Global economy forecast to grow in 2011
In the course of the year, most economic institutes and agencies have revised down their global GDP growth expectations. Current expectations are projecting the world’s GDP to increase by 2.8% for 2011, after growing by 3.7% in 2010. The consensus remains that the majority of the world’s economic growth will continue to be derived from the emerging economies, with modest growth in the developed markets. These developments are also forecasted to support increases in household incomes and help promote global consumer spending, which in turn will be supportive to our growth aspirations. In Western Europe, GDP is expected to increase by around 1.7% in 2011, with Germany as the main regional growth economy, due to strong export levels and increasing domestic demand. However, in many peripheral euro area economies, deficit and sovereign debt concerns coupled with high unemployment levels and tight austerity programmes are all considerable headwinds to growth in these markets. European emerging markets’ GDP is estimated to grow at around 4.5% in 2011, driven by improvements in consumer spending and robust industrial output. Domestic demand in the region’s largest economy, Russia, is forecasted to increase rapidly, supported by recovering consumer confidence, credit expansion and decreasing inflation pressures. In the USA, GDP is forecasted to increase approximately 1.7% in 2011, with improving industrial production a key positive contributor to this growth. However, government deficit concerns, a contraction in public sector spending, weak labour and housing markets, as well as decreases in consumer confidence and spending levels remain as considerable headwinds. In Asia, growth rates are expected to remain high, but to decelerate slightly to 3.9% in 2011. Increases will be driven by growth in the region’s emerging markets, in particular in China and India as a result of strong domestic demand. In Japan, however, due to the negative effects of the natural disaster in March, economic growth is projected to be very modest in 2011. In Latin America, growth rates are likely to moderate to around 4.4% in 2011 as fiscal and monetary tightening provides relief to inflation pressures. Nonetheless, low unemployment levels, robust export activity and rising domestic demand are all supportive to continued economic growth in this region.
Rising incomes to support consumer spending on sporting goods
We expect the global sporting goods industry to expand in 2011, however with significant regional variation. Following macroeconomic trends, consumer spending on sporting goods in the developing economies will outperform the more mature markets. Due to higher input costs, inflation in footwear and apparel prices is also forecasted for the industry, which may dampen growth rates towards the end of the year. In Western Europe, the sporting goods industry is expected to grow modestly in 2011, despite tough prior year comparisons due to the 2010 FIFA World Cup and increasing pressure on prices from rising input costs. The improvement in consumer demand trends seen in the European emerging markets is expected to continue in 2011, led by Russia, where increasing income and consumer spending are supporting sales growth in the sporting goods industry. In North America, footwear and apparel sales growth rates are projected to grow in 2011. From a category perspective, lightweight running, training and outdoor are seen as particular drivers for the year. However, the basketball category is expected to be negatively impacted due to the NBA lock-out. In Greater China, rising domestic consumption is forecasted to continue to propel sporting goods sales in 2011, with considerable divergence in performance between local and global players. While global brands continue to enjoy healthy sales growth, local brands are being hampered by excess inventory levels. In other Asian markets, the sporting goods industry is forecasted to extend its presence, due to rapid growth in markets such as India, Indonesia and Vietnam. However in Japan, despite the gradual market recovery and slight improvements in consumer sentiment, the impact of the disaster and relatively low spending will lead to significant challenges for discretionary purchases including sporting goods. The sporting goods industry in Latin America is projected to grow in 2011, with falling unemployment rates and rising income levels promoting consumer spending.
adidas Group currency-neutral sales to increase at a rate approaching 12% in 2011
We expect adidas Group sales to increase at a rate approaching 12% on a currency-neutral basis in 2011. The positive sales development will be driven by rising consumer confidence as well as strong demand for innovative branded sporting goods. The positive impacts of our high exposure to fast-growing emerging markets, the further expansion of Retail as well as continued momentum at the Reebok brand will more than offset the non-recurrence of positive effects related to the 2010 FIFA World Cup. As a result, we expect the adidas Group to significantly outperform global economic growth in 2011.
