07 Nov Adidas Q3 Profits Leap, Sales Impacted By Softness In Europe
Adidas hiked its 2018 profit guidance, citing a strong earnings performance in the third quarter, but trimmed revenue target due to weaker-than-expected growth in Western Europe.
MAJOR DEVELOPMENTS IN Q3 2018:
▪ Revenues grow 8 percent currency-neutral and 3 percent in euro terms
▪ Gross margin increases 1.4pp to 51.8 percent
▪ Operating margin improves 1.3pp to 15.3 percent
▪ Net income from continuing operations grows 19 percent to €656 million
▪ Basic EPS from continuing operations up 21 percent to €3.26
“We delivered high-quality growth again in Q3. The top-line expansion was driven by double-digit increases across our strategic growth areas North America, Greater China and e-commerce. At the same time, we achieved strong profitability improvements despite a significant increase in marketing investments and severe currency headwinds,” said Adidas CEO Kasper Rorsted. “With these results, we are confident to reach a higher-than-expected profitability level in 2018 and remain firmly on track to achieve our long-term targets until 2020.”
Currency-neutral revenues increase 8 percent in Q3 2018
In the third quarter, currency-neutral revenues grew 8 percent. Revenues at the Adidas brand increased 10 percent, driven by double-digit growth in Sport Inspired as well as high-single-digit growth in Sport Performance, the latter driven by continued double-digit growth in Training and Running. Revenues at the Reebok brand decreased 5 percent as double-digit growth in Classics was more than offset by declines in Training and Running. From a channel perspective, the company’s top line was largely driven by excellent double-digit growth in direct-to-consumer revenues with strong support from e-commerce, where revenues grew 76 percent in the quarter. In euro terms, the company’s revenues were up 3 percent in the third quarter to €5.873 billion (2017: €5.677 billion).
Adverse impact on reported revenues from hyperinflation accounting in Argentina
The company’s top-line development in the third quarter was impacted by the first-time application of hyperinflation accounting to its Argentinian business, which represented 2 percent of global sales in 2017. IAS 29 requires that hyperinflation accounting be applied retrospectively from the start of the relevant reporting period, namely from January 1, 2018. As a result, reported revenues were negatively impacted by a high-double-digit million euro amount. At the same time, hyperinflation accounting had a slightly positive impact on currency-neutral revenue growth.
Double-digit growth in North America and Asia-Pacific
From a market segment perspective, the top-line expansion in the third quarter was driven by ongoing strength in the company’s strategic growth regions: the combined sales of the Adidas and Reebok brands continued to expand at strong double-digit rates in both North America (+16 percent) and Asia-Pacific (+15 percent), the latter driven by Greater China (+26 percent). Revenues in Russia/CIS increased 7 percent as the positive impact from World Cup-related sales still offset the significant amount of store closures during the past twelve months. While revenues in Latin America were flat, sales in Emerging Markets decreased by 2 percent. Revenues in Western Europe, in line with expectations, declined 1 percent during the quarter.
Gross margin up 1.4 percentage points to 51.8 percent
The company’s gross margin increased 1.4 percentage points to 51.8 percent (2017: 50.4 percent). This development was driven by an improved pricing, channel and category mix, reflecting the company’s focus on the quality of its top-line growth, as well as lower sourcing costs. These improvements more than offset severe negative currency effects. Royalty and commission income grew to €37 million (2017: €29 million) while other operating income increased to €39 million (2017: €33 million). Other operating expenses rose 4 percent to €2.220 billion (2017: €2.129 billion). As a percentage of sales, other operating expenses were up 0.3 percentage points to 37.8 percent (2017: 37.5 percent). This increase was driven by significantly higher marketing expenditure, which grew 7 percent in the quarter, reflecting overproportionate investments into the company’s brands and the sell-through of its products. As a percentage of sales, marketing expenditure increased 0.4 percentage points to 12.2 percent (2017: 11.7 percent). In addition, operating overhead costs increased 3 percent as the company continues to invest into further improving the scalability of its business. As a percentage of sales, however, operating overheads declined 0.2 percentage points to 25.6 percent (2017: 25.8 percent).
