Reebok Woes Hit Adidas’ Q4

Adidas AG swung to an operating loss in the fourth quarter, largely due to goodwill impairments tied to its struggling Reebok unit. TaylorMade Adidas-Golf continued to boast strong double-digit gains while the flagship Adidas brand saw moderate growth in the three months.

On the upside, Adidas predicted revenues would climb in the mid-single digit rate in 2013, with earnings moving up at a faster rate. It also raised its dividend payment by 35 percent.

2012 was also not without its challenges, Herbert Hainer, Adidas CEO, said on a conference call with analysts. But as you would expect, we have moved swiftly and aggressively to deal with them, meaning we have delivered on our targets for the year and are ready to drive for another year of new records again in 2013.

The net loss in the quarter of €272 million ($350 million) was a result of goodwill impairment losses in an amount of €265 million ($331.3 mm), which more than offset the positive effects of an increase in gross margin.

The impairment losses were mainly caused by adjusted growth assumptions for the Reebok brand, especially in North America, Latin America and Brazil, and an increase in the country specific discount rates as a result of the euro crisis. Specific allocations include €106 million ($132.5 mm) in North America, €41 million ($51.3 mm) in Latin America, €15 million ($18.8 mm) in Brazil and €11 million ($13.8 mm) in Iberia. Goodwill of €68 million ($85.2 mm) allocated to Reebok-CCM Hockey and €24 million ($30.0.mm) to Rockport was also impaired, again the result of the reevaluation of future growth prospects.

Excluding the goodwill impairment losses, the net loss amounted to €7 million ($8.8 mm) versus net income attributable to shareholders of €3 million last year. Excluding goodwill impairment losses, operating profit amounted to €26 million ($32.5 mm) compared to €18 million last year.

Group revenues grew 3.9 percent to €3.37 billion ($4.21 bn) in the fourth quarter, and inched up 1 percent on a currency-neutral (C-N) basis.

By segment, Wholesale sales were down 3.6 percent on a C-N basis as growth in Greater China, Latin America and other Asian markets was more than offset by declines in other regions. On a reported basis, sales were down 0.8 percent to €2.06 billion ($2.6 bn) at Wholesale. Wholesale C-N sales in the year grew 2.2 percent.

The wholesale decline in the quarter was mainly due to the non-recurrence of the NFL license sales that were taken over by Nike as well as prior year major sporting event-related product sell-in, including the UEFA EURO 2012 and London Olympics. For the full year, the wholesale gross margin increased 0.4 percentage points to 40.3 percent as a result of a more favorable brand sales mix.

C-N sales in Retail climbed 9.2 percent in the fourth quarter and grew 13.4 percent to €882 million ($1.1 bn) on a reported basis. Comps nudged up 1 percent, helped by a 4 percent comp gain in Russia CIS. From a store format perspective concept stores, factory outlets and concession corners all delivered comp store sales increases in the mid-single-digits.

C-N sales in Retail in the year grew 14.0 percent, with Reebok and Adidas each showing 7 percent comp gains. Gross margin in the Retail segment declined 1.7 percentage points during the year with 70 basis points of the decline related to the Russian ruble devaluation versus the US dollar, and the rest due to higher promotional activity given weak retail conditions in many markets particularly in Europe. This completely offset by 1.9 percentage points of operating leverage, which improved overall operating margin in the Retail segment improved 20 basis points to 21.5 percent.

By brand, Adidas Brands sales across Wholesale and Retail were up 2.4 percent on a C-N in the quarter and grew 5.7 percent to €2.53 billion on a reported basis. In the year, C-N sales for the Adidas Brand were up 9.9 percent.

On the call, Hainer said the Adidas Brand particularly benefited from its sponsorship of the London 2012 Olympics as well as its presence at the Euro 2012 soccer championships. But the brand particularly benefited from its sponsorship of the European football league (UEFA) that led to record football (soccer) sales of €1.7 billion ($2.1 bn), eclipsing even our own very high expectations.

Running expanded 13 percent in the year as the AdiZero and Clime product franchisees continued to drive sales globally. AdiZeros footwear sales increased more than 40 percent. Basketball grew 22 percent in 2012 compared to an 11 percent gain a year ago. Its D Rose Crazy Light and NBA licensed product drove growth of almost 50 percent for the category in U.S. mall channel.

Driven by its Terex footwear and apparel, Adidas Outdoor revenues increased 14 percent as Adidas continued to make strides towards its Route 2015 goal reaching sales of €500 million revenues.

Adidas Sports Style area broke the €3 billion revenue mark for the first time with sales increasing 16 percent C-N, or 21 percent in euro terms to over €3.2 billion ($4.0 bn).

Reeboks revenues across Wholesale and Retail in the quarter were down 11.8 percent C-N in the quarter and gave back 9.4 percent to €428 million ($535 mm) on a reported basis. In the year, C-N sales were down 17.9 percent. Excluding the impact from the discontinuation of the NFL business and transfer of the NHL-related sales to Reebok CCM Hockey, sales declined by 8 percent.

