By Thomas J. Ryan

Adidas reported 2019 results came in better than initially expected as all regions recorded sales growth for the first time since 2016. But the big news was the massive impact the company expects in the near-term to China due to coronavirus as well as ongoing uncertainty stemming from the increasingly global epidemic.

“Following the outbreak of the coronavirus, our business in Greater China has experienced a significant negative impact since the Chinese New Year,” said Kasper Rorsted, Adidas CEO, on a conference call with analysts. “As the situation keeps evolving, we cannot yet reliably quantify the magnitude of the overall financial impact in 2020.

For the first quarter, Adidas expects revenues in Greater China to decline between €800 million and €1.0 billion versus the prior-year level. Consequently, operating profit in Greater China is anticipated to decline between €400 million and €500 million in the first quarter.

On a conference call with analysts, Kasper Rorsted, Adidas CEO, said the company’s business in Greater China performed strongly in the first three weeks of 2020 but has been experiencing a “material negative impact” since the outbreak. Due to a significant number of store closures — both owned and partner-operated — and pronounced traffic reduction within the remaining store fleet, revenues in Greater China have tumbled around 80 percent below the prior-year level between Chinese New Year on January 25 and the end of February.

Since then, the company has started to experience a slight improvement in its Greater China business activity, with stores and warehouses gradually opening and consumer traffic slowly picking up. Adidas has also been working closely with its wholesale partners to ensure inventory levels remain healthy in the market, leading to the cancelation of all shipments in February and possibly driving a significant amount of product takebacks, which Adidas plans to clear through its own channels throughout the remainder of the year.

Rorsted said he still expects Greater China to return to double-digit growth seen from 2015 to 2019 once the crisis is contained.

Adidas has also started to observe traffic declines with a corresponding negative business impact in Japan and South Korea although hasn’t felt any impact in the rest of the world. He added that while the company’s supply chain has also been facing disruptions, the majority of factories in China are operational again and global sourcing activities have not been impacted so far.

The company now expects sales in Japan and South Korea to decline about €100 million in the first quarter. In the rest of the world, sales in the first quarter are expected to rise between 6 percent to 8 percent on a currency-neutral basis. Overall, sales for the first quarter are expected to decline more than 10 percent.

Rosy Outlook For 2020 Amid Coronavirus Uncertainty
For the full-year, Adidas delivered upbeat guidance although it doesn’t reflect the impact of the coronavirus outbreak beyond the first quarter.

Revenues are projected to grow between 6 percent and 8 percent, driven by all market segments On a currency-neutral basis, sales are expected to expand low-double-digit rate in North America and Russia/CIS, a high-single-digit rate in Asia-Pacific and Emerging Markets, and a mid-single-digit rate in Europe and Latin America.

Gross margins in 2020 are forecast to decline slightly compared to the prior-year level of 52.0 percent. The decline reflects currency headwinds, as well as higher sourcing costs that are expected to be partially offset by better channel mix as well as normalized use of air freight after last year’s supply chain shortages in the U.S. were successfully mitigated.

Adidas expects to gain some leverage on operating expenses, resulting in its operating margin increasing between 20 and 50 basis points to a level between 11.5 percent and 11.8 percent. Together with continued top-line growth, net earnings are projected to increase between 10 percent and 13 percent, to between € 2.1 billion and € 2.16 billion.

Adidas updated its guidance while reporting solid progress in the fourth quarter and 2019 although much of the conference call centered on achievements during the year.

Fourth-Quarter Currency-Neutral Sales Climb 10 Percent
In the quarter ended December 31, currency-neutral sales increase 10 percent and reported sales climbed 11.5 percent to €5.838 billion ($6.6 bn).

Adidas Brand revenues increased 10.9 percent on a currency-neutral basis and grew 12.1 percent on a reported basis, to $5.31 billion ($6.0 bn). The gains reflected double-digit growth in both Sport Inspired and Sport Performance. The latter was driven by double-digit growth in the training, running and basketball categories.

Revenues at the Reebok brand grew 7.4 percent on a currency-neutral basis, driven by double-digit growth in Sport and a high-single-digit growth rate in Classics. Reported sales for Reebok increased 9.3 percent to €463 million ($522 mm).

