Adidas Group sales declined 8% on a currency-neutral basis in the second quarter of 2009 due to sales declines in all segments with the exception of TaylorMade-adidas Golf. Currency-neutral adidas segment revenues decreased 9%. Growth in North America and in Latin America was offset by declines in most major European and Asian markets.
The Groups gross margin decreased 5.1 percentage points to 45.0% in the second quarter from 50.1% of sales in Q2 last year as a result of higher input costs, currency devaluation effects, in particular related to the Russian ruble, as well as a highly promotional retail environment. As a result of the lower gross margin as well as higher other operating expenses as a percentage of sales the Groups operating margin decreased 5.3 percentage points to 2.9% in the second quarter of 2009 versus 8.2% in the prior year.
Adidas Group operating profit decreased 66% to 72 million ($98 mm) versus 208 million ($325 mm) in 2008. In the second quarter of 2009, the Groups net income attributable to shareholders decreased 93% to 9 million ($12 mm) versus 116 million ($181 mm) in Q2 2008 mainly due to the Groups lower operating profit. Diluted earnings per share for the second quarter declined 90% to 0.06 (8 cents).
“The impacts of the economic downturn and repercussions on consumer spending are well documented and certainly continued to influence our performance in the second quarter”, commented Herbert Hainer, adidas Group CEO and Chairman. “However, the good news is that we did not see any fundamental deterioration in our business since publishing our first quarter results. Our financials for the first half of 2009 are exactly in line with the guidance we provided in May if not a little better. As a result, I believe we have seen the bottom in our financial performance this year.”
In the first half of 2009, Group revenues decreased 7% on a currency-neutral basis, as a result of lower sales in all business segments. The adidas brand segment decreased 8%, the Reebok segment decreased 6% and the TaylorMade-adidas Golf segment dipped 1%. Currency translation effects positively impacted sales in euro terms. Group revenues in euro terms declined 2% to 5.03 billion ($6.72 bn) in the first half of 2009 from 5.14 billion ($7.87 bn) in 2008.
Currency-neutral adidas Group sales declined in all regions except Latin America in the first half of 2009. Group sales in Europe decreased 8% on a currency-neutral basis, due to declines in most major countries impacted by the non-recurrence of strong prior year sales related to the UEFA EURO 2008. In North America, Group sales declined 10% on a currency-neutral basis due to declines in both the U.S. and Canada, a result of lower consumer demand and clearance of excess inventories. Sales for the adidas Group in Asia decreased 9% on a currency-neutral basis, as a result of declines in Japan and China. In Latin America, sales grew 24% on a currency-neutral basis, with double-digit increases coming from most of the regions major markets, supported by the new Reebok companies in Brazil/Paraguay and Argentina.
In euro terms, sales in Europe decreased 9% to 2.14 billion ($2.86 bn) in the first half of 2009 from 2.35 billion ($3.88 bn) in 2008. Sales in North America grew 1% to 1.17 billion ($1.57 bn) from 1.16 billion ($1.78 bn) in 2008. Revenues in Asia grew 3% to 1.25 billion ($1.66 bn) in the first half of 2009 from 1.21 billion ($1.59 bn) in 2008. Sales in Latin America grew 16% to 443 million ($591 mm) from 381 million ($583 mm) in the prior year.
The gross margin of the adidas Group decreased 4.6 percentage points to 45.1% in the first half of 2009 versus 49.6% in H1 2008, due primarily to higher input costs, currency devaluation effects, in particular related to the Russian ruble, as well as a highly promotional retail environment.
The operating margin of the adidas Group decreased 7.0 percentage points to 2.6% of net sales in the first half of 2009 versus 9.5% of sales in the year-ago period. The operating margin decline was due to the decrease in Group gross margin as well as higher other operating expenses as a percentage of sales. Other operating expenses as a percentage of sales increased 2.7 percentage points to 44.3% in the first half of 2009 from 41.7% in 2008, mainly as a result of higher expenses to support the Groups development in emerging markets.
Group operating profit decreased 74% to 129 million ($172 mm) versus 490 million ($750 mm) in 2008.
Income before taxes (IBT) as a percentage of sales decreased 7.4 percentage points to 0.7% in the first half of 2009 from 8.1% in 2008, a result of the Groups operating margin decrease and higher net financial expenses. IBT for the adidas Group declined 91% to 37 million ($49 mm) from 419 million ($641 mm) in 2008.
