Total adidas-Salomon Group sales improved by 5% in the second quarter to 1.47 billion ($1.77 bn) from 1.39 billion ($1.58 bn) in the second quarter of 2003. Gross margin increased 370 basis points to 48.4% of sales from 44.8% in the prior year. Net income was up 36% 44 million ($53 mm), or 0.96 ($1.16) per diluted share, versus 32 million ($36.4 mm), or 0.71 ($0.81) per diluted share in Q2 2003.
For the second quarter, brand adidas sales increased 6.2% in euro terms to 1.21 billion ($1.45 bn) from 1.14 billion ($1.29 bn) in Q2 2003. Salomon sales were up 7.5% to 72 million ($86.7 mm) from 67 million ($76.2 mm) in the year-ago period. TalylorMade-adidas Golf rose 4.5% for the period to 185 million ($222.8 mm), compared to 177 million ($201.2 mm) in the 2003 second quarter. In U.S. Dollar terms, TM-aG saels grew 10.7% for the period.
From a regional standpoint in Q2, total Group sales in Europe grew 2.2% in euro terms to 740 million ($891.3 mm) versus 724 million ($823.1 mm) in the year-ago period. North America sales were down 1.6% in euro terms to 379 million ($456.5 mm) from 385 million ($437.7 mm) in Q2 last year, but was up 4.3% when measured in U.S. dollars. Asia/Pacific saw sales jump 26.2% in euro terms to 289 million ($348.1 mm) from 229 million ($260.3 mm) in Q2 LY. Latin America sales in Q2 were up 19.0% to 50 million ($60.2 mm) versus 42 million ($47.7 mm) in the year-ago period.
Currency-neutral sales for the Group increased 5% in the first half of 2004. In euro terms, revenues increased 1% to 3.09 billion ($3.79 bn) in 2004 from 3.06 billion ($3.21 bn) in the first half of 2003.
“adidas-Salomon has delivered outstanding operational and financial performance in the first half of 2004,” commented adidas-Salomon Chairman and CEO Herbert Hainer. “We have strong momentum, with quarter-on-quarter sales improvements for all brands, a record gross margin and earnings growth of almost 40%. This is the strongest first half year performance in the Group's history.”
From a brand perspective, sales growth at adidas set the pace for Group performance in the first half of 2004. Currency-neutral revenues increased 5%. The success of the football category as well as the “Apparel Breakthrough”
initiative were the main contributors to this development. At Salomon, revenues increased by 4% on a currency-neutral basis in the first half of 2004, driven by positive developments in the apparel, cycling and nordic
categories. Revenues at TaylorMade-adidas Golf increased 3% on a currency-neutral basis driven by the success of the new r7 Quad metalwood which was launched halfway through the second quarter. The putter and apparel categories also reported solid growth.
Currency effects from a strong euro, especially versus the US dollar, negatively impacted sales at all brands in euro terms. As a result, adidas sales increased 2% to 2.58 billion ($3.17 bn) in the first half of 2004 from 2.54 billion ($2.67 bn) in 2003. Salomon sales were up 2% to 194 million ($238.1 mm) in the first six months of 2004 from 191 million ($200.5 mm) in the prior year. TaylorMade-adidas Golf sales declined 3% to 302 million ($370.7 mm) in 2004 from 311 million ($326.5 mm)in 2003, a 13.5 increase when measured in U.S. dollars.
1st Half 1st Half Change y-o-y Change y-o-y 2003 2004 in euro currency- terms neutral euro in euro in in in millions millions % % adidas 2,542 2,584 2 5 Salomon 191 194 2 4 TaylorMade-adidas Golf 311 302 (3) 3 Total 3,061 3,091 1 5 adidas-Salomon sales by brand in 2004, "Total" includes HQ/Consolidation
From a regional perspective, Group sales in Europe grew 3% on a currency-neutral basis, driven in particular by solid increases in France, Iberia, the UK and the emerging markets. In North America, Group sales during the first half declined 1% on a currency-neutral basis due to a decrease in footwear sales in the adidas Sport Performance division. However, this figure hides strong second quarter developments. In Asia, currency-neutral sales increased 15% driven by double-digit growth in Japan, China and Australia. In Latin America, currency-neutral sales increased 34% in the first half, making it the fastest growing region within the Group. Higher sales in Argentina, Brazil and Mexico were the main drivers of this improvement.
