Adidas AG reported a narrower net loss in its fourth quarter, benefiting from sharply lower goodwill impairment charges, as well as higher net sales. Currency-neutral sales rose 12 percent in the period but only 3 percent on a recorded basis. Adidas also issued fiscal 2014 earnings and sales forecast, noting that the results would continue to be significantly impacted by currency movements.

Q4 2013 highlights:

  • Currency-neutral Group sales increase 12 percent
  • Group sales grow in all regions, channels and brands
  • Adidas and Reebok brand sales increase 10 percent and 9 percent currency-neutral,
  • respectively
  • Comparable Retail store sales up 3 percent currency-neutral

Full year 2013 highlights:

  • Currency-neutral Group sales up 3 percent on a currency-neutral basis
  • Gross margin improves 1.5pp to 49.3 percent
  • Goodwill impairment in an amount of €52 million ($7.14 mm)
  • Operating margin excluding goodwill impairment improves to 8.7 percent
  • Earnings per share excluding goodwill impairment increase 6 percent
  • to a record level of €4.01
  • Net cash position of €295 million ($405.2 mm) at year-end
  • Management to propose dividend of €1.50 per share

Outlook

  • Group results in 2014 to be significantly impacted by currency movements
  • Currency-neutral Group sales to increase at a high-single-digit rate
  • Operating margin to be at a level between 8.5 percent and 9.0 percent
  • Net income attributable to shareholders to be at a level between
  • €830 million and €930 million

“We
finished 2013 with an exceptionally strong fourth quarter.
Currency-neutral sales grew 12 percent, which was above our
expectations,” commented Herbert Hainer, Adidas Group CEO. “This ensured
that we met our revised full year targets from September, despite a
further worsening of currency exchange rates. In the fourth quarter
alone, negative currency effects cost us 9 percentage points on the top
line.”

Adidas Group currency-neutral sales increase 12 percent in the fourth quarter

In
the fourth quarter of 2013, Group revenues grew 12 percent on a
currency-neutral basis. Currency-neutral sales in Retail and Other
Businesses increased 15 percent and 28 percent, respectively. Sales in
the Wholesale segment grew 8 percent on a currency-neutral basis.
Currency-neutral revenues in Western Europe increased 3 percent,
supported by strong double-digit growth at Reebok and TaylorMade-Adidas
Golf. In European Emerging Markets, currency-neutral sales were up 11
percent as a result of double-digit revenue growth at both Adidas and
Reebok. Group sales in North America increased 14 percent on a
currency-neutral basis, driven by double-digit sales increases at
Adidas, TaylorMade- Adidas Golf and Reebok-CCM Hockey. In Greater China,
Group sales were up 8 percent on a currency-neutral basis, driven by
strong double-digit sales gains at Adidas Originals & Sport Style.
Currency-neutral revenues in Other Asian Markets grew 15 percent, due to
double-digit increases at Adidas and TaylorMade-Adidas Golf. In Latin
America, Adidas Group sales were up 32 percent on a currency-neutral
basis driven by strong double-digit growth at Adidas and Reebok.
Currency translation effects had a negative impact on sales in euro
terms. Group revenues grew 3 percent to €3.479 billion ($4.78 bn) in the fourth
quarter of 2013 from €3.369 billion in 2012.

Fourth quarter
operating margin excluding goodwill impairment improves 2.0 percentage
points The Group’s gross margin decreased 0.1 percentage points to 47.5
percent (2012: 47.6 percent) in the fourth quarter. Gross margin
development was positively impacted by a more favourable pricing,
product and regional sales mix as well as lower input costs during the
fourth quarter. This, however, was more than offset by the negative
effects resulting from a less favourable hedging rate. Group gross
profit increased 3 percent to €1.652 billion ($2.27 bn) (2012: €1.603 billion).
Other operating expenses as a percentage of sales decreased 2.5
percentage points to 46.5 percent (2012: 49.0 percent), as higher
expenditure related to the Group’s expansion of own-retail activities
was more than offset by lower marketing expenditure as well as a
decrease in operating overhead expenses. In the fourth quarter of 2013,
excluding goodwill impairment losses, operating profit increased
significantly to €98 million (134.6 mm) compared to €26 million in the prior year.
This represents an improvement in operating margin excluding goodwill
impairment of 2.0 percentage points. Including goodwill impairment
losses, the Group reported an operating profit of €45 million ($61.8 mm) compared
to an operating loss of €239 million in 2012. Net income attributable to
shareholders excluding goodwill impairment losses amounted to €42
million ($57.7 mm) versus net loss attributable to shareholders of €7 million last
year.

Adidas Group currency-neutral sales grow 3 percent

In
2013, Group revenues grew 3 percent on a currency-neutral basis, as a
result of sales increases in Retail and Other Businesses.
Currency-neutral Wholesale revenues remained stable compared to the
prior year. Group sales were below Management’s initial expectations of
an increase at a mid-single-digit rate. Currency translation effects had
a negative impact on sales in euro terms. Group revenues decreased 3
percent to €14.492 billion ($19.9 bn) in 2013 from €14.883 billion in 2012.

