07 Nov Adidas’ Q3 Profits Slide on Currency/Golf Challenges
Adidas AG reported third-quarter profits slid 11 percent due to negative currency effects and a continuing slide at its golf division. Currency-neutral (c-n) sales increased 9 percent. In currency-neutral (c-n) terms, sales increased 9 percent, including a gain of 12 percent at Adidas, 7 percent at Reebok and a decline of 36 percent at TaylorMade-Adidas Golf. Management confirmed its full year guidance.
Adidas Group currency – neutral sales increase 9 percent in the third quarter of 2014
During the third quarter of 2014, the Adidas Group continued to deliver robust top-line results. Group revenues increased 9 percent on a currency-neutral basis, driven by a double-digit sales increase in Retail and a high-single-digit revenue growth in Wholesale. All regions, except North America, contributed to the currency-neutral revenue growth.
Western Europe increased 10 percent, mainly as a result of strong sales increases in Germany, France, Spain and the UK. In European Emerging Markets, currency-neutral revenues were up 19 percent, driven by double-digit growth in Russia/CIS. Group sales in North America decreased 1 percent on a currency-neutral basis, as mid-single-digit sales growth at Adidas was more than offset by declines at TaylorMade-Adidas Golf and Reebok. In Greater China, Group sales were up 13 percent on a currency-neutral basis, due to continued momentum across all channels. Currency-neutral revenues in Other Asian Markets grew 6 percent driven by double-digit sales increases in South Korea and India. In Latin America, currency-neutral sales grew 16 percent, with double-digit increases in most markets, in particular Argentina, Brazil and Mexico.
From a brand perspective, the strong top-line momentum at both Adidas and Reebok continued during the quarter. Third quarter sales at Adidas increased 12 percent on a currency-neutral basis, driven by double-digit sales growth in the Sport Performance football and running categories, as well as at Adidas Originals & Sport Style. Sales at Reebok grew 7 percent on a currency-neutral basis, driven by sales momentum in the fitness training, walking and fitness running categories. Revenues in the TaylorMade-Adidas Golf segment declined 36 percent on a currency-neutral basis, as a result of the continued weakness in the golf market as well as TaylorMade-Adidas Golf’s ongoing efforts to clean retail inventories and the timing of new product introductions compared to the prior year period.
Revenues at Reebok-CCM Hockey increased 15 percent on a currency-neutral basis mainly due to growth in key categories such as skates and protective equipment as well as in hockey apparel. Rockport sales increased 5 percent currency-neutral. Currency translation effects had a negative impact on sale s in euro terms. Group revenues increased 6 percent to €4.118 billion in the third quarter of 2014 from €3.879 billion in 2013.
Third quarter gross margin declines 1.9 percentage points
The Group’s gross margin decreased 1.9 percentage points to 47.4 percent (2013: 49.3 percent) in the third quarter, mainly due to higher input costs as well as negative currency effects . In addition, increased clearance activities, in particular in Russia/CIS, contributed to the gross margin decline. Group gross profit increased 2 percent to €1.952 billion (2013: €1.913 billion). Other operating expenses as a percentage of sales decreased 0.9 percentage points to 38.7 percent compared to 39.6 percent the prior year. In euro terms, other operating expenses increased 4 percent to €1.594 billion, mainly as a result of higher marketing working budget expenditure. In addition, higher expenditure related to the expansion of the Group’s own-retail activities contributed to the increase in other operating expenses. The Group’s operating profit declined 13 percent to €405 million (2013: €463 million) in the third quarter. The operating margin decreased 2 .1 percentage points to 9.8 percent from 11.9 percent in 2013. Basic and diluted earnings per share for the third quarter decreased 11 percent to €1.35 (2013: €1.51).
“Our Group delivered a solid third quarter with accelerated growth rates in many of our key markets and categories. At the same time, we have been aggressively addressing our key challenges: restructuring and stabilizing TaylorMade-Adidas Golf, adjusting our business in Russia/CIS and intensifying our efforts to revive momentum and growth in the US, ” commented Herbert Hainer, Adidas Group CEO.
Adidas Group currency-neutral sales increase 6 percent in the first nine months of 2014
In the first nine months of 2014, Group revenues increased 6 percent on a currency-neutral basis, driven by sales increases in Wholesale and Retail. Currency translation effects had a negative impact on sales in euro terms. Group revenues grew 1 percent to €11.116 billion in the first nine months of 2014 from €11.013 billion in 2013.
Nine months Group sales increase driven by growth in Wholesale and Retail
In the first nine months of 2014, currency-neutral Wholesale revenues increased 6 percent, due to sales growth at both Adidas and Reebok. currency-neutral Retail sales were up 21 percent versus the prior year as a result of double-digit sales increases at Adidas and Reebok. Revenues in Other 3 Businesses were down 17 percent on a currency-neutral basis, due to double-digit sales declines at TaylorMade-Adidas Golf. Currency translation effects had a negative impact on segmental sales in euro terms.
By brand, revenues at Adidas grew 11 percent on a currency-neutral basis, driven by double-digit sales growth in the Sport Performance football and running categories, as well as at Adidas NEO. Sales at Reebok grew 6 percent on a currency-neutral basis, driven by double-digit increases in the fitness training, walking and studio categories as well as at Classics . Revenues in the TaylorMade-Adidas Golf segment declined 29 percent on a currency-neutral basis.
