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adidas-Salomon 2004 First Quarter Results

Net income rises 41% +++ Highest first quarter gross margin ever at 45.9%

  • Currency-neutral sales up 3%
  • Income before taxes grows 33%
  • Significant improvement in North American order backlogs
  • Net borrowings reduced by € 579 million
  • Full year earnings growth target increased

adidas-Salomon currency-neutral first quarter sales up 3%

During the first quarter of 2004, Group sales increased 3% on a currency-neutral basis. In euro terms, revenues declined 3% to € 1.623 billion in 2004 from € 1.669 billion in 2003.

"It was a great first quarter for adidas-Salomon, with operational improvements in every region," commented adidas-Salomon Chairman and CEO Herbert Hainer. "I'm extremely impressed with how committed our organization has been to delivering superior performance."

adidas drives top-line growth in the first quarter

From a brand perspective, adidas currency-neutral sales increased by 3%, driven by solid development in the Sport Performance division. In the Salomon segment, revenues increased by 2% on a currency-neutral basis in the first quarter of 2004, largely due to positive developments in the cycling, nordic and apparel categories. Revenues at TaylorMade-adidas Golf decreased 4% on a currency-neutral basis. This was mainly related to the timing of 2004 product launches. 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 declined 2% to € 1.378 billion in the first quarter of 2004 from € 1.405 billion in 2003. Salomon sales in euros were down 1% to € 122 million in the first three months of 2004 from € 124 million in the prior year. TaylorMade-adidas Golf sales in euro terms declined 13% to € 116 million in 2004 from € 134 million in 2003.

 

1st Quarter

2003

1st Quarter

2004

Change y-o-y

in euro terms

Change y-o-y
currency-neutral

 

€ in millions

€ in millions

in %

in %

adidas

1,405

1,378

(2)

3

Salomon

124

122

(1)

2

TaylorMade-adidas Golf

134

116

(13)

(4)

Total

1,669

1,623

(3)

3

adidas-Salomon sales by brand in 2004, “Total” includes HQ/Consolidation

Currency-neutral sales growth in all regions except North America

From a regional perspective, Group sales in Europe grew 4% on a currency-neutral basis, boosted by solid increases in France, Iberia, the UK and the emerging markets. In North America, Group sales declined 7% on a currency-neutral basis due to a decrease in footwear sales in the adidas Sport Performance division. In Asia, currency-neutral sales increased 6% driven by double-digit growth in Japan, China and Australia. In Latin America, where revenues are generated predominately by adidas, currency-neutral sales increased 43% in the first quarter, making it the fastest growing region within the Group. Higher sales in Argentina, Brazil and Mexico were the main drivers of this improvement. In euro terms, currency translation effects negatively impacted sales in the first three months in all regions. Sales in Europe increased 2% in euro terms to € 951 million in the first three months of 2004 from € 933 million in the prior year. In North America, sales in euros declined 19% to € 328 million in 2004 versus € 405 million in 2003. In euro terms, sales in Asia were down 2% to € 276 million in 2004 from € 281 million in 2003. In Latin America, sales in euros grew 36% to € 49 million in 2004 from € 36 million in the prior year.

 

1st Quarter

 2003

1st Quarter

 2004

Change y-o-y

in euro terms

Change y-o-y
currency-neutral

 

€ in millions

€ in millions

in %

in %

Europe

933

951

2

4

North America

405

328

(19)

(7)

Asia

281

276

(2)

6

Latin America

36

49

36

43

Total continuing operations

1,669

1,623

(3)

3

adidas-Salomon sales by region in 2004, “Total” includes HQ/Consolidation

Group gross margin up 3.4 percentage points

adidas-Salomon gross margin grew 3.4 percentage points to 45.9% in the first quarter of 2004 (2003: 42.5%). This represents the highest first quarter gross margin in the history of the Group and reflects the improving product mix and increased adidas own-retail activities, as well as favorable currency effects. As a result, gross profit for the Group rose 5% in the first quarter of 2004 to reach € 744 million versus € 708 million in 2003.

