Nine Months 2005 Results

• Net income attributable to shareholders increases 31%
• Currency-neutral backlogs up 12%, highest growth rate in almost three years
• Sales guidance for 2005 increased to high-single-digit growth on a currency-neutral basis backed by North America
• Earnings growth guidance for full year raised to at least 20%
• adidas outlook for 2006: high-single-digit currency-neutral sales growth, double-digit earnings increase

Third quarter currency-neutral sales grow 8%

Third quarter net sales for the Group increased 8% on a currency-neutral basis with improvements coming from adidas in all regions except Europe, where sales remained stable. In euro terms, sales grew 9% to € 1.924 billion in 2005 from € 1.758 billion in the third quarter of 2004. The Group’s gross margin improved by 0.1 percentage points to reach 48.5% versus 48.4% in 2004, representing the highest third quarter gross margin in the Group’s history. Operating profit increased 12% in the third quarter of 2005 to € 315 million versus € 281 million in 2004. The Group’s net income from continuing operations was up 28% in the third quarter, reaching € 209 million versus € 163 million in 2004. Basic earnings per share from continuing operations increased 29% to € 4.43 (2004: € 3.44 per share). Diluted earnings per share grew 20% to € 4.13 in the third quarter of 2005 from € 3.45 in 2004.

Income from discontinued operations, net of tax, which reflects the performance of the Salomon business that will be deconsolidated at the beginning of the fourth quarter, declined 48% to € 11 million in 2005 from € 22 million in the third quarter of 2004. Net income attributable to shareholders from continuing and discontinued operations increased 20% to € 215 million in the third quarter of 2005 versus last year’s level of € 179 million. This equates to basic earnings per share from continuing and discontinued operations of € 4.68 compared to € 3.92 in the prior year, reflecting an increase of 19%. Diluted earnings per share from continuing and discontinued operations were up 11% to € 4.36 from € 3.92 in 2004.

Currency-neutral sales grow 10% in the first nine months

During the first nine months of 2005, Group sales increased 10% on a currency-neutral basis. In euro terms, sales also grew 10% to € 5.115 billion from € 4.664 billion in 2004.

“The first nine months of 2005 have been outstanding for our Group - both in terms of the strategic decisions we have taken and the financial results we have achieved. Our key region North America is stronger than ever so that we have raised our Group sales and earnings expectations for the year,” commented adidas-Salomon AG Chairman and CEO Herbert Hainer

adidas drives top-line growth in the first nine months

Sales growth in the adidas segment set the pace for Group performance during the first nine months of 2005. Currency-neutral adidas revenues increased 10% in the first nine months. Drivers of this growth were strong double-digit growth in the Sport Heritage division as well as increases in virtually all Sport Performance categories. Currency-neutral revenues in the TaylorMade-adidas Golf segment increased 12%, driven by significant growth in all major categories except putters. Currency effects only had a minor effect on sales at adidas and TaylorMade-adidas Golf in euro terms. adidas sales in euro terms were up 9% to € 4.545 billion in the first nine months from € 4.155 billion in 2004. TaylorMade-adidas Golf sales in euro terms grew 11% to € 528 million in 2005 from € 477 million in 2004.

Group sales by brand in 2005, “Total continuing operations” includes HQ/Consolidation

Double-digit sales increases in North America, Asia and Latin America

From a regional perspective, nine months Group sales in Europe were stable on a currency-neutral basis. Double-digit growth in the region’s emerging markets and solid increases in Italy and Scandinavia were offset by declines in Iberia, France and the UK. In North America, currency-neutral sales grew 17% due to double-digit growth in both the Sport Performance and Sport Heritage divisions as well as at TaylorMade-adidas Golf. In Asia, currency-neutral sales increased 26% in the first nine months of 2005, driven by strong growth in China, where sales nearly doubled, as well as strong increases in Japan, India and many other countries in the region. In Latin America, currency-neutral sales increased 35% in the first nine months, renewing its position as the fastest growing region within the Group. This development was mainly driven by double-digit sales increases in the region’s three biggest markets Brazil, Mexico and Argentina. Currency translation effects only had a minor effect on Group sales in the first nine months of 2005. Sales in Europe increased slightly from the prior year’s level to € 2.537 billion (2004: € 2.530 billion). In North America, sales in euros in the first nine months increased 14% to € 1.203 billion in 2005 from € 1.052 billion in 2004. In euro terms, sales in Asia improved 26% to € 1.111 billion in 2005 from € 882 million in 2004. In Latin America, sales in euro terms grew 41% to € 231 million in 2005 from € 164 million in 2004.

