09 Aug Adidas Q2 Earnings Top Estimates On China And U.S. Growth
Powered by double-digit growth in China and the Americas, Adidas reported second-quarter earnings topped analyst expectations and confirmed its outlook for the year. Reebok’s sales were again down and a charge was taken against the brand due to an accounting correction.
Major Developments in Q2 2018:
- Revenues grow 10 percent currency-neutral and 4 percent in euro terms to €5.26 billion, exceeding analyst’s target of €5.2 billion.
- Gross margin increases 2.2pp to 52.3 percent
- Operating margin improves 1.2pp to 11.3 percent
- Net income from continuing operations grows 20 percent to €418 million. Net earnings beat analyst expectations of €387 million.
- Basic EPS from continuing operations up 20 percent to €2.06
“We delivered another strong quarter on the back of a successful World Cup activation. Our profitable growth was once again driven by our strategic focus areas North America, Greater China and e-commerce, while we continued to invest into the desirability of our brands and the scalability of our business,” said Kasper Rorsted, Adidas CEO. “With these results, we remain firmly on track to achieve our set targets for the full year 2018 and long-term until 2020.”
Currency-neutral sales increase 10 percent in Q2 2018
In the second quarter, Adidas currency-neutral revenues increased 10 percent. Revenues at the Adidas brand increased 12 percent, driven by double-digit growth in Sport Performance, on the back of double-digit growth in the training, running and football categories, as well as high-single-digit growth in Sport Inspired. Revenues at the Reebok brand decreased 3 percent as growth in Classics was more than offset by declines in the training and running categories. While revenues in the wholesale channel increased at a high-single-digit rate, direct-to-consumer sales rose at a double-digit rate with strong support from e-commerce, where revenues grew 26 percent in the quarter. In euro terms, the company’s sales were up 4 percent in the second quarter to €5.261 billion (2017: €5.038 billion).
Double-digit growth in North America, Asia-Pacific, Latin America and Russia/CIS
From a market segment perspective, on a currency-neutral basis, the combined sales of the Adidas and Reebok brands increased in nearly all market segments. The combined sales of the Adidas and Reebok brands grew particularly strongly in North America (+16 percent) and Asia-Pacific (+19 percent), the latter driven by a 27 percent increase in Greater China. Revenues in Latin America (+15 percent) and Russia/CIS (+14 percent) also grew at double-digit rates. While currency-neutral sales in Emerging Markets increased by 1 percent, revenues in Western Europe, in line with expectations, remained flat year-over-year.
Gross margin up 2.2 percentage points to 52.3 percent
The company’s gross margin increased 2.2 percentage points to 52.3 percent (2017: 50.1 percent). This development was driven by an improved pricing and channel mix, reflecting the company’s focus on the quality of its top-line growth. These improvements more than offset negative currency effects as well as higher input costs. Royalty and commission income increased 10 percent to €32 million (2017: €29 million). Other operating income rose from €24 million in the second quarter of 2017 to €70 million in 2018 due to the release of prior year operational provisions and litigation gains. Other operating expenses increased 9 percent to €2.261 billion (2017: €2.072 billion). As a percentage of sales, other operating expenses were up 1.8 percentage points to 43.0 percent (2017: 41.1 percent). This increase was mainly driven by significantly higher marketing expenditure, which grew 14 percent in the quarter, reflecting activities related to the 2018 FIFA World Cup RussiaTM as well as overproportionate investments into the company’s brands and the sell-through of its products. As a percentage of sales, marketing expenditure increased 1.2 percentage points to 13.5 percent (2017: 12.3 percent). In addition, operating overhead costs increased 7 percent or 0.7 percentage points as a percentage of sales to 29.5 percent (2017: 28.8 percent) as the company continues to invest into further improving the scalability of its business.
Operating margin increases 1.2 percentage points to 11.3 percent
The company’s operating profit increased 17 percent to a level of €592 million (2017: €505 million) resulting in an operating margin improvement of 1.2 percentage points to a level of 11.3 percent (2017: 10.0 percent).
