Adidas, in line with a recent update, reported earnings from continuing operations rose 16 on a 19 percent revenue gain on a currency-neutral basis. The development reflected a 21 percent increase at brand Adidas as well as a 5 percent increase at the Reebok brand.

Major developments in Q2 2017

  • Currency-neutral revenues increase 19 percent
  • Gross margin improves 0.7pp to 50.1 percent
  • Net income from continuing operations grows 16 percent to €347 million
  • Basic EPS from continuing operations increases 14 percent to €1.72

Improved outlook for FY 2017:

  • Currency-neutral revenues to increase at a rate between 17 percent and 19 percent
  • Gross margin to increase up to 0.8pp to a level of up to 50.0 percent
  • Operating margin to grow up to 0.6 percentage points to a level of up to 9.2 percent
  • Net income from continuing operations to increase at a rate between 26 percent and 28 percent

“We are pleased to report on another very successful quarter. Both sales and net income from continuing operations increased strongly. This is testament to the continued momentum our brands enjoy across our key regions and channels,” said Adidas CEO Kasper Rorsted. “Based on the strong first half performance, we are raising our full-year guidance. We’ll grow both our top and our bottom line faster than originally anticipated.”

Currency-neutral sales increase 19 percent in Q2 2017

During the second quarter, Adidas continued to deliver a strong financial performance with currency-neutral revenues up 19 percent. This development reflects a 21 percent increase at brand Adidas as well as a 5 percent increase at the Reebok brand. In euro terms, sales were up 20 percent in the second quarter to €5.038 billion (2016: €4.199 billion). Revenue growth at the Adidas brand was driven by double-digit increases in the running category as well as at Adidas Originals and Adidas neo. High-single-digit growth in the training category also contributed to this development. Top-line improvements at Reebok were driven by strong double-digit sales increases in Classics, partly offset by the brand’s ongoing efforts to clean up its distribution in the US marketplace. From a channel perspective, all distribution channels recorded double-digit growth during the second quarter, with particularly strong support from eCommerce, where revenues grew 66 percent.

Double-digit revenue growth in all regions except Russia/CIS

On a currency-neutral basis, the combined sales of the Adidas and Reebok brands grew at double-digit rates in all regions except Russia/CIS. Growth was especially strong in the company’s key regions Greater China (+28 percent) and North America (+26 percent) as well as in Western Europe, where sales increased 19 percent despite difficult prior year comparisons resulting from the non-recurrence of revenues related to UEFA EURO 2016 products. In Latin America, MEAA and Japan, currency-neutral revenues increased 14 percent, 13 percent and 11 percent respectively. Sales in Russia/CIS declined 11 percent, reflecting the ongoing challenging consumer sentiment as well as additional store closures during the quarter. Revenues in Other Businesses, now comprising Adidas Golf, Runtastic and Other centrally managed businesses, were up 27 percent on a currency-neutral basis, driven by double-digit increases in all operating segments.

Underlying operating margin increases 1.4 percentage points to 10.0 percent

The company’s gross margin increased 0.7 percentage points to 50.1 percent (2016: 49.4 percent), despite significant FX headwind in the quarter. This development was mainly due to the positive effects from a better pricing, product and channel mix. While royalty and commission income declined 2 percent to €29 million (2016: €30 million), other operating income decreased significantly to €24 million from €159 million in the prior year, reflecting the non-recurrence of extraordinary gains related to the early termination of the Chelsea FC contract and the Mitchell & Ness divestiture in the second quarter of 2016. Other operating expenses increased 13 percent to €2.072 billion (2016: €1.833 billion).

As a percentage of sales, however, other operating expenses decreased 2.5 percentage points to 41.1 percent (2016: 43.7 percent). This development reflects the strong top-line expansion during the second quarter as well as the different phasing of the company’s marketing spend, which is significantly more weighted towards the second half of the year in 2017. The company’s operating profit increased 18 percent during the second quarter to a level of €505 million (2016: €429 million), resulting in an operating margin decline of 0.2 percentage points to 10.0 percent (2016: 10.2 percent).

Adjusted for the extraordinary gain of around €70 million related to the early termination of the Chelsea FC contract in the second quarter last year, however, the company’s underlying operating margin increased 1.4 percentage points. Net income from continuing operations was up 16 percent to €347 million (2016: €301 million) and basic earnings per share from continuing operations grew 14 percent to €1.72 (2016: €1.50). Losses from discontinued operations, net of tax, mainly related to the planned divestiture of the TaylorMade and CCM Hockey businesses, amounted to €189 million (2016: €10 million). As a result, net income attributable to shareholders declined 46 percent to €158 million (2016: €291 million), resulting in basic earnings per share from continuing and discontinued operations of €0.78, down from €1.45 in 2016.

