Adidas AG reported currency-neutral sales grew 4 percent in the second quarter, constrained by the impact of last year’s lockdowns in Vietnam, the suspension of operations in Russia and continued COVID-19-related lockdowns in Greater China. Despite expectations for continued macroeconomic pressures, CEO Kasper Rorsted vowed to analysts that Adidas would accelerate growth in the second half.

“Let me be clear, this is a time where the strength of our brand makes a difference,” said Rorsted. “With this in mind and the consumer at the heart of everything we do, we’re convinced that we have the right building blocks to drive a significant top-line acceleration in the second half of the year.”

Addressing key takeaways from the quarter, Rorsted said strong momentum in the Western market continued with successful product launches and brand strength in North America, EMEA and Latin America. Adidas raised its growth outlook for North America and Latin America for 2022. Adidas also returned to growth in the second quarter in Asia-Pacific. Rorsted said, “These four markets, representing more than 85 percent of the business combined, grew at a double-digit rate in Q2.”

He said Adidas had a strong pipeline of innovation planned for the months ahead and expected to benefit from major sporting wins such as the FIFA World Cup. Rorsted added, “The restocking opportunity with our strategic wholesale partners, given uncertainty supply and easier prior year comparables, will enable us to accelerate the top line growth and deliver our adjusted 2022 target.”

Rorsted added, “We are thoroughly managing the short-term industry-wide challenges in an agile way while going after the long-term opportunities and structural growth drivers the sporting goods sector has to offer.”

Adidas’ second-quarter results aligned with a pre-announcement on July 26, where Adidas reduced its sales, margin and earnings guidance for the year largely due to weakening sales in Greater China.

Second-Quarter Sales Boosted By Strength In Western Markets
In the second quarter, currency-neutral revenue growth of 4 percent came despite macroeconomic constraints. In euro terms, revenues grew 10 percent to €5.596 billion in the second quarter.

Due to last year’s lockdowns in Vietnam, supply chain constraints reduced top-line growth by around €200 million in the latest quarter. The company also suspended its operations in Russia, reducing revenues by more than €100 million during the quarter. Continued COVID-19-related lockdowns in Greater China also weighed the top-line development in Q2.

From a channel perspective, the top-line increase was, to a similar extent, driven by the company’s DTC activities and increases in its wholesale business. Within DTC, e-commerce, representing more than 20 percent of the company’s total business, showed double-digit growth reflecting strong product sell-through.

From a category perspective, revenue development was strongest in the company’s strategic growth categories Football, Running and Outdoor, which all grew at double-digit rates.

By region, currency-neutral sales in EMEA grew 7 percent despite the impact of last year’s lockdowns in Vietnam. The top-line development in EMEA was also impacted by the loss of revenue in Russia/CIS of more than €100 million.

Revenues in North America increased 21 percent during the quarter, driven by more than 20 percent growth in DTC and wholesale. Revenues in Latin America increased 37 percent. Asia-Pacific returned to growth with currency-neutral revenues increasing 3 percent despite still being impacted by limited tourism activity in the region. In Greater China, currency-neutral sales declined 35 percent, mainly related to the continued broad-based COVID-19-related restrictions and in line with previous expectations. Excluding Greater China, currency-neutral revenues in the company’s other markets combined grew 14 percent in Q2.

Gross Margins Erode 150 Basis Points
Adidas’ gross margin declined 150 basis points to 50.3 percent due to significantly higher supply chain costs and a less favorable market mix due to the significant sales decline in Greater China. These headwinds were offset partly by a higher share of full-price sales, first price increases and the benefits from currency fluctuations.

Operating expenses were up 19 percent to €2.501 billion and increased 320 basis points as a percent of sales to 44.7 percent. Marketing and point-of-sale expenses grew 8 percent to €663 million. Investments are being prioritized in the launch of new products, including its latests sportswear collection, the next iteration of its Supernova running franchise, the first drops related to the Gucci collaboration, and campaigns around major events like Run for the Oceans. 

As a percent of sales, marketing and point-of-sale expenses were down 30 basis points to 11.8 percent.

Operating overhead expenses increased 23 percent to €1.838 billion, driven by continued investments into DTC, digital capabilities, logistics and unfavorable currency fluctuations. As a percent of sales, operating overhead expenses increased 350 basis points to 32.8 percent.

Operating profit fell 27.8 percent to $392 million from $543 million a year ago, reducing the operating margin to 7.0 percent from 10.7 percent.

Net income slightly declined to €360 million, or €1.88, from €387 million, or €1.93, a year ago. The latest year benefited from a one-time tax benefit of more than €100 million due to the reversal of a prior year’s provision.

Inventories increased 35 percent to €5.483 billion as of June 30 in anticipation of revenue growth during the second half. Longer lead times and the challenging market environment in Greater China also contributed to the increase. On a currency-neutral basis, inventories were up 28 percent.

On July 26, Adidas adjusted its guidance for FY 2022 due to the slower-than-expected recovery in Greater China since the start of the third quarter resulting from continued widespread COVID-19-related restrictions. Adidas now expects currency-neutral revenues for the company to grow at a mid- to high-single-digit rate in 2022, previously at the lower end of the 11 percent to 13 percent range, reflecting a double-digit decline in Greater China, previously a significant decline.

While the company did not experience a slowdown in the sell-through of its products or cancellations of wholesale orders in any market other than Greater China, the adjusted guidance also accounts for a potential slowdown of consumer spending in those markets during the second half as a result of the more challenging macroeconomic conditions. Growth in EMEA is expected to be in the low-teens, previously mid-teens growth, while revenues in Asia-Pacific are projected to grow at a high-single-digit rate, previously mid-teens growth.

Adidas increased its forecasts for North America and Latin America, reflecting the strong momentum the brand has had in these markets. In North America, currency-neutral revenues are expected to increase in the high-teens, and sales in Latin America are projected to grow between 30 percent and 40 percent, both previously mid- to high-teens growth.

Due to the less favorable market mix and the impacts of initiatives to clear excess inventories in Greater China until the end of the year, the gross margin should reach a level of around 49.0 percent, previously around 50.7 percent in 2022. The operating margin is now forecasted to be around 7.0 percent, previously, around 9.4 percent and net income from continuing operations is expected to reach around €1.3 billion, previously at the lower end of the €1.8 billion to €1.9 billion range.

Photo courtesy Adidas