Adidas Records Double-Digit Top- And Bottom-Line Growth In Q1

Adidas reported earnings climbed 17 percent in the first quarter as sales grew on a currency-neutral basis and gross margin expanded 150 basis points. Growth was particularly strong in North America, up 21 percent on a currency-neutral basis, and Asia-Pacific, ahead 15 percent.

Adidas confirmed the company’s outlook for the full year.

Major developments in Q1 2018
• Revenues grow 10 percent currency-neutral and 2 percent in euro terms
• Gross margin increases 1.5pp to 51.1 percent driven by pricing and product mix
• Operating margin improves 1.8pp to 13.4 percent despite continued brand investments
• Net income from continuing operations grows 17 percent to €542 million
• Basic EPS from continuing operations up 16 percent to €2.65

“We had a successful start to the year that was fully in line with our expectations: Our high quality top-line growth was driven by our strategic focus areas North America, Greater China and e-commerce,” said adidas CEO Kasper Rorsted. “At the same time, we managed to grow the bottom line significantly faster than the top line while continuing to invest into creating brand desire.”

Currency-Neutral Sales Increase 10 Percent in Q1 2018

Adidas started into the year with currency-neutral revenues increasing 10 percent. This development reflects an 11 percent increase at adidas which was driven by double-digit increases in the running, football and training categories as well as at adidas Originals. Revenues at the Reebok brand decreased 3 percent due to declines in the training and running categories. From a channel perspective, e-commerce was once again the fastest-growing channel with an increase of 27 percent. In euro terms, the company’s sales were up 2 percent in the first quarter to €5.548 billion (2017: €5.447 billion).

Double-Digit Growth in North America, Asia-Pacific and Latin America

From a market segment perspective, on a currency-neutral basis, the combined sales of the adidas and Reebok brands grew in most market segments. Growth was particularly strong in North America (+21 percent) and Asia-Pacific (+15 percent), the latter driven by a 26 percent increase in Greater China. While Latin America also grew at a double-digit rate (+10 percent), revenues in Western Europe increased 5 percent, in line with the full-year outlook for this market. Sales in Emerging Markets and Russia/CIS declined 5 percent and 16 percent, respectively, as a result of the challenging market conditions.

Operating Margin Increases 1.8 Percentage Points to 13.4 Percent

The company’s gross margin increased 1.5 percentage points to 51.1 percent (2017: 49.6 percent). This development was despite a significant currency headwind in the quarter, which was more than offset by the positive effects from a better pricing and product mix. Other operating expenses increased 2 percent to €2.172 billion (2017: €2.122 billion). As a percentage of sales, other operating expenses increased 0.2 percentage points to 39.1 percent (2017: 39.0 percent), as significantly higher marketing investments were largely offset by strong operating overhead leverage. The company’s operating profit increased 17 percent to a level of €746 million (2017: €637 million), resulting in an operating margin improvement of 1.8 percentage points to a level of 13.4 percent (2017: 11.7 percent). Net income from continuing operations was up 17 percent to €542 million (2017: €462 million). Basic earnings per share from continuing operations increased 16 percent to €2.65 (2017: €2.29).

Average Operating Working Capital as a Percentage of Sales Decreases

Inventories decreased 11 percent to €3.224 billion (2017: €3.609 billion). On a currency-neutral basis, inventories were down 4 percent. Inventories from continuing operations decreased 6 percent in euro terms and increased 1 percent currency-neutral. Operating working capital declined 1 percent to €4.488 billion (2017: €4.554 billion) at the end of March 2018. On a currency-neutral basis, operating working capital grew 9 percent. Operating working capital from continuing operations rose 6 percent in euro terms and 17 percent currency-neutral. Average operating working capital as a percentage of sales from continuing operations decreased 0.7 percentage points to 20.3 percent (2017: 21.0 percent), reflecting the company’s continued focus on tight working capital management.

Net Cash Position of €371 Million

Net cash at March 31, 2018 amounted to €371 million (2017: net borrowings of €859 million), representing an increase of €1.230 billion compared to the prior year. This development was driven by a decline in short-term borrowings on the back of working capital improvements as well as, to a lesser extent, the conversion of the convertible bond.

Adidas Confirms Outlook for FY 2018

For 2018, Adidas continues to expect sales to increase at a rate of around 10 percent on a currency-neutral basis, driven by double-digit growth in North America and Asia-Pacific. The company’s gross margin is forecast to increase up to 0.3 percentage points to a level of up to 50.7 percent

2017: 50.4 percent). Gross margin will benefit from the positive effects of a more favorable pricing, channel and regional mix. These improvements will be partly offset by the negative impact from unfavorable currency movements, as well as higher input costs. The operating margin is forecast to improve between 0.5 and 0.7 percentage points to a level between 10.3 percent and 10.5 percent (2017: 9.8 percent), reflecting the projected gross margin improvement, as well as operating overhead leverage which is expected to overcompensate the planned increase in marketing investments.

Net income from continuing operations is projected to increase to a level between €1.615 billion and €1.675 billion. This development reflects an increase of between 13 percent and 17 percent compared to the prior year level of €1.430 billion, excluding the negative one-time tax impact recorded in 2017. Basic EPS from continuing operations is expected to increase at a rate between 12 percent and 16 percent compared to the prior-year level of €7.05, excluding the negative onetime tax impact in 2017, not taking into account any decrease in the number of shares outstanding due to the company’s share buyback program.