Net income from continuing operations as well as basic earnings per share from continuing operations were up 20 percent to €418 million (2017: €347 million) and €2.06 (2017: €1.72), respectively.
Adidas with strong financial performance in the first half of 2018
In the first half of 2018, revenues increased 10 percent on a currency-neutral basis. In euro terms, revenues grew 3 percent to €10.809 billion (2017: €10.485 billion). From a brand perspective, currency-neutral revenues for brand Adidas grew 12 percent. Reebok sales declined 3 percent on a currency-neutral basis versus the prior year. The gross margin improved 1.8 percentage points to 51.7 percent (2017: 49.9 percent), reflecting the positive effects from an improved pricing mix, which more than offset negative currency effects as well as a less favorable channel mix and higher input costs. Royalty and commission income increased 2 percent to €58 million (2017: €57 million). Other operating income increased to €126 million (2017: €52 million). Other operating expenses were up 6 percent to €4.433 billion (2017: €4.194 billion). The company’s operating profit grew 17 percent to €1.338 billion (2017: €1.142 billion), representing an operating margin of 12.4 percent (2017: 10.9 percent), an increase of 1.5 percentage points compared to the prior year. Net income from continuing operations grew 19 percent to €960 million (2017: €809 million), resulting in an 18 percent increase in basic earnings per share from continuing operations to €4.71 (2017: €4.00).
Average operating working capital as a percentage of sales decreases
Inventories declined 6 percent to €3.425 billion (2017: €3.644 billion). On a currency-neutral basis, inventories decreased 2 percent. Operating working capital increased 1 percent to €4.318 billion (2017: €4.258 billion) at the end of June 2018. On a currency-neutral basis, operating working capital grew 6 percent. Average operating working capital as a percentage of sales decreased 0.3 percentage points to 20.1 percent (2017: 20.4 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 €89 million
Net cash at June 30, 2018 amounted to €89 million, representing an improvement of €824 million compared to net borrowings of €735 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 confirms outlook for full year 2018
For 2018, Adidas continues to expect sales to increase at a rate of around 10 percent on a currency-neutral basis, driven by double-digit growth in North America and Asia-Pacific. The company’s gross margin is forecast to increase up to 0.3 percentage points to a level of up to 50.7 percent (2017: 50.4 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 as well as higher input costs. The operating margin is forecast to improve between 0.5 and 0.7 percentage points to a level between 10.3 percent and 10.5 percent (2017: 9.8 percent). Net income from continuing operations is projected to increase to a level between €1.615 billion and €1.675 billion. This development reflects an increase of between 13 percent and 17 percent compared to the prior year level of €1.430 billion, excluding the negative one-time tax impact recorded in 2017. Basic EPS from continuing operations is expected to increase at a rate 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.
Retrospective accounting restatement of Reebok trademark in 2016
As a matter of routine, the German Financial Reporting Enforcement Panel reviewed the company’s 2016 consolidated financial statements. In this context, the Panel took the view that the historical book value related to the Reebok trademark was not sufficiently proven by the annual impairment test conducted at the time. While the Panel confirmed the adequacy of the company’s methodology for impairment testing, it disagreed with the chosen input factors in light of Reebok’s financial performance during the period between 2006 and 2016.
The company has accepted the Panel’s interpretation in order to come to a timely conclusion. As a consequence, the company retrospectively recognized an impairment of intangible assets related to the Reebok trademark in 2016 in an amount in the mid-triple-digit million euro range. The impairment has been reflected ex post in the company’s 2017 opening balance sheet. This retrospective accounting restatement has no impact on the company’s cash position. In addition, the company’s 2018 income and cash flow statements as well as its short- and long-term guidance are also not impacted. Reebok’s strategy and the prospects for the brand, which has been realizing significant profitability improvements since 2017 as a result of its ‘Muscle-Up’ turnaround plan, also remain unchanged.