Adidas AG reported strong third-quarter results, helped by double-digit sales increases in its performance business and at its urban wear units Adidas Originals and Neo. The company also announced plans to restructure its Reebok brand.
Major Developments In Q3 2016
- Group sales increased 17 percent on a currency-neutral basis
- Ongoing momentum at Adidas (+20 percent) and Reebok (+7 percent)
- Double-digit growth in all markets except Russia/CIS
- Gross margin down 0.9 pp to 47.6 percent as a result of increased FX headwind
- Operating profit improves 11 percent to €563 million
- Net income from continuing operations grows 15 percent to €387 million
Management Confirms Outlook For Fiscal Year 2016
- Currency-neutral Group sales to increase at a high-teens rate
- Gross margin to be at a level between 48.0 percent and 48.3 percent
- Operating margin to increase to a level of up to 7.5 percent
- Net income to improve to a level between €975 million and €1 billion
Adidas Group Currency-neutral Sales Increase 17 Percent In The Third Quarter Of 2016
During the third quarter, the Adidas Group delivered a strong financial performance against a background of tougher comparisons following the accelerating business development in last year’s third quarter as well as intensified pressure from negative currency effects. Group revenues increased 17 percent on a currency-neutral basis, driven by strong momentum at both Adidas and Reebok. In euro terms, Group revenues grew 14 percent to €5.413 billion (2015: €4.758 billion).
In particular, the Adidas brand continued its strong momentum with revenues up 20 percent on a currency-neutral basis, fueled by double-digit sales increases in Sport Performance at Adidas Originals as well as Adidas Neo. With the exception of Russia/CIS, where revenues grew at a mid-single-digit rate, Adidas recorded double-digit growth in every geography. Reebok was able to maintain its robust revenue expansion as revenues grew 7 percent during the quarter, with sales growth across all regions. This development was supported by double-digit sales increases in the running category as well as in Classics. TaylorMade-Adidas Golf revenues increased 6 percent currency-neutral, driven by strong double-digit growth in the metalwoods and putters categories.
“I am extremely happy to be the CEO of a company that is doing so well,” said Kasper Rorsted, Adidas Group CEO. “The great momentum across all major markets shows the strength of our strategy ‘Creating the New’ because it is driving significant improvements in the desirability of our brands across the globe.”
Revenue Growth In All Market Segments
From a market segment perspective, combined currency-neutral sales of the Adidas and Reebok brands grew at double-digit rates in all segments except Russia/CIS, where revenues increased at a high-single-digit rate. Revenues in Western Europe increased 15 percent on a currency-neutral basis, driven by the U.K., Germany, France, Italy, Spain and Poland, where revenues grew at double-digit rates each. Growth trends in North America and Greater China remained strong, as reflected in currency-neutral sales increases of 20 percent and 25 percent, respectively. Revenues in Russia/CIS continued to grow at robust rates, up 7 percent on a currency-neutral basis. In Latin America, revenues grew 16 percent on a currency-neutral basis, reflecting double-digit sales increases in Argentina, Peru and Colombia as well as high-single-digit growth in Mexico and Chile. In Japan, sales were up 21 percent on a currency-neutral basis. Currency-neutral sales in MEAA grew 19 percent, driven by double-digit growth in South Korea, Australia, the United Arab Emirates, South Africa, India and Thailand.
Revenues for Other Businesses grew 7 percent in the third quarter. Double-digit sales increases in Other centrally managed businesses, as well as mid-single-digit growth at TaylorMade-Adidas Golf, were only partly offset by sales declines at CCM Hockey, reflecting the overall challenging market conditions in the U.S. hockey market.
Gross Margin Negatively Impacted By Severe Headwinds From Unfavorable FX Effects
In the third quarter of 2016, the Group’s gross margin decreased 0.9 percentage points to 47.6 percent (2015: 48.4 percent). The increased headwinds from negative currency movements more than offset the unchanged positive effects from a more favourable pricing, product and channel mix as well as higher product margins at TaylorMade-Adidas Golf.
Other operating expenses increased as a result of additional investments to strengthen the Group’s growth foundation.
During the third quarter, the Group’s other operating expenses increased 12 percent to €2.058 billion (2015: €1.845 billion). The increase was due to higher expenditure for point-of-sale and marketing investments as well as an increase in operating overhead costs. The latter mainly reflects further investments to spur the company’s ‘Creating the New’ strategic business plan as well as costs associated with restructuring measures at Reebok initiated during the third quarter of 2016. As a percentage of sales, however, other operating expenses decreased 0.8 percentage points to 38.0 percent (2015: 38.8 percent), reflecting the Group’s strong top-line improvement.
Operating Profit Improves 11 percent To €563 Million
The Group’s operating profit increased 11 percent to €563 million compared to €505 million in the third quarter of 2015. This translates into an operating margin of 10.4 percent, a decrease of 0.2 percentage points compared to the prior year level of 10.6 percent. As a consequence, the Group’s net income from continuing operations increased 15 percent to €387 million (2015: €337 million). The Group’s net income attributable to shareholders, which in addition to net income from continuing operations includes the result from discontinued operations, grew 24 percent to €386 million from €311 million in the third quarter of 2015. Basic EPS from continuing and discontinued operations increased 24 percent to €1.93 (2015: €1.55). Diluted EPS from continuing and discontinued operations grew 21 percent to €1.88 (2015: €1.55).
