Helped by securing 400 new doors with Dick’s and Foot Locker so far this year, Adidas AG delivered 33 percent currency-neutral growth for the Adidas Brand in the North America region in the second quarter.

The gain for the Adidas Brand in the region came on top of a 32 percent hike in the second quarter of 2016 and builds on gains of 31 percent generated in the first quarter of this year, 24 percent in last year’s fourth quarter and 20 percent in last year’s third quarter.

Overall sales in the North America region for Adidas Brand grew 36 percent in the second quarter to €915 million ($1.08 billion).

On a conference call with analysts, Harm Ohlmeyer, Adidas AG’s CFO, noted that the gains came despite a “very challenging retail environment in the U.S.” Strong double-digit growth was seen in key categories like running and training, as well as Originals and Neo.

According to SSI Data, powered by SportsOneSource, Adidas share for Athletic Footwear increased 256 basis points to 9.5 percent for fiscal year-to date 2017 while sales grew in the high 30s, outperforming the low-single-digit sales increases of the total Athletic Footwear segment, versus the same time last year for the fiscal year-to-date period ended July 30 in the SSI Data Measured market.

In the Casual/Urban Footwear category, Adidas’ largest sales volume category, sales improved in the high double digits for the fiscal YTD period. Basketball Footwear sales increased in the high teens, while Performance Running Footwear sales remained flat for the period.

Also on the conference call, Kasper Rorsted, Adidas AG’s CEO, noted that the company has a goal of generating €5 billion in sales from Adidas AG in North America overall by 2020, up from €3.4 billion in 2017.

That growth is expected to be supported by greater expansion and wider distribution of Adidas Brand products. Fortunately, Rorsted said the fact that Adidas Brand has been “under distributed” in certain areas of the marketplace wound up lessening the impact of the recent bankruptcies of Sports Authority, Sport Chalet and others on Adidas AG versus some of its competitors. But he still said the Adidas Brand has “not had the appropriate distribution” at places like Dick’s and Foot Locker and continues to benefit from greater allocations.

At the same time, expanded distribution is expected in North America to come from its own direct-to-consumer (DTC) efforts as well as online, including a partnership with Amazon that is expanding.

“We are very happy with the relation we’ve had with Amazon,” said Rorsted. “We had a two-year relationship in the U.S., and U.S. only. Right now we’re not contemplating changing the set of that relationship to expand to other parts of the world.”

Ohlmeyer also noted that Adidas continues to invest in the U.S. market. On August 2, Adidas AG announced that it extended its MLS deal for Adidas Brand through 2024. Ohlmeyer also noted that while continuing to invest in its global headquarters in Herzogenaurach, Adidas AG continues to invest in new offices, buildings and facilities in Adidas Brand’s North America headquarters in Portland, OR.

Over the last three years, Adidas has more than doubled its workforce in Portland from around 800 to more than 1,700. To accommodate growth and continue to foster a culture of creativity and collaboration for its staff, expansion in Portland continues. Adidas Americas recently added a Maker Lab in the middle of campus, is building a new world-class collaboration center and continues to update existing spaces.

Operating profits for Adidas AG in the North America region in the quarter jumped 77 percent to €131 million ($156 million).

Globally, sales for Adidas Brand grew 21.4 percent in the quarter to €4.5 billion ($5.3 billion) and gained 20.5 percent on a currency-neutral basis. Gross margin for Adidas Brand reached 48.0 percent, up from 46.5 percent in the same period a year ago.

Beyond North America, Adidas Brands’ other largest markets also helped drive growth.

In Greater China, sales for the Adidas Brand increased 26 percent to €846 million ($998 million) and added 28 percent on a currency-neutral basis. Operating profits for Adidas AG in China advanced 22 percent to €310 million ($366 million).

In Western Europe, sales for the Adidas Brand grew 16 percent to €1.32 billion ($1.56 billion). Currency-neutral sales advanced 18 percent on top of a 30 percent gain last year. Operating profits for Adidas AG in Western Europe climbed 36 percent to €285 million ($336 million).

In the MEAA (Middle East, Africa and other Asian markets) region, sales increased 16 percent to €657 million ($775 million) and gained 14 percent on a currency-neutral basis. Operating profits for Adidas AG in MEAA rose 44 percent to €183 million ($216 million).

Japan’s revenues for the Adidas Brand increased 12 percent to €233 million ($275 million) and also grew 12 percent on a currency-neutral basis. Operating income for Adidas AG in Japan grew 23 percent to €67 million ($79 million)

Two challenged regions for Adidas Brand continue to be Russia/CIS and Latin America.

In the Russia/CIS region, currency-neutral sales for the Adidas Brand slumped 13 percent although revenues in euros rose 2 percent to €135 million ($159 million). Rorsted said the region continues to contract after four years of sanctions and weakness in oil prices, “and we are also aggressively taking actions against it.” This includes the closing of more than 100 stores so far this year with another 50 set to close before the year end. Rorsted further said Russia is roughly 3 percent of its overall revenue and remains “immaterial to the results of our company.”

Operating profits for Adidas AG in Russia/CIS nonetheless grew 41 percent to €45 million ($54 million).

In Latin America, sales rose 17 percent to €387 million ($456 million) and grew 14 percent on a currency-neutral basis. Rorsted said the gains are being driven by a “very, very strong Mexico” results, a country that is over-proportional in that region. Brazil is particularly being hurt by a challenging political climate that is impacting the economy. Operating profits for Latin America for Adidas AG rose 17 percent to €47 million ($55 million) as a 190-basis-point decline in gross margin due to currency headwinds was offset by operating leverage.