Currency-neutral Wholesale revenues expected to increase at a high-single-digit rate
We project currency-neutral Wholesale segment revenues to increase at a high-single-digit rate compared to the prior year. Order backlog development as well as positive retailer and trade show feedback support our growth expectations for 2011. Currency-neutral adidas Sport Performance sales are forecasted to increase at a mid-single-digit rate due to growth in key categories such as running and training. adidas Sport Style revenues are projected to increase at a mid-teens rate on a currency-neutral basis as a result of the expanded distribution scope and continued momentum in our product lines, in particular the adidas NEO Label. Currency-neutral Reebok sales are expected to increase due to growth in the women’s fitness and men’s training categories as well as increases in the Classics business
Retail sales to increase at a high-teens rate on a currency-neutral basis
adidas Group currency-neutral Retail segment sales are projected to grow at a high-teens rate in 2011. Comparable store sales are expected to increase at a low-double-digit rate and to contribute to revenue growth at a higher rate than the expansion of the Group’s own-retail store base. The Group expects a net increase of its store base by around 100 adidas and Reebok stores in 2011. We forecast to open around 250 new stores, depending on the availability of desired locations. New stores will primarily be located in emerging markets in Eastern Europe. Approximately 150 stores will be closed over the course of the year. Around 200 stores will be remodelled. As a result of the forecasted improvements in the consumer environment in 2011, concept stores are expected to perform slightly better than factory outlets.
Currency-neutral sales of Other Businesses to increase at a high-single-digit rate
In 2011, segmental revenues of Other Businesses are expected to increase at a high-single-digit rate on a currency- neutral basis. TaylorMade-adidas Golf currency-neutral sales are projected to grow at a high-single-digit rate compared to the prior year. Product launches in core categories such as metalwoods, irons and putters should support growth in this segment against a slow recovery in the global golf market. Revenues at Rockport are forecasted to increase at a high-single-digit rate on a currency-neutral basis as a result of improvements in the brand’s product portfolio and own-retail expansion. Currency-neutral sales at Reebok-CCM Hockey are expected to grow at a mid-single-digit rate in 2011, mainly due to new product introductions.
adidas Group sales expected to grow in all regions
We expect Group currency-neutral revenues to increase in all our regions in 2011. In Western Europe, despite the non-recurrence of the 2010 FIFA World Cup, which provided a positive stimulus in the region in 2010, the gradual improvement in the macroeconomic environment will positively impact sales development in this region, albeit at a moderate level. Growth in Central Europe is likely to offset challenging conditions in the region’s peripheral markets. In European Emerging Markets, the expansion of and increasing sophistication in our own-retail activities as well as improving wholesale conditions in some of the region’s markets are forecasted to have a positive influence on Group sales. In North America, we expect to benefit from continued momentum, in particular with the adidas and Reebok brands. This will be driven by new product introductions and product extensions. In Greater China, following a sales decline in 2010, we expect a return to strong growth in this region in 2011. This will be mainly due to more current levels of inventory as well as the expansion of our retail footprint, including the further roll-out of adidas Originals and the adidas NEO Label. In Other Asian Markets, we project sales to increase only slightly compared to the prior year as the setback from the earthquake and tsunami catastrophe in Japan on March 11 will partly offset the good performance in the region’s other markets such as South Korea and India. Lastly, in Latin America, the strong positioning of our brands is expected to more than compensate for the non-recurrence of the positive impetus from sales associated with the 2010 FIFA World Cup.
Group gross margin to be in a range from 47.5% to 48.0%
In 2011, the adidas Group’s gross margin is forecasted to reach a level between 47.5% and 48.0% (2010: 47.8%). While we expect gross margin in our Retail segment to improve, gross margin in the Wholesale segment as well as in Other Businesses is forecasted to decline. In 2011, Group gross margin will benefit from positive regional mix effects, as growth rates in emerging markets are projected to be above growth rates in more mature markets. In addition, improvements in the Retail segment as well as at the Reebok brand will positively influence the development of the Group’s gross margin. However, these positive effects will be offset by several factors. In particular, sourcing costs will increase significantly compared to the prior year as a result of rising raw material costs and capacity constraints. In addition, as a consequence of the dramatic events in Japan during the first quarter of 2011, Group gross margin will be negatively impacted by sales declines in this market.
