Outlook

In 2009, recessionary pressures in most key global markets are expected to have a negative impact on overall consumer demand and the sporting goods industry. Despite our strong market positions in most major markets, a regionally balanced sales mix and strength in innovation, we expect these developments to have a negative impact on the development of the adidas Group’s financial results in 2009. As a result, we forecast adidas Group sales and earnings per share to decline in 2009.

Group business outlook affected by uncertain global macroeconomic development

Expectations for the development of the global economy and the sporting goods industry in 2009 are currently subject to a high degree of uncertainty. The unprecedented slowdown in economic activity recorded towards the end of 2008 has consequences currently not fully foreseeable. As a result, macroeconomic forecasts for 2009 given by various govern­ment bodies and research institutes differ widely in their assessment of how long and deep the expected economic downturn will be. In addition, the effect rising unemploy­ment and lower consumer confidence could have on private consumption cannot be fully assessed. Consequently, the effect global macroeconomic developments could have on the adidas Group’s business outlook is currently difficult to fore­cast, especially with regard to the second half of the year. Our outlook is hence based solely on the scenario of economic and sector development laid down in this report, acknowledging actual developments might significantly differ from this sce­nario. In addition, it is currently difficult to quantify the impact negative currency translation effects could have on the Group’s top- and bottom-line performance. Due to the fact that many currencies such as the Russian ruble, the British pound and several currencies in Latin America have significantly depreciated against the euro towards the end of 2008 and at the begin­ning of 2009, we currently forecast these effects to have a significant negative impact on our Group’s financial performance.

Global economic slowdown projected to intensify in 2009

According to the World Bank, in 2009 growth of the global economy is projected to slow to a level of around 1% due to the real-economy side effects of the banking crisis which intensified during the second half of 2008. Although several governments around the world are instigating policies to combat recessionary pressures, an outright global recession cannot be ruled out.

In Europe, GDP in the Euro Zone is expected to decline around 1.5% in 2009, driven by weakness in domestic consumption, a deteriorating export outlook as well as the impact of tighter financing conditions on investment. European emerging markets are forecasted to show modest growth of around 0.5% in 2009. Economies such as Russia and Turkey are expected to show a steep slowdown based on falling commodity prices and difficulties related to tightening credit markets which may lead to higher levels of unemployment.

In North America, GDP is also projected to decline approxi­mately 1.5% versus the prior year. With consumer confidence at record lows and expected increases in unemployment throughout the year, lower consumer spending is forecasted to lead to a sharp decline in GDP particularly in the first half of 2009. A government stimulus package involving infrastructure spending is expected to lift the economy out of recession in the second half of the year.

In Asia, compared to 2008, growth excluding Japan is likely to slow slightly to a level of around 5% in 2009, the weakest since 2001. China and India are forecasted to be affected by lower industrial production growth, and a slowdown of exports. Japan’s economy is forecasted to decline around 3% in 2009 versus 2008. Falling exports as well as a lack of stimulus for domestic consumption and the likelihood of stagflation make the Japanese macroeconomic landscape similar to that in the USA and the Euro Zone.

In Latin America, growth rates are likely to slow to a level of around 1% in 2009. Private consumption is expected to continue to increase in most major markets. Differences with regard to exposure to commodity prices and dependency on exports are likely to lead to a high variance of GDP development by country.

Low consumer spending to negatively impact the develop­ment of the global sporting goods industry

In 2009, we expect the global sporting goods industry to decline. In mature markets such as the USA and Western Europe, the decline is expected to be more pronounced due to low levels of consumer confidence and dif. cult trading conditions for retailers. This is likely to lead to a highly promotional environment in these markets. Emerging markets such as China are expected to be more resilient as opportunity for distribution expansion continues in these markets.

European sporting goods industry to decline compared to prior year

Due to the non-recurrence of positive effects related to the UEFA EURO 2008™ in the first half of the year, and ongoing difficult market conditions in major Western European markets such as the UK and Spain, we expect the sporting goods indus­try to decline in Europe in 2009. While the region’s emerging markets are likely to be more resilient, we also anticipate a slowdown in consumer spending to impact sporting goods industry sales in these markets. In the second half of the year, the industry is expected to turn its attention to the run-up for the 2010 FIFA World Cup™, which should provide some positive impetus to industry sales towards the end of 2009.

