Underlying sales growth for the Group strong in Q2
Herzogenaurach, August 7, 2002 - Net sales for adidas-Salomon increased 10%, or 14% on a currency-neutral basis, from € 1.4 billion in 2001 to € 1.5 billion in the second quarter of 2002. As a result, Group sales increased 7% (or 9% currency-neutral) from € 2.9 billion in the first half of 2001 to € 3.1 billion in the first half of 2002, exceeding the full year sales target of at least 5% growth.
Commenting on the results, Herbert Hainer, Chairman and CEO of adidas-Salomon, said, "For the quarter, sales and earnings continued to develop positively, with North America and Asia leading the way. With the majority of our expenses now behind us, we expect business to accelerate in the second half of the year, particularly our earnings growth. I am therefore pleased to confirm our 2002 financial targets of at least 5% sales growth and 5 to 10% earnings improvement for the full year."
All product segments develop positively
Footwear revenues for the Group increased 6% year-over-year from € 1.4 billion to € 1.5 billion for the first half of 2002. The main driver of this positive development was a 50% increase in basketball sales. Apparel sales for adidas-Salomon grew 7% from € 1.0 billion in the first half of 2001 to € 1.1 billion in the same period in 2002. This growth was largely driven by the football category, where sales grew 85% fueled by adidas' strong performance at the 2002 FIFA World Cup™. Hardware revenues grew 11% from € 512 million to € 570 million, boosted by sales from the football World Cup, and new sales from the Maxfli and Slazenger Golf brands.
Strong improvements at adidas and TaylorMade-adidas Golf
adidas brand sales increased 7% from € 2.4 billion in the first half of 2001 to € 2.6 billion in 2002. At TaylorMade-adidas Golf, sales reached € 379 million in the first six months of 2002, representing an increase of 17% from € 325 million in the prior year. Maxfli and Slazenger Golf sales contributed € 62 million to this development. Salomon sales remained stable at € 194 million versus the prior year.
Asia and North America on growth path
Group sales in Asia reached € 539 million in the first half year. This represents an increase of 26% versus € 429 million in the prior-year period. In North America, Group sales increased 8% from € 885 million in the first half of 2001 to € 953 million in 2002. On a currency-neutral basis, this increase was also 8%. In Europe, Group sales developed positively, growing 3% to reach € 1.6 billion in the first half of 2002 versus € 1.5 billion in the same period of 2001. In Latin America, Group sales declined 5% from € 82 million in the first half of 2001 to € 78 million in the same period of 2002 as a result of negative currency translation effects. Currency-neutral sales in Latin America increased 19%.
Best adidas order backlogs since 1998
At the end of June 2002, currency-neutral order backlogs for brand adidas increased 11% (+2% in euro), the biggest rise in 15 quarters. The greatest growth came from Asia, where improved brand positioning is driving higher orders. Total backlogs grew 21% on a currency-neutral basis, or 8% in euro. Footwear backlogs increased 36% in constant currency (+21% in euro). Apparel backlogs rose 7% on a currency-neutral basis, although orders declined 5% in euro. In North America, backlogs increased 15% on a currency-neutral basis (-2% in euro). The major driver of this development was the 27% currency-neutral increase in footwear backlogs (+8% in euro). Apparel orders also grew for the first time in more than three years to +1% on a currency-neutral basis (-14% in euro). In Europe, backlogs increased 7% currency-neutral (+4% in euro) supported by strong growth in footwear, which increased 17% currency-neutral (+13% in euro). Apparel backlogs declined 3% in constant currency (-5% in euro), as a result of ongoing market difficulties.
Herbert Hainer continued: "What is most important for us is the strong sales outlook reflected in the adidas order backlogs, which are up 11% on an underlying basis. This is the biggest increase since 1998."
High gross margin maintained
In the second quarter of 2002, the Group's gross margin declined 0.4 percentage points from 45.2% to 44.8%. Gross margin improvements at brand adidas, which were largely due to a lower level of clearance sales, were offset by gross margin declines at TaylorMade-adidas Golf. As a result, the Group's gross margin in the first half of 2002 declined 0.1 percentage points from the prior year's 43.3% to 43.2%. This is above the Group's 41 to 43% long-term gross margin target.
Operating expenses increase driven by World Cup
Operating expenses as a percent of sales in the second quarter of 2002 were 40.2%. This represents an increase of 0.4 percentage points versus the second quarter of 2001. As a result, in the first six months of 2002 operating expenses as a percent of sales increased 1.4 percentage points on a year-over-year basis to reach 37.9%. This development reflects spending on key strategic initiatives, which was heavily weighted in the first half, including marketing expenses for the 2002 FIFA World CupTM, expansion of the adidas own-retail activities and start-up activities associated with the purchase of adidas Italy. However, these additional expenses were partially offset by positive one-time effects of € 23 million. As a result, operating profit declined by 16% in the first half of 2002 to € 167 million compared to € 198 million for the same period in the previous year.
Financial expenses decrease in the first half year
Financial expenses increased 4% from € 26 million in the second quarter of 2001 to € 27 million in 2002. In the first half of 2002, financial expenses were € 46 million, representing a decrease of 23% versus € 59 million in the same period in the previous year. This was largely due to significantly lower interest expenses which were driven by both lower average interest rates and the average debt level. Income before taxes was € 121 million in the first half of 2002, down 13% compared to € 139 million in the same period in 2001, but in line with the expected earnings development for the year.
Q2 EPS increases 4%
In addition to strong top-line growth, earnings development was supported by a favorable earnings mix which led to a tax rate improvement of 2.7 percentage points to 40.1% in the first half of 2002 compared to 42.8% in the same period in 2001. Minority interests decreased 50% from the same period in the previous year to € 4 million, following the acquisition of the remaining shares of adidas Italy early in the year. Net income for the second quarter increased 4% from € 24 million in 2001 to € 25 million in 2002, taking earnings per share to € 0.56 for the second quarter of 2002 compared to € 0.54 in 2001. As a result, net income for the half year declined 3% from € 71 million in the first half of 2001 to € 68 million in the first half of 2002. This development was in line with expectations. Earnings per share were € 1.50 versus € 1.56 in the first half of 2001.
Biggest year-over-year debt reduction since Salomon acquisition
At the end of June, inventories for the Group decreased 12% versus the previous year. Receivables increased 4%, which was less than sales growth in the second quarter. As a result of the positive working capital developments and the strengthening euro, net debt for the Group decreased 10% from € 2.1 billion at the end of the first half of 2001 to € 1.8 billion at the end of the first half of 2002. This represents a debt reduction of € 212 million versus the prior year and is the best year-over-year debt reduction since the acquisition of Salomon in 1997.
Sales and earnings targets confirmed
adidas-Salomon remains confident regarding its 2002 top-line growth target of at least 5%. The development of net income in the first half of 2002 confirms the Group's full year earnings growth target of 5 to 10%. After higher operating expenses in the first half, selling, general and administrative expenses as a percentage of sales are expected to return to levels more in line with 2001 in each of the remaining quarters. As a result, earnings momentum should accelerate throughout the remainder of the year.