Adidas AG reported sales grew 25.6 percent in North America in the second quarter, accelerating from a gain of 21.6 percent in the first quarter.
Also backed by near 30-percent gains in Western Europe and Greater China, Adidas AG scored its highest organic second-quarter growth rate in more than a decade, adding more than €750 million ($835.2 million) to its top line in just one quarter.
The results confirmed preliminary results released the prior week while demonstrating the widespread strength the Adidas brand is seeing. The sporting goods giant also raised its full-year forecast for a fourth time this year the previous week.
On a conference call with analysts, Adidas AG CEO Herbert Hainer said growth was driven by double-digit gains in key performance and lifestyle categories.
With a 7-percent topline increase, sales growth at Reebok saw a further acceleration compared to the previous quarter. Even Adidas-TaylorMade, which was put on the selling block in May, showed a recovery.
From a bottom-line standpoint, despite ongoing “severe headwinds” from negative currency effects, Adidas AG’s gross margin climbed 50 basis points to 48.8 percent, “underlying the high desirability for our brands around the globe,” Hainer said. With significant operating expense leverage, as well as an extraordinary gain related to the early termination of its Chelsea F.C. contract, operating margin improved 3.4 percentage points to 9.4 percent.
Net sales grew 13.2 percent to €4.42 billion ($4.9 billion) and gained 21 percent on a currency-neutral basis.
Consequently, net income from continuing operations grew 99 percent, reaching an all-time high during the second quarter of €291 million ($324.1 million).
“What pleases me more than the pure numbers is their composition,” added Hainer. “It is both our core performance categories, football, training and running, as well as our key lifestyle sub-brands, Adidas Originals and Adidas Neo, that continue to report strong double-digit growth rates across our focus markets.”
By region, North American sales for the Adidas and Reebok brands reached €788 million ($877.6 million), growing 22.6 percent on a reported basis, according to Robin Stalker, Adidas AG’s CFO.
The Adidas brand jumped 32 percent in North America, driven by strong double-digit growth from the running, training and basketball categories, as well as Originals and Neo. The strongest growth rates were generated in running and Originals, both achieving growth rates above 60 percent.
Stalker noted that driven by the “enormous heat around our performance and lifestyle products,” the Adidas brand significantly gained market share with leading U.S. retailers. He added, “In the second quarter, the brand’s wholesale business in North America actually outperformed the growth of our own retail business by more than 5 percentage points. And this, ladies and gentlemen, is proof positive that Adidas is without doubt becoming a viable sports brand in the world’s most relevant sporting goods market.”
Reebok’s revenues in North America slid 3 percent due to efforts around “streamlining the business and rebuilding brand reputation in North America,” including closing outlet stores. Stalker said the smaller decline compared to recent quarters, as well as “encouraging backlogs for the second half of 2016 can be regarded as a clear sign that we are on the right track to turn Reebok around in its home market, just as we have done in the rest of the world.”
Gross margin in the quarter in the North America region increased 2.1 percent percentage points, driven by an improved pricing, product and channel mix. Combined with strong operating leverage, operating margin expanded 6.8 percentage points to 9.4 percent. Stalker described it as “a margin we haven’t seen in North America for years and proof positive the brand strength and scale matters most.”
In Western Europe, sales for the Adidas and Reebok brands grew 29.2 percent on a currency-neutral basis to €1.21 billion ($1.35 billion), while expanding 26.3 percent on a reported basis. The gains were supported by additional revenues generated around UEFA Euro 2016. With strength throughout all key categories, the Adidas brand grew 30 percent and Reebok increased 23 percent. The Adidas brand gains were driven by “tremendous acceleration” in running and training while Originals “was again able to gain further traction” in the quarter, said Stalker. At Reebok, growth was driven by double-digit increases in training and classics. The U.K., Germany, Italy, Poland, France and Spain drove the gains.
Gross margins in Western Europe were down 3.2 percentage points to 44 percent due to the strengthening of the U.S. dollar. However, despite greater marketing spend around the UEFA Euro 2016, strong operating leverage and a decrease in other operating expenses led operating income to increase as a percentage of sales by 1.1 percentage points, to 17.3 percent.
