Hurt by higher
input prices, currency devaluation effects and restructuring cost, adidas Group
reported first-quarter earnings nosedived 97%. Currency-neutral Group sales
decreased 6%. Adidas also announced plans to cut regional headquarters in Asia
and
“consolidate” the companys wholesale business to reduce costs by 100 million ($133.9
million). Adidas also said the devaluation of the Russian ruble will hurt
profitability.
“Weve
faced a number of economic and market challenges in the first quarter of 2009,”
commented Herbert Hainer, adidas Group CEO and Chairman. “Our results have been
materially affected by higher input prices, currency devaluation effects and
restructuring costs. Although some of these items will recur again as we go
through the balance of the year, I am convinced we will put most of these
effects behind us in the current year.”
Group
revenues in euro terms declined 2% to 2.577 billion ($3.45 billion) in the first quarter of
2009 from 2.621 billion ($3.51 billion) in 2008.
Adidas
Group currency-neutral sales decline in all segments. Currency-neutral adidas
segment revenues decreased 6% in the first quarter of 2009, driven in
particular by a decrease in the football category resulting from the
non-recurrence of strong prior year sales related to the UEFA EURO 2008.
Currency-neutral sales in the Reebok segment declined 4% versus the prior year.
Double-digit growth in the womens category was more than offset by declines in
most other categories.
At
TaylorMade-adidas Golf, currency-neutral revenues decreased 6% due to declines
in all major categories. However, this development was partly offset by the
consolidation of Ashworth revenues. Currency translation effects positively
impacted sales in all segments in euro terms. adidas sales in euro terms
decreased 3% to 1.917 billion ($2.57 billion) in the first quarter of 2009. Revenues
at Reebok grew 1% to 458 million ($613.4 million). TaylorMade-adidas Golf
sales increased 2% to 194 million ($259.8 million).
Currency-neutral
adidas Group sales declined in all regions except
America
declines in most major countries impacted by the non-recurrence of prior year
sales related to the UEFA EURO 2008. In North America, Group sales declined 17%
on a currency-neutral basis due to lower consumer demand and retailer
destocking in the
Sales for the adidas Group in Asia decreased 6% on a currency-neutral basis, as
a result of declines in
and
In Latin America, sales grew 31% on a currency-neutral basis, with double-digit
increases coming from most of the regions major markets, supported by the new
Reebok companies in Brazil/Paraguay and
the first quarter of 2009. Sales in
declined 7% to 538 million ($720.3 million). Revenues in
grew 6% to 628 million ($841.1 million). Sales in
America
The gross margin of the adidas
Group decreased 4.0 percentage points to 45.2% in the first quarter of 2009
(2008: 49.1%). This development was mainly due to higher input costs, currency
devaluation effects, in particular related to the Russian rouble, as well as a
highly promotional retail environment. As a result, gross profit for the adidas
Group declined 10% in the first quarter of 2009 to 1.164 billion ($1.56 billion)
in the prior year.
The
operating margin of the adidas Group decreased 8.5 percentage points to 2.2% in
the first quarter of 2009 (2008: 10.8%). The operating margin decline was due
to the decrease in Group gross margin as well as higher other operating
expenses as a percentage of sales.
Other
operating expenses as a percentage of sales increased 4.7 percentage points to
44.7% in the first quarter of 2009 from 40.0% in 2008, mainly as a result of
higher expenses to support the Groups development in emerging markets. Costs
related to restructuring at Reebok, higher allowances for doubtful debts and
the integration of the Ashworth business also contributed to this development.
These one-time effects in nature and the non-recurrence of prior year book
gains impacted net other operating expenses in an amount of 80 million ($107.1
million).
As a
result, Group operating profit decreased 79% to 58 million ($77.7 million)
from 282 million ($377.6 million) in 2008.
Income
before taxes (IBT) as a percentage of sales decreased 9.2 percentage points to
0.3% in the first quarter of 2009 from 9.6% in 2008. This was a result of the
Groups operating margin decrease and higher net financial expenses. Net
financial expenses were negatively impacted by foreign exchange losses in an
amount of 19 million ($25.4 million) resulting from the revaluation of balance sheet items in
foreign currencies. IBT for the adidas Group declined 97% to 9 million ($12.1 million) from 250 million ($334.9 million) in 2008.
