Adidas AG raised its forecast for 2011 after profit and sales came in better-than-expected in the second quarter, driven by growth in China and European emerging markets. The company’s sales are now expected to increase 10 percent for the full year, excluding changes in currency exchange rates. That is up from the previous outlook for high single-digit sales growth.
Highlights of the second quarter include:
Group sales increase 14 percent on a currency-neutral basis
Net income attributable to shareholders up 19 percent to record € 349 million ($567.4 m)
Both adidas and Reebok sales up 14 percent currency-neutral year-to-date
Comparable Retail store sales grow 15 percent currency-neutral in the first half of 2011
Gross margin improves 20 basis points to 49.2 percent in the second quarter despite rising input costs
Operating margin increases 0.3pp to 8.4 percent in the first half of 2011
Net borrowings down 21 percent to €863 million ($1.24 m) at end of June 2011
Adidas Group currency-neutral sales increase 10 percent in the second quarter of 2011
In the second quarter of 2011, Group revenues grew 10 percent on a currency-neutral basis. Currency-neutral revenues in Western Europe increased 5 percent, supported by double-digit growth at TaylorMade-adidas Golf and sales increases at adidas. In European Emerging Markets, currency-neutral sales were up 21 percent as a result of strong increases at both adidas and Reebok. Group sales in North America grew 5 percent on a currency-neutral basis, supported by double-digit increases at adidas as well as TaylorMade-adidas Golf. In Greater China, Group sales were up 41 percent on a currency-neutral basis, supported by strong growth in all major categories. Currency-neutral revenues in Other Asian Markets and Latin America grew 6 percent and 8 percent, respectively. In contrast to previous quarters, currency translation effects had a negative impact on sales in euro terms. Group revenues grew 5 percent to €3.064 billion ($4.4 bn) in the second quarter of 2011 from €2.917 billion in 2010.
Second quarter gross margin increases 20 basis points
The Groups gross margin increased 0.2 percentage points to 49.2 percent (2010: 48.9 percent) in the second quarter as a larger share of higher-margin Retail sales as well as a more favourable product and regional sales mix more than offset an increase in input costs. Group gross profit increased 6 percent to €1.506 billion ($2.17 bn) (2010: €1.427 billion). Other operating expenses as a percentage of sales decreased 60 basis points to 43.3 percent compared to 43.9 percent the prior year, primarily due to lower marketing expenses. As a result of the higher gross margin and lower other operating expenses as a percentage of sales, the Groups operating margin increased 0.5 percentage points to 7.1 percent versus 6.7 percent in 2010.
Operating profit increased 12 percent to €219 million ($315 m) compared to €195 million in 2010. The Groups net income attributable to shareholders amounted to €140 million ($202 m) (2010: €126 million). Diluted earnings per share for the second quarter increased 11 percent to €0.67 (2010: €0.60).
“After outlining our strategic vision for the company through to 2015 late last year, we have wasted no time and come out of the starting blocks in typical adidas Group fashion-fast and focused,” commented Herbert Hainer, adidas Group CEO. “No matter which way we break down our results – by segment, by region or by brand-all facets of our business are excelling.”
adidas Group currency-neutral sales increase 14 percent in the first half of 2011
In the first half of 2011, Group revenues increased 14 percent on a currency-neutral basis. Currency translation effects had a negative impact on sales in euro terms. Group revenues grew 13 percent to €6.337 billion in the first half of 2011 from €5.590 billion in 2010.
First half adidas Group sales increase driven by double-digit growth in all segments
Currency-neutral Wholesale revenues increased 13 percent in the first half of 2011, driven by double-digit sales growth at both adidas and Reebok. Currency-neutral Retail sales increased 21 percent versus the prior year as a result of double-digit adidas and Reebok sales growth. Comparable store sales grew 15 percent on a currency-neutral basis. Revenues in Other Businesses increased 13 percent on a currency-neutral basis, mainly due to double-digit sales growth at TaylorMade-adidas Golf. Currency translation effects had a negative impact on
segmental sales in euro terms.