In Greater China, sales for the Adidas and Reebok brands expanded 30.1 percent to €685 million ($762.9 million) and grew 21.4 percent on a reported basis. Adidas brand sales expanded 30 percent while Reebok’s momentum accelerated further with sales up 38 percent. Said Stalker, “Growth at both brands was driven by double-digit increases in all key performance categories, as well as in the lifestyle business.”
Greater China’s operating margin was up 0.7 percentage points to 37.2 percent. A 1.4-percentage point increase in gross margin was only partly offset by higher operating expenses as a percentage of sales.
“Given our already-strong brand perception in China in connection with the persistent trends around a healthier and a more sports-oriented lifestyle, we have every confidence that China will continue to be a major growth market going forward,” Stalker said. “And with our new strategic partner, Chinese real estate and sports business giant Wanda Group, we have a new ally who shares our enthusiasm for this market.”
In Latin America, sales for the Adidas and Reebok brands grew 7.9 percent on a currency-neutral basis to €379 million ($422.1 million), a pullback from the strong double-digit growth in the first quarter this year. Stalker said the softness reflected the declining purchasing power in Argentina as a result of the strong inflation of the peso. Strategic restructuring in some markets also impacted performance. Reported revenues were down 17 percent.
Due to major currency headwinds, the gross margin in Latin America declined 1.5 percentage points to 41.1 percent in Q2. Combined with higher operating expenses as a percentage of sales, the segment operating margin declined 4.6 percentage points to 10.5 percent.
Stalker noted that in the half, segment revenues increased 13 percent in Latin America, with double-digit growth in all major markets, and “we expect this sort of trend to continue throughout the remainder of this year, also with the additional support of the Olympic Games in Brazil.”
In other regions, Russia/CIS revenues for the Adidas and Reebok brands rose 7.2 percent on a currency-neutral basis to €172 million ($191.6 million), while sliding 15.9 percent on a reported basis. Japan’s sales were up 20.9 percent on a currency-neutral basis to €236 million ($262.8 million), and grew 32.4 percent on a reported basis. In the MEAA region, sales grew 14.2 percent to €572 million ($637 million) and gained 6.8 percent on a reported basis.
Globally, the Adidas brand sales gained 24.6 percent on a currency-neutral basis to €3.71 billion ($4.1 billion). Reported sales for the Adidas brand were up 16.5 percent.
Adidas Brand Gains Lead the Way
Elaborating on the global performance of Adidas brand, Hainer noted that the brand’s core performance categories – football, training and running – as well as its key lifestyle sub-brands, Originals and Neo, continued to report strong double-digit growth rates across their focus markets. Said Hainer, “This underlines that we are focused on those business areas where we can have the biggest impact on the consumer.”
Sales for the Adidas brand in global football, or soccer, expanded 17 percent, with double-digit increases in most markets. The strong performance had previously led the company in June to increase its target for the category to €2.5 billion for the current year.
Hainer said that even before the Euro 2016, Adidas’ soccer segment benefited from the victory of its sponsored team Real Madrid in the UEFA Champions League. During a summer that included Copa America and Euro 2016, Adidas claimed the title of the Most Shareable Brand on the various social media channels. Hainer said the brand benefited from leveraging short films and images relating to federations such as Germany, Wales, Belgium and Spain, as well as key players like Paul Pogba, Mesut Ozil and Gareth Bale.
In running, the Adidas brand was up 30 percent globally, led by a 35 percent gain in footwear. The category saw strong double-digit sales growth in all major markets and benefited from the launch of Ultraboost Uncaged and Alphabounce.
Training was ahead 11 percent globally, with double-digit growth rates in all major markets. Growth was particularly strong in apparel, where revenues grew at a double-digit rate, supported by key concepts such as Climachill and Techfit. The gains were led by strong double-digit growth in women’s training.
In its lifestyle businesses, Adidas Brand’s revenues grew 50 percent in the second quarter, with strong double-digit increases in all markets except Russia, where sales grew at the high-single-digit rate.
Originals also formed a long-term partnership with Kanye West. Hainer heralded the partnership as the “most significant partnership ever created between a non-athlete and an athletic brand.” He noted that the alliance will also focus on performance-intended designs.
