Riding its fifth straight quarter of double-digit revenue growth, Adidas AG reported its first-quarter net profit rose 38 percent to €289 million ($382 million). Particularly strong sales in China and lower borrowing and tax expenses helped to overcome higher raw materials costs.
The strong performance prompted Adidas to raise its outlook for the year, expecting earnings improvement in the range of 12-17 percent instead of 12-15 percent. Sales are expected to increase “at a rate approaching” 10 percent instead of a mid- to high-single digit increase.
Revenues in the quarter rose 14 percent on a currency-neutral (C-N) basis, to €3.8 billion.
By brand, the stars were Adidas, which increased 15.6 percent to €2.89 billion; and TaylorMade-Adidas Golf, which jumped 32.0 percent to €387 million. Reebok-CCM Hockey vaulted 68.8 percent to €38 million, supported by the shift of the NHL license shift from the Reebok brand to Reebok-CCM. Rockport added 7.1 percent to €60 million. The one brand losing ground was Reebok, which slid 7.2 percent to €451 million although it would have grown 10 percent excluding the toning category and changes in its NHL and NFL licensing areas.
One blemish to an admirable report was the admission that “commercial irregularities” had been discovered at its Reebok India business with a potential impact on earlier financial statements by up to €125 million pre-tax. But with the Adidas brand particularly expected to benefit from this summer from both the Olympics and the Euro soccer championship, Adidas officials largely glowed about the company’s strong momentum.
“Looking at the big picture,” said Herbert Hainer, Adidas Group CEO, on a conference call with analysts, “we are right where we want to be. We are maneuvering through the still-challenging economic environment in a diligent way, while at the same time ensuring we capture the opportunities that will deliver on our promise, to secure long-term quality growth and enduring success for our Group.”
The growth was widespread with double-digit increases in Wholesale, Retail and Other Businesses segments.
Wholesale revenues jumped 10.4 percent on a C-N basis to €2.61 billion, due to double-digit sales growth at Adidas as well as growth in all regions except North America. Leading the way was its Other Asian markets and Greater China, which grew 29 percent and 27 percent C-N on a wholesale basis, respectively. Operating profit in the Wholesale segment increased 6.2 percent to €851 million despite gross margins eroding 1.4 basis points to 41.8 percent.
Retail sales increased 16.3 percent on a C-N basis to €693 million, driven by 9 percent comparable store sales growth. The star retail regions were North America, boasting a 17 percent comp gain; and Latin America, scoring a 14 percent comp increase. Operating income in the Retail segment climbed 28.7 percent to €115 million with gross margins improving to 61.5 percent from 61.2 percent.
Revenues in Other Businesses segment (TaylorMade-Adidas Golf, Reebok-CCM Hockey, Rockport) were up 32.0 percent on a C-N basis to €517 million, driven by strong double-digit sales increases at TaylorMade-Adidas Golf and Reebok-CCM Hockey. Excluding NHL license benefit, Reebok-CCM still grew at a strong double-digit rate. Operating profits jumped 39.9 percent to €148 million with the sales gains offsetting a decline in gross margins, down 190 basis points to 43.7 percent.
Among regions, Hainer particularly highlighted the performance in Greater China, North America and Western Europe.
Sales for the Adidas Group in North America grew 11 percent on a C-N basis to €869 million due to strong increases in the U.S. Hainer said sales for the Adidas brand grew 10 percent in the NA region while TaylorMade-Adidas Golf jumped 33 percent. Excluding the impacts from the various NHL/NFL license changes and toning, Reebok’s sales were up 5 percent C-N.
“More importantly, you can see that our presence at retail, particularly in the mall, improves with each and every quarter,” said Hainer. “This is visible in the market share gains of all our brands and validates that our strategies to win over the next generation consumer are in full swing.”
He added, “Adidas, in particular, has seen very strong growth in footwear market share, which now stands at a double-digit level. And sell-in momentum was strong in Q1, with footwear sales up 22 percent.”
Sales in Greater China increased 26 percent on a C-N basis to €385 million. Hainer gave a few reasons he’s convinced Adidas is gaining share in the region. Stated Hainer, “First, because we have rebuilt our business patiently and with discipline since 2009. Second, we have kept a razor-sharp focus on the quality of distribution, optimizing the number and type of stores, as well as their locations. And third, we have refined our product offering, brand marketing, and retail merchandising to match a more sophisticated and mature Chinese consumer.”
He added that feedback from its retail partners in Greater China “clearly shows that Adidas is the brand with the most momentum. This fact is also verified by our own retail store development. The traffic is high and comparable-store sales increased 10 percent in the first quarter.”
Revenues in Western Europe increased 7 percent on a C-N basis to
€1.17 billion despite challenging economies, primarily as a result of sales growth in the UK, Italy, Poland, Spain and Germany. Hainer said Adidas “not only secured but built on the significant market share gains of the last year.” Notable regions were U.K. and Poland, hosts to the Olympics and the Euro 2012 soccer championship, with sales ahead 19 percent and 35 percent C-N respectively.
