Adidas AG said Wednesday that fourth-quarter net profit more than doubled, thanks to lower taxes and marketing costs, but warned that sales and profit are likely to fall this year. Backlogs on a currency-neutral basis were down 6% for the adidas brand and 17% for Reebok.
In the three months ended Dec. 31, net profit jumped to 54 million ($68 mm) from 21 million ($26.5 mm) as sales rose 6.2% to 2.57 billion ($3.2 bn) from 2.42 billion (3.04 bn). Adidas attributed the surge in profit to a lower tax rate and higher operating profit because of lower marketing expenses, while sales were aided by favorable currency fluctuations.
Fourth quarter Group revenues grew 4% on a currency-neutral basis due to higher sales in the adidas segment. Reebok revenues declined, but TaylorMade-adidas Golf increased. On a regional basis, currency-neutral sales grew by double-digit rates in both Asia and
Fourth quarter gross margin declined 0.2 percentage points to 46.4% from 46.6%. A higher gross margin in the adidas segment could not offset declines in the Reebok segment as a result of higher clearance sales at lower margins and in the TaylorMade-adidas Golf segment. At TaylorMade-adidas Golf, a promotional golf retail environment had a negative effect on gross margin development.
Group gross profit grew 6% to 1.194 billion ($1.5 bn) from 1.127 billion ($1.42 bn). Net operating expenses and income as a percentage of sales decreased mainly due to lower marketing expenses in the adidas segment. The realization of a book gain in an amount of 21 million ($26.5 mm) related to the acquisition of Ashworth, Inc. was partially offset by restructuring costs and other one-time expenses of 7 million ($8.8 mm). As a result, the Groups operating margin increased 1.7 percentage points to 4.2% in the fourth quarter of 2008 versus 2.5% in the prior year. Operating profit grew 77% to 107 million ($134.8 mm) versus 61 million ($76.9 mm) in 2007.
The Groups net income attributable to shareholders increased 151% to 54 million ($68 mm) from 21 million ($26.4 mm) due to higher operating profit and a lower tax rate. The Group tax rate declined strongly as a result of one-time tax benefits. Net financial expenses, however, increased primarily as a result of net foreign currency exchange losses resulting from the revaluation of balance sheet positions in foreign currencies.
2008 RESULTS
In 2008, Group revenues increased 9% on a currency-neutral basis, as a result of strong sales growth in the adidas and TaylorMade-adidas Golf segments. Currency translation effects negatively impacted Group sales in euro terms. Group revenues grew 5% in euro terms to 10.799 billion ($13.6 bn) in 2008 from 10.299 billion ($13.0 bn) in 2007.
“2008 was another record year for our Group,” commented Herbert Hainer, adidas Group CEO and Chairman. “This performance is clearly a testament to the underlying strength of our business model being global, diversified and consumer focused.”
The adidas segment was the most significant contributor to Group sales growth in 2008. Currency-neutral adidas segment revenues increased 14% during the period, driven by double-digit increases in all major performance categories. Currency-neutral sales in the Reebok segment decreased 2% versus the prior year. Growth in the running category was offset by declines in most other categories. At TaylorMade-adidas Golf, currency-neutral revenues increased 7%, due to positive sales momentum in apparel, footwear, balls and putters. Currency translation effects negatively impacted sales in all segments in euro terms. adidas sales increased 10% to 7.82 billion ($9.85 bn) in 2008 from 7.11 billion ($8.96 bn) in 2007. Sales at Reebok decreased 8% to 2.15 billion ($2.7 bn) versus 2.33 billion ($2.9 bn) in the prior year. TaylorMade-adidas Golf sales increased 1% to 812 million ($1.02 bn) in 2008 from 804 million ($1.01 bn) in 2007.
adidas Group sales grew at double-digit rates on a currency-neutral basis in all regions except
Sales in
The gross margin of the adidas Group increased 1.3 percentage points to 48.7% in 2008 (2007: 47.4%). This is the highest annual gross margin for the Group since the IPO in 1995. The improvement was mainly due to an improving regional mix, further own-retail expansion and a more favourable product mix. As a result, gross profit for the adidas Group rose 8% in 2008 to reach 5.256 billion ($6.62 bn) versus 4.882 billion ($6.15 bn) in the prior year.