Group gross margin up 0.4 percentage points

The Group’s gross margin grew 0.4 percentage points to 48.5% of sales in the first nine months of 2005 (2004: 48.1%). This represents the highest first nine months gross margin in the history of the Group and mainly reflects increased adidas own-retail activities as well as an improving product mix. Hedging activities that enabled the Group to capitalize on favorable currency movements also contributed to the margin improvement. As a result of strong sales growth and the gross margin increase, gross profit rose 11% in the first nine months of 2005 to reach € 2.481 billion versus € 2.244 billion in 2004.

Operating profit grows 19%

Royalty and commission income increased 8% in the first nine months of 2005 to € 34 million in 2005 from € 32 million in the prior year. Operating expenses, including selling, general and administrative expenses (SG&A) and depreciation and amortization (excluding goodwill) increased 9% to € 1.843 billion in the first nine months of 2005 from € 1.685 billion in 2004. As a percentage of sales, this equates to 36.0%, which is 0.1 percentage points lower than the 2004 level of 36.1%. This decrease mainly reflects lower marketing expenditures as a result of a shift of product launches to the fourth quarter of 2005, when new products related to the FIFA World Cup 2006™ will be brought to market. During the first nine months of 2005 no goodwill impairment was incurred. This compares to scheduled goodwill amortization from continuing operations of € 26 million during the first nine months of 2004. As a result, the Group’s operating profit increased 19% to € 672 million in 2005 from € 564 million in the first nine months of 2004. This improvement was driven by higher sales and gross margin as well as operating expense leverage. Similarly, the operating margin grew 1.1 percentage points to 13.1% in the first nine months of 2005 versus 12.1% in the same period of 2004. The adoption of new and revised International Financial Reporting Standards had a positive impact on the Group’s reported operational performance in the first nine months of 2005. On a comparable basis , the Group’s operating profit and margin would have increased 14% or 0.5 percentage points respectively during the first nine months of 2005.

Income before taxes (IBT) up 25%

Financial expenses decreased 46% to € 24 million during the first nine months of 2005 (2004: € 45 million) as a result of positive currency effects and lower interest expenses due to the lower average debt level which more than offset an increase of the weighted average interest rate. As a result of the operating improvements and lower financial expenses, the Group’s IBT increased 25% to € 648 million in the first nine months of 2005 from € 519 million in 2004. On a comparable basis3, IBT and IBT as a percentage of sales would have increased 19% and 1.0 percentage points respectively during the first nine months of 2005.

Net income from continuing operations increases 33%

The Group’s net income from continuing operations increased 33% to € 434 million in the first nine months of 2005 from € 326 million in 2004. Strong sales increases, coupled with improving gross and operating margins, were the main drivers of this improvement. The Group’s minority interests declined 12% to € 11 million in 2005 from € 12 million in the prior year. This decline mainly reflects the first-time exclusion of adidas Turkey, Salomon & Taylor Made Japan and adidas Malaysia whose remaining shares were acquired in 2004 and which are now fully included in adidas results. The tax rate declined 4.3 percentage points to 33.0% in the first nine months of 2005 from 37.3% in 2004. On a comparable basis3, net income from the Group’s continuing operations would have increased 23% during the first nine months of 2005.

Basic earnings per share from continuing operations at € 9.21

The Group’s basic earnings per share from continuing operations increased 34% to € 9.21 for the first nine months of 2005 versus € 6.88 in 2004. First nine months diluted earnings per share from continuing operations were up 26% to € 8.63 in 2005 from € 6.87 in the prior year. On a comparable basis3, basic and diluted earnings per share from continuing operations would have increased 24% and 16% respectively.

Net income attributable to shareholders up 31%

The Group’s net income attributable to shareholders, which in addition to net income from continuing operations includes net income from discontinued operations, increased 31% to € 386 million in the first nine months of 2005 from € 295 million in 2004, despite an increase in the loss from discontinued operations. This improvement reflects the strong performance of the Group’s continuing operations. In the first nine months of 2005, income from discontinued operations decreased by 97% to negative € 37 million from negative € 19 million in the prior year, reflecting a decline in Salomon’s operating activities as well as negative effects related to the divestiture of this business segment. On a comparable basis³, net income attributable to shareholders from continuing and discontinued operations would have increased 18% during the first nine months of 2005.

Basic earnings per share from continuing and discontinued operations at € 8.40

The Group’s basic earnings per share from continuing and discontinued operations increased 30% to € 8.40 for the first nine months of 2005 versus € 6.46 in 2004. Diluted earnings per share from continuing and discontinued operations in the first nine months of 2005 increased 22% to € 7.89 in 2005 from € 6.46 in 2004. On a comparable basis3, basic and diluted earnings per share from continuing and discontinued operations would have increased by 17% and 9% respectively during the first nine months of 2005.