Operating margin increases 1.3 percentage points to 15.3 percent
The company’s operating profit increased 13 percent to a level of €901 million (2017: €795 million) resulting in an operating margin improvement of 1.3 percentage points to a level of 15.3 percent (2017: 14.0 percent). Net income from continuing operations was up 19 percent to €656 million (2017: €549 million). Consequently, basic earnings per share from continuing operations reached €3.26, an increase of 21 percent year-over-year (2017: €2.70). The average number of shares used in the calculation of EPS declined to 200,653,842 as a result of the company’s share buyback program, which was partly offset by share conversions in relation to the convertible bond.
Adidas with strong top- and bottom-line growth in the first nine months of 2018
In the first nine months of 2018, revenues increased 9 percent on a currency-neutral basis. In euro terms, revenues grew 3 percent to €16.682 billion (2017: €16.162 billion). From a brand perspective, currency-neutral revenues for brand Adidas grew 11 percent, while Reebok revenues declined 4 percent. The gross margin improved 1.7 percentage points to 51.7 percent (2017: 50.1 percent), reflecting the positive effects from an improved pricing and channel mix, which more than offset negative currency effects. Royalty and commission income increased to €96 million (2017: €86 million) while other operating income rose to €165 million (2017: €85 million) due to the release of prior-year operational provisions and litigation gains during the first half of the year. Other operating expenses were up 5 percent to €6.652 billion (2017: €6.323 billion). This increase was mainly driven by higher marketing expenditures, which increased 11 percent. The company’s operating profit grew 16 percent to €2.239 billion (2017: €1.938 billion), representing an operating margin of 13.4 percent (2017: 12.0 percent), an increase of 1.4 percentage points compared to the prior year. Net income from continuing operations grew 19 percent to €1.616 billion (2017: €1.358 billion), resulting in a 19 percent increase in basic earnings per share from continuing operations to €7.97 (2017: €6.71).
Average operating working capital as a percentage of sales decreases
Inventories declined 7 percent to €3.216 billion (2017: €3.441 billion). On a currency-neutral basis, inventories decreased 4 percent. Operating working capital decreased 4 percent to €4.324 billion (2017: €4.502 billion) at the end of September 2018. On a currency-neutral basis, operating working capital remained at prior year level. Average operating working capital as a percentage of sales decreased 0.6 percentage points to 19.7 percent (2017: 20.3 percent), reflecting the strong top-line development during the last twelve months as well as the company’s continued focus on tight working capital management.
Net cash position of €535 million
Net cash at September 30, 2018 amounted to €535 million, representing an improvement of €880 million compared to net borrowings of €345 million in the prior year. This development was driven by a decrease in short-term borrowings as well as an increase in the company’s cash position, mainly related to the strong generation of cash from operating activities.
Adidas increases outlook for full year 2018
Due to the strong financial performance in the first nine months of 2018, Adidas has increased its profitability outlook for the year and specified the targeted range for its top-line growth. The company now projects currency-neutral revenues in 2018 to grow between 8 percent and 9 percent, at the lower end of the communicated range (previously: around 10 percent), due to lower-than-initially-expected growth in Western Europe. At the same time, Adidas now forecasts net income from continuing operations to reach between €1.660 billion and €1.720 billion, reflecting an increase of between 16 percent and 20 percent compared to the prior-year level of €1.430 billion (previously: increase of between 13 percent and 17 percent to between €1.615 billion and €1.675 billion). The company’s gross margin is now projected to increase up to 1.0 percentage points to a level of up to 51.4 percent (previously: to increase up to 0.3 percentage points to up to 50.7 percent). Gross margin will benefit from the positive effects of a more favorable pricing, channel and regional mix. These improvements will be partly offset by the negative impact from unfavorable currency movements. The operating margin is expected to improve by around 1.0 percentage points to a level around 10.8 percent (previously: to increase between 0.5 and 0.7 percentage points to between 10.3 percent and 10.5 percent). Basic EPS from continuing operations is forecast to increase at a rate between 15 percent and 19 percent (previously: increase of between 12 percent and 16 percent) compared to the prior-year level of €7.05, excluding the negative one-time tax impact in 2017, not taking into account any decrease in the number of shares outstanding due to the company’s share buyback program.