05 May Adidas Profit Rises on North America Rebound
Adidas Group reported sales rose 17 percent in the first quarter, or 9 percent on a currency-neutral basis. While Western Europe and China grew faster, a highlight was North America, which rebounded to show a gain of 7 percent on a currency-neutral basis.
Highlights of the quarter:
• Group sales increase 9 percent on a currency-neutral basis[1]
• Revenues in euro terms grow 17 percent to a first quarter record of €4.1 billion
• Strong momentum at Adidas and Reebok with currency-neutral sales up 11 percent and 9 percent, respectively
• Double-digit growth in Western Europe, Greater China and MEAA
• Gross margin stable at 49.2 percent
• Operating margin excluding goodwill impairment increases 0.1pp to 8.9 percent
• Net income from continuing operations excluding goodwill impairment up 22 percent
• Group confirms full year guidance
Adidas Group currency-neutral sales increase 9 percent in the first quarter of 2015
In the first quarter of 2015, Group revenues increased 9 percent on a currency-neutral basis, driven by a double-digit increase at Adidas as well as high-single-digit growth at Reebok. Currency translation effects had a positive impact on sales in euro terms. Group revenues grew 17 percent to €4.083 billion in the first quarter of 2015 from €3.480 billion in 2014. Currency-neutral Adidas revenues increased 11 percent. This development was driven by double-digit sales increases in running, at Adidas Originals and Adidas NEO as well as a high-single-digit increase in training. Currency-neutral Reebok sales were up 9 percent versus the prior year as a result of double-digit sales increases in the training and studio categories as well as mid-single-digit sales growth in Classics. Revenues at TaylorMade-Adidas Golf decreased 9 percent currency-neutral, mainly due to sales declines in the metalwoods and irons categories, which more than offset a double-digit increase in golf apparel.
“We got off to a successful start to the year with our Adidas and Reebok brands enjoying great momentum. With our innovative performance products, fashion-driven styles and highly engaging marketing campaigns, we have excited our consumers around the world,” said Herbert Hainer, CEO.
Currency-neutral sales grow in nearly all market segments
In the first quarter of 2015, on a currency-neutral basis the combined sales of the Adidas and Reebok brands grew in all market segments except Russia/CIS. Revenues in Western Europe increased 11 percent on a currency-neutral basis, due to double-digit sales growth at both the Adidas and Reebok brand. Currency-neutral sales in North America increased 7 percent, as a result of high-single-digit sales growth at Adidas. Revenues in Greater China were up 21 percent on a currency-neutral basis reflecting double-digit top-line growth at Adidas and Reebok. Currency-neutral sales in Russia/CIS declined 3 percent as mid-single-digit growth at Reebok was more than offset by sales declines at Adidas. In Latin America, revenues grew 6 percent on a currency-neutral basis with a double-digit improvement at Reebok and a mid-single-digit increase at Adidas. In Japan, sales were up 7 percent on a currency-neutral basis due to strong double-digit sales increases at Reebok as well as low-single-digit sales growth at Adidas. Sales in MEAA grew 10 percent on a currency-neutral basis, reflecting a double-digit top-line improvement at Adidas.
Revenues in Other Businesses were down 1 percent on a currency-neutral basis. Double-digit sales increases in Other centrally managed businesses as well as high-single-digit growth at Reebok-CCM Hockey were more than offset by the sales decline at TaylorMade-Adidas Golf.
With the exception of Russia/CIS, currency translation effects had a positive impact on segmental sales in euro terms.
Group sales development supported by double-digit growth in retail
In the first quarter of 2015, retail revenues increased 14 percent on a currency-neutral basis as a result of double-digit sales growth at Adidas and high-single-digit revenue increases at Reebok. Concept stores, factory outlets and concession corners were all up versus the prior year. eCommerce grew 56 percent on a currency-neutral basis. Currency translation effects negatively impacted retail revenues in euro terms. Sales grew 13 percent to €895 million from €794 million in the prior year. Currency-neutral comparable store sales increased 4 percent versus the prior year, due to sales growth across all store formats and most markets.
