adidas-Salomon in the first half of 2003: Group earnings up 22%; currency-neutral sales grow 8%

adidas-Salomon currency-neutral sales up 8% for the first half

Second quarter net sales for the Group grew 3% on a currency-neutral basis with a positive underlying performance at all brands. However, as currency fluctuations affected this figure significantly, reported Group sales actually decreased 8% from € 1.5 billion in 2002 to € 1.4 billion in 2003. As a result, currency-neutral Group sales increased 8% in the six months ending June 30, 2003. In euro terms, revenues declined 3% or € 84 million from € 3.1 billion in 2002 to € 3.1 billion in 2003.

Herbert Hainer, Chairman and CEO of adidas-Salomon, stated: "In the first half year, markets changed fast and got tougher. This challenged us to respond quickly and to push even harder in all our markets. All of our operating measurements moved visibly in the right direction. The positive underlying sales developments coupled with a strong reduction in our financial expenses helped drive our earnings for the first half of the year up significantly."

Brand adidas drives top-line growth in the first half year

Sales at brand adidas drove Group performance in the first half of 2003. Currency-neutral adidas revenues increased by 10%. Drivers of this growth were strong developments in the Sport Performance categories running and training as well as the Sport Heritage division. At Salomon, underlying sales grew 5% as a result of solid growth in soft goods, alpine skis and bicycle components. And at TaylorMade-adidas Golf, currency-neutral sales decreased 3%. This development hides strong underlying sales improvement in the second quarter due to growth in RAC irons as well as in both footwear and apparel. Excluding € 17 million of Slazenger Golf sales in the first half of 2002 from a license agreement that was not renewed in 2003, underlying sales for TaylorMade-adidas Golf rose by 1%. In euro terms, adidas sales in the first half year declined by less than 1% from € 2.6 billion in 2002 to € 2.5 billion in 2003. Salomon sales declined 1% from € 194 million to € 191 million. And TaylorMade-adidas Golf decreased 18%, from € 379 million to € 311 million.

Underlying first-half sales growth in all regions

In Europe, currency-neutral sales for adidas-Salomon increased 10% in the first half year compared to the prior year, reflecting particularly strong development in Italy, France, Germany and the UK as well as the emerging markets. Underlying Group sales in Asia rose 8% year-over-year with growth driven by vigorous increases at adidas in Japan, South Korea and China as well as double-digit growth at Salomon in the second quarter. In North America, underlying 2003 first half year sales for the Group were up 1% despite the very difficult retail environment. Latin American currency-neutral sales improved by 41% versus the previous year due to higher sales in Argentina and Brazil. In the reporting currency, however, sales grew 7% in Europe, declined 5% and 17% in Asia and North America respectively and were stable in Latin America.

adidas order backlogs grow currency-neutral despite difficult retail situation in North America

Despite continued difficult market conditions in North America and tough comparisons with the prior year, underlying order backlogs at the end of the second quarter of 2003 for brand adidas grew 4%. Currency translation effects had a strong impact on these backlog figures. On an underlying basis, total footwear backlogs were stable and apparel orders grew 7%. The currency-neutral backlogs by region developed as follows: In Europe, orders improved 10%, with footwear up 7% and apparel backlogs increasing 12%. In Asia, backlogs grew 18%. Footwear backlogs rose 3% and apparel orders increased 44%. In North America, order backlogs declined 12%, which is in line with the guidance Management provided for the market at the end of the quarter. Footwear backlogs fell 11% and apparel orders decreased 14%. In euro terms, backlogs in Europe and Asia grew 8% and 4% respectively and declined in North America by 23%.

Gross margin improves

As a result of lower sales in the reporting currency, adidas-Salomon gross profit decreased 8% during the second quarter from € 675 million in 2002 to € 623 million in 2003 despite a stable gross margin at 44.8%. In the first half of 2003, Group gross profit declined 2% to € 1.3 billion versus € 1.4 billion in 2002. The gross margin, however, improved 0.3 percentage points to 43.5% (2002: 43.2%) largely due to currency effects.

Operating profit up 6%

Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), were reduced by 7% in the second quarter from € 606 million in 2002 to € 561 million in 2003. As a percentage of sales, however, operating expenses grew by 0.1 percentage points from 40.2% in 2002 to 40.3% in 2003 due to a positive one-time effect of € 23 million in the second quarter of 2002 associated with the resolution of an outstanding legal dispute and a sale of real estate. As a result, operating profit for the quarter declined 10% from € 69 million in 2002 to € 62 million in 2003. In the first half, operating expenses were reduced by 3% or € 37 million from € 1.2 billion in 2002 to € 1.2 billion in 2003. As a percentage of net sales this equates to 37.7%, which is 0.2 percentage points lower than the 2002 level of 37.9%. Therefore, Group operating profit increased 6% from € 167 million in 2002 to € 178 million in 2003 and operating margin increased 0.5 percentage points from 5.3% in the first half of 2002 to 5.8% in 2003.

Earnings up significantly: 27% for Q2, 22% for the half

In the second quarter of 2003, financial expenses were reduced by 64%, from € 27 million to € 10 million. The main factors contributing to this development were the financial stabilization of emerging markets such as Argentina, Turkey and Brazil which had negatively impacted the financial result in the prior year. Net income grew 27% during the second quarter, reaching € 32 million in 2003 versus € 25 million in 2002 and taking earnings per share to € 0.71 compared to € 0.56 in the prior year. In the first half, financial expenses declined 40% from € 46 million in 2002 to € 28 million in 2003. Income before taxes increased 22% from € 121 million to € 148 million in 2003. The Group tax rate improved by 0.3 percentage points from 40.1% in the first half of 2002 to 39.8% in 2003. Minority interests were up 30% to € 6 million (2002: € 4 million) due to strong results from adidas South Korea. Net income for the first six months increased 22% from € 68 million in 2002 to € 83 million in 2003, and EPS was € 1.83 in 2003 versus € 1.50 in 2002.

Strong working capital management and debt reduction continue

Group inventories were reduced by 5% from € 1.4 billion at the end of the first half of 2002 to € 1.3 billion in 2003. On a currency-neutral basis, inventories increased 1%, which is below sales growth expectations for the third quarter. Receivables decreased year-over-year by 4% to € 1.2 billion in 2003 versus € 1.3 billion in 2002. On a currency-neutral basis, receivables increased by 4%, which approximates the Group’s second quarter currency-neutral sales growth. As a result of these working capital improvements, net borrowings at June 30, 2003 were € 1.6 billion, down 14% or € 266 million versus € 1.8 billion in the prior year.

Full year sales and earnings targets confirmed

In light of adidas backlogs, retailer feedback and the anticipated macroeconomic environment, adidas-Salomon maintains its 2003 sales growth target of around 5% on a currency-neutral basis. This will be driven by higher than originally anticipated revenues in Europe. In addition, solid sales growth in Asia and Latin America is expected to continue on a currency-neutral basis. Due to extremely difficult market conditions in North America, currency-neutral sales in the region are likely to be slightly below 2002 levels. Reported sales in all regions will be negatively impacted by the stronger euro vis-à-vis other major currencies. The net income growth target for the Group also remains unchanged, with earnings expected to increase between 10 and 15%.

Herbert Hainer stated: "The first half of 2003 is a good demonstration that our Group is capable of delivering strong results even as the markets get tougher. I can again confirm that we are on track to meet our full year sales, margin and earnings targets."