Currency-neutral sales grow in nearly all regions
In the first nine months of 2014, currency-neutral Adidas Group sales grew in all regions except North America. Revenues in Western Europe increased 7 percent on a currency-neutral basis, driven by sales increases in Germany, France, Spain, the UK and Pol and. In European Emerging Markets , Group sales were up 20 percent on a currency-neutral basis, with double-digit sales increases in all of the region’s major markets. currency-neutral sales for the Adidas Group in North America decreased 7 percent, mainly due to sales declines in the USA. Sales in Greater China increased 10 percent on a currency-neutral basis. Currency-neutral revenues in Other Asian Markets grew 2 percent, driven by sales increases in South Korea and India. In Latin America, sales grew 22 percent on a currency-neutral basis, with double-digit increases in most markets, in particular Argentina, Brazil, Mexico and Colombia. Currency translation effects had a mixed impact on regional sales in euro terms.
Group gross margin declines 1.3 percentage points
The gross margin of the Adidas Group decreased 1.3 percentage points to 48.5 percent in the first nine months of 2014 (2013: 49.8 percent) . This development was mainly due to negative currency effects as well as higher input costs. In addition, increased clearance activities, in particular in Russia/CIS, as well as lower margins at TaylorMade-Adidas Golf contributed to the gross margin decline. Gross profit for the Adidas Group decreased 2 percent in the first nine months of 2014 to €5.392 billion versus €5.488 billion in the prior year.
Operating margin decreases to 8.3 percent
Group operating profit declined 20 percent to €927 million in the first nine months of 2014 versus €1.157 billion in 2013 . The operating margin of the Adidas Group decreased 2.2 percentage points to 8.3 percent (2013: 10.5 percent). This development was primarily due to the negative effects from the lower gross margin as well as higher other operating expenses as a percentage of sales. In euro terms, other operating expenses increased 3 percent to €4.647 billion (2013: €4.515 billion), as a result of higher expenditure related to the expansion of the Group’s own-retail activities as well as an increase in sales and marketing working budget expenditure. Sales and marketing working budget expenditure increased 8 percent to €1.441 billion (2013: €1.336 billion) , driven by increased marketing expenditure at brand Adidas related to the 2014 FIFA World Cup.
Financial income down 5 percent
Financial income declined 5 percent to €14 million in the first nine months of 2014 from €15 million in the prior year, due to a decrease in interest income.
Financial expenses down 25 percent
Financial expenses decreased 25 percent to €50 million in the first nine months of 2014 (2013: €67 million). This development was the result of a decrease in both negative exchange rate effects as well as interest expenses.
Income before taxes declines 19 percent
In the first nine months of 2014, income before taxes (IBT) for the Adidas Group decreased 19 percent to €892 million from €1.105 billion in 2013. IBT as a percentage of sales declined 2.0 percentage points to 8.0 percent in the first nine months of 2014 (2013: 10.0 percent), as a result of the Group’s lower operating margin.
Net income attributable to shareholders down 21 percent
The Group’s net income attributable to shareholders decreased to €630 million in the first nine months of 2014 from €796 million in 2013. This represents a decline of 21 percent versus the prior year level. The Group’s tax rate increased 1.1 percentage points to 28.8 percent in the first nine months of 2014 (2013: 27.7 percent), mainly due to a less favorable earnings mix.
Basic and diluted earnings per share decrease to €3.01
In the first nine months of 2014, basic and diluted earnings per share decreased 21 percent to €3.01 versus €3.81 in the prior year. The weighted average number of shares used in the calculation of both basic and diluted earnings per share was 209, 216,186 (2013 average: 209,216,186) as there were no potential dilutive shares at the end of the first nine months.
Group inventories increase 7 percent currency-neutral
Group inventories increased 5 percent to €2.647 billion at the end of September 2014 versus €2.513 billion in 2013. On a currency-neutral basis, inventories were up 7 percent, as a result of the Group’s expectations for growth in the coming quarters as well as higher inventories at TaylorMade-Adidas Golf.
Accounts receivable up 7 percent currency-neutral
Group receivables increased 8 percent to €2.322 billion at the end of September 2014 (2013: €2.156 billion). On a currency-neutral basis, receivables were up 7 percent.
Net borrowings increase to €543 million
Net borrowings at September 30, 2014 amounted to €543 million, compared to net borrowings of €180 million in 2013, representing an increase of €363 million. This increase is mainly a result of higher capital expenditure during the first nine months of 2014. Currency translation had a positive effect of €12 million on net borrowings. The Group’s ratio of net borrowings over EBITDA amounted to 0.4 at the end of September 2014 (2013: 0.1).
Adidas Group confirms guidance for the full year 2014
Management expects Adidas Group sales to increase at a mid-to high single-digit rate on a currency – neutral basis in 2014. In particular the Adidas brand will benefit from the 2014 FIFA World Cup, where Management expects record sales of €2 billion in the football category. Group sales development will also be favorably impacted by the Group‘s high exposure to fast – growing emerging markets as well as the further expansion of Retail. Currency translation is expected to negatively impact the Group‘s top-line development in reported terms. In 2014, the Adidas Group gross margin is forecasted to decrease to a level between 48.0 percent and 48.5 percent (previously: between 48.5 percent and 49.0 percent) compared to 49.3 percent in 2013. Management expects the operating margin for the Adidas Group to be at a level between 6.5 percent and 7.0 percent compared to 8.7 percent in 2013 excluding goodwill impairment losses. Net income attributable to shareholders is expected to be at a level of around €650 million compared to the 2013 net income attributable to shareholders, excluding goodwill impairment losses, of €839 million. This represents basic earnings per share of around €3.10.
Hainer stated: “In any sport, to reach your goals, tactics and desire are critical to compete and win. We are here to do both. In 2015, Group sales are forecasted to increase at a mid-single-digit rate. Net income will grow at a higher rate than Group sales. At the same time, we will use 2015 to prepare the ground for our next strategic plan, where we will take the powerful capabilities we have built over Route 2015 and apply them with more vigor and intent to unlock the potential of our brands. W e will present our vision for the future in March 2015.”
