With growth accelerating for the Adidas brand in most major markets, Adidas AG reported a 10.4 percent gain in third-quarter profit and raised its full-year revenue, gross-margin and net-income targets.

Earnings in the quarter reached €311 million ($341 million), exceeding Wall Street’s average estimate of €301 million.
Revenues grew 13 percent on a currency-neutral basis, driven by strong momentum for both performance and lifestyle products for the Adidas brand but also steady growth at Reebok. On a reported basis, sales grew 17.7 percent to $4.76 billion ($5.19 billion), the highest quarterly turnover Adidas AG has ever generated.

While Western Europe and China drove much of the top-line growth, particularly encouraging was the resumption in sales growth in the North American region, led by double-digit gains for Adidas brand. TaylorMade-Adidas Golf, which Adidas is exploring selling, also saw some recovery in sales but it was against easy comparisons. Adidas AG officials announced plans to eliminate another 14 percent of the brand’s workforce.

On a conference call with analysts, CEO Herbert Hainer linked the improvement at Adidas and Reebok to an almost 20-percent increase in brand investments in the nine months. The investments supported several campaigns and the major signings of Manchester United, Aaron Rodgers of the Green Bay Packers, and James Harden of the Houston Rockets.

“Both Adidas and Reebok are enjoying great momentum across the globe, as our product and marketing initiatives are resonating extremely well with the respective target audience, both in the lifestyle and the performance arena,”  Hainer said on the conference call with analysts.

The Adidas Brand's global sales were up 14.4 percent on a currency-neutral basis to €4 billion ($4.35 billion), driven by double-digit sales increases in Western Europe, North America, Greater China, Latin America and MEAA. Revenues advanced 19.1 percent on a reported basis. Gross margins for the Adidas brand improved 160 basis points in the quarter.

Hainer said the gains for Adidas brand were achieved despite tough comparisons against Germany’s victory in last year’s World Cup. Global football led the gains for Adidas brand, growing 19 percent with double-digit growth in key markets such as Western Europe, North America and Latin America. The gains were boosted by the introduction of new football footwear franchises, ACE and X. Global football apparel revenues increased at a double-digit rate, driven by the successful launch of partnerships with Juventus Turin and Manchester United.

Said Hainer, “Particularly, teaming up with Man United has yielded unprecedented success so far with both a record-breaking first day and first week launch. Figures in the club's channels delivered over a month's worth of forecasted sales within the first five days.”

Thanks to the Boost franchise, running grew 9 percent for Adidas brand, led by double-digit growth in North America, Greater China and Japan. Year to date, Adidas has sold almost 8 million pairs of Boost running shoes.

In its lifestyle business, “the momentum we are seeing at the Adidas Originals, and also at Adidas NEO is just amazing,” added Hainer. Originals expanded 33 percent in the quarter, representing the third consecutive quarter of double-digit growth. All regions grew double-digits with the exception of Russia/CIS. Added Hainer, “We are seeing unprecedented demand for our major footwear franchises, Superstar, Stan Smith, ZX Flux and Tubular.”

Reebok's sales rose 3.4 percent on a currency-neutral basis in the quarter globally to €476 million ($517.4 million) and advanced 6.6 percent on a reported basis. Hainer said Reebok marked its 10th consecutive quarter of growth, heralding it as “clear testimony that the brand is resonating well with the fit generation.”

With the exception of North America and Russia/CIS, sales increased in all markets, with double-digit growth Japan, EMEA and Latin America. Greater China, although on small scale, doubled in Q3. Revenues in North America continued to be negatively impacted by efforts to streamline its factory outlet business.

“From a category perspective, Reebok's growth during the third quarter is directly linked to key fitness categories, with double-digit growth in the studio category, as well as robust growth in training and running,”  Hainer said. “The classic business continues to show strong momentum and increased at a double-digit rate.”

In North America, sales for the Adidas brand and Reebok were up 6.5 percent on a currency-neutral basis to €776 million ($843.5 million), accelerating from a 2.7 percent gain seen in the first half. Currency-adjusted sales had dipped 0.5 percent in the second quarter. Sales in the latest quarter jumped 25.5 percent on a reported basis.

Adidas brand’s revenues were ahead 11 percent in the region, offsetting declines at Reebok. For the Adidas brand, double-digit increases were seen in running and global football as well as its lifestyle brands. Training, its biggest category in North America grew at a high-single-digit rate.

Said Robin Stalker, CFO, on the call, “There's no question that we are seeing the first positive signs of our turnaround strategy, fueled by strong partnerships such as James Harden, Aaron Rodgers and Kanye West; and our increased visibility in U.S. sports in general, which is clearly helping us to authenticate the brand, vis-a-vis the U.S. consumer.”

