adidas Group Struggles with North America

Worldwide revenues at adidas Group declined 1.7% in euro terms to €2.58 billion ($3.37 bn) in the first quarter of 2009.

In a conference call with analysts, Hainer pointed to some bright spots in the first quarter, including double-digit gains in the Sports Style segment for brand adidas as well as in the women's categories at Reebok. But overall Q1 profitability was sharply lower than prior year levels due to what management described as higher production and restructuring costs, currency devaluations, and a promotional climate worldwide.

The company also announced plans to cut more than 1,000 jobs and close certain regional offices as part of a restructuring plan to save €100 million.  Management warned that first half earnings per share will be “around break-even” before a second half recovery.

Overall Group sales in North America declined 6.9% to €538 million ($704 mm), compared to €578 million ($866 mm) in the year-ago period.  The weakness in the region particularly stood out since UEFA EURO 2008 and the Beijing 2008 Olympic Games led to tough comparisons for both the company’s Europe and Asia regions.  Hainer said the company is taking steps to improve its North America operations and there is increasing speculation the adidas Portland, OR and Reebok Canton. MA headquarters could be merged into the Boston suburb.

For brand adidas, the company proactively took back product early in the year in North America to channel it through its factory outlets in order “to ensure (the) offering stayed fresh and positioned correctly.” Hainer noted that this action accounted for more than one-third of the brand’s sales decline in the first quarter but did lead to an increase in retail margins.  Said Hainer, “I have no doubt it was the right thing to do in the interest of our cornerstone brand.”      

 

As Reebok Works to Exit Lower Price Points…          

At Reebok, North America sales also declined “significantly” due to what management said was the environment as well as its decision to exit the $29.99 price point.   On the positive side, Hainer said product at the $29.99 price point is now below 10% of Reebok's mix in the U.S., down from over 35% a year ago. Said Hainer, “We are completely clean at all our key strategic accounts.”

In other regions, group sales in Europe decreased 5% on a currency-neutral basis due to the non-recurrence of prior year sales related to the UEFA EURO 2008. In euro terms, sales in Europe decreased 6% to €1.175 billion ($1.54 billion). Group sales in Asia decreased 6% on a currency-neutral basis, as a result of declines in Japan and China. Revenues in Asia grew 6% to €628 million ($821 million). In Latin America, sales grew 31% on a currency-neutral basis, with double-digit increases coming from most of the region’s major markets, supported by the new Reebok companies in Brazil/Paraguay and Argentina. Sales in Latin America grew 23% to €218 million ($285 million).

Excluding Russia and China, growth in emerging markets was up 16%. Hainer described adidas' business in Russia as “fundamentally” healthy, but said growth had slowed considerably from the prior year. Volumes continue to increase for both brand adidas and Reebok as it has grown its network to more  than 750 owned stores in the region. However, the devaluation of the ruble accounted for about one-third of the company's total gross profit decline in the period. Although adidas is offsetting these currency pressures through price increases and rent concessions, “both these steps will still take a while to turn the profitability impact around.”

In China, Hainer said inventories in the channel “are still too high as a result of oversupply by several brands in 2008,” leading a sales decline in the region for adidas Group. For brand adidas, the company is “taking a very disciplined approach towards supplying the market and, for the sake of a quarter or two” in order to protect the brand's premium positioning in the region. Store expansion plans in China have been scaled back to focus on new or under-represented store formats like Style Essentials, Originals and factory outlets.           

Regarding Reebok, Hainer said the brand “simply grew too quickly in China,” and unproductive stores and locations are being aggressively closed.

 

 

At Brand adidas, currency-neutral revenues decreased 6%, driven primarily by a decrease in the football (soccer) category resulting from the non-recurrence of stronger prior-year sales related to the EURO 2008 Championships. Adidas brand sales decreased 2.6% in euro terms to €1.92 billion ($2.51 bn) in Q1. 