First Nine Months Of 2016
In the first nine months of 2016, Group revenues increased 20 percent on a currency-neutral basis, driven by strong double-digit growth at Adidas and high-single-digit sales increases at Reebok. In euro terms, Group revenues grew 15 percent to €14.604 billion (2015: €12.748 billion). All market segments posted currency-neutral sales increases, with double-digit growth across all regions except Russia/CIS, where revenues grew at a mid-single-digit rate. At 48.6 percent, the Group’s gross margin decreased 0.1 percentage points versus the prior year level, as the positive effects from a more favorable pricing, product and channel mix almost entirely compensated for the severe headwinds from negative currency effects. Capitalizing on the strong top-line development, the Group was able to generate significant operating leverage, with other operating expenses as a percentage of sales down 0.8 percentage points to 40.5 percent. This development, in combination with the extraordinary gain related to the early termination of the Chelsea F.C. contract, resulted in a strong increase in the Group’s operating margin. At 10.0 percent, the operating margin was up 1.4 percentage points versus the prior year level excluding last year’s goodwill impairment losses. As a result, net income from continuing operations, excluding goodwill impairment losses in the prior year, increased 39 percent to €1.028 billion. At €5.01, diluted EPS from continuing and discontinued operations grew 46 percent, excluding goodwill impairment losses in the prior year.
Average Operating Working Capital As A Percentage Of Sales Decreases Significantly
The Group’s inventories increased 19 percent to €3.203 billion (2015: €2.698 billion). On a currency-neutral basis, inventories grew 18 percent, reflecting higher stock levels to support the Group’s top-line momentum. Accounts receivable increased 9 percent to €2.715 billion (2015: €2.502 billion). On a currency-neutral basis, receivables were also up 9 percent, reflecting the Group’s strong growth during the third quarter. Operating working capital was up 14 percent to €4.228 billion (2015: €3.724 billion). Average operating working capital as a percentage of sales decreased 0.4 percentage points to 20.3 percent (2015: 20.7 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.
Net Borrowings Decrease To €769 Million
Net borrowings amounted to €769 million (2015: €903 million), representing a decrease of €134 million. This development is mainly a result of an increase in cash generated from operating activities, partly offset by the utilization of cash for the purchase of fixed assets and the dividend payment. The Group’s ratio of net borrowings over EBITDA amounted to 0.4, which is within the Group’s mid-term target corridor of below two times.
Adidas Group Confirms 2016 Outlook
Against the background of the outstanding financial performance in the first nine months of 2016, management has confirmed the outlook for the full year despite one-time costs in the second half of the year related to measures aimed at strengthening the Group’s growth foundation. The company expects revenues to increase at a rate in the high teens on a currency-neutral basis in 2016. The top-line development will be supported by double-digit growth in all regions except Russia/CIS, where sales are forecasted to grow at a mid-single-digit rate.
In 2016, the Group’s gross margin is expected to be at a level between 48.0 percent and 48.3 percent compared to the prior year level of 48.3 percent. While the Group’s gross margin will be negatively impacted by severe headwinds from negative currency effects, these negative effects are projected to be almost completely offset by the positive effects from a more favorable pricing, product and regional mix as well as further enhancements in the channel mix, which is driven by the continued expansion of the company’s controlled space activities.
The Group’s other operating expenses as a percentage of sales are expected to decrease compared to the prior year level (2015: 43.1 percent). Due to the strong top-line growth, expenditure for point-of-sale and marketing investments as a percentage of sales is projected to be below the prior year level of 13.9 percent. Operating overhead expenditure as a percentage of sales is now forecasted to be around the prior year level of 29.2 percent (previously: to be below the prior year level). This development mainly reflects further investments to spur the company’s ‘Creating the New’ strategic business plan as well as one-time costs during the second half in a total magnitude of around €30 million associated with restructuring measures at Reebok. In spite of these one-off expenses, which are expected to impact the Group’s operating profit in the fourth quarter in an amount of around €20 million, the company continues to project the operating margin for the Adidas Group to increase to a level of up to 7.5 percent in 2016 compared to the prior year level of 6.5 percent.
On a media call, Rorsted said plans for Reebok include moving the business to central Boston from Canton, MA in 2017. The 650 Reebok staff in Canton will relocate. Another 300 who do some work for Reebok will transfer to Portland, OR or Europe. The remaining 150 positions will be eliminated. About half of Reebok’s U.S. outlet base will be closed to place a greater focus on its wholesale business.
As a result of the strong top-line development and the robust operating margin expansion, net income from continuing operations excluding goodwill impairment is expected to increase at a rate between 35 percent and 39 percent to a level between €975 million and €1.0 billion compared to the prior year level of €720 million.
“2016 will be a record year for the Adidas Group with truly exceptional results,” said Kasper Rorsted, Adidas Group CEO. “Going forward, it is our job to make this fantastic company even better. We will ensure that the Adidas Group remains a growth company that delivers sustainable top- and bottom-line improvements in the years to come as outlined in our long-term strategic business plan ‘Creating the New’.”
Photo courtesy Adidas