after a “more difficult-than-expected” first half.  China growth is expected to moderate across the industry, according to adidas Group, as all brands fail to anniversary the high sell-in rates and “exceptional high rate of retail expansion last year due to the Beijing Olympics. 

 

Japan sales are expected to decline and the Group is expressing concerns about Latin America due to increasing trade barriers that could “dampen growth prospects for the remainder of the year.”
Brazil and Argentina have recently implemented import duties on footwear from China, with Brazil implementing a preliminary anti-dumping duty of $12.47 per pair on footwear made in China.  Management suggested that while a sizeable share of their products in these markets are sourced locally, the duties are expected to have an immediate negative impact on Group gross profitability — and potentially also on sales growth.

The Group is projecting a low- to mid-single digit sales decline on a currency-neutral basis for both the adidas brand and Reebok segment for the year.  Currency-neutral sales at TaylorMade-adidas Golf are forecast to increase at a low-single digit rate, driven by the consolidation of Ashworth for the full twelve-month period.                                                 

At Brand adidas, total sales in euro terms decreased 4.8% to €2.11 billion ($3.02 bn) in the third quarter from €2.22 billion ($3.34 bn) in Q3 2008, but declined 15% when excluding the change in currency exchange rates.

Owned-retail was one of the few positive bright spots for the adidas brand for the quarter, increasing 7.5% in euro terms to €428 million ($612 mm) in Q3 from €398 million ($600 mm) in the year-ago period.  Still, the owned-retail gains moderated a great deal for the period as the rate of growth — which was driven by new store openings — was halved versus the year-ago quarter and the second quarter.  For the third quarter, owned-retail accounted for 20% of brand sales, compared to 18% of sales last year.  For the first nine months of the year, comparable store sales declined in the high-single-digits — a sharp reversal from H1 and year-ago periods.  Brand adidas Q3 revenues would have decreased 7.5% without the benefit of the owned-retail growth.

The Sport Performance category slowed its declines in the third quarter versus the Q2 decrease.  For the third quarter, Brand adidas Sport Performance sales — which represented 78% of Brand adidas sales — increased 10.7% to €1.64 billion ($2.34 bn), compared to €1.76 billion ($2.64 bn) in the year-ago period.  For the first nine months of the year, all major product categories saw sales declines, with football (soccer) “strongly impacted” by the inability to anniversary against the Euro 2008 Championships last year.  Sales in performance running grew in the high-single digits for the Q3.

Regarding basketball, Hainer appeared to accept the current environment for the category for the brand.  On the quarterly conference call with analysts, he said the category wasn’t in a declining mode, but “definitely not an increasing mode overall around the world.”  He also said the “category is not big enough,” going on the say, “If a category is not big enough and is not growing, then it is not one of our main categories in the moment.” Sport Performance sales for the first nine months of 2009 declined 10% on a currency-neutral basis, compared to the 19% currency-neutral increase in the year-ago comp period.

adidas Sport Style revenues again posted healthy growth for the third quarter, up 7.1% to €485 million ($693 mm) compared to €453 million ($683 mm) in Q3 last year. Sport Style represented 23% of sales for the quarter versus 20% in the year-ago period.  Sales for the nine-month YTS period grew 11% for the Sport Style business, driven by the recently-launched Style Essentials collection, as well as all other Sport Style categories.

On a regional basis, Brand adidas sales were a mixed bag when measured in euros.  Sales were down 8.3% in Europe to €1.09 billion ($1.55 bn) from €1.18 billion ($1.78 bn) in the year-ago period.  In North America, Brand adidas sales declined 6.9% in euro terms to €297 million ($424 mm) from €319 million ($481 mm) in Q3 last year. Currency fluctuations were actually beneficial to the brand this year as North America sales fell 11.7% for the quarter when measured in U.S. dollars.  Asia/Pacific sales were up 2.4% for Q3 in euro terms to €510 million ($729 mm) from €498 million ($750 mm) in the year-ago quarter. The adidas store base in China is still expected to “increase slightly year-over-year.” Brand adidas sales to Latin America totaled €199 million ($284 mm) for the quarter, up 4.7% from €190 million ($286 mm) in Q3 last year.