Operating profit in North America improved 40.5 percent to €55 million ($59.8 million). Operating margin improved 70 basis points despite further increases in marketing and point-of-sale investments, which grew more than 35 percent in the region in Q3.

Hainer said the Adidas brand has quickly made “major inroads” in the United States over the last couple of months to establish platforms to connect with the U.S. consumer, including grassroots events at the high school and college level and “much higher visibility” in all of the major U.S. sports.

Partnerships with Kanye West and Pharrell Williams are showing that Adidas “is a brand that can make the kids look cool on and off the pitch,” officials said.

At the store level, the Adidas brand has rapidly expanded its A Standard in-store-shops with Foot Locker. The brand also launched 600 soccer shop-in-shop solutions for back to school at Dick’s Sporting Goods, expanding its market share at the sporting goods chain in the category by 10 percentage points in Q3.

Ten HomeCourt stores have already opened as part of a plan to open 55 across the U.S. by the end of 2017. The stores are experiencing “significantly higher than expected sell-through rates due to better in-store communication, improved customer service and superior merchandising.”

Another category seeing momentum is American football, where Adidas brand is seeing significant market share gains.

Said Hainer, “While I am far away from suggesting that we have solved all our problems in the U.S., these examples, just like our performance during the third quarter, clearly prove that we can be successful in the US. And I promise you, we will be.”

In other regions, sales in Western Europe for the Adidas brand and Reebok grew 18 percent on a currency-neutral basis to €1.4 billion ($1.52 billion). Sales gained 20.1 percent on a reported basis.

Adidas brand sales jumped 19 percent in Western Europe on a currency-neutral basis despite tough challenges against year-ago sales from Germany’s World Cup victory in Brazil. Reebok’s sales advanced 6 percent in Western Europe, driven by double-digits increases in the training and studio, as well as high single-digit growth in running. U.K., Italy and France each grew double-digit rates. Western Europe’s operating profits expanded 40.2 percent to € 345 million ($375 million).

In Greater China, sales jumped 15.1 percent on a currency-neutral basis for the Adidas brand and Reebok to €691 million ($751 million). The gains were mainly as a result of 14 percent growth at Adidas Brand although Reebok’s revenues more than doubled. Sales expanded 35.1 percent on a reported basis. For the Adidas brand, double-digit gains were seen in training, running global football, Originals and NEO. Reebok saw growth across key categories.  Operating profits rose 22.1 percent to €225 million ($244.6 million).

Stalker said Adidas’ strong position with both brands in China has placed the company “without a doubt, in a position to withstand the negative trend in the Chinese economy.

Stalker added, “Indeed, we remain absolutely encouraged by the highly visible trend in China towards living a healthier life, as sports participation and the interest in sport in general, continue to trend upwards. With our highly desirable brands, we have the right forces to leverage the values of sport in this growing marketplace.”

In Russia/CIS, sales were down 6.7 percent on a currency-neutral basis for the Adidas brand and Reebok to €195 million ($212 million), sequentially improving versus the second quarter. Sales on a reported basis tumbled 34.1 percent. Operating income in the region slid 53.2 percent to €22 million ($23.9 million).

The sales decline reflected an additional 58 store closures during the quarter, which led to a further 29 percent decrease in operating expenses in the period. Inventory rationalization also remains a focus in the region and Adidas AG was able to reduce its promotional activities to boost full-price sales. Said Stalker, “While we are still waiting for the Russian economy and, indeed, consumer sentiment to start bottoming out, we are right on track with our commitment to keep our Russian operations in profitable territory this year.”

In Latin America, sales on a currency-neutral basis climbed 20.1 percent to €489 million ($531.5 million) as a result of significant double-digit sales growth at both Adidas Brand and Reebok. Sales on a reported basis were up 14.9 percent. Adidas Brand saw double-digit increases in training and global football, as well as at Originals and NEO. Reebok saw double-digit growth in running, training and walking, as well as high single-digit sales growth in classics. Argentina, Mexico, Colombia and Chile led the region. Operating income in Latin America grew 8.6 percent to €61 million ($66.3 million).

In Japan, sales were up 5.8 percent on a currency-neutral basis for the Adidas brand and Reebok to €186 million ($202.2 million) due to mid-single-digit growth at Adidas brand and double-digit increases at Reebok. Sales added 7.4 percent on a reported basis. The Adidas brand was driven by double-digit increases in running and Originals, while running and classics drove Reebok. Operating income in Japan grew 30.5 percent to €37 million ($40.2 million).