Group gross margin remains stable
In the first quarter of 2015, gross profit for the Adidas Group increased 17 percent to €2.008 billion versus €1.712 billion in the prior year. The gross margin of the Adidas Group remained unchanged at 49.2 percent (2014: 49.2 percent). A more favourable product and pricing mix was offset by higher input costs as well as negative currency effects.
Goodwill impairment in an amount of €18 million
As a result of the change in the composition of the Group’s reportable segments and associated cash-generating units, respectively, the Group recorded goodwill impairment losses of €18 million during the first three months ending March 31, 2015. This charge was related to the Latin America (€15 million) and Russia/CIS (€3 million) operating segments. Goodwill for these groups of cash-generating units is now completely impaired. The impairment losses were non-cash in nature and do not affect the Adidas Group’s liquidity.
Operating margin excluding goodwill impairment increases to 8.9 percent
Group operating profit increased 12 percent to €345 million in the first quarter of 2015 versus €307 million in 2014. The operating margin of the Adidas Group decreased 0.4 percentage points to 8.4 percent (2014: 8.8 percent). Excluding the goodwill impairment losses, operating profit grew 18 percent to €363 million from €307 billion last year, representing an operating margin of 8.9 percent, up 0.1 percentage points from the prior year level (2014: 8.8 percent). This development was primarily due to the positive effect from lower other operating expenses as a percentage of sales. First quarter other operating expenses increased 15 percent to €1.700 billion (2014: €1.478 billion), reflecting a significant increase in marketing working budget expenditure as well as higher operating overhead costs. As a percentage of sales, however, other operating expenses decreased 0.8 percentage points to 41.6 percent from 42.5 percent in 2014. Sales and marketing working budget expenditure amounted to €554 million, which represents an increase of 26 percent versus the prior year level (2014: €442 million).
Financial income increases
Financial income increased to €16 million in the first quarter of 2015 from €7 million in the prior year, as a result of positive exchange rate effects.
Financial expenses down 22 percent
Financial expenses decreased 22 percent to €16 million in the first quarter of 2015 (2014: €20 million). This development was mainly due to the non-recurrence of negative exchange rate effects compared to the prior year period.
Income before taxes excluding goodwill impairment up 24 percent
Income before taxes (IBT) for the Adidas Group increased 17 percent to €345 million from €294 million in 2014. IBT as a percentage of sales remained stable at 8.4 percent in the first quarter of 2015 (2014: 8.4 percent). Excluding the goodwill impairment losses, IBT was up 24 percent to €363 million from €294 million in 2014 and, as a percentage of sales, increased 0.4 percentage points to 8.9 percent from 8.4 percent in the prior year.
The Group’s net income from continuing operations increased 13 percent to €237 million in the first quarter of 2015 from €209 million in 2014. Excluding the goodwill impairment losses, net income from continuing operations was up 22 percent to €255 million (2014: €209 million). The Group’s tax rate increased 2.5 percentage points to 31.4 percent in the first quarter of 2015 (2014: 28.9 percent). Excluding the goodwill impairment losses, the effective tax rate grew 0.9 percentage points to 29.8 percent from 28.9 percent in 2014, mainly due to a less favourable earnings mix.
Losses from discontinued operations total €14 million
In the first quarter of 2015, the Group incurred losses from discontinued operations of €14 million, net of tax, related to the Rockport operating segment, which is planned to be divested during the course of 2015 (2014: losses of €3 million). Losses from discontinued operations were due to a loss recognised on the measurement to fair value less costs to sell, net of tax, in the amount of €10 million, which was mainly caused by currency movements, as well as a loss from Rockport’s operating activities of €4 million.
Net income attributable to shareholders excluding goodwill impairment up 17 percent
The Group’s net income attributable to shareholders, which in addition to net income from continuing operations includes the losses from discontinued operations, increased 8 percent to €221 million in the first quarter of 2015 from €204 million in 2014. Excluding the goodwill impairment losses, net income attributable to shareholders was up 17 percent to €239 million (2014: €204 million).
Basic EPS from continuing operations excluding goodwill impairment up 25 percent
Basic EPS from continuing operations increased 16 percent to €1.15 in the first quarter of 2015 (2014: €0.99). Excluding the goodwill impairment losses, basic EPS from continuing operations increased 25 percent to €1.24 from €0.99 in 2014. Basic EPS from continuing and discontinued operations increased 11 percent to €1.08 in the first quarter of 2015 (2014: €0.98). Excluding the goodwill impairment losses, basic EPS from continuing and discontinued operations increased 20 percent to €1.17 from €0.98 in 2014.