North American sporting goods market to experience consolidation

As a result of the recession in the USA, we expect the North American sporting goods market to decline in 2009. According to the National Retail Federation, retail industry sales are expected to fall 0.5% compared to the prior year. Lower overall consumer spending and potential shifts in consumption pat­terns away from discretionary products are expected to lead to shifts in consumer priorities which we expect to also negatively impact the sporting goods industry. In addition, we anticipate further consolidation of the retail landscape as several smaller retailers succumb to financial pressure and many rationalise existing store bases.

Asian sporting goods industry negatively impacted by slowing domestic demand

Although we expect Asia to continue to be the fastest-growing sporting goods market in 2009, we anticipate growth rates to moderate considerably compared to the prior year. In China, industry growth is likely to moderate significantly in 2009, due to the exceptionally high rate of retail expansion in 2008, and high sell-in rates by sporting goods manufacturers ahead of the Beijing 2008 Olympics. Nevertheless, we expect the sporting goods industry in China to show continued growth in 2009, as underlying consumer trends remain positive and retail infrastructure continues to develop across the country. In Japan, however, we expect the sporting goods industry to decline, in line with private consumption expectations in that market.

Latin American sporting goods industry affected by depreciation of currencies against the dollar

With a majority of sporting goods in Latin America being purchased in US dollars, we expect demand for sporting goods to be negatively affected by the recent depreciation of currencies in the major countries of the region. In addition, there are currently concerns related to increasing trade barriers being potentially implemented in certain markets such as Brazil.

Consolidation of new businesses supports TaylorMade-adidas Golf and Reebok sales

Sales recorded in the TaylorMade-adidas Golf segment will be supported by the consolidation of Ashworth, Inc. revenues for the full twelve-month period. Ashworth, Inc., a US-based golf lifestyle apparel brand, has been consolidated within the adidas Group as of November 20, 2008. In addition, sales in the Reebok segment are expected to be positively influenced by the consolidation of sales from the brand’s new companies in Latin America for the full twelve-month period.

adidas Group sales and earnings per share to decrease in 2009

We expect adidas Group sales to decline at a low- to mid­single-digit rate on a currency-neutral basis in 2009. Sales development will be negatively impacted by weaker consumer demand due to low levels of consumer confidence and rising unemployment in many major markets. Group currency-neutral sales in the emerging markets of Europe, Asia and Latin America are forecasted to develop better relative to mature markets such as Western Europe and North America.

In 2009, the adidas Group gross margin is forecasted to decline. A promotional environment in mature markets, as well as expected higher sourcing costs due to increased raw material and wage costs, in particular in the first half of the year, will contribute to this development. Further own-retail expansion at both adidas and Reebok is expected to partially offset these developments.

In 2009, the Group’s operating expenses as a percentage of sales are expected to increase. Higher expenses for controlled space initiatives in the adidas and Reebok segments will drive increases, partially compensated by positive effects from efficiency improvements throughout our organisation. Marketing working budget expenses as a percentage of sales are forecasted to be at or below the prior year level. Operating income is expected to decline. This will mainly be driven by the non-recurrence of book gains from acquisitions and disposals in the TaylorMade-adidas Golf segment in the prior year.

We expect the number of employees within the adidas Group to be around the prior year level. A hiring freeze implemented in autumn 2008 for all Group and brand functions and initiatives to streamline our organisation are forecasted to offset new hirings related to further retail expansion in emerging markets.

The adidas Group will continue to spend around 1% of sales on research and development in 2009. Areas of particular focus include training, running, football and basketball at the adidas and Reebok brands, as well as golf hardware at TaylorMade­adidas Golf. The number of employees working in research and development throughout the Group will remain stable in 2009.

In 2009, we expect the operating margin for the adidas Group to decline. This forecast reflects our projection of a Group gross margin decline and an increase in operating expenses as a percentage of sales.

As a result of lower interest rate expenses in line with the planned reduction of net borrowings, we forecast lower financial expenses in 2009. The Group tax rate is expected to be slightly above the prior year level (2008: 28.8%).

