Adidas Group had a solid first quarter at its adidas and TalyorMade-adidas Group divisions, but experienced continued declines in the Reebok business. Both the adidas and Reebok segments got a boost from an increase in the owned-retail business and the company appears to be relying on expanding growth in that area for gross margin improvements and revenue gains for the balance of the year and into 2009.


 


That plan, accompanied with the expectation that most of the growth will come out emerging markets in Europe, Asia and Latin America, perhaps reflects less confidence in the established markets and retail channels to produce the gains needed to produce the required results. adidas said they had around 1,073 stores at the end of the first quarter, including concept stores, factory outlets and concession corners, while group sales in China grew over 70% and Russia increased about 50% in Q1.


 


One area of the current business that is expected to show some gains this year is in the U.S.. The adidas brand is re-releasing the iconic Superstar product back into the market — which is expected to boost revenues in the second quarter and forward — and Reebok is getting back into the Foot Locker business in the fourth quarter. At Brand adidas, total sales in euro terms increased 8.2% to €1.82 billion in the first quarter of 2008 from €1.82 billion in Q1 2007, but improved 14% when excluding the FX rate impact from the stronger Euro against other currencies.


 


Owned-retail again played a big role in the increase, growing 22.0% (+31% currency-neutral) for the period to €310 million, or 16% of adidas brand revenues, from €254 million, or 14% of brand revenues, 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. Brand adidas revenues would have increased 5.9% in euro terms excluding the owned-retail business, which would be compared to the 0.8% dip in the first quarter last year.


 


Sport Performance category sales more than doubled from the year-ago high-single-digit growth rate, posting a 19% increase in currency-neutral terms, driven by double-digit growth in footwear, apparel and equipment, with particular strength in football (soccer), running and training. In euro terms, Sport Performance sales were up 13% to €1.57 billion ($2.35 bn) in the quarter, compared to €1.39 billion ($1.82 bn) in the year-ago period. adidas Sport Style revenues were down 9% for the quarter to €385 million ($577 mm) from €421 million ($552 mm) in Q1 last year. Originals sales declined, but Fashion sales increased for the quarter. Currency-neutral sales were down roughly 4% for the period.


 


 On a regional basis, brand adidas currency-neutral sales increased “strongly” in all regions except North America. Currency-neutral revenues were up 15% in Europe, increasing 12.2% in Euro terms to €1.05 billion ($1.57 bn) from €936 million ($1.23 bn) in the year-ago period. Strong growth in the region’s emerging markets, Russia in particular, as well as the U.K. and Germany were said to be the primary drivers of the growth. The brand opened 60 new shop-in-shops with JD Sports in the U.K. and in France the company “engineered” a month-long adidas brand makeover at one of “the most prestigious sporting goods retailer in Paris.” adidas brand full year revenues are expected to increase in mid- to high-single-digits, thanks in part to the Euro 2008 Championships.


 


The European football championship had an impact on backlog, but it was only three percentage points in Europe for the quarter. In North America, brand adidas sales declined 16.6% in Euro terms to €281 million ($421 mm) from €337 million ($442 mm) in Q1 last year, reflecting a 4.7% decrease in U.S. dollar terms. Currency-neutral sales decreased 6% due to declines in both the U.S. and Canada. Full year sales in North America are expected to remain negative. Asia/Pacific currency-neutral sales were up 24% for Q1, and increased 18.0% in euro terms to €466 million ($698 mm), driven by double-digit increases in “nearly all markets.”


 


Latin America is posting solid gains for brand adidas, with regional sales jumping 21% in currency-neutral terms on top of a 32% increase in the year-ago period. Sales increased 16.3% in euros to €157 million ($235 mm). Full year sales are expected to grow in double-digits for both Asia and Latin America. Brand adidas gross margin improved 170 basis points to 49.0% of sales. Management pointed to an “improving product and regional 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 increased 24.4% to €336 million ($503 mm) from €270 million ($354 mm) in the prior year quarter.


 


Based on current backlog figures (see chart below), and continued growth with owned-retail, brand adidas expects to see currency-neutral sales increase in the high-single-digits for the full year. Reebok segment revenues decreased 6% on a currency-neutral basis, driven by double-digit declines in the U.S. and the U.K., which together comprise around 50% of brand revenue, but management pointed to weakness in all regions except Asia. Sales in North America declined 12% on a currency-neutral basis and decreased 10% to $309 million (€206 mm) when measured in U.S. dollars.


 


Sales in Europe declined 7% on a currency-neutral basis, due to declines in the U.K., partially offset by gains in emerging markets, Russia in particular. Europe sales declined 11.6% in euro terms to €167 million ($250 mm). Latin America sales were down 2% on a currency-neutral basis, and declined 1.3% to $28 million (€22 mm) in U.S. dollar terms, due to declines in Mexico. Asia revenues jumped 30% in currency-neutral terms, driven by “strong double-digit growth in nearly all major countries.” In U.S. dollar terms, Asia sales grew 39% to $93 million (€62 mm).


 


Owned-retail revenues partly offset the sharper declines in the wholesale business, with retail posting a 16% increase for the quarter on a currency-neutral basis. In U.S. dollar terms, owned-retail grew 19% to $106 million, reflecting an increase in store openings, and represented 16% of Reebok segment sales in the first quarter, compared to 13% in the year-ago period. Excluding owned-retail, Reebok segment sales were down 4% in U.S. dollar terms to $574 million (€383 mm). Reebok brand sales were $562 million (€375 mm) for the quarter, representing a 4% decrease on a currency-neutral basis, or a 0.4% increase when measured in U.S. dollars. Rockport brand revenues decreased 6% to $85 million (€57 mm) for the quarter versus $90 million (€57 mm) in the year-ago period, representing an 8% decline in currency-neutral terms. The decline reflects a tough business in department stores and the mall, as well as a weaker U.K..


 


Reebok-CCM Hockey, which includes the Reebok Hockey, CCM, JOFA, and KOHO brands, tumbled 10% in U.S. dollar terms to $22 million (€206 mm) in Q1 from $37 million (€28 mm) in Q1 last year, reflecting a 20% decrease on a currency-neutral basis. Management said that sales decreased here for the quarter due to a shift in product launch and delivery schedules. Reebok segment gross margins were up 30 basis points for the period to 37.1% of sales, due primarily to double-digit growth at the owned-retail business and an “improving product mix” and retail mix during the quarter. Based on the Reebok brand backlog (see below), Reebok segment sales are forecast to grow in the mid- to high-single-digits for the full year, up from previous estimates, due to a new joint venture in Brazil and Paraguay. Sales are expected to increase at Reebok, Reebok-CCM Hockey and Rockport.


 


The rosier picture for Reebok was based on what management described as “positive retailer and trade show feedback, especially in emerging markets.” In North America, backlogs were driven downward by continued pressure in footwear. Backlog was also impacted by a negative swing in apparel, which was “largely driven by tough comparisons and the lack of new licensed apparel product launches.” Management said the declining footwear backlog picture for the Reebok brand was due to “strategic initiatives” to turn the brand around in the U.S., the U.K. and Japan. The decrease in the apparel backlog was said to be due to increased penetration of private label at key retail partners in the U.S. and U.K. Equipment backlogs grew at a double-digit rate due to increases in the hockey category.