adidas Expands Q2 Margins to Post 27% Net Income Gain

The adidas segment set the pace for the Group’s organic sales growth in the first six months of 2007. Currency-neutral adidas revenues increased 9% in the first half of 2007. Currency-neutral sales in the Reebok segment grew 4% driven by the inclusion of January, which was not consolidated in 2006. On a like-for-like basis, comparing sales for the full six-month periods and excluding the transfer of the NBA and Liverpool licensed businesses to brand adidas, however, currency-neutral sales declined by 6% in the first six months of 2007. At TaylorMade-adidas Golf, currency-neutral revenues decreased 3%, negatively impacted by the divestiture of the GNC wholesale business. On a like-for-like basis, sales increased 5%. Currency translation effects negatively impacted sales at all brands in euro terms. adidas sales increased 4% to € 3.454 billion ($4.59 bn) in the first half of 2007 from € 3.308 billion ($4.07 bn) in 2006. Sales at Reebok decreased 1% to € 1.038 billion ($1.38 bn) versus € 1.050 billion ($1.29 bn) in the prior year. TaylorMade-adidas Golf sales declined 10% to € 419 million ($557.1 mm) in 2007 from € 464 million ($570.6 mm) in 2006.

adidas Group sales grew strongly in all regions except North America. This growth was driven by positive development at brand adidas as well as the consolidation of six months of Reebok’s revenues in the first half of 2007 versus only five months in the prior year. adidas Group sales in Europe during the first six months of 2007 grew 7% on a currency-neutral basis. In North America, currency-neutral Group sales declined 3%. Sales for the adidas Group in Asia increased 15% on a currency-neutral basis in the first six months of 2007. In Latin America, currency-neutral sales increased 36% in the first half of the year. Currency translation effects negatively impacted reported revenues in all regions. Sales in Europe increased 6% in euro terms to € 2.116 billion ($2.81 bn) in 2007 from € 2.004 billion ($2.46 bn) in 2006. Sales in North America decreased 10% to € 1.429 billion ($1.90 bn) from € 1.592 billion ($1.96 bn) in the prior year. Revenues in Asia grew 7% to € 1.036 billion ($1.38 bn) from € 964 million ($1.19 bn) in 2006. Sales in Latin America grew 28% to € 310 million ($412.1 mm) from € 241 million ($296.3 mm) in the prior year.

The gross margin of the adidas Group increased by 2.3 percentage points to 47.1% in the first six months of 2007 (2006: 44.8%), driven by improvements in all segments. This mainly reflects first cost synergies resulting from the integration of adidas and Reebok sourcing activities, which positively affected both segments’ cost of sales, as well as the non-recurrence of negative impacts from purchase price allocation in the Reebok segment. A higher gross margin at TaylorMade-adidas Golf also contributed to the Group’s gross margin increase.

The operating margin of the adidas Group declined 0.2 percentage points to 8.5% in the first half of 2007 (2006: 8.6%). This decrease reflects higher operating expenses as a percentage of sales primarily due to one-time costs associated with the Reebok integration. Increased expenses in the Reebok segment for advertising, product development and initiatives to grow the brand in emerging markets also contributed to this development. The operating expense increase more than offset gross profit improvements. As a result, operating profit for the adidas Group declined 1% in the first six months of 2007 to reach € 417 million ($554.4 mm) versus € 420 million ($516.5 mm) in 2006.

Net financial expenses increased 1% to € 73 million ($97 mm) in the first half of 2007 from € 72 million ($89 mm) in the prior year as a result of lower financial income, which was only partly offset by lower financial expenses.

In line with the Group’s operating profit decline, income before taxes for the adidas Group decreased 1% to € 344 million ($457.3 mm) in the first six months of 2007 from € 348 million ($427.9 mm)  in 2006.