Meanwhile, sales of Neo expanded 31 percent in Q2, reflecting strong double-digit increases in all markets except Japan. A new comfort footwear concept, Cloudfoam, led to strong double-digit increases in footwear across all key distribution channels. Added Hainer, “This new comfort concept is resonating extremely well with girls, Adidas-Neo’s clear target consumer root, which was achieved through girl-specific footwear models in terms of material and color choice.”
Reebok Banks on Fitness
At Reebok, sales globally gained 6.9 percent on a currency-neutral basis to €399 million ($444.4 million), but declined 2.1 percent on a reported basis. With the exception of North America, where Reebok continues to streamline its U.S. business, the brand is growing at double-digit rates in most of its key markets, including Western Europe, Greater China, Russia and Japan.
“From a category perspective, Reebok is more and more considered as a true fitness brand, as reflected by strong growth rates posted in the all-important running and training categories,” said Hainer. He noted that training is expected to be supported by Reebok’s new partnership with J.J. Watt.
In classics, another focused category of Reebok, the brand is capitalizing on strong underlying lifestyle trends in the marketplace. Said Hainer, “Reebok’s strong heritage in casual sports, together with its unique partnership around Kendrick Lamar, is not only translating into double-digit growth for the category but, more importantly, enabling the brand to win back shelf space at important key accounts, including in its home market, North America.”
The turnaround in the U.S. remains “the key for the brand” at retail, where further rationalization efforts will continue, as well as wholesale.
“So far we have seen a huge step up in more presence year-to-date, including permanent displays at Finish Line, dedicated windows at Champs and branded space at Footaction,” said Hainer. “And the feedback we’re getting from retailers for the upcoming spring/summer 2017 season is clearly indicating that they are excited to further engage with the Reebok brand.”
Golf on the Upswing
At its other businesses segment, which includes Adidas-TaylorMade and CCM Hockey, sales were up 6.1 percent on a currency-neutral basis to €377 million ($420 million), and grew 3.3 percent on a reported basis.
TaylorMade-Adidas Golf’s sales were up 6.9 percent to €248 million ($276 million). The gains were led by a 24 percent increase at TaylorMade, reflecting strong double-digit growth in metal woods, where its M1 and M2 product families are seeing strong sell-through rates in the marketplace, particularly North America.
“Consequently, TaylorMade remains the undisputed number-one golf brand in metal woods, with strong market share gains year to date too,” said Hainer, “and these operational improvements are also reflected in the financials.”
Driven by a significantly more favorable pricing and product mix, TaylorMade-Adidas Golf has seen “major gross margin improvements” during the second quarter. Along with a considerable reduction in operating expenses as part of a restructuring that has taken place over the last 12 months, TaylorMade-Adidas Golf turned profitable again at the end of Q2.
Sales of CCM Hockey were down 17.7 percent to €64 million ($71.3 million), and lost 20.3 percent on a reported basis. The drop was mainly the result of declines in the licensed apparel and equipment business, reflecting the “challenging environment in the U.S. hockey market, with excess inventory at retail and two major customers having filed for bankruptcy.” Stalker said he expects CCM’s “business to normalize in the second half of the year.”
As reported the prior week, Adidas now expects its sales to expand on a currency-neutral basis at a rate in the high teens, up from around 15 percent previously. The topline development will be supported by double-digit growth in all regions except Russia/CIS, where sales are now forecasted to grow at a mid-single-digit rate.
Adidas AG’s gross margin is expected to be at a level between 48 percent and 48.3 percent, compared to the prior-year level of 48.3 percent. Less favorable U.S. dollar hedging rates and rising labor expenditures are now projected to be almost completely offset by the positive effects from more favorable pricing, product and regional mix as well as further enhancements in the channel mix, which are driven by the continued expansion of the company’s direct-to-consumer business.
Operating expenses as a percentage of sales are expected to decrease compared to the prior-year level of 43.1 percent, due to the stronger-than-expected top-line growth
Net income from continuing operations, excluding goodwill impairment, is now projected to increase at a rate between 35 percent and 39 percent, up from a rate of around 25 percent previously.
Lead photo courtesy Adidas