First half net sales development by segment
In the first half of 2011, currency-neutral adidas Group sales grew in all regions. Revenues in Western Europe increased 10 percent on a currency-neutral basis, primarily as a result of strong sales growth in Germany, France, Italy and Spain. In European Emerging Markets, Group sales increased 23 percent on a currency-neutral basis due to growth in most of the regions markets, in particular Russia. Sales for the adidas Group in North America grew 15 percent on a currency-neutral basis due to double-digit sales increases in both the USA and Canada. Sales in Greater China increased 38 percent on a currency-neutral basis. Currency-neutral revenues in Other Asian Markets grew 6 percent due to increases in most markets, in particular South Korea. In Latin America, sales grew 11 percent on a currency-neutral basis, with double-digit increases in most of the regions major markets. Currency translation effects had a mixed impact on regional sales in euro terms.
Group gross margin remains stable
The gross margin of the adidas Group remained stable at 48.8 percent in the first half of 2011 (2010: 48.8 percent). The positive impact from a larger share of higher-margin Retail sales as well as a more favourable product and regional sales mix offset an increase in input costs. Gross profit for the adidas Group grew 13 percent in the first half of 2011 to €3.093 billion versus €2.727 billion in the prior year.
Operating margin increases 0.3 percentage points
In the first half of 2011, Group operating profit increased 17 percent to €532 million versus €454 million in 2010. As a percentage of sales, the operating margin of the adidas Group was up 0.3 percentage points to 8.4 percent (2010: 8.1 percent). This development was primarily due to the positive effects from lower other operating expenses as a percentage of sales, which more than offset the non-recurrence of prior year positive effects related to the settlement of a lawsuit and the divestiture of a trademark. Other operating expenses as a percentage of sales decreased 1.1 percentage points to 41.6 percent in the first half of 2011 from 42.8 percent in 2010. In euro terms, other operating expenses increased 10 percent to €2.637 billion in the first half of 2011 (2010: €2.390 billion), as a result of higher marketing expenditure as well as the expansion of the Groups own-retail activities. Thereof, sales and marketing working budget expenditure amounted to €832 million, which represents an increase of 10 percent versus the prior year level (2010: €756 million). Nevertheless, as a result of the strong revenue development, sales and marketing working budget expenditure as a percentage of sales decreased 0.4 percentage points to 13.1 percent (2010: 13.5 percent).
Financial income down 43 percent
Financial income decreased 43 percent to €13 million in the first half of 2011 from €23 million in the prior year, mainly due to the non-recurrence of positive exchange rate effects in the prior year.
Financial expenses up 8 percent
Financial expenses increased 8 percent to €63 million in the first half of 2011 (2010: €58 million), mainly as a result of negative exchange rate effects, which more than offset the positive effect of lower interest expenses. Excluding those effects, financial expenses decreased 11 percent.
Net income attributable to shareholders up 19 percent
Income before taxes (IBT) for the adidas Group increased 15 percent to €482 million from €419 million in 2010. The Groups tax rate decreased 2.0 percentage points to 27.5 percent in the first half of 2011 (2010: 29.5 percent). As a result, the Groups net income attributable to shareholders increased to €349 million in the first half of 2011 from €295 million in 2010. This represents an increase of 19 percent versus the
prior year level.
Earnings per share reach €1.67
In the first half of 2011, basic and diluted earnings per share amounted to €1.67 (2010: €1.41), representing an increase of 19 percent. The weighted average number of shares used in the calculation was 209,216,186.
Group inventories up 16 percent
Group inventories increased 16 percent to €2.376 billion at the end of June 2011 versus €2.049 billion in 2010. On a currency-neutral basis, inventories grew 26 percent, driven by a normalisation of inventory levels compared to the prior year as well as continued growth expectations in the coming quarters.
