Analysts were ecstatic about the surprisingly positive first quarter turned in by the adidas Group that reflected strength in both the Brand adidas and TaylorMade-adidas Golf segments. While currency-neutral revenues jumped 40% when including two months of the Reebok segment, currency-neutral sales excluding Reebok would have still increased 13% for the period. Gross margin declined a bit on the impact of accounting charges related to the Reebok acquisition, but net income from continuing operations still managed to increase 16% to €150 million.

At brand adidas, total sales in Euro terms increased 17.5% to €1.78 billion in the first quarter of 2006 from €1.51 billion in Q1 2005, and still improved 12% when excluding the FX rate impact. The brand saw double–digit sales increases in all regions and across categories. Owned-retail also got into the act, growing 37.5% (+31% currency-neutral) for Q1 to €198 million, or 11.3% of adidas brand revenues, from 9.6% of brand revenues in Q1 2005. Brand adidas revenues rose 14.9% excluding the owned-retail business.

Sport Performance category sales accelerated from the year-ago growth rate, posting an 11% increase in currency-neutral terms, thanks to “strong growth” in footwear, apparel, and equipment, supported by strong increases in “nearly all major categories.” In Euro terms, Sports Performance sales were up 16.5% to €1.34 billion ($1.61 bn) in the quarter, compared to €1.15 billion ($1.51 bn) in the year-ago period.

adidas plans to generate football (soccer) sales of roughly €1.2 billion for the year, a gain of about 30% versus last year and a 50% increase over the last World Cup. The company had previously forecast selling 10 million +Teamgeist balls this year. They now expect to sell more than 15 million of the match balls for the year. They also expect to sell more than 750,000 pairs of the +F50 TUNIT soccer boot in its first year on the market.

Sport Heritage category sales were up more than 18% in the period to €417 million ($502 mm) from €353 million ($463 mm) in Q1 last year. The increase was said to be driven by double-digit gains in both footwear and apparel and across all regions. Currency-neutral sales were up roughly 13% for the period.

The Sport Style business, which is the limited distribution fashionista offering, posted a 36% increase in currency-neutral terms after declining 16% in Q1 last year. The category saw sales in Euro terms increase 28.6% to approximately €9 million ($10.8 mm) from €7 million ($9.2 mm) in Q1 last year.

On a regional basis, Brand adidas currency-neutral sales were up 5% in Europe after a flat quarter last year, and increased 6.7% in Euro terms to €905 million ($1.01 bn). The company pointed to the World Cup in Germany this year as a major driver. In North America, Brand adidas sales jumped 30.5% in Euro terms to €364 million ($438 mm), reflecting a 19.5% increase in U.S. Dollar terms. Management said branded apparel drove the gains here, increasing more than 30% on a currency-neutral basis. Asia/Pacific currency-neutral sales were up 18% for Q1, and increased 23% in Euros to €380 million, led by growth in China, Japan, and Korea. The World Cup is having an impact on Latin America as well. Regional sales jumped 42% in currency-neutral terms.

Brand adidas gross margin dipped 50 basis points to 46.6% of sales, with higher cost of goods offset a bit by owned-retail. Operating profits for brand adidas increased 8.1% to €279 million ($336 mm) from €258 million ($339 mm) in the prior year quarter.

Based on current backlog figures (see chart page 3), and continued growth in owned-retail, Brand adidas expects to see full year currency-neutral sales increase in high-single-digits for the year.

Reebok segment revenues were down 16% on a currency-neutral basis, due primarily to weaker sales to key accounts in the U.S. and the U.K., the brand’s two largest markets, and declines in music-related product sales and Reebok Classics. adidas Group closed its acquisition of Reebok at the end of January and the results reported for the quarter include just two months of sales. In Euro terms, Reebok sales declined 10.1% to €454 million ($546 mm) from €505 million ($663 mm) for the two months last year, or a 17.5% decline when measured in U.S. Dollar terms.

Reebok brand sales were €372 million, or a 20% decrease on a currency-neutral basis. Management said that sales were “significantly better” than the backlogs at the end of the fourth quarter.

Rockport brand revenues were €60 million for the quarter, or a 6% increase in currency-neutral terms, driven by gains in Europe and North America. The Hockey Company, which includes the CCM, JOFA, and KOHO brands, were up significantly to €22 million, a 46% increase on a currency-neutral basis, thanks to the NHL being back in business.

Reebok segment gross margins were down significantly on the accounting effects of €22 million related to the purchase price allocation for the acquisition. Reported GM was 35.7% of sales, but would have been 40.5% of sales excluding the accounting effects. The full year impact of the purchase price accounting is expected to be about $50 million on the gross margin line. Inventories at Reebok were said to be “definitely okay,” but less current than the adidas inventories. Management said there will be some “clean up” of the Reebok inventories over the next few months.

Reebok brand backlogs were down 14% in currency-neutral terms at the end of the quarter and were down 20% in Euros. Management pointed to a $50 million cancellation from one customer for the third quarter and other weakness with key accounts as a key driver for the decline.

Revenues at TaylorMade-adidas Golf increased 26% on a currency-neutral basis on top of a 31% increase in the year-ago period, and grew about 24% when measured in U.S. dollars, due in large part to a 45% increase in sales in the North America market and the inclusion of the Greg Norman Collection business, which was moved over from the Reebok segment. GNC delivered about €16 million to the TMaG segment for Q1 and is anticipated to be €85 million to €95 million for the year.

North America sales were up 33% when measured in U.S. Dollars to $146 million (€122 mm), compared to $101 million (€77 mm) in Q1 last year. Europe sales did a bit of an about-face, declining roughly 15% in the first quarter to €23 million ($28 mm) after jumping 66% last year to €27 million ($35 mm) versus the previous year period. Asia/Pacific sales were up 12.5% in U.S. Dollars to $65 million (€54 mm) from $58 million (€44 mm) in the year-ago period. Latin America sales were flat at about one million Euros, but declined more than 8% to $1.2 million when measured in U.S. Dollars.

Based on the strong Q1 and the addition of Greg Norman Collection, the company expects TM-aG full year currency-neutral sales to increase in the double-digit range.

adidas Group
First Quarter Results
(in $ millions) First Quarter
2006 US $** 2005 US $** € Chg C-N Chg*
Total Sales 2459 $2,957 1674 $2,197 46.900% 40%
adidas 1776 $2,136 1512 $1,984 17.500% 12%
Reebok 454 $546 505 $663 -10.100% -16%
TM-aG 201 $242 149 $196 34.900% 45%
Gross Margin 45.0% 48.1% -310 bps 
Net Income €150 $180  €108 $142  +38.9% n/a
Diluted EPS €2.67 $3.21  €2.15 $2.82  +24.2% n/a
Accts Rcvble*** €1,898 $2,292  €1,182 $1,527  +50.1%

About The Author

Teresa Hartford

Teresa Hartford Editorial & Creative Director | SGB Media | 704.651.5741



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