<span style="color: #9e9e9e;">Adidas AG’s third-quarter sales and profitability recovered smartly with revenues only slightly below year-ago levels. However, a hoped-for return to growth in the fourth quarter has been dashed as the second wave of coronavirus outbreak in Europe has led to lockdowns and pandemic-related risks increase in other regions.
On a conference call with analysts, Adidas CEO Kasper Rorsted noted that new lockdowns in Europe have led to 40 percent of its stores in the region being closed. Globally, open rates are now between 92 and 93 percent, down from 96 percent at the end of the third quarter. Stricter social-distancing guidelines are also having a negative impact on traffic in European stores that are open.
North America also faces lockdown risks as the region’s sales recovery had already reversed in September for Adidas as the benefits of fiscal stimulus efforts and pent-up demand “faded,” noted Rorsted. Delays and shifts to a virtual back-to-school also impacted September’s sales.
Another factor holding back sales growth in the fourth quarter will be a focus on keeping lean inventories to emphasize full-price sell-through and better position the company for 2021. Inventories were reduced by 10 percent at the close of the third quarter compared to the end of Q2.
As a result, sales in the fourth quarter are expected to decline in the low to-mid single-digit range, similar to the third quarter.
Part of the decline also reflects strong year-ago comparisons as sales grew 19 percent in Q419 with the benefit of initial product launches for EURO 2020 and earlier shipments due to different timing of Chinese New Year. Excluding those items, sales would have been about level with year-ago levels with still healthy demand for the Adidas brand. Said Rorsted, “Despite these difficult times, revenue would have returned to growth in absence of new lockdowns in Europe.”
With Q4 gross margins expected to be flat year-over-year due to focus on profitable sell-through and disciplined sell-in, Q4 operating profit is expected to range between 100 and 200 million.
Third-Quarter Revenues Decline 3 Percent Currency-Neutral
The third quarter nonetheless marked a strong recovery from the second quarter when stores were largely closed globally due to the pandemic, underscoring generally healthy demand for the Adidas brand and disciplined expense and inventory management.
“Our focus on healthy inventories, profitable sell-through and disciplined sell-in clearly paid off. Inventories declined by more than half a billion euros, and our full-price share in e-com increased at a double-digit rate. At the same time, we kept costs under control and delivered a profit improvement of more than €1.1 billion compared to Q2,” said Adidas CEO Kasper Rorsted
In total, third-quarter revenues decreased 3 percent in currency-neutral terms, improving on the 34 percent drop seen in the second quarter. In euro terms, revenues decreased 7.0 percent to €5.964 billion.
A highlight of the quarter was e-commerce, where currency-neutral sales surged 51 percent. The growth came despite more than 90 percent of the company’s owned retail stores being operational in the period after many had been closed for several weeks during the second quarter. The e-commerce growth was supported by a strong increase in full-price sales.
The company’s overall DTC business grew 13 percent in currency-neutral terms and accounted for 35 percent of total sales in the quarter. In the year-to-date period, DTC accounted for 40 percent of sales, up 10 percentage points year-over-year. Said Rorsted, “Establishing a direct relationship to consumers across both digital and physical touch-points provides us with insights as well as opportunities for profitable growth.”
Adidas’ wholesale business improved sharply but remained below the prior-year level in part due to the company’s efforts to restrain shipments to reduce inventory risks in light of the uncertainties related to the coronavirus pandemic. At the same time, Rorsted said the company is “exiting thousands of non-strategic wholesale accounts, particularly in the U.S., to win with winners, but not only in the U.S.”
Rorsted noted that traffic in stores continued to improve yet remained significantly below prior-year levels. At the same time, conversion rates stayed elevated as consumers that visited stores had a clearer buying intent.
Adidas Brand Finds Growth In Originals And Run Categories
Brand Adidas sales declined 2 percent in the quarter after declining 33 percent in the second quarter. Growth for the Adidas brand was seen in Originals, up 4 percent, with “exceptional growth” in the Superstar franchise. The Running category was ahead 2 percent as the Ultra Boost franchise continued to grow at high-single-digits.
Reebok’s revenues were down 7 percent after declining 42 percent in the second quarter. Rorsted said Reebok’s worse performance reflects the brand’s lower exposure to running and outdoor categories, which is “predominantly where we’ve seen all growth coming in the sporting category.” Reebok also has a higher exposure to North America, a market that has recovered more slowly than Europe.
Rorsted said he couldn’t address rumors that Adidas is looking to sell the Reebok brand. He told analysts, “We are aware of the media coverage over the last weeks. I ask for your understanding but would like to say, right away, that as a matter of company policy, we will not be commenting on rumors or speculation. What I can tell you is that we continue to work on our 2025 strategic business plan, which we will be presenting to you in March next year.”
Among regions, Europe and Russia/CIS return to growth during the third quarter and all regions showed a sequential recovery compared to the second quarter. Currency-neutral sales in Russia/CIS ran up 11 percent and Europe grew 4 percent.
In North America, a slight decline of 1 percent was seen for the full quarter as positive sales growth over the first two months was offset by a decline in September. Asia-Pacific sales declined by 7 percent, with Greater China recording a 5 percent decrease, also as initial pent-up demand faded. While the company’s DTC sales in Greater China grew at a rate of more than 30 percent, franchise revenues were below the prior-year level also due to Adidas’ disciplined approach to sell-in.
The most challenging regions were Latin America, down 13 percent on a currency-neutral basis, and Emerging Markets, off 10 percent. In both areas, several stores remained closed as coronavirus outbreaks continued to cause disruptions.
Gross Margins Better Than Expected
Gross margins decreased by 210 percentage points to 50.0 percent. The decline reflects negative currency developments during the quarter and continued promotional activity although the promotional activity was significantly less pronounced than the second quarter due to the company’s focus on profitable sell-through and disciplined sell-in. The extent of the margin decline was lessened due to a more favorable channel mix driven by the over proportionate growth of the DTC business as well as a more favorable regional mix.
As a result of the company’s strict cost control measures, other operating expenses decreased 11 percent to €2.223 billion. As a percent of sales, other operating expenses decreased 150 basis points to 37.3 percent. Marketing and POS expenses declined 23 percent due in part to less of a need to support physical marketing activities as many sporting events have been restricted or canceled.
Net income from continuing operations reached €578 million, down 10.2 percent from €644 million a year ago. The quarter marked a return to profitability after Adidas logged a loss of €306 million in the second quarter against income of €462 million.
Photos courtesy Adidas
