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adidas Group Full Year 2007 Results

Q4 currency-neutral sales up 14% with increases in all regions +++ Q4 net income grows 63% +++ Currency-neutral adidas backlogs at highest level in almost 10 years

  • Currency-neutral sales grow 7% in 2007
  • Full year net income attributable to shareholders up 14%
  • Net borrowings reduced by nearly € 500 million to € 1.766 billion
  • Currency-neutral adidas backlogs grow 17%
  • Reebok backlogs decrease 8% on a currency-neutral basis

Fourth quarter adidas Group currency-neutral sales grow 14%

Fourth quarter Group revenues grew 14% on a currency-neutral basis. This development was driven by strong sales increases at both adidas and TaylorMade-adidas Golf. Reebok sales, however, declined. On a regional basis, sales grew by double-digit rates in all regions except North America, where sales increased at a low-single-digit rate. Currency movements negatively impacted revenues in euro terms. Group sales in euro terms increased 8% to € 2.419 billion in the fourth quarter of 2007 (2006: € 2.248 billion).

Fourth quarter net income attributable to shareholders up 63%

Fourth quarter gross margin increased 3.2 percentage points to 46.6% (2006: 43.4%) as a result of underlying improvements in all segments. Cost synergies resulting from the combination of adidas and Reebok sourcing activities and, to a lesser extent, the non-recurrence of negative impacts from purchase price allocation in the Reebok segment also positively impacted gross margin development. Group gross profit increased 15% to € 1.127 billion (2006: € 976 million). Operating expenses as a percentage of sales increased mainly due to higher marketing expenses in the adidas segment. As a result of the strong gross margin increase, which more than offset the increase in operating expenses, the Group’s operating margin increased 0.2 percentage points to 2.5% in the fourth quarter of 2007 versus 2.3% in the prior year. Operating profit grew 18% to € 61 million versus € 52 million in 2006. The Group’s net income attributable to shareholders increased 63% to € 21 million (2006: € 13 million) due to higher operating profit and lower net financial expenses. Net financial expenses decreased following the strong reduction of net borrowings. These positive effects more than offset a higher tax rate. 

adidas Group currency-neutral sales grow 7% in 2007

In 2007, Group revenues increased 7% on a currency-neutral basis, mainly as a result of sales growth in the adidas segment. Currency movements negatively impacted Group sales in euro terms. Group revenues grew 2% to € 10.299 billion in 2007 from € 10.084 billion in 2006. 

“Our Group made big strides in 2007,” commented adidas AG Chairman and CEO Herbert Hainer. “Our focus on performance and executional excellence was a big contributor to our success. I am extremely proud that all our hard work has helped the Group achieve new record sales and net income levels - and all this despite conditions that got tougher in some important markets as the year went on.”

adidas segment drives top-line growth

The adidas segment set the pace for the Group’s sales growth in 2007. Currency-neutral adidas segment revenues increased 12% during the period, representing the brand’s third consecutive year of double-digit growth. Currency-neutral sales in the Reebok segment were stable as a result of the consolidation of twelve months of Reebok’s revenues in 2007 versus only eleven months in the prior year. On a like-for-like basis, Reebok segment sales declined by 5% in 2007. At TaylorMade-adidas Golf, currency-neutral revenues increased 1%, negatively impacted by the divestiture of the Greg Norman Collection wholesale business. On a like-for-like basis, TaylorMade-adidas Golf sales increased 9%. Sales in the HQ/Consolidation segment decreased by 60% on a currency-neutral basis, mainly due to the expiration of the Salomon footwear sourcing cooperation agreement. Currency translation effects negatively impacted sales in all segments in euro terms. adidas sales increased 7% to € 7.113 billion in 2007 from € 6.626 billion in 2006. Sales at Reebok decreased 6% to € 2.333 billion versus € 2.473 billion in the prior year. TaylorMade-adidas Golf sales declined 6% to € 804 million in 2007 from € 856 million in 2006. HQ/Consolidation sales decreased 62% to € 48 million from € 129 million in the prior year. 

