Adidas profit drops 34% in first quarter; N. America sales off 20%

Adidas profit drops 34% in first quarter; N. America sales off 20%

Adidas AG, the world’s second largest athletic footwear and apparel company to Nike, said Tuesday its first-quarter net profit fell 34 percent as currency exchange rates and changes at its TaylorMade golf business weighed on the bottom line.

Net income fell to 204 million euros ($284 million) from 308 million euros ($430 million) in the same quarter last year. Group revenues fell 6 percent to 3.533 billion euros ($4.92 billion).

The company said currency translation effects “had a significant negative impact” on sales. A stronger euro shrinks revenues in other currencies when they are converted to euros for the earnings statement. Revenues were “stable” without the currency effect.

“While we still have to be wary of currencies and their effects on our financials, the first quarter will be the low point of our performance,” chief executive Herbert Hainer said in prepared remarks. “I expect a strong second quarter to point the way forward. After all, with the 2014 FIFA World Cup taking centre-stage, it will definitely be an Adidas quarter.”

The quarter’s earnings were hit by double-digit sales declines at TaylorMade-Adidas Golf. The company is making “strategic changes” at the business to align shipping and product launch cycles with market demand patterns.

Those sales declines contributed to the 20 percent drop-off in Adidas revenue in North America during the quarter, primarily because of the TaylorMade strategic shift, the company said. The golf unit accounted for more than half the sales decline in the region.

(TaylorMade president Mark King was recently named the next president of Adidas America, the company’s North American headquarters in Portland, replacing Patrik Nilsson.)

A 13 percent sales decline in the Adidas brand, especially in Originals and Global Basketball, along with an 8 percent dip at Reebok also contributed to the North American declines, the company said.

With the World Cup poised to begin this summer in Brazil, soccer sales were up double-digit in the U.S., 27 percent worldwide, the company said.

Hainer said sales of federation jerseys and the Official Match Ball brazuca have been “significantly higher than in the same time period four years ago. We are therefore well on track to achieve record football sales of 2 billion euro.” ($2.8 billion)

Globally, sales grew in key markets: up 28 percent in European Emerging Markets, 19 percent in Latin America and 5 percent in China.

Hainer talked about the disappointing North American performance extensively in prepared remarks:

My Board colleagues and I are definitely not happy with our current performance in North America, but let me assure you of one thing — we are fully committed to driving long-term success for the Group in this market. When it comes to our brand positioning, we are convinced that we are focusing on the right areas.

Nonetheless, our biggest obstacle has been and still is the quality of our execution, particularly in the wholesale channel. When I look at own retail, sales were up 13% in the quarter, clearly showing the strong consumer desire and conversion of our brands when they are presented in the right way.

Therefore, in North America, we are accelerating change internally, with the completion of the joint operating model for adidas and Reebok and the appointment of Mark King, who has been responsible for taking TaylorMade-adidas Golf to the top of the golf industry. Under the guidance of my Board colleague Roland Auschel, who will take over responsibility for the market at the Board level from me, as well as strong support from Eric Liedtke and his brand management team, we are putting our top minds and talents fully behind this market as we build towards our next strategic plan.

While this team will focus their attention on building a more robust Group executional strategy for the market in the long term, in the short term we already see improving trends for both brands in North America, and I expect adidas and Reebok to reverse the negative trend from the first quarter and to grow in North America for the full year.

And not just in North America.: Higher volumes of Boost running shoes and the introduction of our award-winning Boost technology into basketball are all driving increasing demand and orders for adidas for the second half of the year. In Originals, product launches such as the Originals ZX Flux are enjoying encouraging early signs from Western Europe with sell-throughs clearly outpacing our major competitor at Foot Locker Europe. We also have had strong responses to our new collaborations with TopShop and Farm as well as record conversion and sell-through from the Stan Smith re-launch. And as you know, we also have an array of hotly anticipated initiatives in the pipeline be it Kanye West, Pharrell Williams amongst others to bring momentum back to the category.

— Allan Brettman