While we are obviously disappointed with the Reebok results, we have seen the underlying business further stabilize as we accelerated our measures to position Reebok as the fitness brand, said Hainer. He noted that in the fourth quarter, Reebok sales, excluding license revenues, were up 3 percent, driven by 13 percent growth in Classics and almost 40 percent growth in apparel.

In its Other Businesses group (Taylor Made, Rockport, Reebok-CCM Hockey), C-N sales grew 6.8 percent. Total sales grew 10.9 percent to €424 million ($530 mm).

The gain was mainly a result of the continued momentum at TaylorMade-Adidas Golf where C-N revenues grew 14.6 percent in the quarter. This was driven by almost 60 percent growth in the irons category as a result of the RocketBladez launch. Reported TaylorMade sales jumped 18.3 percent on a reported basis to €273 million ($341.3 mm).

Rockport sales inched up 0.1 percent C-N in the quarter but grew 4.5 percent to €79 million ($98.8 mm) on a reported basis. Reebok-CCM Hockey revenues were down 17.8 percent C-N and were down 13.2 percent to €54 million ($67.5 mm) on a recorded basis.

In the full year, Other Business C-N revenues grew 16.8 percent, with Taylormade climbing 19.5 percent, Rockport ahead 1.8 percent, and Reebok-CCM Hockey up 8.9 percent.

Hainer noted that TaylorMade-Adidas Golf now has marked sales gains of 48 percent over the last two years to already pass its initial 2015 targets.  Added Hainer, Considering that the golf industry is still relatively stagnant, this is a remarkable testament to TaylorMade-adidas Golf’s relentless focus on helping golfers to perform better.

Full-year gross margin in its Other Businesses segment decreased 80 basis points to 42.8 percent, driven by lower product margins at Reebok-CCM Hockey where increased sourcing costs as well as the NHL lockout negatively impacted gross margin development. However, due to scale effects segmental operating margin for Other Businesses increased 40 basis points to 27.4 percent.

By region, Group sales in North America were down 7.5 percent in the quarter on a currency-neutral basis, as growth at Adidas and TaylorMade-Adidas Golf was more than offset by declines at Reebok, mainly due to the non-recurrence of prior year related NFL license sales. Recorded sales were down 3.4 percent to €769 million ($961 mm). C-N revenues in 2012 grew 1.7 percent with Adidas Brand increasing 9 percent and TaylorMade climbing 25 percent. Excluding the impact from the NFL and the NHL license, Reebok revenues declined 11 percent in North America while total group sales excluding the NFL increased by 6 percent.

In its largest region, currency-neutral revenues in Western Europe decreased 4.1 percent in the quarter, primarily as a result of high prior year comparisons due to the sell-in of event-related products for the UEFA EURO 2012 and the London 2012 Olympic Games. Total sales were down 2.2 percent to $733 million. C-N sales in the year were up 2.6 percent, aided by double-digit growth in the UK and Poland as well as increases in Germany and France.

In European Emerging Markets, C-N sales were up 8.7 percent in the quarter as a result of double-digit revenue growth at Reebok. Reported sales grew 13.0 percent to 461 million. C-N sales grew 15.1 percent in the year, driven by Russia.

In Greater China, Group sales were up 12.5 percent on a C-N basis in the quarter, driven by strong double-digit sales gains at Adidas Sport Style. Reported sales ran up 19.4 percent to €393 million ($491.3 mm). C-N sales grew 15.0 percent in the year.

Currency-neutral revenues in Other Asian Markets grew 3.6 percent, due to increases at Reebok and TaylorMade. Reported sales were up 7.4 percent to €666 million ($832,5 mm). Full-year revenues in Other Asian Markets gained 7.3 percent due to double-digit growth in South Korea and 11.0 percent growth in Japan.

In Latin America, Adidas Group sales were up 4.4 percent on a C-N basis driven by growth at Adidas and TaylorMade. Reported sales increased 2.8 percent to €347 million ($433.8 mm). Full-year C-N revenues were up 8.3 percent, driven by a 13 percent gain for the Adidas Brand on strength in football and running.

Overall, Adidas gross margin in the quarter increased 2.0 percentage points to 47.6 percent due to product price increases, a more favorable product and regional sales mix as well as a larger share of higher-margin Retail sales that more than offset the increase in input costs.

For 2013, Adidas Group sales are forecasted to increase at a mid-single-digit rate on a C-N basis. The gains are expected to be aided by Adidas strong exposure to fast-growing emerging markets as well as the further expansion of Retail. Expected strong product launches are expected to more than offset the non-recurrence of sales related to the UEFA EURO 2012 and the London 2012 Olympic Games. The sales growth is projected to be weighted towards the second half of the year.

Adidas Group gross margin is forecasted to increase to a level between 48.0 percent and 48.5 percent, up from 47.7 percent in 2012. Gross margin is expected to benefit from higher growth rates in high-margin emerging markets and Retail than in more mature markets and Wholesale. In addition, improvements in the Retail segment as well as at the Reebok brand will boots margins. This is expected to offset less favorable hedging terms compared to the prior year as well as increasing labor costs. Operating expenses are expected to decrease modestly as a percent of sales. EPS is expected to increase at a rate of 12 percent to 16 percent to a level between €4.25 and €4.40, including 2012s goodwill impairment charges.