Excluding owned-retail, adidas brand revenues declined 4.9% in euro terms to €1.58 billion ($2.07 bn).  Worldwide owned-retail sales jumped 10.2% to €334 million ($437 mm) and represented 17.4% of total revenues in Q1, compared to 15.4% of revenues in the year-ago period.
Brand adidas revenues, including owned-retail, declined 6.1% to €986 million ($1.29 bn) in Europe in the first quarter and fell 15.7% in euro terms (-25% currency-neutral) to €237 million ($310 mm) in North America.  Asia Pacific revenues rose 9.0% in euro terms (-4% c-n) to €508 million ($664 mm) and Latin America revenues increased 7.6% in euro terms (+16% c-n) to €169 million ($221 mm) in the first quarter.
Hainer said that the “biggest step forward” was the performance of its Sport Style business, where sales grew 13.0% in euro terms (+12% c-n) to €435 million ($569 mm) in the first quarter. The Sports Lifestyle segment is being supported by its House Party campaign-the biggest brand campaign in the history of Originals-and celebrations around the Original's 60th anniversary.  The larger Sport Performance business posted a 5.7% decrease (-9% c-n) in revenues to €1.48 billion ($1.94 bn) in Q1. 

Among the other highlights for brand adidas, TECHFIT apparel was said to be  “growing strongly,” Outdoor saw double-digit increases, and basketball is “making big strides” in Asia.  Running experienced “stable development globally,” although the Supernova and adiStar lines saw “strong performances” in the period.

Gross margins at Brand adidas declined 200 basis points to 47.0% of net sales in the first quarter.  Operating profits fell 32.1% for the brand to €228 million ($298 mm) in the period.                                                     

 

Reebok a Drag, but Shows Some Light…                                  

 

At the Reebok division, currency-neutral sales declined 4% as double-digit growth in the women’s category was more than offset by declines in most other categories. In euro terms, revenues in the division grew 0.9% to €458 million ($599 mm). In Reebok's home currency in the U.S., sales fell 12% from $680 million in Q1 2008.  In U.S. dollar terms, Reebok division revenues fell 16% (-3% c-n) to $209 million (€160 mm) in Europe, decreased 18% (-16% c-n) to $252 million (€193 mm) in North America, and declined 17% (-8% c-n) to $77 million (€59 mm) in Asia Pacific.  Revenues in Latin America jumped 116% in U.S dollar terms (+148% c-n) to $61 million (€47 mm) for the period, due in large part to the continued acquisition of former distributor businesses.
Reebok division gross margins declined 770 basis points to 29.4% of net sales in euro terms. 

 

The operating loss for the division expanded 545% in U.S. dollar terms to a loss of $126 million (-€96 mm) for the period.

Hainer finally appears to be coming to terms with the issues at Reebok and intimated that that the “damage that had been done to the brand after years of careless distribution” was higher than expected. But he also said he “never doubted the potential of the Reebok brand.”  He added the refined three-tier strategy around Own Women’s Fitness, Challenge Men’s Sport and Revive Classics “is really starting to kick in.
Among the successes, Hainer said the response to JUKARI Fit to Fly, a new workout line with Cirque du Soleil, “has been nothing short of phenomenal.” EasyTone, which helps tone key leg muscles, has generated sell-through rates as high as 20% and is one of the top-selling shoes at Lady Foot Locker with a price point above $100. In markets like Germany, Scandinavia, Japan and India, Reebok is also seeing “positive momentum.”

 

 

At TaylorMade-adidas Golf, first quarter currency-neutral revenues decreased 6% and fell 12% in U.S. dollar terms to $254 million (€194 mm).  Declines in all major categories was partly offset by the consolidation of the acquired  Ashworth business.

In U.S. dollar terms, TM-aG division revenues fell 18% (+11% c-n) to $39 million (€300 mm) in Europe, decreased 3% (-1% c-n) to $133 million (€102 mm) in North America, declined 18% (-17% c-n) to $80 million (€61 mm) in Asia Pacific and revenues in Latin America fell 56% in U.S dollar terms (-17% c-n) to $1 million (€1 mm) in the first quarter.
Hainer said the golf industry overall “is off to a very weak start in 2009, with most major markets around the world contracting at double-digit rates,” and he considered TM-aG's mid-single digit decline as a sign that the brand  continues to significantly outperform its competitors. Hainer noted that the launch of R9 club had been highly successful and it's already the top-selling driver at retail in the U.S. Market.

 

adidas Group sales for the full year are expected to decrease at a low- to mid-single-digit rate on a currency-neutral basis.  Management is forecasting declines in the same range for Brand adidas for the year.  Reebok is expected to be “at least stable.” TM-aG is expected to rise at a low-single-digit rate due to the Ashworth acquisition.

EPS is expected to be around breakeven in the first six months of 2009, with “significantly positive earnings” expected in the second half with some help from the moderation of product cost increases and positive impetus ahead of the 2010 FIFA World Cup.