adidas-Salomon 2004 First Nine Months Results: Net income rises 26%; highest first nine months gross margin ever at 47.4%
Currency-neutral sales up 6% +++ Income before taxes grows 24% +++ Net borrowings reduced by € 510 million +++ 2004 full year earnings target reconfirmed, earnings in 2005 expected to improve 10 to 15%
Third quarter currency-neutral sales grow 9%
Third quarter net sales for the Group increased 9% on a currency-neutral basis with improvements coming from all brands and regions. This represents growth of 5% in euro terms to € 1.953 billion in 2004 from € 1.853 billion in the third quarter of 2003. Gross margin improved 2.8 percentage points to 47.8% of sales from 45.0% in the prior year. Third quarter operating profit grew 16% to € 313 million in 2004 from € 270 million in the prior year. Net income was up 19% reaching € 179 million versus € 150 million in 2003. This equates to basic earnings per share of € 3.92 and represents an increase of 18% versus the prior year (2003: € 3.31 per share).
First nine months Group sales up 6% on a currency-neutral basis
Currency-neutral sales for the Group rose 6% in the first nine months of 2004. In euro terms, revenues increased 3% to € 5.044 billion in 2004 from € 4.913 billion in the first nine months of 2003.
"The first nine months of 2004 have been exceptionally successful for adidas-Salomon - financially and operationally," commented adidas-Salomon Chairman and CEO Herbert Hainer. "We've delivered an impressive turnaround in the key region North America, we are on track with our raised performance targets for the year, and we were the dominant brand at the Olympic Games in Athens and the European Football Championships in Portugal."
adidas leads top-line growth in the first nine month
Sales growth at adidas set the pace for Group performance in the first nine months of 2004. Currency-neutral adidas revenues rose 7%. The success of the football category as well as the "Apparel Breakthrough" initiative was the major contributor to this development. At Salomon, revenues grew by 5% on a currency-neutral basis during the first nine months of 2004, mainly driven by positive developments in the apparel, cycling and nordic categories. Revenues for TaylorMade-adidas Golf increased 4% on a currency-neutral basis driven by growth in the metalwoods category, in particular relating to the success of the new r7 Quad driver. The putter and apparel categories also reported strong growth. Currency effects from a strong euro, especially versus the US dollar, negatively impacted sales at all brands in euro terms. As a result, adidas sales in euro terms were up 3% to € 4.155 billion in the first nine months of 2004 from € 4.017 billion in the same period of 2003. Salomon sales in euro terms were up 2% to € 399 million in the first nine months of 2004 from € 390 million in the prior year. TaylorMade-adidas Golf sales in euro terms declined 2% to € 477 million in 2004 from € 487 million in 2003.
|
Nine months 2003 |
Nine months 2004 |
Change y-o-y in euro terms |
Change y-o-y |
|
€ in millions |
€ in millions |
in % |
in % |
adidas |
4,017 |
4,155 |
3 |
7 |
Salomon |
390 |
399 |
2 |
5 |
TaylorMade-adidas Golf |
487 |
477 |
(2) |
4 |
Total |
4,913 |
5,044 |
3 |
6 |
adidas-Salomon sales by brand in 2004, “Total” includes HQ/Consolidation
Positive regional sales development
From a regional perspective, Group sales in Europe grew 4% on a currency-neutral basis during the first nine months, driven in particular by solid increases in France, Iberia, the UK and the emerging markets. In North America, Group sales increased 2% on a currency-neutral basis, mainly due to growth in the Sport Heritage division and Sport Performance apparel categories. In Asia, currency-neutral sales increased 16% driven by double-digit growth in Japan and China. In Latin America, currency-neutral sales increased 35% in the first nine months, making it the fastest growing region within the Group. Double-digit sales increases in Argentina, Brazil and Mexico were the main components of this improvement. In euro terms, currency translation effects negatively impacted sales in the first nine months in all regions. Sales in Europe increased 3% in euro terms to € 2.767 billion in the first nine months of 2004 from € 2.677 billion in the prior year. In North America, sales in euros declined 7% to € 1.161 billion in 2004 from € 1.249 billion in 2003. In euro terms, sales in Asia improved 12% to € 912 million in 2004 from € 817 million in 2003. In Latin America, sales in euros grew 26% to € 164 million in the first nine months of 2004 from € 130 million in 2003.
|
Nine months 2003 |
Nine months 2004 |
Change y-o-y in euro terms |
Change y-o-y |
|
€ in millions |
€ in millions |
in % |
in % |
Europe |
2,677 |
2,767 |
3 |
4 |
North America |
1,249 |
1,161 |
(7) |
2 |
Asia |
817 |
912 |
12 |
16 |
Latin America |
130 |
164 |
26 |
35 |
Total |
4,913 |
5,044 |
3 |
6 |
adidas-Salomon sales by region in 2004, "Total" includes HQ/Consolidation
Group gross margin up 3.3 percentage points
adidas-Salomon gross margin grew 3.3 percentage points to 47.4% in the first nine months of 2004 (2003: 44.1%). This represents the highest first nine months gross margin in the history of the Group and reflects lower clearance sales combined with higher clearance margins, the improved product mix as well as increased adidas own-retail activities. Favorable currency effects due to the Group’s international sourcing structure were also a significant factor in this development. As a result of the strong gross margin expansion, gross profit for the Group rose 10% in the first nine months of 2004 to reach € 2.390 billion versus € 2.166 billion in 2003.