Operating profit grows 24%

Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill), increased by 1% to € 601 million in the first quarter of 2004 from € 592 million in 2003. As a percentage of sales, this equates to 37.0%, which is 1.5 percentage points higher than the 2003 level of 35.5%. This increase reflects timing effects in the marketing working budget expenditures associated with the adidas "Impossible is Nothing" global advertising campaign as well as initial expenditures for the Olympic Summer Games in Athens. Operating expenses were also impacted by the continued expansion of adidas own-retail activities. Group operating profit improved 24% to € 144 million in 2004 from € 116 million in the first quarter of 2003, reflecting the quarter's strong gross margin development. Similarly, the operating margin grew 1.9 percentage points to 8.9% in the first three months of 2004 versus 7.0% in the same period of 2003.

Income before taxes up 33% due to further reduction in financial expenses

Income before taxes grew 33% to € 130 million in the first quarter of 2004 from € 98 million in 2003. Operational progress was enhanced by significantly lower financial expenses which declined 33% to € 12 million in 2004 from € 18 million in the first quarter of 2003. The main factor contributing to this development was lower interest expenses associated with a lower average level of debt. Goodwill amortization was stable versus the prior year at € 11 million in the first quarter of 2004. Royalty and commission income declined 13% to € 9 million in 2004 from € 11 million in 2003 as a result of currency effects.

Net income surges 41%

Net income for the Group increased 41% to € 72 million in the first quarter of 2004 from € 51 million in 2003. Solid currency-neutral sales growth and the improving gross and operating margins, supported by lower financial expenses, were the drivers of this improvement. Minority interests were down 23% to € 5 million in 2004 from € 6 million in the prior year. As a result of these developments, basic earnings per share increased by 41% to € 1.58 for the first three months of 2004 versus € 1.13 in 2003.

Net borrowings reduced by € 579 million

Net borrowings at March 31, 2004 were € 1.045 billion, down 36% or € 579 million versus € 1.624 billion in the prior year. Positive currency effects influenced Group borrowing levels by around 10%. As a consequence, the Group's financial leverage improved 73 percentage points to 71% in 2004 from 144% in 2003.

Successful working capital management continues

Group inventories were reduced by 4% to € 1.074 billion at the end of the first quarter of 2004 from € 1.119 billion in 2003. On a currency-neutral basis, inventories were down 1%. Receivables at adidas-Salomon were reduced by 5% to € 1.346 billion at the end of the first quarter of 2004 versus € 1.410 billion in the prior year. On a currency-neutral basis, this represents a decline of 2%.

Order backlogs up

Currency-neutral order backlogs for adidas grew 3% at the end of the first quarter of 2004. Apparel orders increased 13% on a currency-neutral basis, reflecting the Group's successful "Apparel Breakthrough" initiative to grow sales in this product category. Footwear backlogs declined 5% on a currency-neutral basis, mainly as a result of lower, but compared to former quarters significantly improving orders in North America. In euro terms, adidas total order backlogs increased 1%.

 

Footwear

Apparel

Total

Change y-o-y

in %

in euros

currency-neutral

in euros

currency-neutral

in euros

currency-neutral

Europe

(6)(6)101012

North America

(23)(14)112(14)(4)

Asia

151623242021

Total

(8)(5)101313

adidas order backlogs by product category and region as at March 31, 2004

Full year net earnings target increased

As a result of the Group's first quarter performance and business expectations for the rest of 2004, adidas-Salomon is confirming the sales guidance provided with the 2003 full year results and increasing the Group's earnings target. Group revenues are expected to increase by 3 to 5% on a currency-neutral basis, with double-digit currency-neutral growth in Asia and Latin America and mid-single-digit sales growth in Europe. Positive sales development is also expected in North America during the second half of the year. Group gross margin is projected to be at least 45% and operating margin will improve versus the prior year's level. As a result of strong first quarter performance, Group earnings for the full year are now expected to grow by 10 to 15%.

Herbert Hainer said: "The steps we've taken all along, and particularly those we took to overcome the challenges of last year, are paying off. Our margins have strengthened sharply, we have boosted our net income and we're starting to see measurable progress in North America. With a great quarter like this as a start, we are confident that the full year performance in 2004 will be better than we had originally expected."