Brand adidas gross margin declined 260 basis points to 47.1% of sales from 49.8% for the year-ago quarter.  Higher input costs and the Russian ruble were said to be responsible for more than two-thirds of the margin decrease, with the higher clearance sales accounting for the remainder.

Operating profits for brand adidas fell 15.0% to €373 million ($533 mm) in the third quarter from €439 million ($661 mm) in Q3 last year.
                                                                                       

 

Reebok segment third quarter revenues decreased 11.1% when measured in euros and fell 15.7% when measured in home country U.S. dollars.  Sales declined 12% on a currency-neutral basis.  Sales in North America, which represents 45% of total Reebok segment sales,  declined 14.7% to $383 million (€268 mm) from $449 million (€298 mm) in the year-ago period when measured in U.S. dollars.  Sales in North America declined 10.1% when measured in euros. Europe sales declined 14.3% in euro terms to €191 million ($273 mm) from €223 million ($336 mm) in Q3 last year, but declined 14.8% when measured in U.S. dollars.  Latin America sales fell 12.8% in U.S. dollar terms to $74 million (€97 mm) from $112 million (€74mm) in the year-ago period, or an 8.1% decline in euro terms.  Asia revenues decreased 14.8% in U.S. dollars to $89 million (€69 mm), compared to $104 million (€69 mm) in third quarter 2008.

Reebok owned-retail revenues partly offset the sharper declines in the wholesale business, with retail posting a 4.4% increase for the quarter in euro terms.  In U.S. dollar terms, owned-retail dipped 0.9% to $169 million (€118 mm), representing 20% of Reebok segment sales in the third quarter compared to 17% in the year-ago period. Excluding owned-retail, Reebok segment sales decreased 19% in U.S. dollar terms to $676 million (€473 mm). Reebok sales excluding owned-retail declined 14.3% in euro terms.

Reebok brand sales were $669 million (€468 mm) in the third quarter, a 16.6% decline in U.S. dollar terms to $802 million (€532 mm) in the year-ago period, representing a 12.0% decrease in euro terms. 
Rockport brand revenues decreased 12.1% in U.S. dollar terms to $90 million (€63 mm) for the quarter versus $102 million (€68 mm) in the year-ago period. For the nine-month year-to-date period, Rockport currency-neutral sales declined 8%.

Reebok-CCM Hockey turned negative versus a flat quarter last year, declining 12.6% in U.S. dollar terms to $90 million (€63 mm) in the third quarter from $96 million (€64 mm) in Q3 last year.  Sales were down 7.4% when measured in euros. Currency-neutral sales decreased 6% for the year-to-date period.

Reebok segment gross margins declined 170 basis points for Q3 to 34.7% of sales from 36.4% of sales in Q3 last year.  The decline was on top of a 380 basis point decline in the year-ago period.
Reebok segment operating profit fell 35.5% in U.S. dollar terms to $24 million (€17 mm), compared to $38 million (€25 mm) in the prior-year third quarter. In euro terms, operating profits fell 32.0% for the period.

TaylorMade-adidas Golf segment currency-neutral revenues fell 12% for the third quarter.  In home currency U.S. dollar terms, net sales decreased 11.4% to $263 million (€184 mm) from $297 million (€197 mm) in Q3 last year.  The segment got a small lift from the Ashworth business that was acquired in November 2008.  Ashworth contributed approximately $10 million (€7 mm) for the period.  Excluding Ashworth, TM-aG sales were down 14.8% for the quarter in U.S. dollar terms, or a 10.2% decline in euro terms.

Sales in North America declined 15.3% in U.S. dollar terms to $119 million (€83 mm) from $140 million (€93 mm) in the year-ago period. North America comprised 45% of sales for the period.  Asia/Pacific, the second-largest region with 42% of total sales, posted a 12.0% decrease in U.S. dollar terms to $110 million (€77 mm) from $125 million (€83 mm) in Q3 last year.  Europe sales increased 21.2% in U.S. dollar terms to $33 million (€23mm), a 27.8% in euro terms, and  Latin America revenues jumped nearly 90% to $3 million (€2 mm)

TM-aG gross margins declined 350 basis points to 39.1% of sales in the third quarter, compared to 42.6% of sales in the year-ago period.The TaylorMade-adidas Golf segment swung to an $6 million (€4 mm) operating loss in the third quarter, compared to an operating profit of $17 million (€11 mm) in the 2008 third quarter.