adidas-Salomon saw a sizable gain in its gross margin overshadow sales declines across most regions and brand groups to help the company post a 41% increase in net income for the first quarter of 2004.
The company pointed to the impact of foreign currency exchange rates, which contributed more than 50% of the GM improvement, and an increased focus on owned-retail at brand adidas.
The gains are said to have “more than offset” the lower margins in North America due to higher close-out sales and a negative FX rate impact of associated with Salomons sourcing structure.
Europe must now be worrisome as well to the adidas folks, as footwear backlog there declines for the first time in a long while even as the North American backlog declines start to moderate, albeit off of already flat to negative numbers. Total currency-neutral footwear sales decreased 3.0% for the quarter and fell 9.0% in the reporting Euro terms to 769 million compared to 841 million in Q1 last year.
Apparel looks to be the bright spot, keeping Europe in positive territory for overall backlog and nearly offsetting the North America decline (see chart on page 2). Consolidated apparel sales grew 13% in Q1, led by double-digit gains in the Sport Performance Running and Soccer categories, Sport Heritage sales, and increases at Salomon. In Euro terms, apparel sales increased 8.0% to 623 million from 577 million in the year-ago period.
Hardlines sales declined 2.0% on a currency-neutral basis and fell 8.0% in Euro terms to 231 million from 251 million in the year-ago period. “Solid increases” at brand adidas, especially in Soccer balls, were more than offset by declines in Salomon winter sports product and TM-aG golf product.
At brand adidas, total sales in euro terms declined 1.9% to 1.38 billion ($1.72 bn) in the first quarter of 2004 from 1.41 billion ($1.51 bn) in 2003, but actually increased 3.0% for the quarter excluding FX rate impact.
The company said the increase was driven by Sport Performance category sales, which grew 5.0% in currency-neutral terms. The Soccer and Training categories were leaders here as Europe gears up for the European Football Championships and the Olympics.
In Euro terms, Sport Performance sales were essentially flat at 1.13 billion in the quarter.
Conversely, Sport Heritage sales declined 7.0% in the quarter, due primarily to lower footwear numbers. The Sport Heritage apparel business grew more than 50% for the period. The company said that the footwear declines are attributable to moves to limit distribution of the SH product in Europe and Japan, but were also impacted by a lack of SH footwear in “lifestyle and fashion channels in North America”. SH sales fell 12% in Euro terms to 237 million from 269 million in the year-ago period.
The Sport Style business, which is the limited distribution fashionista offering, grew roughly 73% in Q1, in both Euro and currency-neutral terms, to 8 million from 5 million in Q1 last year.
On a regional basis, brand adidas currency-neutral sales increased 4.0% in Europe — with strength coming from France, Iberia, the U.K. and Russia –but decreased 8.0% in North America. Asia rose 7.0% and Latin America sales jumped 42% in currency-neutral terms. In Euro terms, brand adidas sales fell 20.6% in the North America market to 243 million ($303.6 million) from 306 million ($328.3 million) in the year-ago quarter. Europe had a 2.4% increase in sales to 845 million compared to 825 million in Q1 LY. Asia was off less than one percent to 232 million, while Latin America increased 43.3% in Euro terms to #47 million in the first quarter of 2004.
Brand adidas gross margin improved 470 basis points to 44.1% of sales versus 39.5% in the year-ago quarter, due primarily to FX rate benefits and owned-retail. Operating profits for brand adidas increased 34% to 182 million from 135 million.
Based on current backlog figures, adidas expects to see full year currency-neutral sales increase in the 3% to 5% range. While the increase is expected to be driven by Europe, Asia, and Latin America, the company expects the North America business to be “slightly positive” for the year.
In the Salomon segment, revenues increased by 2.0% on a currency-neutral basis in the first quarter, largely due to gains in the Cycling, Nordic and Apparel categories. As a result, Salomon sales in euros were down 1.6% to 122 million ($152.4 mm) in Q1 from 124 million ($133.0 mm) in the prior year.
On a regional basis, Salomon saw a 2.0% currency-neutral gain in Europe and a 6.0% decline in North America under the same terms. Asia sales jumped 35% currency-neutral and Latin America reported a 96% increase in currency-neutral sales.
Revenues at TaylorMade-adidas Golf decreased 4.0% on a currency-neutral basis, but inched up 0.8% measured in U.S. dollars. This was mainly related to the timing of product launches in 2004 versus 2003. New launches scheduled for Q2 this year occurred in Q1 last year. TM-aG also saw an increase in clearance activities in the first quarter this year. TaylorMade-adidas Golf sales in euro terms declined 13% to 116 million ($144.9 mm) in 2004 from 134 million ($143.8 mm) in 2003, but inched up 0.8% in U.S. dollar terms.
On a regional basis, TM-aG saw flat sales in North America offset by currency-neutral declines in Europe, which was down 16%, and Asia, which was off 3.0% in the period. In Euro terms, sales in Europe declined 17% to 16 million from 20 million in Q1 last year. North America sales were down 13% in Euros to 61 million ($76.2 million) compared to 70 million ($75.1 million) in the year-ago period, but were up 1.5% in U.S. dollar terms. Asia sales declined 9.0% to 38 million from 42 million in Q1 last year.
TM-aG gross margin improved 50 basis points to 44.3% from 43.9% in the year-ago quarter. TM-aG posted an operating loss of 13 million versus an operating profit of 2.0 million in the year-ago period. In U.S. dollar terms, the operating loss was approximately $16.2 million versus roughly $2.1 million in operating profit LY.
The company expects TM-aG full year currency-neutral sales to increase in the mid-single-digit range.
Consolidated group sales declined 2.8% in Euro terms to 1.62 billion in the first quarter. In euro terms, currency translation effects negatively impacted sales in the first three months in all regions. Sales in Europe increased 2% in euro terms to 951 million in Q1 2004 from 933 million in the prior year. In North America, sales in euros declined 19% to 328 million ($409.7 mm) in 2004 versus 405 million ($434.5 mm) in 2003, but declined 5.7% in U.S. dollar terms. In euro terms, sales in Asia were down 2% to 276 million in 2004 from 281 million in 2003. In Latin America, sales in euros grew 36% to 49 million in 2004 from 36 million in the prior year.
