adidas-Salomon saw fairly balanced sales increases across all three divisions in the third quarter, but a slowdown in brand adidas order backlog in Europe is offsetting excitement over renewed energy in North America. Still, total third quarter net sales increased 9% on a currency-neutral basis. This represents growth of 5.4% in euro terms to 1.95 billion ($2.39 bn) in 2004 from 1.85 billion ($2.09 bn) in the third quarter of 2003.
Gross margin improved 280 basis points to 47.8% of sales from 45.0% in the year-ago period. Net income was up 19.3% to 179 million ($219 mm), or 3.91 ($4.78) per diluted share, versus 150 million ($169 mm), or 3.31 ($3.73) per diluted share, in Q3 2003. Currency-neutral sales for the Group rose 6% in the first nine months of 2004. In euro terms, revenues increased 2.7% to 5.04 billion ($6.20 bn) in 2004 from 4.91 billion ($5.45 bn) in the first nine months of 2003.
Apparel sales increased 12.4% to 1.93 billion in the nine-month YTD period from 1.72 billion in the 2003 YTD period. Currency-neutral Apparel sales were up 17%, driven by “strong double-digit growth” in the Football (Soccer) and Running categories in adidas Sport Performance, as well as increases in adidas Sport Heritage, Salomon, and adidas Golf product. Footwear sales decreased 4% in currency-neutral terms in the YTD period and declined 4.0% in Euro terms to 2.23 billion from 2.32 billion last year. Brand adidas saw improvement in the Sport Performance Football, Training, and Outdoor categories, but the gains were not enough to offset declines elsewhere. Hardlines sales were up 8% on a currency-neutral basis for the nine-month period and inched up 1.3% in Euro terms to 883 million from 872 million in the year-ago period. The gain was driven by higher Football (Soccer) sales at brand adidas, increases in TaylorMade Metalwoods and Putters, and Salomon Nordic, Alpine Boots and Cycling product.
From a regional standpoint, third quarter Group sales in Europe grew 5.6% to 1.08 billion versus 1.02 billion in the year-ago period, driven by gains at adidas and Salomon.
A strong presence at the Summer Olympics in Athens during the quarter helped boost revenues. North America sales were down 1.1% to 454 million ($555 mm) in the third quarter from 459 million ($517 mm) in Q3 last year, but were up 7.4% when measured in U.S. dollars. Asia/Pacific saw sales jump 12.3% in euro terms to 346 million from 308 million in Q3 LY, but increased 18% in currency-neutral terms. Latin America sales in Q3 were up 25.0% to 65 million versus 52 million in the year-ago period, a 37% gain in currency-neutral terms.
Brand adidas sales increased 6.4% to 1.57 billion ($1.92 bn) in third quarter from 1.48 billion ($1.66 bn) in Q3 2003, driven by gains in Football (Soccer) and the brands “Apparel Breakthrough” initiative. adidas also saw double-digit growth in the Sport Heritage category. Owned-retail revenues increased 23% on a currency-neutral basis for the YTD period, representing a 21% increase in Euro terms to 402 million ($495 mm).
Brand adidas sales in Europe increased 5.9% to 945 million ($1.16 bn) from 892 million ($1.0 bn) in the year-ago period. Sales in North America rose 2.4% to 299 million ($366 mm) from 292 million ($329 mm) in Q3 2003, but increased 11.1% when measured in U.S. dollars.
Asia/Pacific sales jumped 26.6% to 266 million ($325 mm) from 229 million ($258 mm) in Q3 last year. Latin America sales were up 23.5% for the quarter to 63 million ($77 mm) from 51 million ($57 mm) in the year-ago period.
Sports Performance division sales grew 6% on a currency-neutral basis for the third quarter, or a 2.7% gain in Euro terms to 1.28 billion ($1.56 bn). Sports Heritage sales jumped 28% on a currency-neutral basis in Q3 and grew 24.9% in Euro terms to 281 million ($344 mm). Sport Style Q3 sales fell 21% in both Euro and currency-neutral terms to 7 million ($8.5 mm), due to the spreading of product launches across more of the year.
adidas gross margin improved 400 basis points in the third quarter to 45.6% versus 41.6% in the year-ago period, reflecting lower closeout sales and higher owned-retail sales. Operating profit at brand adidas jumped 25.4% to 262 million ($320 million).