Income before taxes grew 11% to 904 million ($1.14 bn) in 2008 from 815 million ($1,02 bn) in 2007. This was a result of the Groups operating margin increase, which more than offset higher net financial expenses.
Net financial expenses increased 23% to 166 million ($209.2 mm) 2008 from 134 million ($168.9 mm) in the prior year primarily due to foreign currency exchange losses resulting from the revaluation of balance sheet positions in foreign currencies
In 2008, earnings per share increased at a higher rate than the Groups net income attributable to shareholders due to a decrease in the number of shares outstanding related to the Groups share buyback program.. Basic earnings per share increased 20% to 3.25 in 2008 versus 2.71 in 2007. Diluted earnings per share grew 20% to 3.07 from 2.57 in the prior year.
Group inventories increased 22% to 1.995 billion ($2.51 bn) at the end of 2008 versus 1.629 billion ($2.05 bn) in 2007. On a currency-neutral basis, inventories grew 21%. This was a result of a higher volume of product shipments received from suppliers towards the end of the year. Hesitant customer order patterns also impacted this development. Inventory ageing, however, improved compared to the prior year. Group receivables increased 11% to 1.624 billion ($2.04 bn). On a currency-neutral basis, receivables grew 13%. This increase mainly reflects slower receipt of payments due to the difficult economic situation in some markets.
Net borrowings at December 31, 2008 amounted to 2.189 billion ($2.75 bn), which represents an increase of 24%, versus 1.766 billion ($2.23 bn) in the prior year. The Groups share buyback in an amount of 409 million (515.4 mm), higher working capital requirements and negative currency effects contributed to this development. Consequently, the Groups financial leverage increased to 64.6% at the end of 2008 versus 58.4% in the prior year.
Backlogs
Backlogs for the adidas brand at the end of 2008 decreased 6% versus the prior year on a currency-neutral basis. In euro terms, adidas backlogs declined 4%. This development reflects the difficult retail environment in many major markets. In addition, order backlogs in
Currency-neutral Reebok backlogs at the end of 2008 were down 17% versus the prior year. In euro terms, this represents a decline of 18%. Footwear backlogs decreased 10% in currency-neutral terms (11% in euros) as a result of declines in all regions. Apparel backlogs declined 33% on a currency-neutral basis (33% in euros) driven by lower orders for licensed apparel in particular in
Outlook
Expectations for the development of the global economy and its impact on the sporting goods industry in 2009 are currently subject to a high degree of uncertainty. Consequently, the effect global macroeconomic developments could have on the adidas Groups business outlook is difficult to forecast, especially with regard to the second half of the year. In addition, due to current foreign exchange rate volatility, it is difficult to quantify the impact negative currency translation effects could have on the Groups top- and bottom-line performance.
adidas Group sales are forecasted to decline at a low- to mid-single-digit rate on a currency-neutral basis in 2009. Revenues in the adidas segment are projected to decrease at a low- to mid-single-digit rate on a currency-neutral basis. Reebok segment sales are expected to be at least stable compared to the prior year on a currency-neutral basis. Currency-neutral TaylorMade-adidas Golf sales are forecasted to grow at a low-single-digit rate due to the consolidation of Ashworth, Inc. for the full 12-month period.
In 2009, the adidas Group gross margin is expected to decline compared to the prior year. A promotional environment in mature markets, as well as expected higher sourcing costs due to increased raw material and wage costs, in particular in the first half of the year, will contribute to this development. The Groups operating expenses as a percentage of sales are expected to increase mainly as a result of higher expenses for controlled space initiatives in the adidas and Reebok segments. Consequently, the Groups operating margin and earnings per share are projected to decline.
At the Annual General Meeting on May 7, 2009, the Executive Board intends to propose an unchanged dividend per share of 0.50 for the financial year 2008. Management has decided to maintain the dividend level despite the tough business environment and the Groups focus on reducing net borrowings. Based on the number of shares outstanding at the end of 2008, the dividend payout will decrease 2% to 97 million (122.2 mm). This represents a payout ratio of 15% versus 18% in 2007.
Hainer concluded: “We cannot ignore the unprecedented economic crisis all global businesses are facing today. I believe the real winners of this crisis will be the ones who remain consistent with their long-term strategies. We have the resources and the energy to tackle the challenges that come.”
