Adidas Group Hikes Full Year Guidance on Stellar First Quarter

Net income grew 24.5 percent as operating expense leverage and growth in the higher-margin retail segment helped offset rising sourcing costs and a hike in marketing expenses. Citing strength in emerging markets, retail expansion as well as continued momentum at both the Adidas and Reebok brands, the company raised its outlook for the year.  Adidas Group now expects full-year sales to increase at a high-single-digit rate on a currency-neutral basis. Previously, the Group projected mid- to high-single-digit sales growth.

In reporting euro terms, Group revenues grew 22.4 percent to €3.27 billion ($4.47 bn) in the first quarter.

Currency-neutral Wholesale revenues increased 18.3 percent due to double-digit sales growth at both Adidas and Reebok. Standing out was North America, surging 31 percent; and Greater China, up 39 percent. In euro terms, wholesale sales grew 22.2 percent to €2.3 billion ($3.17 bn).

By brand, Adidas Wholesale first quarter sales increased 17 percent on a currency-neutral basis, with Adidas Sports Performance expanding 16 percent, and Adidas Sport Style increasing 21 percent.  Reebok Wholesale sales grew 26 percent currency-neutral, driven by Running and Training.

Gross margin for the wholesale segment was stable at 43.1 percent. A more favorable product mix, fewer clearance sales and shifts within the regional sales mix boosted margins. The wholesale segment’s operating margin added 1.5 percentage points, to 34.6 percent.

In the Retail segment for the Adidas and Reebok brands, currency-neutral comps jumped 17 percent during the quarter. Including new store openings, revenues grew 22 percent in currency-neutral terms.

 

 

All geographies contributed to the gains, led by 39 percent growth in European Emerging Markets, thanks to strong double-digit growth in Russia from both Reebok and Adidas stores, and 33 percent in Latin America. Retail revenues in Western Europe grew 12 percent on a currency-neutral basis, primarily due to growth in Germany, France and Italy.  North America owned-retail sales grew 13 percent currency-neutral for the quarter, due to double-digit growth in the U.S. market. Currency-neutral owned-retail sales in Greater China increase 19 percent on a currency-neutral basis, while sales in Other Asia Markets grew 4 percent in currency-neutral terms, with growth in South Korea offset in part by declines in the Japan market.  The Reebok brands owned-retail business reportedly grew at a double-digit rate in Japan.
By concept, all formats increased at double-digit rates, with Concept Stores and Factory Outlets growing 25 percent and 16 percent, respectively, on a currency-neutral basis. In euro terms, Retail segment revenues grew 25.7 percent to €577 million ($789 mm).

Retail gross margin improved 300 basis points, to 61.2 percent, supported by improvements at all store formats and both major brands. Reebok, in particular, saw a 7 point improvement in retail gross margins. At quarter-end, the Group operated 2,297 stores, a net increase of 27 versus December last year. The retail segment’s operating margin improved 4.2 percentage points  to 15.4 percent of sales.

Revenues in the Groups Other Businesses segment were up 14.3 percent currency-neutral, driven by a 20.5 percent sales increase at TaylorMade-adidas Golf.

Company CEO Herbert Hainer said TaylorMade benefited from a “very successful” launch of the R11 driver.

 

Hainer added that they have become “more cautious” on growth prospects for TaylorMade since Japan accounts for about 20 percent of the brand’s sales. Sales at Reebok CCM Hockey were flat, while Rockport sales were down 5.8 percent currency-neutral.
In euro terms, Other Businesses revenue jumped 19.1 percent to €376 million ($514 mm). TaylorMade sales grew 26.2 percent to €281 million ($384 mm), Rockport slid 3.0 percent to €54 million ($74 mm) and Reebok/CCM Hockey grew 4.7 percent to €22 million ($30 mm).

Segmental operating margin declined 0.9 percentage points, to 28.1 percent of sales, as higher gross margins were more than offset by increased operating expenses to roll out Rockport stores in the U.S. and Russia.

By region, sales for the Adidas Group in North America grew 25.7 percent currency-neutral, driven by a 30 percent increase for Adidas and 22 percent for Reebok. In euro terms, revenues grew 28.4 percent to €751.6 million ($1.03 bn).

“The performance of Adidas in America demonstrates the marriage of the strategies we are now executing to close, to get to our major competitor,” said Hainer on the call. “Running, Basketball and Originals, Adidas in the U.S. is on fire.  Hainer said running sales were up 65 percent in the quarter.

Revenues in Western Europe increased 13.8 percent currency-neutral, primarily as a result of double-digit sales growth in all major markets, in particular, Germany and France, as well as double-digit growth for Adidas and Reebok. In euro terms, sales grew 15.8 percent to €1.09 billion ($1.50 bn).

Sales in Greater China increased 36.0 percent on a currency-neutral basis and 43 percent in euro terms to €284 ($388 mm).
“Fresh inventory in the market, as well as strong demand in the expansion of Adidas Sport Style presence, where sales grew 51 percent in the quarter, contributed to the improvement,” said Hainer.