In euro terms, currency translation effects negatively impacted sales in the first half year in all regions. Sales in Europe increased 2% in euro terms to 1.69 billion in the first half of 2004 from 1.66 billion in the prior year. In North America, sales in euros declined 11% to 707 million in 2004 from 790 million in 2003. In euro terms, sales in Asia improved 11% to 566 million in 2004 from 509 million in 2003. In Latin America, sales in euros grew 27% to 99 million in the first six months of 2004 from 78 million in 2003.
1st Half 1st Half Change y-o-y Change y-o-y 2003 2004 in euro currency- terms neutral euro in euro in in in millions millions % % Europe 1,657 1,691 2 3 North America 790 707 (11) (1) Asia 509 566 11 15 Latin America 78 99 27 34 Total 3,061 3,091 1 5 adidas-Salomon sales by region in 2004, "Total" includes HQ/Consolidation
adidas-Salomon gross margin grew 3.6 percentage points to 47.1% in the first six months of 2004 (2003: 43.5%). This represents the highest first half gross margin in the history of the Group and reflects favorable currency
effects, an improving product mix and increased adidas own-retail activities. As a result of the strong gross margin expansion, gross profit for the Group rose 9% in the first six months of 2004 to reach euro 1.456 billion versus
euro 1.331 billion in 2003.
Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), increased by 6%
to euro 1.220 billion in the first half of 2004 from euro 1.154 billion in 2003. As a percentage of sales, this equates to 39.5%, which is 1.8 percentage points higher than the 2003 level of 37.7%. This development reflects
increased marketing expenditures for the UEFA EURO 2004(TM) European Football Championships and the Athens 2004 Olympic Games(TM). Operating expenses were also impacted by the continued expansion of adidas own-retail activities as well as higher doubtful debt provisions at TaylorMade-adidas Golf in the first quarter of this year. Group operating profit increased 33% to euro 236 million
in 2004 from euro 178 million in the first half of 2003, reflecting the Group's strong gross margin development in the period. Similarly, the operating margin grew 1.8 percentage points to 7.6% in the first six months of
2004 versus 5.8% in the same period in 2003.
Income before taxes up 36%
As a result of the strong operational improvements during the first half of 2004, the Group's income before taxes grew 36% to euro 202 million from euro 148 million in 2003. Financial expenses grew 15% to euro 32 million in
2004 from euro 28 million in the first six months of 2003. This reflects difficult comparisons in exchange rate effects on balance sheet items. Goodwill amortization was euro 23 million in the first half of 2004 versus
euro 22 million during the same period in 2003. Royalty and commission income increased 3% to euro 21 million in 2004 from euro 20 million in 2003.
Net income for the Group increased 39% to euro 116 million in the first half of 2004 from euro 83 million in 2003. Solid currency-neutral sales increases, coupled with the strong gross and operating margins, were the drivers of this improvement. Minority interests increased 9% to euro 6 million in 2004 (2003: euro 6 million). The Group tax rate declined 0.2 percentage points to 39.6% in the first six months of 2004 from 39.8% in 2003. As a result, basic earnings per share increased 39% to euro 2.54 for the first six months of 2004 versus euro 1.83 in 2003.
Net borrowings at June 30, 2004 were euro 967 million, down 39% or euro 616 million versus euro 1.583 billion in the prior year. Strong bottom-line profitability and continued tight working capital management were the drivers of this improvement. As a consequence, the Group's financial leverage improved 77 percentage points to 66% in 2004 versus 143% in 2003.