As a result of these developments, net income attributable to shareholders is projected to decline in 2009. Basic and diluted earnings per share are expected to decline at a lower rate than net income attributable to shareholders due to a lower weighted average number of shares outstanding compared to the prior year.

adidas backlogs decrease 6% currency-neutral

Backlogs for the adidas brand at the end of 2008 decreased 6% versus the prior year on a currency-neutral basis. In euro terms, adidas backlogs declined 4%. This development reflects the difficult retail environment in many major markets. In addition, order backlogs in Europe were negatively impacted by the non-recurrence of strong prior year orders for foot­ball products supported by the UEFA EURO 2008™. Differ­ences in order timing had a negative effect on the develop­ment of backlogs in Asia. Footwear backlogs decreased 4% in currency-neutral terms (– 2% in euros). Growth in North America could not offset declines in Europe and Asia. Apparel backlogs decreased 6% on a currency-neutral basis (– 4% in euros) with declines in all regions. Backlogs do not include the segment’s own-retail business. We also expect the share of at-once business in the adidas sales mix to grow as a result of increasing uncertainty among retailers regarding future market development. As a result, order backlogs are no longer a reliable indicator for expected sales development.

Brand adidas sales to decline in 2009

We project a low- to mid-single-digit sales decline on a currency-neutral basis for brand adidas in 2009. Revenues in both the adidas Sport Performance and adidas Sport Style divisions are forecasted to decrease. In the Sport Performance division, revenues in the football category in particular are forecasted to decline as a result of the non-recurrence of strong sales in connection with the UEFA EURO 2008™. Sport Style sales are expected to be negatively affected by challenging market conditions in many major markets. Incremental sales from the further segmentation of the brand’s product range to effectively address specific consumer groups are forecasted to partly offset this development.

Reebok backlogs decline

Currency-neutral Reebok backlogs at the end of 2008 were down 17% versus the prior year. In euro terms, this represents a decline of 18%. Footwear backlogs decreased 10% in currency-neutral terms (–11% in euros) as a result of declines in all regions. Apparel backlogs declined 33% on a currency-neutral basis driven by lower orders for licensed apparel in particular in North America (– 33% in euros). These developments largely reflect challenging market conditions in Reebok’s major markets. Due to the exclusion of the own-retail business and the high share of at-once business in Reebok’s sales mix, order backlogs in this segment are not indicative of expected sales development.

Reebok segment sales to be at least stable

Reebok segment sales are projected to be at least stable compared to the prior year on a currency-neutral basis in 2009. The brand’s key focus categories, Women’s Fitness and Men’s Sport, are expected to develop significantly better compared to other categories due to new product launches and campaigns in 2009. In the Classics category, we will continue to visibly upgrade and improve the brand’s product offering. The consolidation of sales from Reebok’s new companies in Latin America for the full twelve-month period is projected to support revenue development.

TaylorMade-adidas Golf sales to increase at a low-single-digit rate

We expect the consolidation of Ashworth, Inc. for the full 12-month period to support a currency-neutral low-single-digit sales increase at TaylorMade-adidas Golf in 2009. On a comparable basis, however, excluding Ashworth, sales are projected to decline despite a strong product pipeline. This will be a result of the challenging market situation in North America. Because the order profile in golf differs from other parts of our Group’s business, we do not provide order information for TaylorMade-adidas Golf.

Working capital management to improve balance sheet

Our goal is to reduce operating working capital as a percentage of sales in 2009. Inventory management will be a focus area in this respect. Based on tight control of inventory ageing, optimising inventory levels for fast replenishment is at the forefront of our activities to ensure we are able to satisfy short-term retailer demand on an at-once basis.

Investment level to be between € 300 and € 400 million

In 2009, investments in tangible and intangible assets are expected to amount to € 300 million to € 400 million (2008: € 380 million). Investments will focus on adidas and Reebok controlled space initiatives, in particular in emerging mar­kets. These investments will account for almost 50% of total investments in 2009. Other areas of investment include the further development of the adidas Group Headquarters in Herzogenaurach, Germany and the increased deployment of SAP and other IT systems in major subsidiaries within the Group. The most important factors in determining the exact level and timing of investments will be the rate at which we are able to successfully secure controlled space opportunities. All investments within the adidas Group in 2009 are expected to be fully financed through cash generated in our operating businesses.

Excess cash to be used to reduce net debt

In 2009, we expect continued strong cash flows from operating activities. Cash flows from operating activities will be used to finance working capital needs, investment activities, as well as dividend payments. Tight working capital management and disciplined investment activities are expected to help optimise the Group’s free cash flow in 2009. We intend to largely use excess cash to reduce net borrowings, which we forecast to be below the prior year level. As a result, we expect to make progress towards achieving our medium-term financial leverage target of below 50% (2008: 64.6).