By region in the fourth quarter, sales in Europe grew 15.2 percent to €1.4 billion and moved up 14.3 percent on a currency-neutral basis. Sales in North America advanced 13.7 percent to €1.48 billion and moved up 10.0 percent on a currency-neutral basis

Asia-Pacific’s revenues were up 15.5 percent to €1.93 billion and gained 6.0 percent on a currency-neutral basis. In Latin America, sales were up 6.5 percent to €476 million and jumped 21.7 percent on a currency-neutral basis. Emerging Markets’ sales climbed 18.3 percent to €303 million and improved 13.4 percent on a currency-neutral basis. In the Russia/CIS region, sales climbed 15.5 percent to €153 million and tacked on 6.0 on a currency-neutral basis.

In line with the company’s expectations, gross margin decreased 320 basis points to 49.0 percent as negative currency effects and a less favorable pricing mix more than offset positive effects from lower sourcing costs as well as a better product and channel mix.

Operating expenses were up 1.9 percent to €2.694 billion. As a percentage of sales, operating expenses decreased 440 basis points to 46.1 percent. Operating earnings vaulted 89.9 percent to €245 million from €129 million in 2018.

Net profits from continuing operations surged 94.6 percent to €181 million, or €92 cents, but came in below analyst’s consensus target by 7 cents. Including the impact from discontinued operations in both periods, net income attributable to shareholders improved to €167 million, or €85 cents, compared to €108 million, €54 cents, in 2018.

Full-Year Currency-Neutral Revenues Expand 6 Percent
For the full-year, currency-neutral sales increase 6 percent despite supply chain shortages which the company had experienced earlier in the year following a strong increase in demand for mid-priced apparel. Revenues on a reported basis grew 7.9 percent to €23.64 billion.

The growth was driven by a 6.6 percent currency-neutral improvement at Adidas Brand. Reported Adidas sales grew 8.6 percent to €21.5 billion. The gains reflect high-single-digit sales growth in Sport Inspired as well as a mid-single-digit gain in Sport Performance.

The Reebok brand returned to growth in 2019, with currency-neutral revenues up 1.6 percent versus the prior year. Reported growth at Reebok was up 3.6 percent to €1.75 billion. Reebok’s growth was driven by double-digit growth in its home market North America.

From a channel perspective, the company’s top-line increase for the year was largely driven by 18 percent growth in direct-to-consumer (DTC) revenues. E-commerce grew 34 percent to almost €3 billion in 2019. DTC, including e-commerce, now accounts for one-third of the company’s total business, up from 30 percent in 2018.

Among regions, the top-line expansion in 2019 was driven by growth in all regions. The combined currency-neutral sales of the Adidas and Reebok brands continued to expand at double-digit rates in both Asia-Pacific (10 percent), driven by a 15 percent increase in Greater China and Emerging Markets (13 percent). North America’s currency-neutral revenues were up 8 percent, despite the supply chain shortages which weighed on the region’s growth in the first half. Currency-neutral revenues in Latin America were up 7 percent, and sales in Russia/CIS increased 8 percent despite tough prior-year comparisons related to the 2018 FIFA World Cup. Europe returned to growth with a currency-neutral sales increase of 3 percent as strategic measures showed the planned effects.

Gross margins in the year increased 20 basis points to 52.0 percent. Lower sourcing costs, positive currency developments as well as a better product and channel mix more than offset higher air freight costs to mitigate the supply chain shortages and a less favorable pricing mix.

Operating expenses were up 7 percent to €9.843 billion in 2019. As a percentage of sales, however, other operating expenses decreased 20 basis points to 41.6 percent. In 2019, marketing and point-of-sale expenses increased slightly to €3.04 billion from €3.0 billion as the company further increased investments into its brands and into the sell-through of its products. As a percentage of sales, marketing, and point-of-sale expenses decreased 80 basis points to 12.9 percent.

Operating overhead expenses increased 10.2 percent to €6.8 billion, driven by over proportionate growth in the DTC business and further investments into the company’s scalability. As a percent of sales, operating overhead expenses increased 60 basis points to 28.8 percent. Operating profit grew 12.3 percent in 2019 to €2.660 billion.

Net income from continuing operations increased 12.2 percent to €1.918 billion, or €9.70. The first-time application of IFRS 16 had a negative impact on net income from continuing operations in the amount of €54 million in 2019, which reduced year-over-year net income and EPS growth by approximately 3 percentage points. Excluding this impact, net income from continuing operations grew 15 percent to €1.972 billion in 2019 while basic EPS from continuing operations increased 18 percent to €9.97.

Photos courtesy Adidas Future of Sportswear + Eddie Peng