Successful working capital management continues
Group inventories grew 1% to euro 1.304 billion at the end of the first half of 2004 from euro 1.285 billion in 2003. On a currency-neutral basis, this represents an increase of 4%. Due to continued tight inventory management, however, the increase in inventories is below the adidas backlogs
growth and the Group's sales increase expectations for the third quarter of 2004. Receivables at adidas-Salomon were reduced by 8% to euro 1.122 billion at the end of the first half versus euro 1.217 billion in the prior year. On a currency-neutral basis, this represents a decline of 6%.
Currency-neutral order backlogs for adidas grew 10% (+8% in euros) at the end of the second quarter of 2004, reflecting sequential improvement in all regions. Overall apparel orders increased 18% on a currency-neutral basis, or 17% in euro terms, reflecting the successful “Apparel Breakthrough” initiative to grow sales in this product category. Footwear backlogs grew 2% on a currency-neutral basis and were stable in euros, driven primarily by growth in Asia.
Footwear Apparel Total Change y-o-y in % in euro currency- in euro currency- in euro currency- neutral neutral neutral Europe 0 0 11 10 6 5 North America (7) (2) 6 13 (2) 5 Asia 12 14 56 57 34 35 Total 0 2 17 18 8 10 adidas order backlogs by product category and region as at June 30, 2004
As a result of the Group's performance during the first half of the year and business expectations for the rest of 2004, adidas-Salomon is increasing the sales guidance provided earlier this year and again raising the Group's
earnings target. Group revenues are expected to increase by around 5% on a currency-neutral basis, with double-digit currency-neutral growth in Asia and Latin America and mid-single-digit sales growth in Europe. Positive sales
development is also expected in North America on a full year basis.
Group gross margin is projected to clearly exceed 45% for the first time ever and operating margin will improve by at least one percentage point versus the prior year's level of 7.8%. As a result of the strong first half year
performance, Group earnings for the full year are now expected to grow by around 20%.
Herbert Hainer stated, “I have never felt more confident in our Group's capacity to deliver sustained strong performance than I do today. With our great results in the first half year and double-digit order backlog growth, I
am confident of our ability to perform significantly better than we'd originally anticipated at the beginning of the year.”
adidas-Salomon CONSOLIDATED INCOME STATEMENT (IFRS) 2nd QUARTER euro in millions 2004 2003 Change 2004/2003 NET SALES 1,468 1,392 5.5 % COST OF SALES 757 769 (1.5) % GROSS PROFIT 711 623 14.2 % (% OF NET SALES) 48.4 % 44.8 % 3.7 PP SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 595 539 10.5 % (% OF NET SALES) 40.6 % 38.7 % 1.8 PP DEPRECIATION AND AMORTIZATION (EXCL. GOODWILL) 24 23 6.7 % OPERATING PROFIT 92 62 49.1 % (% OF NET SALES) 6.3 % 4.4 % 1.8 PP GOODWILL AMORTIZATION 12 11 5.1 % ROYALTY AND COMMISSION INCOME 12 10 20.3 % FINANCIAL EXPENSES, NET 20 10 102.3 % INCOME BEFORE TAXES AND MINORITY INTERESTS 72 50 43.0 % (% OF NET SALES) 4.9 % 3.6 % 1.3 PP INCOME TAXES 27 19 43.4 % (% OF INCOME BEFORE TAXES AND MINORITY INTERESTS) 37.5 % 37.4 % 0.1 PP MINORITY INTERESTS (1) 1 n/a NET INCOME 44 32 35.8 % (% OF NET SALES) 3.0 % 2.3 % 0.7 PP BASIC EARNINGS PER SHARE (IN euro) 0.96 0.71 35.5 % DILUTED EARNINGS PER SHARE (IN euro) 0.96 0.71 35.4 % NET SALES euro in millions 2004 2003 Change 2004/2003 adidas 1,207 1,137 6.2 % Salomon 72 67 6.7 % TaylorMade-adidas Golf 185 177 4.9 % EUROPE 740 724 2.2 % NORTH AMERICA 379 385 (1.6) % ASIA 289 229 26.7 % LATIN AMERICA 50 42 19.1 %