Operating profit grows 22%
Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), increased by 7% to € 1.841 billion in the first nine months of 2004 from € 1.718 billion in 2003. As a percentage of sales, this equates to 36.5%, which is 1.5 percentage points higher than the 2003 level of 35.0%. This development reflects increased marketing expenditures for the UEFA EURO 2004™ European Football Championships and the Athens 2004 Olympic Games™. Operating expenses were also impacted by the continued expansion of adidas own-retail activities as well as higher doubtful debt provisions at TaylorMade-adidas Golf in the first quarter of this year. Group operating profit increased 22% to € 549 million in 2004 from € 448 million in the first nine months of 2003, reflecting the Group’s strong gross margin development in the period. Similarly, the operating margin grew 1.8 percentage points to 10.9% in the first nine months of 2004 versus 9.1% in the same period in 2003.
Income before taxes up 24%
As a result of the strong operational improvements during the first nine months of 2004, the Group's income before taxes grew 24% to € 499 million from € 401 million in 2003. Financial expenses increased by 6% to € 47 million in 2004 from € 44 million in the first nine months of 2003. This is a result of positive effects from the valuation of balance sheet items in foreign currency in 2003 which were not repeated in 2004 and which more than offset the lower interest expenses in 2004. Goodwill amortization rose 2% during the first nine months of 2004 to € 34 million (2003: € 34 million). Royalty and commission income increased 2% to € 32 million in 2004 from € 31 million in 2003.
Net income grows 26%
Net income for the Group increased 26% to € 295 million in the first nine months of 2004 from € 234 million in 2003. Solid sales increases, coupled with the strong gross and operating margins, were the drivers of this improvement. Minority interests decreased 4% to € 12 million in 2004 (2003: € 13 million). The Group tax rate was unchanged at 38.6%. As a result, basic earnings per share increased 26% to € 6.46 for the first nine months of 2004 versus € 5.14 in 2003.
Working capital development reflects strict discipline in trade terms management
Group inventories grew 4% to € 1.134 billion at the end of the first nine months of 2004 from € 1.088 billion in 2003. On a currency-neutral basis, inventories increased 8%, mainly as a result of higher goods in transit to meet increasing demand in North America and Asia. Receivables at adidas-Salomon were reduced by 4% to € 1.398 billion at the end of the first nine months of 2004 versus € 1.455 billion in the prior year. On a currency-neutral basis, this represents a decline of 1% and reflects strict discipline in the Group's trade terms management and concerted collection efforts at all brands.
Net borrowings reduced by € 510 million
Net borrowings at September 30, 2004 were € 913 million, down 36% or € 510 million versus € 1.423 billion in the prior year. Strong bottom-line profitability was the primary driver of this improvement. As a consequence, the Group's financial leverage improved 59 percentage points to 55% at the end of September 2004 versus 114% on the same date in 2003.
Mixed regional adidas order backlog development at the end of the third quarter
Currency-neutral order backlogs for adidas grew 5% (+2% in euros) at the end of the third quarter of 2004. Overall apparel orders increased 8% on a currency-neutral basis, or 5% in euro terms, reflecting the ongoing success of the "Apparel Breakthrough" initiative. Footwear backlogs grew 3% on a currency-neutral basis and were stable in euros. From a regional perspective, in Europe, orders decreased 4% currency-neutral (-4% in euros). This shortfall was mainly due to the increasingly difficult retail environment in most major markets which led to changing order patterns and a more reorder- and auto-replenishment-oriented business in the region. In North America, currency-neutral order backlogs were up 6% and remained stable in euro terms. In Asia, currency-neutral backlogs grew 30% (+23% in euros).
|
Footwear |
Apparel |
Total |
|||
Change y-o-y in % |
in € |
currency-neutral |
in € |
currency-neutral |
in € |
currency-neutral |
Europe |
(3) |
(3) |
(6) |
(6) |
(4) |
(4) |
North America |
0 |
6 |
(1) |
5 |
0 |
6 |
Asia |
8 |
14 |
44 |
53 |
23 |
30 |
Total |
0 |
3 |
5 |
8 |
2 |
5 |
adidas order backlogs by product category and region as at September 30, 2004
Raised 2004 full year earnings target confirmed
As a result of the strong year-to-date performance and expectations for the rest of 2004, adidas-Salomon confirms its improved sales and earnings guidance as communicated in August. Group revenues are expected to be up by around 5% on a currency-neutral basis, with double-digit growth in Asia and Latin America and a mid-single-digit sales increase in Europe. Furthermore, the current sales and order backlog development at adidas in North America makes the Group confident that it will reach a currency-neutral sales increase of 3 to 5% in this region on a full year basis. Group gross margin is projected to clearly exceed 45% and operating margin will improve by at least one percentage point versus the prior-year level. As a result of strong performance in the first nine months of the year, Group earnings for the full year are expected to grow by around 20%.
2005 Outlook
For the full year of 2005, adidas-Salomon anticipates mid- to high-single-digit currency-neutral top-line growth. Earnings are expected to improve 10 to 15% over the projected 2004 level.
Herbert Hainer stated, "Looking at our performance in the first nine months, we have gained competitive momentum and we are going to keep pushing for the remainder of this year and beyond. It's already clear that 2005 will be another great year for adidas-Salomon. Our brands are strong and our market position is improving. We are stronger and more competitive than we have ever been in the past."