Helped by its World Cup sponsorship, the resurgence of Reebok, and strength in emerging markets, Adidas Group AG reported robust second quarter improvement and now expects its full-year earnings to more than double over the prior year. Results were noticeably strong in North America, where revenues grew 8% on a currency-neutral basis, driven by a 7% sales increase for Adidas and a 30% sales jump for Reebok in the quarter.

Adidas now expects fiscal 2010 EPS to range between €2.50 and €2.62 a share, compared with a previous forecast of between €2.05 and €2.30 and EPS of €1.22 in 2009.  Sales are projected to increase at the mid-single digit rate in currency-neutral terms, driven mid-single growth in the Wholesale business and low-double digit gains in the company’s Retail segment.

Earnings in the quarter significantly improved to €126 million ($160 mm), from €9 million ($12 mm) in the year-ago period. Worldwide revenues grew 18.7% to €2.92 billion ($3.72 bn). Results matched a forecast provided on July 26 that had been well ahead of Street guidance at the time.

By operating segment, Wholesale revenues (Adidas and Reebok) gained 12.1% currency-neutral to €1.93 billion ($2.7 bn). On a conference call with analysts, company CEO Herbert Hainer noted that Wholesale division revenues saw a “strong pickup” in Q2, helping overall Wholesale sales grow 6% currency-neutral in the first half. Western Europe and North America saw wholesale revenues rise 10% and 15%, respectively, in the first half.

Retail division revenues for the Adidas and Reebok brands gained 16.7% currency-neutral in the quarter to €602 million ($831 mm). Comparable store sales climbed 10%, with a 9% gain at Adidas stores and 16% increase at the Reebok stores. For the first half, Retail segment sales grew 16% currency-neutral, and comps were up 8% for the period. North America and European emerging markets grew 14% and 27%, respectively, in the first half, with greater China and Latin America witnessing increases of 48% and 45%, respectively. Comps in North America, Russia and China all grew at double digit rates in the half.                           

Revenues in the company’s Other Businesses division, which includes TaylorMade-adidas Golf, Reebok-CCM Hockey and Rockport, were down 0.8% in the quarter to €387 million ($534 mm.)

By brand, Adidas second quarter sales climbed 12.5% currency-adjusted to €2.1 billion ($2.9 bn), thanks to its sponsorship of the 2010 World Cup. Gross margin for the Adidas brand expanded 210 basis points to 48.2% of sales.

“Before the first whistle was blown, we knew that this World Cup was going to be a powerful event for our Group, and it turned out even bigger and better than we had expected,” said Hainer on the call.

Four Adidas teams competed in the quarterfinals, two in the semifinals, and sponsored-team Spain won the championship. Over 200 players wore the F50 adiZero shoe.

The shoe scored a total of 41 out of the 145 goals, double that of its nearest rival, according to Adidas.  Hainer said a study shows that Adidas earned “the most online buzz” and had the strongest visibility of any brand associated with the event.

In total, Football (Soccer) category sales were up over 60% in Q2, and almost 50% for the first half. More than 6.5 million replica jerseys were sold. The number of federation jerseys sold more than doubled versus 2006. In addition, Adidas said it will sell more soccer balls than ever before in 2010, with more than 13 million of the over 20 million balls sold featuring the design of the Jabulani. Adidas continues to expect record sales of at least €1.5 billion ($2.1 bn) for the ball for the entire 2010 year, representing an increase of more than 15% compared to 2008, and an increase of 25% compared to the year of the last FIFA World Cup in 2006.

“No matter how you look at it,” said Hainer. “Adidas has once again shown its ability to prize commercial success from large sporting events, and there can be no argument about who is and who continues to be the undisputed number one football brand.”

Equally strong were Running, Outdoor and SportsStyle, which all grew at double digit rates for the Adidas brand in the quarter.       

In Running, sales of its lightweight adiZero collection catapulted over 70%, and its Supernova Adapt took the Runners' World Readers' Choice Award.

In Outdoor, both Footwear and the Power apparel sales increased at a double digit rate in the quarter. In SportsStyle, YTD sales are up 19% currency neutral as collections like adiColor, Vespa, and Originals by Originals “are keeping us right at the heartbeat of today's fashion conscious young consumer,” according to Hainer.

