Adidas AG reported net earnings rose 35 percent in the third quarter as sales improved 12 percent on a currency-neutral basis. The gains were driven by Greater China, up 28 percent, and North America, ahead 23 percent, driven by the Adidas brand.
MAJOR DEVELOPMENTS IN Q3 2017
- Currency-neutral revenues increase 12 percent
- Gross margin improves 2.4pp to 50.4 percent
- Operating margin increases 2.7pp to 14.0 percent
- Net income from continuing operations grows 35 percent to €549 million
- Basic EPS from continuing operations increases 33 percent to €2.70
“The company’s strategic growth areas – North America, Greater China and eCommerce – were again the main drivers of our strong top-line performance during the third quarter. We are even more pleased with the quality of our growth, which is clearly reflected in the exceptional profitability improvement in Q3,” said Adidas CEO Kasper Rorsted. “We delivered another set of strong results and are fully on track to achieve our ambitious 2017 financial targets.”
Currency-neutral sales increase 12 percent in Q3 2017
During the third quarter, Adidas continued to deliver a strong financial performance with currency-neutral revenues up 12 percent. This development mainly reflects a 13 percent increase at brand Adidas, which was driven by double-digit increases in the running and outdoor categories as well as at Adidas Originals and Adidas neo. Sales in the football and basketball categories declined, reflecting significantly lower license revenues mainly due to the termination of two major sponsorship agreements. Revenues at the Reebok brand grew 1 percent, as the planned efforts to clean up Reebok’s distribution in the US marketplace are having an increasingly negative impact on the brand’s top-line development. From a channel perspective, the company’s revenue growth was driven by increases in all distribution channels, with particularly strong support from eCommerce, where revenues grew 39 percent. In euro terms, sales for the company were up 9 percent in the third quarter to €5.677 billion (2016: €5.222 billion).
Excellent growth in Greater China and North America
On a currency-neutral basis, the combined sales of the Adidas and Reebok brands grew in all regions except Russia/CIS. Greater China (+28 percent) and North America (+23 percent) increased at double-digit rates each, driven by the Adidas brand, which continues to enjoy particularly strong momentum in these key regions as reflected in growth rates of 29 percent and 31 percent, respectively. Currency-neutral revenues in Western Europe (+7 percent) and Latin America (+8 percent) increased at a high-single-digit rate each. Currency-neutral revenues in MEAA and Japan increased 6 percent and 3 percent, respectively. Sales in Russia/CIS declined 17 percent, reflecting the ongoing challenging consumer sentiment as well as additional store closures during the third quarter. Revenues in Other Businesses, comprising Adidas Golf, Runtastic and Other centrally managed businesses, were up 14 percent on a currency-neutral basis, driven by double-digit increases at Adidas Golf.
Operating margin increases 2.7 percentage points to 14.0 percent
The company’s gross margin increased 2.4 percentage points to 50.4 percent (2016: 48.1 percent). This development was mainly due to the positive effects from a better pricing and product mix, which more than offset higher input costs as well as unfavorable currency developments. Other operating expenses increased 8 percent to €2.129 billion (2016: €1.963 billion), reflecting an increase in expenditure for point-of-sale and marketing investments as well as operating overhead expenditure. As a percentage of sales, however, other operating expenses decreased 0.1 percentage points to 37.5 percent (2016: 37.6 percent). The company’s operating profit increased 35 percent during the third quarter to a level of €795 million (2016: €591 million), resulting in an operating margin increase of 2.7 percentage points to 14.0 percent (2016: 11.3 percent). Net income from continuing operations was up 35 percent to €549 million (2016: €407 million) and basic earnings per share from continuing operations grew 33 percent to €2.70 (2016: €2.03). Losses from discontinued operations, net of tax, mainly related to the divestiture of the TaylorMade and CCM Hockey businesses, amounted to €22 million (2016: €20 million). As a result, net income attributable to shareholders increased 36 percent to €526 million (2016: €386 million), resulting in basic earnings per share from continuing and discontinued operations of €2.59, up 34 percent compared to €1.93 in 2016.
Adidas with strong financial performance in the first nine months of 2017
In the first nine months of 2017, revenues increased 16 percent on a currency-neutral basis and in euro terms, to €16.162 billion (2016: €13.983 billion). From a brand perspective, currency-neutral revenues for brand Adidas grew 17 percent. Reebok sales were up 6 percent on a currency-neutral basis versus the prior year. The gross margin increased 0.9 percentage points to 50.1 percent (2016: 49.2 percent), reflecting the positive effects from an improved pricing and product mix, which more than offset unfavourable currency developments as well as higher input costs. Royalty and commission income increased 5 percent to €86 million (2016: €82 million). Other operating income declined 59 percent to €85 million (2016: €206 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 13 percent to €6.323 billion (2016: €5.620 billion). The company’s operating profit grew 26 percent to €1.938 billion (2016: €1.541 billion), representing an operating margin of 12.0 percent (2016: 11.0 percent), an increase of 1.0 percentage points compared to the prior year. Net income from continuing operations grew 26 percent to €1.358 billion (2016: €1.078 billion), resulting in a 25 percent increase in basic earnings per share from continuing operations to €6.71 (2016: €5.37). In the first nine months of 2017, Adidas incurred losses from discontinued operations of €217 million, net of tax (2016: losses of €48 million). As a result, net income attributable to shareholders increased 11 percent to €1.139 billion (2016: €1.027 billion) while basic EPS from continuing and discontinued operations grew 10 percent to €5.63 (2016: €5.13).
Average operating working capital as a percentage of sales decreases
Inventories increased 7 percent to €3.441 billion (2016: €3.203 billion). On a currency-neutral basis, inventories grew 11 percent. Inventories from continuing operations increased 13 percent (+16 percent currency-neutral). Operating working capital increased 6 percent to €4.502 billion (2016: €4.228 billion) at the end of September 2017. On a currency-neutral basis, operating working capital grew 11 percent. Operating working capital from continuing operations rose 14 percent (+19 percent currency-neutral). Average operating working capital as a percentage of sales from continuing operations decreased 1.0 percentage points to 20.3 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 confirms its top- and bottom-line outlook for FY 2017
Against the background of the strong financial performance in the first nine months of 2017, Adidas has confirmed its outlook for the financial year 2017, which the company had previously increased with the announcement of its preliminary second quarter results on July 27, 2017. The company continues to expect sales to increase at a rate between 17 percent and 19 percent on a currency-neutral basis in 2017. 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.
In addition to the strong revenue growth, the excellent bottom-line improvement will be driven by a gross margin increase of up to 0.8 percentage points to a level of up to 50.0 percent. 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. These positive effects will be partly offset by the significant decline in other operating income, mainly 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. As a result, operating profit is expected to increase between 24 percent and 26 percent, reflecting an operating margin improvement of up to 0.6 percentage points to a level of up to 9.2 percent. Due to 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.
Photo courtesy Adidas