Group other operating expenses to decrease as a percentage of sales
In 2011, the Group’s other operating expenses as a percentage of sales are expected to decrease modestly (2010: 42.1%). Sales and marketing working budget expenses as a percentage of sales are also projected to decline modestly compared to the prior year. Marketing investments to support Reebok’s growth strategy in the women’s fitness and men’s training categories, as well as investments to support growth in our key attack markets North America, Greater China and Russia/CIS will be offset by the non-recurrence of expenses in relation to adidas’ presence at the 2010 FIFA World Cup. Operating overhead expenditures as a percentage of sales are forecasted to decline slightly in 2011. Higher administrative and personnel expenses in the Retail segment due to the planned expansion of the Group’s store base will be offset by leverage and efficiency gains in the Group’s non-allocated central costs. We expect the number of employees within the adidas Group to increase versus the prior year level. Additional hires will be mainly related to own-retail expansion. The majority of new hires will be employed on a part-time basis and will be located in emerging markets. The adidas Group will continue to spend around 1% of Group sales on research and development in 2011. Areas of particular focus include customisation and digital sports products at adidas, as well as supporting the expansion of Reebok’s fitness and training positioning. .
Operating margin to continue to expand
In 2011, we expect the operating margin for the adidas Group to increase to a level between 7.5% and 8.0% (2010: 7.5%). Lower other operating expenses as a percentage of sales are expected to be the primary driver of the improvement. .
Earnings per share to increase at a rate approaching 16%
Earnings per share are expected to increase at a rate approaching 16% to a level around € 3.15 (2010 diluted earnings per share: € 2.71). Top-line improvement and an increased operating margin will be the primary drivers of this positive development. In addition, we expect lower interest expenses in 2011 as a result of a lower average level of net borrowings. The Group’s tax rate is expected to be below the prior year level of 29.5%. .
Operating working capital as a percentage of sales to increase
In 2011, average operating working capital as a percentage of sales is expected to increase compared to the prior year level (2010: 20.8%). This is mainly due to working capital increases to support the growth of our business. .
Investment level between € 350 million and € 400 million
In 2011, investments in tangible and intangible assets are expected to amount to € 350 million to € 400 million (2010: € 269 million). Investments will focus on adidas and Reebok controlled space retail initiatives, in particular in emerging markets. These investments will account for almost one-third of total investments in 2011. 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. All investments within the adidas Group in 2011 are expected to be fully financed through cash generated from operations. .
Excess cash to be used to support growth initiatives
In 2011, we expect continued positive cash flows from operating activities. Cash will be used to finance working capital needs, investment activities, as well as dividend payments. We intend to largely use excess cash to invest in our Route 2015 growth initiatives and to further reduce net borrowings. Over the long term, we aim to maintain a ratio of net borrowings over EBITDA of less than two times as measured at year-end (2010 ratio: 0.2). .
adidas Group prepared for successful 2012
Assuming no significant deterioration in the economic environment, Management expects adidas Group sales and earnings to increase in 2012. Based on the strong momentum of our brands as well as the opportunities provided by the UEFA EURO 2012 and the London 2012 Olympic Games, sales are projected to increase at a mid- to high-single-digit rate on a currency-neutral basis. Increases in input and labour costs as well as currency volatility will continue to be headwinds for the development of Group profitability as in 2011. Nevertheless, due to operating leverage, earnings per share are forecasted to increase faster than sales, at a rate between 10% and 15%. A detailed 2012 outlook will be given with the presentation of the Group’s 2011 full year results on March 7, 2012.