Reebok's currency-neutral revenues climbed 15.8%, or 24.4% on a reported basis to €435 million ($555 mm). Reebok H1 currency-neutral sales were up 9%; gross margins were up almost 500 basis points, and ASPs in footwear increased over 20%. Said Hainer, “Our achievement in the second quarter underscores my confidence that we have re-energized the brand.”

Reebok's 30% currency-neutral gain in the second quarter represents an acceleration over the 6% gain in Q1. In Toning, Reebok's market share reportedly expanded significantly due to product extensions and increase distribution.  According to retail point-of-sale data compiled by SportScanInfo, Reebok brand share in Toning Shoes increased nearly 14 full points to 35.6% of the dollars sold in the category in Q2 compared to the first quarter.

Muscle Activation and Strength products were introduced in Men's for the first time. The launch of the EasyTone Shake It TV campaign in several markets, including Germany, U.K., Russia, and Japan, drove sell-through rates “through the roof” in many regions.

ZigTech had a “highly successful introduction.”  Strength was also seen in Women's Training and Technical Running, where the latest generation Premier and Verona collections “have also shown meaningful improvements.”

In the Other Business segment, TaylorMade-adidas Golf slid 1.5% currency-neutral to €269 million ($371 mm.) The decline was mainly due to the timing of this year's product launches, and last year's termination of its Ashworth licensing arrangement.

“This is, again, a solid performance in the Golf market, which is down at a mid to high single digit rate so far this year,” noted Hainer. “As in the first quarter, the underlying growth of our business during Q2 was mainly driven by irons and balls, which both grew over 30%, as well as advances in Footwear and Putters.”

Rockport's currency-adjusted sales slid 2.6% to €58 million ($80 million) while Reebok-CCM Hockey's currency-neutral sales increased 6.1% to €52 million ($71.8 mm).

By region, Group revenues in North America grew 8% currency-neutral, driven by strong demand in Wholesale, “a development we expect to continue over the coming quarters,” said Hainer.

Currency-neutral revenues in Western Europe increased 13% to €827 million ($1.14 bn) supported by strong growth in the Football (Soccer) category. Growth was driven by the U.K., Germany, and Iberia. Currency-neutral sales in European Emerging Markets increased 25.5% to €343 million ($473 mm), driven by a significant acceleration of trends in Russia.

Currency-neutral sales in Greater China declined 17.9% to €205 million ($283 mm), reflecting inventory reduction efforts. Greater China is expected to resume growth in the second half. Currency-neutral sales in Other Asian Markets were up 10.8% currency-neutral to €484 million ($668 mm), supported by double-digit growth in Japan, Korea and India. In Japan, sales improved, driven by growth at the Adidas brand which was up against an easy prior year comparisons, and also due to Reebok, where sales increased over 20% partly as a result of the brand's “clear domination” of the Toning market. In Latin America, second quarter revenues were up 27.4% currency-natural to €330 million ($421 mm).

The Group's gross margin increased 400 basis points to 48.9% mainly due to lower input costs, less clearance sales and a larger share of higher-margin Retail sales as well as positive currency effects, particularly related to the Russian ruble.

For the second half, Hainer said the Adidas brand will look to continue to capitalize on strong trends around toning, lightweight technologies and lifestyle. In Football (soccer), Adidas “will intensify” marketing efforts around the F50 adiZero, as well as aggressively support the UEFA Champions League and the 2011 FIFA Women's World Cup. Its miCoach training product will be supported by aggressive TV and online campaigns, as well.

For Reebok, significantly more marketing investments are planned in the second half versus the first half in the toning category. More stylish new collections as well as the launch of TrainTone in women's and a men's training toning category will support growth. EasyTone apparel will be launched in Q4. ZigTech's marketing will likewise be expanded with a basketball launch campaign centered on the NBA draft's number one pick, John Wall.

But management will be looking to mitigate higher raw material, labor, and transportation costs as well as the U.S. dollar appreciation, including exploring raising prices.

“The bigger question mark at this stage, however, is whether the economic environment will be strong enough to bear broader price increases,” said Hainer. “Given the recovering consumer sentiment seen so far this year, as well as cleaner inventory levels at retail, we probably have more flexibility in pricing than we had in 2009. But, I still believe an air of caution is warranted, as the global economy is still very fragile.”