The good results achieved by Germany in the World Cup in Brazil do not fit with the poor performance experienced by adidas year to date, and stock has fallen over 40% since the start of 2014. The second largest sportswear manufacturer, behind only Nike, has slowed down its sales projection for the second half of 2014 and expects net income to be around €650 million, down from an earlier estimate that assumed net income to be in the range of €830 million to €930 million. The group also predicts a business decline in 2015 compared to its Route 2015 agenda.
Adidas CEO, Herbert Hainer, explained the main reasons for lowering its full year guidance were currency negative impact, less favourable hedging rates, higher marketing spend for the 2014 FIFA World Cup, poor retail sentiment and significantly lower contribution from TaylorMade Adidas Golf. Additionally, European and USA sanctions against Russia also had an impact on the company’s results.
- unfavorable exchange rates, specially a weak Ruble, caused a sales loss over €450 million year-to-date and a gross margin decline.
- the golf market slowdown, in which adidas has a leading position, caused a sales declined by €236 million in the first six months of 2014 hitting the operating profit by €120 million.
- an intense promotional activity in Russia and CIS countries to reactivate a declining consumption as a result of the Ukraine political conflict also seriously impacted the group´s retail profitability.
In the first half of 2014, group revenues decreased by 2% to €6.998 billion from €7.134 billion in 2013, mainly due to the negative impact of currency exchange rates. If considering results at constant exchange rates, sales increased 5%.
Wholesale business still accounts for a large portion of group sales, with a 63% share, followed by retail sales, which represented 25% of total turnover during the period. Retail sales increased 10% to €1.752 billion whilst wholesale revenues decreased 1% to €4.442 billion in the first half of 2014. Other businesses however experienced a significant fall of 23% to €804 million versus €1.05 billion achieved in 2013.
During the first half, the group opened 199 stores, 114 were closed and 64 were revamped. As of June 30, the group totaled 2,017 stores: 1,590 adidas branded, plus 427 Reebok stores. The adidas own-retail sales increased 11.5% to €1.486 billion compared to €1.332 billion in first half of 2013. Reebok branded own-retail sales reached €267 million, up 5% during the period. Ecommerce continue to expand, moving from €56 million in first half 2013 to €64 million in 2014.
By region, mature markets, including North America and Western Europe accounted for 50% of group net sales, whilst the other half came from emerging economies such as Greater China (12%), Latin America (11%), European emerging markets (13%) and other Asian countries (14%).
Revenues in Western Europe increased 6% on a currency-neutral basis, pushed by sales increase in Germany, Spain, France and the UK. East European markets performed even better with sales increased at 21%, also on constant basis. But the North American and Japanese markets disappointed with sales decreasing at double-digit rates. Latin America performed well as expected, with sales growing 25% on a currency neutral basis, but diverse currency impacts depending on the country have made sales increase at current exchange rates by a discreet 2% to €781 million, from €765 million in 2013.
By product category, footwear revenues in first half of 2014 fell 6% at current exchange rates, to €3.293 billion, whilst apparel performed much better with turnover increased 8% to €2.860 billion. The hardware group experienced a serious decline of 14% to €845 million from €979 million in first half 2013.
Gross margin has decreased 1.0 percentage point to 49.2% mainly due to lower margins at the TaylorMade Golf division, higher input costs and negative effects from currencies devaluation (related to the weakness of the ruble and the dollar). On top of that, group operating expenses on sales were up 1,9% during the period, mainly due to overheads cost increased by 11% and higher marketing and sales budgets, which must be urgently addressed in next quarters.
As a result, the group operating profit dramatically declined 25% to €523 million, and net income attributable to shareholders was down 27% to €348 million in the first fall of 2014. Adidas share is now trading at a discount compared to its industry peers. This pullback means it is a perfect moment for investors to buy. Adidas is still a solid company with good underlying growth potential.
THE FUTURE OUTLOOK
Regarding the Russian market, the group has decided to reduce the number of openings from the 150 stores previously planned to 80 this year, and a similar number for next year, in order to reduce risks and secure profits. Given the current promotional environment existing in the country, the company expects an operating profit fall of around €50million in the second half of 2014.
The group wants to strengthen their brand image and will transform its marketing organization to become more consumer-focused, also responding more quickly to customer needs and new emerging trends. Marketing budget will increase one percentage point to 13-14% of sales and overheads will be tighter controlled. Adidas will reinforce their partnership activity in several sport areas, such as their agreement with the Manchester United and some NBA´s leading players.
At TaylorMade-adidas Golf, given the inventory still in the market, the group will carefully look at new launches and introduction timings, will reduce high overheads accordingly to lower sales expectations and hope to reactivate consumption launching some innovative products.
Adidas is still a solid company and measures to address a tough 2014 performance have already been taken. Experts advise to buy adidas shares as strong sales recovery is expected in the coming quarters.