Group inventories from continuing operations stable currency-neutral
Group inventories increased 1 percent to €2.539 billion at the end of March 2015 versus €2.505 billion in 2014. On a currency-neutral basis, inventories decreased 4 percent, mainly as a result of the transfer of Rockport inventories to assets classified as held for sale. Inventories from continuing operations increased 5 percent (0 percent currency-neutral), reflecting the Group’s strict inventory management.
Accounts receivable from continuing operations up 2 percent currency-neutral
The Group’s accounts receivable increased 13 percent to €2.456 billion at the end of March 2015 (2014: €2.176 billion). On a currency-neutral basis, receivables remained virtually unchanged. Receivables from continuing operations rose 15 percent (+2 percent currency-neutral).
Net borrowings increase by €288 million
Net borrowings at March 31, 2015 amounted to €542 million, compared to net borrowings of €254 million in 2014, representing an increase of €288 million. This development is mainly a result of the utilisation of cash for the share buyback programme in an amount of €381 million. Currency translation had a positive effect of €137 million on net borrowings. The Group’s ratio of net borrowings over EBITDA amounted to 0.4 at the end of March 2015 (2014: 0.2).
Adidas Group confirms guidance for the full year 2015
Adidas Group sales are forecasted to increase at a mid-single-digit rate on a currency-neutral basis in 2015. Despite a high degree of uncertainty regarding the economic outlook and consumer spending in Russia/CIS, the positive sales development will be supported by rising consumer confidence in most geographical areas. In particular, Group sales development will be favourably impacted by a significantly improved top-line development at TaylorMade-Adidas Golf as well as ongoing robust momentum at both Adidas and Reebok. This, as well as the further expansion and improvement of the Group’s controlled space initiatives, will more than offset the non-recurrence of sales related to the 2014 FIFA World Cup™. Currency translation is expected to positively impact top-line development in reported terms, given the strengthening of major currencies such as the US dollar and the Chinese renminbi versus the euro.
The Adidas Group gross margin is forecasted to be at a level between 47.5 percent and 48.5 percent in 2015 (2014: 47.6 percent). Higher product margins at TaylorMade-Adidas Golf as a result of lower levels of clearance activity as well as a more favourable pricing and product mix at both Adidas and Reebok are expected to positively influence the Group’s gross margin development. However, adverse currency movements in emerging markets, in particular in Russia/CIS, are expected to negatively impact the Group’s gross margin development. The wider than usual target corridor reflects the currently persisting high degree of uncertainty regarding future currency movements.
In 2015, the Group’s other operating expenses as a percentage of sales are expected to be around the prior year level (2014: 42.7 percent). Sales and marketing working budget as a percentage of sales is projected to increase versus the prior year. Given the robust momentum at Adidas and Reebok, the company will step up marketing and point-of-sale investments in 2015 to secure and drive faster growth rates and market share gains, particularly in developed markets such as North America and Western Europe. As part of these marketing efforts, both Adidas and Reebok launched major brand campaigns at the beginning of the year. Operating overhead expenditure as a percentage of sales is forecasted to be around the level recorded in 2014.
The operating margin excluding goodwill impairment for the Adidas Group is forecasted to be at a level between 6.5 percent and 7.0 percent in 2015 (2014 excluding goodwill impairment losses: 6.6 percent). This development will be strongly influenced by currency movements. The Group’s tax rate is expected to be at a level of around 29.5 percent and thus more favourable compared to the 2014 effective tax rate excluding goodwill impairment losses of 29.7 percent. Net income from continuing operations excluding goodwill impairment is projected to increase at a rate of 7 percent to 10 percent, thus outpacing the Group’s expected top-line development (2014: net income from continuing operations excluding goodwill impairment losses of €642 million).
Hainer concluded, “I am proud how fast we rebounded after a challenging 2014. Now, after getting off the starting block well this year, we are optimistic about our prospects for the full year. But we will not stop there. Our new strategy, ‘Creating the New’, will enable us to accelerate the Adidas Group’s growth until 2020 and create sustainable