Adidas with strong financial performance in the first half of 2017

In the first half of 2017, revenues increased 18 percent on a currency-neutral basis. In euro terms, revenues grew 20 percent to €10.485 billion (2016: €8.761 billion). From a brand perspective, currency-neutral revenues for brand Adidas grew 19 percent. Reebok sales were up 9 percent on a currency-neutral basis versus the prior year. The gross margin improved slightly to 49.9 percent (2016: 49.8 percent), reflecting the positive effects from an improved pricing, product and channel mix as well as lower input costs, which were largely offset by unfavorable currency developments. Royalty and commission income increased 7 percent to €57 million (2016: €53 million). Other operating income declined 72 percent to €52 million (2016: €190 million), mainly due to the non-recurrence of extraordinary gains related to the early termination of the Chelsea FC contract and the Mitchell & Ness divestiture. Other operating expenses were up 15 percent to €4.194 billion (2016: €3.657 billion).

The company’s operating profit grew 20 percent to €1.142 billion (2016: €950 million), representing an operating margin of 10.9 percent (2016: 10.8 percent), an increase of 0.1 percentage points compared to the prior year. Net income from continuing operations grew 21 percent to €809 million (2016: €671 million), resulting in a 20 percent increase in basic earnings per share from continuing operations to €4.00 (2016: €3.34). In the first half of 2017, Adidas incurred losses from discontinued operations of €195 million, net of tax (2016: losses of €28 million). As a result, net income attributable to shareholders declined 4 percent to €613 million (2016:  €641 million) while basic EPS from continuing and discontinued operations decreased 5 percent to €3.04 (2016: €3.20).

Average operating working capital as a percentage of sales decreases

Inventories increased 4 percent to €3.644 billion (2016: €3.514 billion). On a currency-neutral basis, inventories grew 6 percent. Inventories from continuing operations increased 9 percent (+11 percent currency-neutral). Operating working capital increased 6 percent to €4.258 billion (2016: €4.013 billion) at the end of June 2017.

On a currency-neutral basis, operating working capital grew 9 percent. Operating working capital from continuing operations rose 17 percent (+20 percent currency-neutral). Average operating working capital as a percentage of sales from continuing operations decreased 1.0 percentage points to 20.4 percent, reflecting the strong top-line development during the last twelve months as well as the company’s continued focus on tight working capital management.

Adidas raises top- and bottom-line outlook for the 2017 financial year

Due to the strong financial performance in the first half of 2017, Adidas has increased its 2017 financial outlook. The company now expects sales to increase at a rate between 17 percent and 19 percent (previously: to increase at a rate between 12 percent and 14 percent) on a currency-neutral basis in 2017. The gross margin is expected to increase up to 0.8 percentage points to a level of up to 50.0 percent (previously: to increase up to 0.3 percentage points). Other operating expenses as a percentage of sales are forecasted to be below the prior year level of 42.7 percent, driven by leverage from both expenditure for point-of-sale and marketing investments as well as lower operating overheads as a percentage of sales. The operating profit is expected to increase between 24 percent and 26 percent (previously: to increase between 13 percent and 15 percent), reflecting an operating margin improvement of up to 0.6 percentage points to a level of up to 9.2 percent (previously: to increase between 0.2 and 0.4 percentage points). This development will be driven by the projected gross margin improvement as well as lower other operating expenses as a percentage of sales.

These positive effects will be partly offset by the significant decline in other operating income, reflecting the non-recurrence of the one-time gain related to the early termination of the Chelsea FC sponsorship that was included in the prior year. Net income from continuing operations is projected to increase at a rate between 26 percent and 28 percent to a level between €1.360 billion and €1.390 billion. This compares to the original guidance as provided in March of an increase in the company’s net income from continuing operations of between 13 percent and 15 percent to a level between €1.200 billion and €1.225 billion. As a result of an increase in the average number of shares following conversions of convertible bonds into Adidas AG shares, basic earnings per share from continuing operations are expected to increase at a rate between 25 percent and 27 percent (previously: to increase at a rate between 13 percent and 15 percent).

Photo courtesy Adidas