adidas-Salomon chairman and CEO Herbert Hainer has finally backed off his chest-pounding claims of grabbing 20% market share in the U.S. - at least for now and will instead focus on building a profitable business in North America.
In a conference call with analysts last week, Hainer acknowledged that brand adidas had been “slow to adapt to a shift in demand” from consumers and that the brand “oversupplied some retail channels” following what he described as “strong momentum” in 2002. He talked of a a “slowing” of the Sport Heritage business after sales “nearly doubled” in 2001 and 2002.
Hainer sees a shifting strategy that will force adidas to “step back in some markets” with Sport Heritage to ensure the category is not sold into “quick-sale” venues going forward. He went on to say that they did not fully exploit the potential of the North America market because they focused too much on key accounts.
The new strategy for the category will tear a page out of the Puma handbook as adidas looks to build presence in the boutique shops and trend retailers and moves Sport Heritage away from “retro-focused product” into something “much more forward-looking”.
He said the efforts in the Sport Lifestyle segment will be extended to “specifically address the needs of the metropolitan, urban, and coastal consumers”, instead of just the consumers who have a “strong affinity” for the brand and its “historical positioning”.
Hainer also said that they will take steps to avoid the “inventory management challenges” they had in 2003 by selling into retail what they feel they can sell through in a particular channel. He said the move will take more “discipline” as “retailers often have vested interests in generating high volumes as quickly as possible”.
The shift in strategy will be accompanied by a much more integrated approach to product and marketing between Portland and Herzogenaurach, with global marketing chief Erich Stammingers move to run North America prompting an integration of the global and U.S. efforts.
The company said the moves to integrate the marketing groups will “increase crossover of ideas and people” between the two operating units and should “eliminate unnecessary hierarchy within the organization” and “improve speed-to-market” while increasing flexibility with customers.
The key marketing efforts will include efforts to improve retail in-store presence, expanding the adidas owned-retail business, and moving the advertising focus away from product-specific activities to more brand advertising.
The changes will also reportedly see the Sports Heritage segment developed in both Oregon and Germany to “foster further growth of the division”. Hanier said this will be a “unique structure within the industry”.
The shifting strategy is expected to help stop the bleeding at the North America unit, the only region that did not see currency-neutral sales gains in 2003. The North America weakness was cited as the primary reason for a 4.0% currency-neutral decline in adidas-Salomon sales for the fourth quarter.
The 5.0% currency-neutral sales increase for the adidas brand in 2003 was said to be driven by Sports performance sales, which grew 7.0% on a currency-neutral basis for the year and made up 83% of total brand revenues. Sales in the Sports Heritage segment declined 4.0% for the year and new Sport Style segment delivered just 15 million ($17 mm) in sales.
The real growth came in the owned-retail segment of the business which increased 9.0%, or 21% in currency-neutral terms, to 447 million ($506 mm) for the year. The division, which currently has three Sports Performance stores and two Sports Heritage stores in the U.S., plans to add 15 more stores globally in 2004.
Owned-retail is roughly 9.0% of total adidas brand sales, but adi expects the percentage to get to 10% with the new real estate, a percentage they see as the top end of share of total brand business.
Total brand adidas sales were down 11.6% for the quarter to 933.0 million ($1.11 bn) when measured in the reporting Euro currency and declined 3.0% to 4.95 billion ($5.6 bn) for full year 2003 from 5.11 billion ($4.8 bn) in 2002. The increase in owned-retail activities helped increase brand adidas gross margin 130 basis points for the year to 40.6% of sales, “despite lower margins in N.A. from higher close-out sales.
Salomon sales were up 2.9% for the quarter in the reporting Euro currency to 268 million ($319 mm) and grew 8.0% in currency-neutral terms. Sales for the division declined 3.8% for the year to 658 million ($745 mm) from 684 million ($647 mm) in the prior year. The divisions 2.0% currency-neutral increase for the year was attributed primarily to “higher sales of Mavic cycling components, outdoor footwear and Salomon apparel”, offset a bit by declines in winter sports hardware in the early part of 2003.
The company is working to reposition Salomon toward a more “seasonally balanced product range” with a stronger emphasis on footwear and apparel. Sales of summer products increased 6.0% in currency-neutral terms for the year, or 2.0% in the reporting Euro, and is now roughly a third of the divisions sales. Hainer sees that figure growing to 50% by the “end of 2005”.
Hainer also tried to dispel rumors of a potential sale of the Salomon unit, calling the industry buzz “rumors, exactly that”. He did little to calm the chatter when he said that the company does not “intend at the moment to sell Salomon”.