Group sales increase driven by growth in Retail and Other Businesses

In
2013, currency-neutral Wholesale revenues remained stable. While sales
at Reebok grew at a low-single-digit rate, revenues at Adidas remained
at the prior year level. Currency-neutral Retail sales increased 8
percent versus the prior year, as a result of sales growth at both
Adidas and Reebok. Revenues in Other Businesses were up 5 percent on a
currency-neutral basis, driven by sales increases at TaylorMade-Adidas
Golf, Reebok- CCM Hockey and Rockport. Currency translation effects had a
negative impact on segmental sales in euro terms.

Currency-neutral
sales increase in nearly all regions In 2013, revenues in Western
Europe decreased 6 percent on a currency-neutral basis, mainly due to
sales declines in the UK, Italy and Spain. In European Emerging Markets,
Group sales increased 4 percent on a currency-neutral basis as a result
of sales growth in most of the region’s major markets. Sales for the
Adidas Group in North America grew 2 percent on a currency-neutral
basis, due to sales increases in both the USA and Canada. Sales in
Greater China increased 7 percent on a currency-neutral basis.
Currency-neutral revenues in Other Asian Markets grew 5 percent, driven
by strong increases in India, South Korea and Australia. In Latin
America, sales grew 19 percent on a currency-neutral basis with double-
digit increases in most of the region’s major markets, in particular
Argentina, Colombia and Mexico. Currency translation effects had a
negative impact on regional sales in euro terms.

Group gross margin increases 1.5 percentage points

The
gross margin of the Adidas Group increased 1.5 percentage points to
49.3 percent in 2013 (2012: 47.7 percent), above Management’s initial
expectations of between 48.0 percent and 48.5 percent. This development
was due to a more favourable pricing, product and regional sales mix as
well as a larger share of higher-margin Retail sales, which more than
offset the negative effect from a less favourable hedging rate. Gross
profit for the Adidas Group grew 1 percent in 2013 to €7.140 billion
($9.81 bn) versus €7.103 billion in the prior year.

Goodwill impairment in an amount of €52 million

As
a result of the annual impairment test, the Adidas Group has impaired
goodwill and recorded a €52 million ($71.4 mm) pre-tax charge as at December 31,
2013 (2012: €265 million). Within the wholesale cash-generating unit
Iberia, goodwill impairment losses of €23 million ($31.6 mm) were recognised.
Within the retail cash-generating unit North America, goodwill
impairment losses of €29 million ($39.8 mm) were recognised. The goodwill of these
two cash-generating units is completely impaired. The impairment losses
were mainly caused by adjusted growth assumptions and an increase in the
country-specific discount rates. The impairment losses were non-cash in
nature and do not affect the Adidas Group’s liquidity.

Operating margin excluding goodwill impairment improves to 8.7 percent

Group
operating profit increased 31 percent to €1.202 billion ($1.65 bn) in 2013 versus
€920 million in 2012. The operating margin of the Adidas Group improved
2.1 percentage points to 8.3 percent (2012: 6.2 percent). Excluding the
goodwill impairment losses, operating profit grew 6 percent to €1.254
billion ($1.72 bn) from €1.185 billion last year, representing an operating margin
of 8.7 percent, up 0.7 percentage points (2012: 8.0 percent). This is
below Management’s initial expectations of an operating margin
approaching 9.0 percent. The improvement in the operating margin was
primarily due to the positive effects from the increase in gross margin,
which more than offset higher other operating expenses as a percentage
of sales.

Financial income down 28 percent

Financial
income decreased 28 percent to €26 million ($35.7 mm) in 2013 from €36 million in
the prior year, mainly due to a decrease in interest income.

Financial expenses decrease 11 percent

Financial
expenses declined 11 percent to €94 million ($129.1 mm) in 2013 (2012: €105
million). The decrease in interest expenses was the main contributor to
the decline.

Net income attributable to shareholders excluding goodwill impairment up 6 percent

The
Group’s net income attributable to shareholders increased to €787
million ($1.08 bn) in 2013 from €526 million in 2012. This represents an increase
of 49 percent versus the prior year level. Excluding the goodwill
impairment losses, net income attributable to shareholders increased 6
percent to €839 million ($1.15 bn) (2012: €791 million). The Group’s tax rate
decreased 8.0 percentage points to 30.4 percent in 2013 (2012: 38.4
percent), mainly due to lower non-tax-deductible goodwill impairment
losses. Excluding the goodwill impairment losses, the effective tax rate
improved 0.3 percentage points to 29.0 percent from 29.3 percent last
year.

Earnings per share excluding goodwill impairment reach €4.01

In
2013, basic and diluted earnings per share amounted to €3.76 (2012:
€2.52), representing an increase of 49 percent. Excluding the goodwill
impairment losses, basic and diluted earnings per share were up 6
percent to €4.01, which is below Management’s initial projections of
€4.25 to €4.40 (2012: €3.78). The weighted average number of shares used
in the calculation was 209,216,186.