The company still expects brand adidas sales for the year to increase in mid-single-digits on a currency-neutral basis. They expect sales in North America to see growth in the 3% to 5% range.
adidas Europe sales are expected to grow at mid-single-digit rates. The decline in order backlog in Europe at the end of the quarter was said to be mainly due to the “increasingly difficult retail environment in most major markets” which led to changing order patterns and a more reorder- and auto-replenishment-oriented business in the region.
Salomon sales were up 3.0% to 205 million ($251 mm) in Q3 compared to 199 million ($224 mm) in the year-ago period, but increased 6.0% in currency-neutral terms. Sales in Europe grew 12.4% for the period to 118 million from 105 million in the year-ago quarter. In North America, Salomon saw sales increase 2.6% when measured in U.S. dollars, but declined 5.5% in Euro terms to 69 million ($84 mm) from 73 million ($82 mm) in Q3 last year. Asia/Pacific sales fell 15.8% in Q3 to 16 million ($20 mm) from 19 million ($21 mm) in the year-ago period and Latin America sales were flat at 1.0 million ($1.2 mm) in the quarter.
Gross margins at Salomon declined 180 basis points in Q3 to 42.9% of sales versus 44.7% of sales in the year-ago period. The decrease is due to FX rate impact of sourcing goods in Europe that are sold internationally. Reduction in operating expenses more than offset declines in GM as operating profit for the division rose 5.6% to 25 million ($31 mm). Salomon posted a YTD operating loss of 7.0 million, a 133% increase compared to the 3.0 million operating loss posted in the YTD period last year.
Looking ahead, the company expects full year currency-neutral sales at Salomon to increase at a mid-single-digit rate, but GM and operating margin are expected to decline.
TaylorMade-adidas Golf sales were flat for the quarter at 176 million ($215 mm), but increased 8.5% when measured in U.S. dollar terms from $198 million in Q3 last year and rose 5% in currency-neutral terms.
TM-aG sales in the North America region inched up 0.4% for the period to $105 million (86 mm), but showed a 7.5% decline when measured in Euros. In Europe, TM-aG sales increased 8.5% in U.S dollar terms to roughly $29 million (24 mm) from $27 million (24 mm) in the year-ago period. Asia/Pacific sales jumped 17.6% in U.S. dollar terms to $79 million (65 mm) from $68 million (60 mm) in the year-ago period. Latin America sales were $1.2 million (1.0 mm).
Gross margin for TM-aG improved 170 basis points to 47.7% of sales versus 46.0% of sales in the year-ago period, due in large part to apparel becoming a larger percentage of sales. operating profit declined 6.4% in U.S. dollar terms to $31 million (25 mm) from $33 million (29 mm) in the year-ago period and decreased 13.8% in Euro terms.
At the recent adidas-Salomon Investor Day in Herzogenaurach, Germany, TM-aG CEO Mark King said that Callaway product line launch delays will benefit TaylorMade. The R7 driver launched in May at a new $499 price point already boasts a 5% market share in Metalwoods. The R5 take-down, which was launched in the fall with less technology and a $329 price point, picked up almost two share points in the last two months, according to the company.
TM-aG sales are still expected to increase in mid-single-digits for the year in currency-neutral terms.
adidas-Salomon reiterated its August guidance that calls for Group revenues 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. North America sales are expected to increase 3% to 5% for 2004.
Group gross margin is projected to exceed 45% for the first time and operating margin is forecast to improve by at least 100 basis points versus the prior year's level of 7.8%. Group earnings for the full year are now expected to grow by around 20% for the year.
For 2005, adidas-Salomon anticipates mid- to high-single-digit currency-neutral revenue growth, while earnings are expected to improve 10% to 15% over the projected 2004 forecast.