The Group’s net income attributable to shareholders increased 3% to € 232 million ($308.4 mm) in the first half of 2007 from € 226 million ($277.9 mm) in 2006. The slight decline of the Group’s operating profit was more than compensated for by lower minority interests. The Group’s minority interests declined by 78% to € 2 million ($3 mm) in the first half of 2007 from € 8 million ($10 mm) last year due to the buyout of the Group’s joint venture partner in Korea, which became effective on September 1, 2006. A lower tax rate, which decreased 0.9 percentage points to 32.0% in the first six months of 2007 from 32.9% in the prior year, also contributed to this development.

In line with the increase of the Group’s net income attributable to shareholders, basic earnings per share also increased 3% to € 1.14 ($1.52) in the first six months of 2007 versus € 1.11 ($1.36) in 2006. Diluted earnings per share in the first six months of 2007 also increased 3% to € 1.09 ($1.45) from € 1.06 ($1.30) in the prior year. The dilutive effect mainly results from approximately sixteen million additional potential shares that could be created in relation to the outstanding convertible bond, for which conversion criteria were met for the first time at the end of the fourth quarter of 2004.

Group inventories decreased 2% to € 1.72 billion ($2.31 bn) at the end of the first half of 2007 versus € 1.75 billion ($2.20 bn) in 2006. On a currency-neutral basis, inventories increased 1%, which is below sales growth expectations for the adidas Group. Group receivables increased 1% (+3% currency-neutral) to € 1.69 billion ($2.28 bn) at the end of the first half of 2007 versus € 1.68 billion ($2.11 bn) in the prior year. This increase is in line with sales growth during the second quarter of 2007.

Net borrowings at June 30, 2007 were € 2.40 billion ($3.23 bn), down 15% versus € 2.83 billion ($3.55 bn) in the prior year. Strong bottom-line profitability and continued tight working capital management were the drivers of this reduction.

adidas backlogs grow 9% on a currency-neutral basis

Backlogs for the adidas brand at the end of June 2007 increased 9% versus the prior year on a currency-neutral basis. This improvement highlights the brand’s strong product pipeline for the second half of the year. First orders for the UEFA EURO 2008™ also positively impacted this development. In euro terms, adidas backlogs grew 6%. Footwear backlogs grew 7% in currency-neutral terms (+5% in euros). A modest decline in North America was more than offset by growth in both Asia and Europe. Apparel backlogs grew 11% on a currency-neutral basis (+ 8% in euros), driven by strong increases in all regions.

Reebok currency-neutral backlogs stable versus prior year

Backlogs for the Reebok brand at the end of the second quarter of 2007 were stable versus the prior year on a currency-neutral basis. In euro terms, this represents a decline of 3%. Footwear backlogs declined 17% in currency-neutral terms (–20% in euros) primarily as a result of lower footwear orders from mall-based retailers in North America in several categories such as Classics and basketball. Apparel backlogs, however, grew by 21% on a currency-neutral basis (+17% in euros), largely driven by strong growth in seasonal categories such as hockey and American football.

adidas Group sales in 2007 are expected to grow at a mid-single-digit rate on a currency-neutral basis. Sales at brand adidas are also expected to increase at a mid-single-digit rate on a currency-neutral basis in 2007. Currency-neutral revenues at Reebok are forecasted to improve at a low-single-digit rate compared to the prior year. Currency-neutral TaylorMade-adidas Golf revenues will increase at a mid-single-digit rate on a like-for-like basis. However, due to the divestiture of the GNC wholesale business in November 2006, reported sales for TaylorMade-adidas Golf will decline compared to the prior year. The Group gross margin is expected to be in the range of between 45 and 47%, driven by underlying improvements in all three brand segments and the non-recurrence of purchase price allocation charges following the Reebok acquisition, which negatively impacted the Reebok gross margin in 2006. The Group’s operating margin is forecasted to be around 9%, which will be modestly higher than in 2006. Net income attributable to shareholders for the adidas Group is expected to grow at a double-digit rate, approaching 15%.