Globally for the Adidas Brand, a star area was women’s, which saw a gain of more than 30 percent. Among regions, women’s jumped 77 percent in North America and 27 percent in Western Europe. Rorsted called the women’s performance “key for us as this is one of our strategic areas of focus.”

Across major categories, the gains were driven by double-digit increases in the running category as well as at Adidas Originals and Neo. High-single-digit growth was seen in the training category.

Adidas Brand’s Sports Performance grew 7 percent in the second quarter, accelerating from 4 percent growth globally in the first quarter. Running revenues was up 27 percent, driven by the success of it Boost franchises.

Training sales grew 9 percent, reflecting “exceptional growth initiatives” in athletics. Global football and basketball are still in decline. Global football is being hurt by declines in apparel, which is being impacted by the Euro Cup and the termination of its Chelsea contract. Global football footwear revenues area ahead 13 percent and the brand’s major club franchises are all growing.

The basketball decline is solely driven by end of its NBA partnership. Adidas Brands’ footwear business in basketball is up almost 50 percent.

Originals was up 36 percent driven by strong double-digit growth in all key regions. Declining growth rates in its Superstar and Stan Smith franchises are being offset by new franchises. Declining growth rates are expected to continue for Superstar and Stan Smith, but are also expected to be offset by gains in newer franchises like NMD, Tubular and EQT. Said Rorsted, “Adidas is more than a white tennis shoe.”

The Neo business grew 45 percent, reflecting more than 50 percent improvement in footwear.

One particularly strong area across the company is e-commerce, which grew 66 percent in the quarter. Online sales grew 80 percent in North America and more than 100 percent in China. Said Rorsted, “It’s clear that the consumer is moving online and the importance of online will be immensely important moving forward.”

Rorsted also said the company is planning further investments in its own online properties as well as product allocation to third-party sites.

An underperforming area was apparel. Global apparel sales across Adidas Brand and Reebok rose 6 percent to €1.75 billion ($2.1 million) and gained 4 percent on a currency-neutral basis. By comparison, sales in footwear across the company rose 32 percent to €3.03 billion ($3.6 billion) and gained 31 percent on a currency-neutral basis.

Rorsted said the goal is to have apparel and footwear “be equal over time” and the company “needs to have a stronger growth in apparel business.”

Adidas AG’s overall results were in line with a forecast update given on July 27, when it sharply raised its guidance for the year.

In the quarter ended June 30, sales rose 20 percent to €5.04 billion ($5.9 billion). Currency-neutral sales increased 19 percent.

Beyond the Adidas Brand, Reebok’s sales grew 7.9 percent to €431 million ($508 million) and gained 4.9 percent on a currency-neutral basis.

Revenues in Other Businesses, now comprising Adidas Golf, Runtastic and Other centrally managed businesses, were up 26.7 percent on a currency-neutral basis, driven by double-digit increases in all operating segments. Sales in its Other Businesses grew 28 percent to €198 billion ($234 million).

The company’s gross margin increased 0.7 percentage points to 50.1 despite significant FX headwind in the quarter. The improvement was mainly due to the positive effects from a better pricing, product and channel mix. While royalty and commission income declined 2 percent to €29 million ($34 million), other operating income decreased significantly to €24 million ($28 million) from €159 million in the prior year, reflecting the non-recurrence of extraordinary gains related to the early termination of the Chelsea FC contract and the Mitchell & Ness divestiture in the second quarter of 2016. Other operating expenses increased 13 percent to €2.07 billion ($2.4 billion).

As a percentage of sales, however, other operating expenses decreased 2.5 percentage points to 41.1 percent due to the strong top-line expansion during the quarter as well as the different phasing of the company’s marketing spend, which is significantly more weighted towards the second half of the year in 2017. Operating profits advanced 17.7 percent to €505 million ($596 million), resulting in an operating margin decline of 0.2 percentage points to 10 percent.

Adjusted for the extraordinary gain of around €70 million ($83 million) related to the early termination of the Chelsea FC contract in the second quarter last year, however, the company’s underlying operating margin increased 1.4 percentage points.

Net income from continuing operations was up 15.5 percent to €347 million ($409 million), or to €1.72 a share. Losses from discontinued operations, net of tax, mainly related to the planned divestiture of the TaylorMade and CCM Hockey businesses, amounted to €189 million ($223 million) versus €10 million in the prior year.  As a result, net income attributable to shareholders declined 45.6 percent to €158 million ($186 million).

In May, Adidas reached an agreement to sell its former golf business, including TaylorMade, Adams Golf and Ashworth, to KPS Capital Partners for $425 million. On the same day it raised its guidance, Adidas said it agreed to sell its CCM hockey unit to Canadian private-equity firm Birch Hill Equity Partners for $110 million.

As reported on July 29, the strong quarterly performance prompted Adidas to raise its guidance for the year.

Revenues are now expected to increase between 17 and 19 percent on a constant currency basis for the year, compared to previous estimates of 12 to 14 percent growth.

The gross margin is expected to increase up to 0.8 percentage points to a level of up to 50.0 percent (previously: to increase up to 0.3 percentage points). Other operating expenses as a percentage of sales are forecasted to be below the prior year level of 42.7 percent, driven by leverage from both expenditure for point-of-sale and marketing investments as well as lower operating overheads as a percentage of sales.

The operating profit is expected to increase between 24 percent and 26 percent (previously: to increase between 13 percent and 15 percent), reflecting an operating margin improvement of up to 0.6 percentage points to a level of up to 9.2 percent (previously: to increase between 0.2 and 0.4 percentage points).

Net income from continuing operations is now forecast to increase by between 26 percent and 28 percent, double the lower end of its previous estimate of 13 percent to 15 percent growth.

Photo courtesy Adidas