Accounts receivable increase 1 percent
At the end of June 2011, Group receivables increased 1 percent to €2.023 billion (2010: €1.999 billion) as a result of the Groups sales growth. On a currency-neutral basis, receivables were up 9 percent.
Net borrowings down €227 million
Net borrowings at June 30, 2011 amounted to €863 million, which represents a decrease of €227 million, or 21 percent, versus €1.090 billion at the end of June 2010. The decrease was driven by the strong operating cash flow development over the past 12 months. Currency translation had a positive effect in an amount of €25 million. The Groups ratio of net borrowings over 12-month rolling EBITDA decreased to 0.7 at the end of June 2011 versus 1.0 in the prior year.
adidas Group increases full year 2011 sales and earnings guidance
After the stronger than expected first half year performance, Management has decided to increase the full year 2011 adidas Group sales and earnings guidance. Management now forecasts adidas Group sales to increase at around 10 percent on a currency-neutral basis in 2011 (previously: increase at high-single-digit rate). High exposure to fast-growing emerging markets, the further expansion of Retail as well as continued momentum at all key brands will more than offset the non-recurrence of sales related to the 2010 FIFA World Cup.
Currency-neutral Wholesale segment revenues are now projected to increase at a high-single-digit rate (previously: mid- to high-single-digit rate) compared to the prior year due to strong performance of the adidas brand in Greater China and North America and a less severe decline in Japan than originally expected in the aftermath of the disaster earlier this year. adidas Group currency-neutral Retail segment sales are projected to grow at a mid-teens rate in 2011 (previously: low-double-digit rate). Comparable store sales are expected to contribute to the revenue growth at a higher rate than the expansion of the Groups own-retail store base. Segmental revenues of Other Businesses are now projected to increase at a mid- to high-single-digit rate on a currency-neutral basis (previously: mid-single-digit rate).
In 2011, the adidas Groups gross margin is forecasted to reach a level between 47.5 percent and 48.0 percent (2010: 47.8 percent). Group gross margin will benefit from positive regional mix effects. In addition, improvements in the Retail segment as well as at the Reebok brand will positively influence the development of the Groups gross margin. However, these positive effects will be offset by several factors. In particular, sourcing costs will increase significantly compared to the prior year as a result of rising raw material costs and capacity constraints. In addition, as a consequence of the tragic events in Japan during the first quarter of 2011, Group gross margin will be negatively impacted by sales declines in this market.
The adidas Groups other operating expenses as a percentage of sales are expected to decrease modestly in 2011 (2010: 42.1 percent). Sales and marketing working budget expenses as a percentage of sales are also projected to decline modestly compared to the prior year. Marketing investments to support Reeboks growth strategy in the mens training and womens fitness categories, as well as investments to support growth in the Groups key attack markets-North America, Greater China and Russia/CIS-will be offset by the non-recurrence of expenses in relation to adidas presence at the 2010 FIFA World Cup.
In 2011, the operating margin for the adidas Group is expected
to increase to a level between 7.5 percent and 8.0 percent (2010: 7.5 percent). In addition, Management expects lower interest expenses in 2011 due to a lower average level of net borrowings. As a result of these developments and in light of the Groups increased sales expectations, earnings per share are now projected to increase at a rate approaching 15 percent to a level between €3.10 and €3.12 (previously: increase at around 10 percent to 15 percent to a level between €2.98 and €3.12; 2010: €2.71).
Hainer stated: “No matter which retailer I speak to, or which market share statistic I read, our product sell-throughs are stronger than they have ever been. Despite severe external pressures from currency volatility and rising commodity prices, we were able to defend our profitability as a result of our unparalleled strength in innovation and design as well as supply chain excellence. After the strong first half performance, we are on our way to record sales and earnings in 2011. This is all the more notable as various currencies have been weakening versus the euro, which negatively impacts our financial results in the short term.”