Efficient liquidity management in place for 2009 and beyond

Efficient liquidity management continues to be a priority for the adidas Group in 2009. We focus on continuously anticipating the cash inflows from the operating activities of our Group segments, as this represents the main source of liquidity within the Group. Liquidity is forecasted on a multi-year financial and liquidity plan on a quarterly basis. Long-term liquidity is ensured by continued positive free cash flows and sufficient unused committed and uncommitted credit facilities see Treasury, p. 093. Consequently, we do not plan any significant financing initiatives in 2009.

Management to propose unchanged dividend of € 0.50

We are committed to maintaining the Group’s dividend payout ratio corridor of between 15 and 25% of net income attribut­able to shareholders. At our Annual General Meeting on May 7, 2009, we intend to propose an unchanged dividend per share of € 0.50 for the financial year 2008. Management has decided to maintain the dividend level in light of the tough business environment and our focus on reducing net borrowings. Based on the number of shares outstanding at the end of 2008, the dividend payout will decrease 2% to € 97 million (2007: € 99 million). This represents a payout ratio of 15% versus 18% in 2007.

Potential changes in legal structure due to subsidiary mergers

In 2009, we will continue to evaluate the merger of adidas and Reebok subsidiaries in various countries on a case-by-case basis. In doing so, we strive to realise operational and financial efficiencies with a view to maximising long-term growth opportunities for our Group. In markets where third parties act as distributors for our brands or control a stake in our subsidi­aries we may consider the buyback of distribution rights, the buyout of minority stakes or the setting up of joint ventures for our brands.

Increasing momentum for adidas Group in 2010 and beyond

In line with the projections of the OECD, the World Bank and independent researchers, we expect the global macroeconomic environment to recover in 2010, although growth rates are estimated to remain well below 2008 levels. We forecast this development to support the operational performance of our Group in 2010. Under this assumption, we project adidas Group sales and net income to improve in 2010 compared to 2009 levels. Football sales related to the 2010 FIFA World Cup™ will support revenues in the adidas segment. We also forecast our initiatives to revitalise the Reebok brand to gain traction. Finally, the TaylorMade-adidas Golf segment is projected to benefit from leading market positions in key categories, supported by continuously bringing new product innovations to the consumer as well as leveraging the benefit we anticipate gaining from the Ashworth acquisition.

Key goals for long-term success

In addition, the Group will continue to work towards reaching our priority goals to achieve long-term sustainable shareholder value creation. These include:

		Expand presence in emerging markets: Emerging economies in Asia, Europe and Latin America have consistently grown at stronger rates than more mature markets over the last several years. We believe these markets continue to represent the most significant long-term opportunity to our industry as a whole. Rising standards of living, increasing disposable income and positive demographic trends should continue to support increasing private consumption in these markets. Therefore, assuming constant exchange rates, our Group sees the oppor­tunity to increase our representation in emerging markets to over 35% of Group sales.
		Intensify controlled space focus: We intend to increase our controlled space initiatives to at least 35% of Group sales in the coming years. This includes new openings of adidas and Reebok own-retail stores, the further extension of our mono-branded store base in China, as well as new shop-in-shop initiatives with retail partners in several markets around the world.
		Leverage growth and operational scale through to bottom line: A higher exposure to emerging markets as well as expanding controlled space activities are important levers to improving brand presence, increasing sell-through and driving higher Group profitability. Our continued focus on innovation and design leadership and marketing excellence is an important Group priority to protect and increase the image and consumer appeal of all our brands. This is particularly important in the Reebok segment, as we work to support the revitalisation of the Reebok brand. Taking these opportunities together with our continuous efforts to reduce organisation complexity and further integrate Group structures to take advantage of our global scale, we believe there is significant potential to increase the Group’s operating margin to over 11%.
		Increase financial flexibility: We intend to further decrease net borrowings to achieve a financial leverage of below 50% in the medium term. Excess cash will be largely used to achieve this goal and reduce exposure to financing risks. A strong balance sheet and a lower level of debt also increase our flexibility to realise value-generating medium- and long-term opportunities in the best interests of our shareholders as they arise.