In the MEAA (Middle East, Africa and the rest of Asia) region, sales were up 13.5 percent on a currency-neutral basis for Adidas brand and Reebok to €674 million ($732.6 million) and grew 20 percent on a reported basis. The gains reflected double-digit sales growth at both the Adidas brand and Reebok. The Adidas brand's gains were led by double-digit gains in Originals, NEO and global football, a well as high-single run growth. Reebok was led by classics, training and running. Double-digit growth was seen in South Korea, the United Arab Emirates, South Africa and Australia. Operating earnings in MEAA increased 10.6 percent to €206 million ($223.9 million).

In its Other Businesses segment, sales grew 10.3 percent on a currency-neutral basis to €342 million ($371.8 million) and gained 18.1 percent on a reported basis.

Taylor-Made sales rose 6.5 percent on a currency-neutral basis to €159 million ($172.8 million) and climbed 15.4 percent on a reported basis. Reebok-CCM Hockey grew 9.1 percent on a currency-neutral basis to $112 million and added 18.6 percent on a reported basis. Adidas AG’s other centrally managed businesses grew 17 percent in currency-neutral terms.

The segment reduced its operational loss to $23 million from $34 million. The reduction reflects gross margin improvements at TaylorMade following the healthier top-line development, as well as lower levels of promotional activity.

Hainer said TaylorMade benefited from Jason Day's win at the PGA Championship and the launch of the M1 club line. The M1 has been “very well received so far” with Q4 launch quantities already sold out. Soft goods sales for TaylorMade grew in the high-single digits, reflecting strength in its Boost franchise.

Hainer said that while the gains for TaylorMade reflect “a cleaner trading environment and first operational improvements, it is, to a large degree, also the result of easier comparisons with the prior year.” Adidas' golf sales were down 34 percent in the year-ago period.

As such, TaylorMade is still pressing ahead with its restructuring plan despite its hiring last quarter of Guggenheim Partners to look at options for the unit, including a sale. The review is expected to conclude by the first quarter of 2016.

“No matter what the outcome of the strategic review will be, we continue to press ahead with our far-reaching restructuring plan,” said Hainer on a call with reporters. “We're working on more than 40 different initiatives.”

As part of this, TaylorMade will reduce its global workforce by 14 percent, or about 200 positions, by the end of the year. While this will negatively impact the Adidas AG’s profitability by a low-double-digit million euro amount in the fourth quarter, the result will be “a more nimble organization which will have a positive impact on the Group’s profitability from 2016 onwards,”  Hainer said.

Companywide, gross margins in the quarter increased to 48.4 percent from 47.4 percent, driven by the positive effects from a more favorable pricing and channel mix, partly offset by higher input costs, negative currency effects as well as a less favorable product mix.

As a percentage of sales, other operating expenses was essentially flat at 38.8 percent against 38.7 percent as the sales leverage offset an increase in sales and marketing investments as well as higher operating overhead costs.
Adidas AG’s operating margin was up 70 basis points to 10.6 percent.

Looking ahead, Adidas AG said that due to the strong momentum at both Adidas and Reebok, it now expects currency-neutral sales to increase at a high-single-digit rate in 2015, up from a mid-single-digit rate previously. Group sales development will be driven by double-digit increases in Western Europe, Greater China and MEAA. Latin America’s currency-neutral sales are now projected to increase at a high-single-digit rate, up from mid-single digit previously while currency-neutral sales in North America are now expected to grow at a mid-single-digit rate, up from low- to mid-single-digit previously. Sales at Reebok-CCM Hockey are now projected to grow at a high-single-digit rate on a currency-neutral basis, up from a mid-single-digit rate.

Gross margins are now expected to range between 48 percent and 48.5 percent, up from 47.5 percent and 48.5 percent previously. The change reflects a more favorable pricing and product mix at both Adidas Brand and Reebok together with a better channel mix.

Adidas AG’s other operating expenses as a percentage of sales are now expected to increase moderately in 2015 versus being flat previously due to the layoffs at TaylorMade and increased marketing and point-of-sale investments to leverage current momentum in Adidas Brand and Reebok.

Net income from continuing operations excluding goodwill impairment is now projected to increase at a rate of around 10 percent, up from previous guidance calling for an increase at a rate of between 7 percent and 10 percent.

Adidas also released initial guidance for the full year 2016. The company expects currency-neutral sales to increase at a high-single-digit rate in 2016. It said it planned to increase pricing to balance out the negative impact from any increased material costs.

Finally, Adidas AG said it would extend the contract of Roland Auschel, head of global sales and a candidate to succeed Hainer, by three years to 2019. The contract of Eric Liedtke, another director considered a candidate for the top job, expires in March 2017, as does Hainer's.

–Tom Ryan