The Groups net income attributable to shareholders decreased 95% to 13 million ($17 mm) in the first half of 2009 from 286 million ($438 mm) in 2008. The Groups lower operating profit was the primary reason for this decline. The Groups tax rate increased 35.3 percentage points to 66.8% in the first half of 2009 (2008: 31.5%), mainly due to a less favorable regional earnings mix.
Basic earnings per share decreased 95% to 0.07 (9 cents) in the first half of 2009 versus 1.42 ($2.17) in 2008. The weighted average number of shares used in the calculation of basic earnings per share decreased to 193,515,512 in the first half of 2009 (2008 average: 200,415,758) due to the share buyback program from January to October 2008. Diluted earnings per share in the first half of 2009 decreased 93% to 0.10 (13 cents) from 1.35 ($2.07) in the prior year. The weighted average number of shares used in the calculation of diluted earnings per share was 209,259,974 (2008 average: 216,211,434).
Group inventories increased 13% to 2.04 billion ($2.87 bn) at the end of June 2009 versus 1.81 billion ($2.85 bn) in 2008. On a currency-neutral basis, inventories grew 8%, due mainly to accelerated product shipments to Brazil and Argentina due to the threat of higher import tariffs. Lower customer demand compared to the Groups expectations when planning production for the first half of 2009 and the consolidation of the Ashworth business since November 2008 also contributed to the increase.
At the end of June 2009, Group receivables increased 5% to 1.73 billion ($2.43 bn) 1.64 billion ($2.59 bn) versus the comp period in 2008. On a currency-neutral basis, receivables grew 4%, reflecting slower receipt of payments due to the difficult economic situation in most markets.
Net borrowings at June 30, 2009 amounted to 2.73 billion, which represents an increase of 472 million, or 21%, versus 2.26 billion at the end of June 2008. Higher working capital requirements were the main reason for the net debt increase. In addition, since June 30, 2008, cash in an amount of 136 million has been used for the share buyback program. Currency translation effects negatively impacted net borrowings by an amount of 110 million. Consequently, the Groups financial leverage increased to 85.7% at the end of June 2009 versus 82.3% in the prior year.
adidas Group sales are expected to decline at a low- to mid single-digit rate on a currency-neutral basis in 2009. The Group projects a low- to mid-single-digit sales decline on a currency-neutral basis for the adidas brand in 2009. Reebok segment sales are now expected to decline at a low- to mid-single-digit rate compared to the prior year on a currency-neutral basis in 2009. Currency-neutral sales at TaylorMade-adidas Golf are forecasted to increase at a low-single-digit rate, supported by the consolidation of Ashworth for the full twelve-month period.
In 2009, the adidas Group gross margin is forecasted to decline. A promotional environment in mature markets, as well as expected higher sourcing costs due to increased raw material and wage costs will contribute to this development. Currency devaluation effects, in particular from the depreciation of the Russian ruble, are expected to also have a significant negative impact on gross margin development in 2009. The Groups other operating expenses as a percentage of sales are expected to increase in 2009. Costs related to restructuring activities as well as higher expenses for controlled space initiatives in the adidas and Reebok segments will drive this development, partially compensated by positive effects from efficiency improvements throughout the organization.
As a result of the expected Group gross margin decline and the projected increase in other operating expenses as a percentage of sales, the operating margin for the adidas Group is expected to decline. The adidas Group expects earnings per share to be significantly more positive in the second half of 2009 compared to the development in the first half year. Profitability will improve compared to the first half year as a result of a more moderate increase of input costs and positive impetus ahead of the 2010 FIFA World Cup. However, earnings per share in the second half of the year will not reach the levels achieved in the second half of the prior year. Tight working capital management and disciplined investment activities are expected to help optimize the Groups free cash flow in 2009. Excess cash will largely be used to reduce net borrowings, which are forecasted to be below the prior year level at year-end.
Herbert Hainer stated: “Although there are still challenges ahead, I am confident that our results will improve as we go through the remainder of the year. We expect to generate significantly positive earnings per share in the second half of the year, albeit below the record levels of the prior year. And we will make further progress on our inventories, setting our Group up for a fresh start to an event-filled 2010.”