In European Emerging Markets, sales increased 26 percent currency-neutral. In Russia and the other CIS (Commonwealth of Independent States) countries, sales climbed 44 percent. Same-store sales at Adidas owned-retail stores, which represent the majority of its business in the region, jumped 37 percent in the quarter. In Euros, sales advanced 27.7 percent to €370 million ($506 mm). Currency-neutral revenues in Other Asian Markets grew 7 percent due to increases in most markets, in particular South Korea. In euro terms, sales increased 16.3 percent to €446 million ($610 mm).

In Latin America, sales grew 15 percent currency-neutral, led by double-digit growth for the Adidas brand. In euro terms, Q1 sales grew 21.0 percent to €328 million ($448 mm).

 

Breaking out the Adidas brand overall, sales in euros rose 22.1 percent to €2.44 billion ($3.33 bn). The 18 percent currency-neutral gain was boosted by 50 percent gain in Sport Performance, with all major categories showing double-digit growth. Adidas Sport Style was up 27 percent in currency-neutral terms. Led by adiZero F50 Runner and ClimaCool Ride, the Running category was up over 30 percent in the quarter.

Hainer said AdiZero Rose and the Crazy 8 have provided some “much needed momentum” in Basketball footwear and “significant interest” is expected for its June launch of the adiZero Crazylight, touted as the lightest basketball shoe ever at 9.8 ounces. Outdoor was up 25 percent due to market share gains in key markets, as well as expansion in emerging markets while Training was also strong.

Football (Soccer) was flat despite going against the 2010 World Cup, driven by a 34 percent increase in footwear sales due to popularity of the adiZero F50 boot. For the second half, a highly-anticipated launch will be an interactive boot featuring Adidas miCoach technology.

Also boosting the brand was the March launch of the All In Adidas campaign that for the first time combined both the Performance and Sports Style segments of the brand. From its launch on March 16 to the end of April, Adidas gained 3.2 million new fans on Facebook, and now has over 16 million fans across all categories. It also saw an increase of 26 percent in traffic to the adidas.com website.

“In the coming months,” added Hainer. “I am convinced the impact of this campaign will only get stronger, which is very important at a time when driving brand desirability is so crucial, given the backdrop of increasing prices.”

The Reebok brand’s overall sales in euros were up 26.9 percent to €477 ($652 mm). In home-country U.S. dollar terms, total Reebok brand sales increased 20.4 percent for the quarter.
The 24 percent currency-neutral growth follows a dramatic rebound that only started last year, when Reebok resumed growth with 1 percent currency-neutral growth in Q1 2010. The 22 percent gain for Reebok in North America was actually exceeded by growth of more than 25 percent in Western Europe, European Emerging Markets, and Other Asian Markets. Gross margins for Reebok grew almost a percentage point, to 37.2 percent of sales.

Toning continued to be a growth driver globally due to international expansion. In North America, Hainer noted that “the good news for Reebok is that sales of our toning collections continues to be very good, and we are liquidating product faster than our main competitor in stores where we are competing.”
ZigTech drove North American growth and demand remains “extremely strong.” Hainer pointed out that almost three-quarters of the customized shoes being created on YourReebok.com are Zig-related.

He added that initial sales of RealFlex, its minimalist running shoe offering, in its first two weeks at retail “has been very encouraging and I am convinced that RealFlex has all the potential to become another hit for Reebok.” A Classic Lite collection will be launched in the U.S. this summer to support the Reebok Classics business.

With the brand anniversarying its global toning push in the second quarter, Reeboks pace of growth will “moderate briefly” until new concepts build speed. Said Hainer, “I am sure these new initiatives will provide plenty of new impetus to growth as we get into the second half of 2011.”

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First quarter gross margin for Adidas Group eased 10 basis points to 48.5 percent of sales. Higher sourcing costs depressed gross margins by a little over 1 percentage point but those pressures were largely offset by growth in its Retail segment, fewer clearance sales, and the over-proportionate growth in higher-margin markets such as Greater China and Russia.

Excluding the positive impact of a lawsuit settlement in the 2010 period, operating margin was up around a percentage point on a comparable basis. With the aid of sales leverage, operating expenses, as a percentage of sales were down 1.5 percentage points to 40.0 percent despite 25 percent hike marketing spend to support its All Adidas campaign.

Hainer warned that sales in Japan could decline by 15 percent to 25 percent over the nine months from April to December, leading to a potential “significant double-digit million euro” profit hit.  Japan contributes a high-single-digit percentage of Group sales.
Hainer also said it has started the company has started to selectively increase prices “on a very small basis,” to offset rising costs and will continue to do so over the next six to 12 months across various categories depending on competitor’s moves and its own pricing leverage.

“There is not one starting point, and there is not one across the board price increase,” said Hainer. “We are looking very carefully into it, when, by how much we can increase our prices.”