The
Groups net income attributable to shareholders decreased 97% to 5 million ($6.7
million) in the first quarter of 2009 from 169 million ($226.3 million) in
2008. The Groups lower operating profit was the primary reason for this development.
The Groups tax rate increased 19.7 percentage points to 51.7% in the first
quarter of 2009 (2008: 32.0%), mainly due to a less favourable regional
earnings mix throughout the Group.
Basic
earnings per share declined 97% to 0.02 in the first quarter of 2009 versus 0.84 in 2008. Diluted earnings per share in the first quarter of 2009 decreased
95% to 0.04 from 0.79 in the prior year.
Group
inventories up 18% currency-neutral Group inventories increased 18% on a
currency-neutral basis at the end of March 2009. In euro terms, inventories
increased 28% to 2.016 billion ($2.7 billion) versus 1.578 billion ($2.1 billion) in 2008. This was
mainly a result of lower customer demand compared to the Groups expectations
when planning production for the first half of 2009. In addition, the new
Reebok companies in
the consolidation of the Ashworth business acquired in November 2008
contributed to the increase.
Accounts
receivable increased 11% on a currency-neutral basis. In euro terms,
receivables grew 15% to 1.884 billion $2.532 billion. This increase
reflects slower receipt of payments due to the difficult economic situation in
some markets. The new Reebok companies in
as well as the consolidation of the Ashworth business also contributed to this
increase.
Net borrowings at March 31, 2009 amounted to 2.883
billion ($3.86 billion), which represents an increase of 810 million ($1.09 billion), or 39%, versus 2.073
billion($2.78 billion) at the end of March 2008. Higher working capital requirements were the
main reason for the net debt increase. Since March 31, 2008, cash in an amount
of 275 million ($368.3 million) has been used for the meanwhile completed share buyback
programme. Currency translation effects negatively impacted net borrowings by
an amount of 136 million ($182.1 million.)
Consequently, the Groups financial leverage
increased to 81.8% at the end of March 2009 versus 72.9% in 2008.
Looking
ahead, adidas Group said “expectations for the development of the global
economy and the sporting goods industry in 2009 are subject to a high degree of
uncertainty. Consequently, the effect global macroeconomic developments could
have on the adidas Groups business outlook continues to be difficult to
forecast, especially with regard to the second half of the year. In particular,
it is difficult to quantify the impact negative currency translation effects
could have on the Groups top- and bottom-line performance.”
Group
sales to decline at a low- to mid-single-digit rate adidas Group sales are
expected to decrease at a low- to mid-single-digit rate on a currency-neutral
basis in 2009. Sales for brand adidas are projected to decline at a low- to
mid-single-digit on a currency-neutral basis in 2009. Reebok segment sales are
expected to be at least stable compared to the prior year on a currency-neutral
basis in 2009. Currency-neutral sales at TaylorMade-adidas Golf are forecasted
to increase at a low-single-digit rate, supported by the consolidation of
Ashworth for the full twelve-month period.
In 2009,
the adidas Group gross margin is forecasted to decline. 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. Currency devaluation effects,
especially from the depreciation of the Russian rouble, are expected to also
have a significant negative impact on gross margin in 2009. Other operating
expenses as a percentage of sales are expected to increase as a result of
higher expenses for controlled space initiatives in the adidas and Reebok
segments as well as costs related to restructuring activities.
As a
result of the expected Group gross margin decline and the projected increase in
other operating expenses as a percentage of sales, the Groups operating margin
and earnings per share are expected to decline. The adidas Group expects
earnings per share to be around breakeven in the first six months of 2009.
However, the Group will generate significantly positive earnings per share
again in the second half of the year, albeit at lower levels compared to the prior
year. This will be a consequence of a moderation of input cost increases and
positive impetus ahead of the 2010 FIFA World Cup. In 2009, reduction of net
borrowings will continue to be a key priority for the Group. Tight working
capital management, particularly through inventory management, and disciplined
investment activities are expected to help optimise the Groups free cash flow
and contribute to this goal.
Hainer
stated: “We feel the effects of the economic downturn in many of our key
markets. However, our Group is well positioned for this challenging period, and
we are doing all the right things to keep our company on its long-term growth
path. Our biggest asset in this or any other environment is the strengths of
our brands and our commitment to provide unrivalled consumer experience. We
will work hard throughout the remainder of the year on strengthening our brands
while at the same time implementing a series of initiatives to better position
our Group for sustainable long-term growth”