TaylorMade-adidas Golf sales plunged 21.5% to 150 ($179 mm) for the quarter when measured in the reporting Euro currency, but would have been off just 1.1% when measured in U.S. dollars. For the year, TM-aG sales declined 9.9% in Euros to 637 million ($721 mm) from 707 million ($669 mm) in 2002, but were up 7.8% when measured in U.S. dollars and grew 4.0% on a currency-neutral basis.
The company pointed to “double-digit increases” in the TaylorMade iron and putter categories and adidas Golf apparel for the gains that more than offset the negative sales effect from lower metalwood and golf ball sales and the non-renewal in late 2002 of a licensing and distribution agreement with Slazenger Golf. Excluding 25 million in Slazenger Golf revenues that were in the number in the year-ago Q4, TM-aG sales would have gained 9.0% for the year on a currency-neutral basis.
Gross margin at TaylorMade-adidas Golf declined 330 basis points to 45.5% of sales in 2003, impacted primarily from lower metalwoods and golf ball margins. Margin and revenue declines in the metalwoods category were due to increased sales from clearance of aged inventory before the new 2004 product launch. Golf ball margins suffered due to “higher costs associated with increased tour standards”.
When measured in the reporting Euro currency, total adidas-Salomon group sales fell 10.4% to 1.35 bn ($1.6 bn) in the fourth quarter and declined 3.9% to 6.27 billion ($7.09 bn) for the full year from 6.52 billion ($6.17 bn) in 2002. Royalty and commission income declined 8.0% to 42 million for the year, due entirely to the stronger Euro.
On a regional basis, Group sales in North America fell 34.4% in Q4 when measured in Euros, posting sales of 313 million ($373 mm) for the quarter. Full year sales declined 20.3% to 1.56 billion ($1.77 bn) in 2003 versus 1.96 billion ($1.85 bn) in 2002. Measured in U.S. dollars, the North America business was off 17.4% for the fourth quarter and down 4.6% for 2003.
In reporting Euro terms, sales for adidas-Salomon in Europe increased 4.4% in Q4 to 688 million ($819 million) and rose 5.2% to 3.37 billion ($3.81 bn) for full year 2003 from 3.20 billion ($3.03 bn) in 2002.
Fourth quarter sales in Asia were down 8.1% to 299 million ($356 mm) and off 4.3% to 1.12 billion for the full year from 1.17 billion in 2002.
Latin America was the fastest growing region for the Group for Q4 and the year, jumping 14.7% in Q4 to 48.0 million ($57.2 mm) and growing 9.8% to 179 million ($203 mm) in 2003 versus 163 million ($154 mm) in 2002. Currency-neutral sales were up 35% for the year, “reflecting particularly strong performance in Brazil and Argentina”.
The look ahead doesnt look great for the adidas Footwear business as currency-neutral backlog figures declined 7.0% for the division, reflecting a softer business in all categories except Soccer. In Euro terms, Europe Footwear backlog at year-end was up 1.0%, but North America was down 38% and Asia was off 8.0%. Currency-neutral backlog for Footwear was down 7.0% at year-end, driven by a 26% fall in N.A. Footwear orders.
The Apparel numbers fared much better, rising 6.0% at year-end in Euro terms, as Europe backlog rose 11% and Asia jumped 28%, while North America fell 17% when measured in Euros. Currency-neutral backlog saw up 13%, with North America again the lone decliner with a 2.0% dip in Apparel futures.
The net impact on total adidas backlog in Euro terms from a 6.0% gain in Europe, a 31% fall in North America backlog, and an 8.0% increase in Asia, resulted in a overall 5.0% decline at year-end. Currency-neutral backlog was up 2.0% at year-end, hurt by the overall 18% decline in N.A. futures for the adidas brand.
Management appears to be staking their forecast for the year on stronger potential in the back half of the year, forecasting currency-neutral growth in the 3% to 5% range for the full year.
They see “mid single-digit” growth for “all major brands” in Europe for the year, along with “double-digit” growth in both Asia and Latin America. That all makes sense based on the backlog of those regions, but they appear to be betting on more to come in the N.A. market as they predict “flat to slightly positive” growth for the year of the current 18% deficit in futures.
CFO Robin Stalker said they expect North America sales to exceed the backlog indicators because they expect fewer cancellations.
They may also be banking on increased sales at Foot Locker in the back half for the uptick even as they admit that first half sales will “not be as good” due to the “over-inventory” there in 2003. Hainer stated emphatically that adidas “definitely will significantly gain shelf space in the Foot Locker stores” in the second half, but offered no details.
To even stay flat in the market they would apparently have to anniversary quite a bit of close-out sales to get back to square one even before the backlog declines.
>>> If they are playing inventory tighter in hopes of controlled distribution, and fewer cancellations provide less off-price, those volume opportunities are in jeopardy as well…
>>> Better to stick with re-positioning at this point and go for the profit win. Any attempts to drive sales run counter to the stated long-term goals here
