Adidas slightly lowered its full-year sales and profit forecasts, citing sourcing disruptions and a tough market environment in China after third-quarter results missed analyst expectations. Currency-neutral sales in the third quarter increased 3 percent. On a currency-neutral basis, revenues in EMEA and North America both grew 9 percent, Latin America surged 55 percent and Asia-Pacific fell 8 percent.

Highlights of the quarter include:

  • Currency-neutral sales up 3 percent, despite €600 million drag from external factors;
  • Strong top-line momentum in EMEA, North America and Latin America with a double-digit increase across these regions;
  • Direct-to-consumer business grows at a double-digit rate in EMEA, North America and Latin America;
  • Gross margin at 50.1 percent as significantly higher full-price sales partly compensate negative currency impact and higher supply chain costs;
  • Operating margin at 11.7 percent despite a strong double-digit increase in marketing spend;
  • Net income from continuing operations reaches €479 million;
  • Inventories down 23 percent currency-neutral; and
  • 2021 top- and bottom-line outlook confirmed.

“Adidas performed well in an environment characterized by severe challenges on both the supply and demand side,” said Adidas CEO Kasper Rorsted. “As a consequence of successful product launches, we are experiencing strong top-line momentum in all markets that operate without major disruption. Double-digit growth in our direct-to-consumer businesses in EMEA, North America and Latin America is a testament to the strong consumer demand for our products. At the same time, we are navigating through the current worldwide supply chain constraints. Despite all challenges, we are on track to delivering a successful first year within our new strategic cycle.”

Currency-Neutral Revenues Grow 3 Percent In Third Quarter
Despite several external factors weighing on demand and supply during the quarter, Adidas was able to increase its currency-neutral revenues by 3 percent. In total, the challenging market environment in Greater China, extensive Covid-related lockdowns in Asia-Pacific as well as industry-wide supply chain disruptions reduced revenue growth by around €600 million in Q3. From a channel perspective, the company’s top-line development was driven by growth in its own direct-to-consumer channel where currency-neutral sales grew 5 percent year-on-year, reflecting an increase of nearly 20 percent compared to the 2019 level. Adidas’ e-commerce revenues experienced a significant increase in full-price sales during the quarter and grew 8 percent year on year. This reflects an increase of 64 percent compared to the level of 2019, reflecting the exceptionally high growth in the prior-year period. In euro terms, Adidas revenues also grew 3 percent in the third quarter to €5.752 billion (2020: €5.561 billion).

Strong Revenue Growth In EMEA, North America And Latin America
From a regional perspective, the company continued to experience strong top-line momentum across all markets with largely undisrupted demand. Revenues in EMEA and North America both grew 9 percent currency-neutral during the quarter despite the negative impact from significantly longer lead times due to ongoing industry-wide shipping and handling constraints. In addition, revenues in Latin America grew 55 percent. At the same time, sales in Asia-Pacific declined 8 percent reflecting the impact of the extensive lockdowns in the region. In Greater China, the geopolitical situation, the resurgence of COVID-related restrictions as well as natural disasters weighed on the company’s top-line performance and led to a revenue decline of 15 percent.

Gross Margin At 50.1 percent Negatively Impacted By Currency Fluctuations And Supply Chain Costs
Adidas’ gross margin in the third quarter slightly declined by 0.2 percentage points to 50.1 percent (2020: 50.3 percent) as the positive effects from significantly higher full-price sales were offset by the negative impact from currency fluctuations, significantly higher supply chain costs as well as a less favorable market mix. Other operating expenses increased 7 percent to €2.237 billion (2020: €2.092 billion) during the quarter. As a percentage of sales, other operating expenses were up 1.3 percentage points to 38.9 percent (2020: 37.6 percent). Marketing and point-of-sale expenses grew 25 percent to €674 million (2020: €538 million) as the company leveraged major sporting events to drive brand heat, supported the launch of new product introductions and invested into the consumer experience across both its digital and physical platforms. As a percentage of sales, marketing and point-of-sale expenses increased 2.1 percentage points to 11.7 percent (2020: 9.7 percent). Operating overhead expenses with €1.562 billion were at the previous year’s level (2020: €1.554 billion) and included stranded costs related to the divestiture of Reebok in an amount of around €60 million. As a percentage of sales operating overhead expenses decreased to 27.2 percent (2020: 27.9 percent). The company’s operating profit reached a level of €672 million (2020: €735 million) reflecting a strong operating margin of 11.7 percent (2020: 13.2 percent). The company’s net income from continuing operations reached €479 million in the quarter (2020: €535 million), reflecting basic earnings per share from continuing operations of €2.34 (2020: €2.58).