Group inventories up 6 percent

Group
inventories increased 6 percent to €2.634 billion ($3.62 bn) at the end of
December 2013 versus €2.486 billion in 2012. On a currency-neutral
basis, inventories were up 13 percent as a result of the Group’s
expectations for growth in the coming quarters as well as higher
inventories in Russia/CIS due to distribution centre issues during the
second half of 2013.

Accounts receivable increase 7 percent

Group
receivables increased 7 percent to €1.809 billion ($2.48 bn) at the end of
December 2013 (2012: €1.688 billion). On a currency-neutral basis,
receivables were up 17 percent, reflecting the growth of the Group’s
business during the fourth quarter of 2013.

Net cash position of €295 million

Net
cash at Dec. 31, 2013 amounted to €295 million ($405.2 mm), compared to net
cash of €448 million at the end of December 2012, representing a
decrease of €153 million ($210.1 mm). Higher working capital requirements were the
primary drivers of this development. Currency translation had a positive
effect of €3 million ($4.1 mm). The Group’s ratio of net borrowings over EBITDA
amounted to –0.2 at the end of December 2013 (2012: –0.3).

Adidas Group currency-neutral sales to increase at a high-single-digit rate in 2014

Adidas
Group sales are forecasted to increase at a high-single-digit rate on a
currency- neutral basis in 2014. In particular, this year’s major
sporting events will provide positive stimulus to Group sales. As the
Official Partner of the 2014 FIFA World CupTM in Brazil, the Adidas
brand will be the most visible brand during the event and will benefit
from record sales in the football category. Group sales development will
also be favourably impacted by the Group’s high exposure to
fast-growing emerging markets as well as the further expansion of
Retail. Currency translation is expected to have a significant negative
impact on the Group’s top-line development in reported terms.

Net
income attributable to shareholders to be at a level between €830
million and €930 million In 2014, the Adidas Group gross margin is
forecasted to increase to a level between 49.5 percent and 49.8 percent
(2013: 49.3 percent). Improvements are expected in most segments. Group
gross margin will benefit from a positive pricing, product and regional
sales mix, as growth rates in high-margin emerging markets are projected
to be above growth rates in more mature markets. In addition, the
Reebok brand will positively influence Group gross margin development.
However, these positive effects will be partly offset by less favourable
hedging terms compared to the prior year, negative exchange rate
variances in emerging markets such as Russia and Argentina, as well as
increasing labour costs in our cost of sales.

In 2014, the
Group’s other operating expenses as a percentage of sales are expected
to be around the prior year level (2013: 42.3 percent). Sales and
marketing working budget expenses as a percentage of sales are projected
to increase modestly compared to the prior year. Marketing investments
will be centred on major sporting events such as the 2014 FIFA World
CupTM and highly innovative product launches, particularly in the
running category. Further, the Group will support Reebok’s growth
strategy in key fitness categories, leveraging partnership assets such
as CrossFit, Spartan Race and Les Mills. Operating overhead expenditure
as a percentage of sales is forecasted to decrease modestly in 2014.
Higher expenses in the Retail segment due to the planned expansion of
the Group’s store base will be offset by leverage in other areas.

In
2014, the operating margin for the Adidas Group is forecasted to be at a
level between 8.5 percent and 9.0 percent (2013 excluding goodwill
impairment losses: 8.7 percent). The Group tax rate is expected to be at
a level of around 28.5 percent and thus more favourable compared to the
2013 tax rate excluding goodwill impairment losses of 29.0 percent. As a
result of these developments, net income attributable to shareholders
is expected to be at a level between €830 million and €930 million
compared to the 2013 net income attributable to shareholders, excluding
goodwill impairment losses, of €839 million. This represents basic
earnings per share of between €3.97 and €4.45.

Dividend proposal of €1.50 per share

The
Adidas AG Executive and Supervisory Boards will recommend paying a
dividend of €1.50 to shareholders at the Annual General Meeting (AGM) on
May 8, 2014 (2012: €1.35). Subject to the meeting’s approval, the
dividend will be paid on May 9, 2014. This represents an increase of 11
percent compared to an increase of net income attributable to
shareholders, excluding goodwill impairment losses, of 6 percent. The
total payout of €314million (2012: €282million) reflects a payout ratio
of 37.4 percent of net income attributable to shareholders, excluding
goodwill impairment losses, versus 35.7 percent in the prior year. This
is in line with the Group’s dividend policy, where Management intends to
pay out between 20 percent and 40 percent of net income attributable to
shareholders

Hainer stated: “Currency headwinds had a
significant negative impact on our results in euro terms, and this is
also expected to continue in 2014. From an operational perspective,
there is no doubt that 2014 will be a successful year for us. Driven by
our dominant role at the 2014 FIFA World Cup, we will generate
high-single-digit currency-neutral growth in line with our strategic
business plan Route 2015.”