In other regions, C-N revenues in Other Asian Markets grew 26 percent to €594 million, driven by strong double-digit increases in Japan and South Korea. In European Emerging Markets, Group C-N sales increased 15 percent to €430 million, due to double-digit growth in most of the region’s markets.
In Latin America, sales grew 14 percent on a C-N basis to €372 million, with double-digit increases in most of the region’s major markets.
Commenting on the company’s major brands, Hainer noted that Adidas’ 16 percent C-N gain marked the brands’ eighth consecutive quarter of double-digit growth with double-digit rates increases seen in all regions. Said Hainer, “All of our core categories continued to gain momentum.”
Football (soccer) for the Adidas brand saw sales increase 23 percent with major launches such as Predator Lethal Zones, and the introduction of new jerseys and match balls for the 2012-2013 club season expected to extend its market share lead in the category in 2013. A boost is also expected to come from the European Football Championship, which kicks off in Warsaw on June 8.
Olympic-related product, with the Team GB offering, designed together with Stella McCartney, is “exceeding all of our expectations,” added Hainer.
Running sales for the Adidas brand were up 16 percent, driven by a 40 percent gain in its adiZero offerings as well as new CLIMACOOL Seduction, which helped drive sales in the Adidas brand’s Clima franchises up over 80 percent. Heavy marketing around its “Are You Ready to Run” and “We All Run” themes are planned around the Olympics.
Adidas basketball continued its momentum, increasing 23 percent in the quarter. The adiZero Crazy Light 2 was launched just over a week ago at a $140 price point “as our brand momentum enables us to move up the price level,” said Hainer.
Adidas brand Outdoor’s sales surged 45 percent while Sports Style grew 24 percent. The NEO collection, which is part of the Sports Style segment and targets a young consumer, was up 30 percent in the quarter.
Regarding Reebok, Hainer noted that excluding the impact from shifting the reporting of NHL sales to the Reebok-CCM Hockey segment, the end of the NFL license, and excluding toning, Reebok brand sales increased 10 percent on a C-N basis. He noted that the impact of the lack of the NFL license was “rather small” in the quarter since the contract just ended in March.
He noted that Reebok “has some challenges to overcome in Western Europe this year due to the weak economic environment and as retailers currently focus on the major sporting events,” while adding, “we nevertheless continue to see good progress in most other regions.”
In North America, sales were up 5 percent on a like-for-like basis and excluding toning and profitability improved “markedly” due to a better price mix and an overall stronger product offering. In all other regions, sales were up for the quarter as performance-related offerings like Zig and RealFlex were expanded and new Classic products were introduced.
Gaining some traction, global Classics revenues were up 7 percent C-N.
Hainer noted that these gains helped improve Reebok’s gross margins by 60 basis points in the period. Major product and technology launches are being planned for 2013 to jumpstart growth.
Regarding the irregularities in India, Hainer said the company cannot comment further given the ongoing investigation while noting that the incident has provided an opportunity to restructure an underperforming region for the Reebok brand. Under a new leadership team, which was announced at the end of March, “we will now accelerate and more aggressively restructure our business activities in India, including significant changes to our commercial business practices.”
The implementation of new commercial initiatives and terms could result in a reduction of its Reebok franchisee store base with partners by about one third. These, along with other planned actions, could lead to additional one-time charges in the remaining quarters of 2012 in an estimated amount of up to €70 million. Said Hainer, “Rest assured, our goal is to begin 2013 with a clean sheet in this market.”
Hainer described the quarter’s performance of TaylorMade-Adidas Golf as “simply breathtaking.” Sales grew at double-digits in all club categories, apparel, and footwear, with metal woods up 28 percent and irons growing 64 percent. Its US market share in metal woods reached 50 percent in the quarter with share of irons reaching almost 26 percent. TaylorMade-Adidas Golf doubled its operating profit in the period.
Hainer also said its pending acquisition of Adams Golf will provide Adidas with an even further reach across geographies, products, and customer demographics in the golf category.
“The proposed combination of TaylorMade-Adidas Golf and Adams Golf brings together two highly complementary sets of brands, combining TaylorMade-Adidas Golf's focus on the younger and the low-to-mid handicap golfer with Adams Golf's focus on game improvement, as well as senior and women's golfers,” said Hainer.
Companywide gross margins decreased 0.7 percentage points to 47.7 percent as the increase in input costs more than offset the positive impact from a more favorable product and regional sales mix as well as a larger share of higher-margin Retail sales. The bottom line was helped by the top-line growth as well tight expense controls. The quarter marked the fifth consecutive quarter operating expenses increased at a lower rate compared to sales.
Regarding its raised sales outlook, C-N Wholesale segment revenues are now projected to increase at a mid- to high-single-digit rate, up from mid-single-digit rate previously. Retail segment sales are still projected to grow at a low-teens rate in 2012. Revenues of Other Businesses are now expected to increase at a low-teens rate, up from low- to mid-single-digit rate previously.