Operating profit of €672 million was just short of analysts’ consensus target of €682 million. Sales of €5.752 billion missed analysts’ target of sales of €5.83 billion.

Adidas With Significant Bottom-Line Growth In The First Nine Months Of 2021
In the first nine months of 2021, revenues increased 24 percent on a currency-neutral basis driven by strong double-digit growth in all markets. In euro terms, revenues grew 21 percent to €16.096 billion (2020: €13.294 billion). The company’s gross margin increased by 0.9 percentage points to 51.2 percent (2020: 50.4 percent) during the first nine months of 2021. Unfavorable currency fluctuations, higher supply chain costs, as well as a negative market and channel mix, weighed on the gross margin development during the first nine months of the year. These negative effects were more than compensated by significantly lower discounts, reduced inventory allowances as well as the non-recurrence of last year’s purchase order cancellation costs. Other operating expenses increased 2 percent to €6.391 billion (2020: €6.249 billion). As a percentage of sales, other operating expenses were down 7.3 percentage points, to 39.7 percent (2020: 47.0 percent). Adidas generated an operating profit of €1.920 billion (2020: €520 million) during the first nine months of the year, resulting in an operating margin of 11.9 percent (2020: 3.9 percent). Net income from continuing operations reached €1.369 billion, reflecting an improvement of more than €1 billion compared to the prior-year level (2020: €318 million). Accordingly, basic earnings per share from continuing operations improved to €6.87 (2020: €1.61).

Average Operating Working Capital Declines Significantly
Inventories decreased 22 percent to €3.664 billion (2020: €4.676 billion). On a currency-neutral basis, inventories were down 23 percent. While the reclassification of Reebok supported this development, inventories were still down strong double-digits year-on-year on a like-for-like basis. Operating working capital decreased 17 percent to €4.616 billion (2020: €5.573 billion). On a currency-neutral basis, the decrease was 19 percent. Average operating working capital as a percentage of sales declined by 5.0 percentage points to 20.1 percent (2020: 25.1 percent).

Adjusted Net Borrowings At €3.260 Billion
Adjusted net borrowings on September 30, 2021 amounted to €3.260 billion (September 30, 2020, €5.226 billion), representing a year-on-year decrease of €1.966 billion. This development was driven by the increase in cash generated from operating activities, partly offset by the dividend payment, the outflow related to the company’s share buyback activities as well as the repayment of the Eurobond and short-term borrowings.

Divestiture Process Of Reebok Well On Track
During the third quarter, Adidas signed an agreement to sell the Reebok brand to Authentic Brands Group for a total consideration of up to €2.1 billion. The majority of the consideration will be paid in cash at the closing of the transaction which is subject to customary closing conditions and expected to occur in the first quarter of 2022. Adidas intends to share the majority of the cash proceeds to be received upon closing with its shareholders. As a result of the agreement, Adidas recorded a write-up of the previously impaired Reebok trademark in the amount of €402 million net of tax within discontinued operations in Q3.

Adidas Confirms Top- And Bottom-Line Outlook For FY 2021 
Despite several external factors continuing to weigh on industry-wide demand and supply, Adidas confirms its top- and bottom-line outlook for 2021. While the company continues to expect currency-neutral revenues to increase by a rate of up to 20 percent, growth is now anticipated to come in at the lower end of this range due to the longer-than-expected sourcing disruptions as well as the challenging market environment in China. Consequently, both operating margin and net income from continuing operations are also forecasted to reach the lower end of the previously communicated ranges of between 9.5 percent and 10 percent (operating margin) and between €1.4 billion and €1.5 billion (net income from continuing operations). At the same time, due to significantly higher supply chain costs as well as a less favorable market mix, the gross margin is now expected to increase to a level between 50.5 percent and 51.0 percent in 2021 (previously around 52 percent).

Photo courtesy Adidas