adidas group followed up a strong first quarter with healthy growth in the second, but again saw the stronger dollar eat into top line results. The dramatic UEFA EURO tournament held in Austria and Switzerland helped boost football sales for the company, while TaylorMade-adidas Golf also had a strong quarter, with currency-neutral sales growth, though results decline when measured in euros. However, Reebok remains a bit of a worry as sales declined in euros with backlogs down for nearly every region. Management sees that business finally turning around next year. A large part of that turn-around effort will be the companys owned-retail business, with Reebok opening its second full price retail store in Foxboro, MA last week.
Though adidas for the most part reports only first half results, not often devling into second quarter-specific numbers, the Q2 results can be easily gleaned from a comparison between H1 and Q1 reported figures. The results presented here focus largely on implied second quarter numbers and not figures actually reported by adidas. All numbers in the accompanying charts, however, were supplied by adidas AG.
At Brand adidas, total sales in euro terms increased 11.2% to 1.82 billion ($2.84 bn) in the second quarter of 2008 from 1.64 billion ($2.20 bn) in Q2 2007, but improved 19% when excluding the FX rate impact from the stronger Euro against other currencies.
Owned-retail grew slightly faster than the overall brand, up 12.8% for the period to 343 million ($536 mm) from 304 million ($410 mm) in the year-ago period. The owned-retail increase was again driven by double-digit comparable store sales increases as well as the addition of new stores. For the second quarter, owned-retail accounted for 17% of brand sales, compared to 16% last year.
Brand adidas revenues would have increased 10.7% in euro terms excluding the owned-retail business, much better than the 5.9% growth reported in the first quarter.
The Sport Performance category continued the double-digit growth rate established in the first quarter with a 13.6% increase in Euro terms for the second quarter. For the first half, all major product categories saw sales increase with football (soccer) posting the largest growth fueled by the UEFA EURO 2008 tournament. In euro terms, Sport Performance sales were up 20%. For the second quarter, Sport Performance sales increased 13.6% to 1.49 billion ($2.33 bn) in the quarter, compared to 1.31 billion ($1.77 bn) in the year-ago period.
adidas Sport Style revenues were relatively flat for the quarter at 320 million ($500 mm) compared to 318 million ($429 mm) in Q2 last year. Originals were stable for the first half, after decreasing in Q1, but Fashion sales were up double-digits. First half currency-neutral Sport Style sales increased 1%.
On a regional basis, brand adidas sales when measured in euros increased in the double-digits in all regions except North America, where they were down double-digits. Sales were up 17.8% in Europe to 926 mm billion ($1.45 bn) from 789 million ($1.06 bn) in the year-ago period.
In North America, brand adidas sales dropped 20.6% in euro terms to 243 million ($380 mm) from 306 million ($413 mm) in Q2 last year, reflecting a 7.9% decrease in U.S. dollar terms. Full year sales in North America are expected to remain negative, but management sees a turn-around in 2009 with growth expected then.
Asia/Pacific sales were up 21.7% for Q2 in euro terms to 493 million ($771 mm) from 405 million ($546 mm).
Latin America saw a slowdown from the Q1 trend of 20%+ growth, growing 11.9% for the second quarter in euro terms to 150 million ($235 mm) from 134 million ($1801 mm).
Brand adidas gross margin improved 220 basis points to 48.3% of sales from 46.1% for the year-ago quarter. Management pointed to an “improving regional and product mix, further own-retail expansion and favorable currency movements.” Cost synergies with Reebok were also called out as a continued driver here.
Operating profits for brand adidas, however, decreased 8.4% to 175 million ($274 mm) from 191 million ($258 mm) in the prior year quarter as costs related to UEFA EURO 2008 and the Beijing Olympic increased operating expenses.
Following the strong H1 result, the company raised sales guidance for brand adidas for the full year. At the end of Q1, currency-neutral sales were expected to grow in the high-single-digits for the full year. The company now expects brand sales for the full year to grow in the low-double-digits on a currency-neutral basis. Growth is expected in both the Sport Performance and Sport Style divisions.
Reebok segment revenues decreased 8.8% when measured in euro terms, but did manage to grow 5.8% when measured in U.S. dollars. Sales in North America declined 14.8% to $330 million (211 mm) when measured in U.S. dollars. Europe sales declined 2.6% in euro terms to 147 million ($230 mm) from 151 million ($204 mm) last year. Latin America sales jumped 206% in euro terms to 52 million ($81 mm) from 17 million ($23 mm) last year. Asia revenues were flat at 59 million ($92 mm).
Owned-retail revenues partly offset the sharper declines in the wholesale business, with retail posting a 5.8% increase for the quarter in euro terms. In U.S. dollar terms, owned-retail grew 22.7% to $142 million (91 mm), reflecting an increase in store openings, and represented 19% of Reebok segment sales in the first quarter, compared to 17% in the year-ago period. Excluding owned-retail, Reebok segment sales were up 4% in U.S. dollar terms to $591 million (378 mm), but declined 11.7% in euro terms.
Reebok brand sales were 365 million ($571 mm) for the quarter, representing an 8% decrease in euro terms, but a 6% increase when measured in U.S. dollars. First half Reebok brand sales decreased 1% on a currency-neutral basis mainly due to volume declines in the U.S., the UK and Japan.
Rockport brand revenues decreased 7% in U.S. dollar terms to $88 million (56 mm) for the quarter versus $94 million (70 mm) in the year-ago period. For the first half, Rockport currency-neutral sales declined 9% reflecting the difficult environment at department and mall specialty stores in the U.S.
Reebok-CCM Hockey, which includes the Reebok Hockey, CCM, JOFA, and KOHO brands, jumped 21% in U.S. dollar terms to $75 million (48 mm) in Q2 from $62 million (46 mm) in Q2 last year. However, the growth (+4.3% in euro terms) offset a heavy decline in Q1, which led to first half currency-neutral sales being relatively flat.
Reebok segment gross margins were up 200 basis points for the period to 41.2% of sales.
Management held stead with full year sales for the Reebok segment sales are forecast to grow in the mid- to high-single-digits. Declines in footwear and apparel backlogs were said to be reflective of the “short-term impact of strategic initiatives to revitalize the Reebok brand” in the U.S., UK and Japan. Hardware backlogs were up due to increases at Reebok-CCM Hockey.
For the second quarter, currency-neutral net sales for the TaylorMade-adidas Golf business grew 6% to 226 million ($353 mm) from 239 million ($322 mm) last year. However, sales declined 5% when measured in euros. The divesture of the Maxfli business, which TmaG sold to Dicks Sporting Goods in February (see SEW_0807), negatively impacted Q2 sales by approximately 2 million.
North America sales were up 7% when measured in U.S. dollars to $197 million (126 mm), compared to $185 million (137 mm), in Q2 last year, despite the Maxfli divesture. Sales decreased 8% in euro terms. Europe sales were flat in euro terms at 30 million ($47 mm).
Asia/Pacific sales were up 13% in U.S. dollars to $108 million (69 mm) from $96 million (71 mm) in the year-ago period, but decreased 3% in euro terms. Latin America sales more than doubled in Q2 in U.S. dollar terms, up 132% to $3 million (2 mm).
The company expects TM-aG full year currency-neutral sales to increase in the mid-single-digits.