Working capital improvement continues

Group receivables were reduced by 13% to € 1.220 billion at the end of the third quarter of 2005 versus € 1.398 billion in the prior year mainly because € 203 million were transferred to “Assets classified as held for sale” . Receivables from continuing operations increased 2% (-1% on a currency-neutral basis), which is significantly lower than sales growth during the period. Group inventories were reduced by 7% to € 1.053 billion at the end of the third quarter of 2005 versus € 1.134 billion in 2004, mainly as a result of the reclassification of € 222 million inventories related to the Salomon business into “Assets classified as held for sale”4. Inventories from continuing operations increased 13%, or 10% on a currency-neutral basis. This increase reflects preparations for the first deliveries of World Cup product in the fourth quarter.

Net borrowings reduced by € 326 million

Net borrowings at September 30, 2005 were € 586 million, down 36% or € 326 million versus € 913 million in the prior year. Strong bottom-line profitability was the driver of this reduction. As a consequence, the Group’s financial leverage improved 27 percentage points to 28% in 2005 versus 55% in 2004.

Strong backlogs increase supports sales growth expectations for brand adidas

adidas backlogs at the end of the third quarter of 2005 increased 12% versus the prior year on a currency-neutral basis. In euro terms, this represents an increase of 14%, one of the highest quarterly backlog growth rates in euro terms in the Group’s history. Footwear backlogs grew 10% in currency-neutral terms (+12% in euros), reflecting improvements in particular in football as a result of strong FIFA World Cup 2006™ product ordering in advance of the product launches in the fourth quarter as well as in the Sport Heritage division. Apparel backlogs grew 12% on a currency-neutral basis (+14% in euros), also highlighting the strong FIFA World Cup 2006™ product ordering as well as the continuing strength of the Group’s “Apparel Breakthrough” initiative. From a regional perspective, currency-neutral orders in Europe rose by 8% (+9% in euros) compared to the prior year. In North America, currency-neutral order backlogs increased 14% (+18% in euros). Asian backlogs grew 18% in currency-neutral terms (+22% in euros).

Group sales by region in 2005, “Total continuing operations” includes HQ/Consolidation

Currency-neutral sales now expected to grow at high-single-digit rates in 2005

As a result of the anticipated positive macroeconomic and sector environment, and in view of strong adidas backlog development, expectations for adidas own-retail activities as well as positive retailer feedback, the Group has increased the full year sales growth expectations. Currency-neutral sales are now expected to grow at high-single-digit rates compared to the previous forecast of mid- to-high-single digit rates. This raised projection is based on increased expectations of double-digit revenue growth in North America due to strong year-to-date sales performance and across-the-board backlog increases. Double-digit sales momentum is expected to continue in Asia and Latin America. Europe is forecasted to grow at mid-single-digit rates characterized by a particularly strong fourth quarter positively impacted by new product launches in advance of the 2006 FIFA World CupTM. The Group’s gross margin is expected to be around 48%. The hedging rates secured over the last 12 months will continue to positively impact sourcing costs and therefore further support gross margin strength, albeit at a significantly lower level than in 2004 or the first nine months of 2005. Operating margin is expected to surpass the Group’s highest operating margin on record and achieve a level of around 11%, reflecting the Group’s operational improvements. Based on the strong operational performance in the first nine months, net income attributable to shareholders from continuing and discontinued operations is now expected to grow by at least 20% in 2005 compared to the reported 2004 level of € 314 million. For 2006, the Group expects to increase currency-neutral sales at high-single-digit rates and to grow earnings at double-digit rates. This is a preliminary outlook for the continuing business of the adidas Group, excluding all impacts associated with the acquisition of Reebok.

Herbert Hainer stated, “2005 has been exciting for us so far on many fronts, and we are well positioned for continued success going forward. As the countdown to the World Cup has already begun, we are on track to deliver top-notch performance again in 2006 and beyond.”

1) Unless otherwise stated, all figures in this press release refer to the Group’s continuing operations.
2) Pro-forma figures reflect continuing operations as a result of the divestiture of the Salomon business segment in accordance with the Sale & Purchase Agreement (SPA) with Amer Sports Corporation, subject to amendments agreed upon at transaction closing.
3) The figures stated on a comparable basis are adjusted to eliminate the goodwill amortization incurred in 2004. Furthermore, operating profit reflects the inclusion of royalty and commission income in the operating profit for 2004 and 2005.
4) The 2005 balance sheet items with the exception of net borrowings and equity only reflect the Group’s continuing operations. However, a restatement of the 2004 balance sheet items is not possible under IFRS. In the 2005 balance sheet, the assets and liabilities for the Salomon business segment, which will be deconsolidated at the beginning of the fourth quarter, are included in the Group’s total assets in separate positions as “Assets classified as held for sale” and “Liabilities classified as held for sales”.