 

2007

2006

Change y-o-y in euro terms

Change y-o-y currency-neutral

 

€ in millions

€ in millions

in %

in %

adidas

7,113

6,626

7

12

Reebok[1]

 

2,333

2,473

(6)

0

TaylorMade-adidas Golf[2]

 

804

856

(6)

1

HQ/Consolidation

48

129

(62)

(60)

Total

10,299

10,084

2

7

[1] Reebok 2006 results only included eleven months of the twelve-month period.

[2] TaylorMade-adidas Golf results included Greg Norman apparel business

 from February 1, 2006 to November 30, 2006.

Sales increase in nearly all regions

adidas Group sales grew in all regions except North America in 2007. Group sales in Europe grew 7% on a currency-neutral basis as a result of strong growth in the region’s emerging markets. In North America, Group sales declined 2% on a currency-neutral basis due to lower Reebok sales in the USA. Sales for the adidas Group in Asia increased 18% on a currency-neutral basis, driven in particular by strong growth in China. In Latin America, sales grew 38% on a currency-neutral basis, with increases coming from all of the region’s major markets. Currency translation effects negatively impacted sales in euro terms in all regions. In euro terms, sales in Europe increased 5% to € 4.369 billion in 2007 from € 4.162 billion in 2006. Sales in North America decreased 9% to € 2.929 billion in 2007 from € 3.234 billion in the prior year. Revenues in Asia grew 12% to € 2.254 billion in 2007 from € 2.020 billion in 2006. Sales in Latin America grew 32% to € 657 million in 2007 from € 499 million in the prior year.
 

 

2007

2006[1]

Change y-o-y in euro terms

Change y-o-y currency-neutral

 

€ in millions

€ in millions

in %

in %

Europe

4,369

4,162

5

7

North America

2,929

3,234

(9)

(2)

Asia

2,254

2,020

12

18

Latin America

657

499

32

38

Total[2]

 

10,299

10,084

2

7

[1] Reebok 2006 results only included eleven months of the twelve-month period.

 TaylorMade-adidas Golf 2006 results included Greg Norman apparel business from February 1 to November 30.

[2] Including HQ/Consolidation.

Gross margin increases by 2.8 percentage points

The gross margin of the adidas Group increased by 2.8 percentage points to 47.4% in 2007 (2006: 44.6%). The non-recurrence of negative impacts from purchase price allocation in the Reebok segment, which in 2006 amounted to € 76 million, positively impacted gross margin development. Cost synergies resulting from the combination of adidas and Reebok sourcing activities as well as underlying improvements in all segments also contributed to this development. As a result, gross profit for the adidas Group rose 9% in 2007 to reach € 4.882 billion versus € 4.495 billion in the prior year.

Operating margin reaches 9.2%

The operating margin of the adidas Group increased 0.5 percentage points to 9.2% in 2007 (2006: 8.7%). The operating margin increase was a result of the Group’s gross margin improvement, which more than offset higher operating expenses as a percentage of sales. Operating expenses as a percentage of sales grew 2.5 percentage points to 39.2% in 2007 from 36.7% in 2006. This increase primarily reflects one-time costs related to the integration of Reebok into the adidas Group as well as higher expenses in the Reebok segment for marketing, product development and initiatives to grow the brand in emerging markets. Group operating profit increased 8% in 2007 to reach € 949 million versus € 881 million in 2006.

Income before taxes increases by 13%

Income before taxes increased 13% to € 815 million in 2007 from € 723 million in 2006. Operational improvements and lower financial expenses contributed to this development. Net financial expenses decreased 15% to € 134 million in 2007 from € 158 million in the prior year mainly as a result of the strong reduction of net borrowings.

Net income attributable to shareholders grows 14%

The Group’s net income attributable to shareholders increased 14% to € 551 million in 2007 from € 483 million in 2006, representing the seventh consecutive year of double-digit earnings growth. The Group’s higher operating profit, lower net financial expenses and lower minority interests each contributed to this development. These effects more than offset a slightly higher tax rate.

Basic and diluted earnings per share both increase 14%

In line with the increase of the Group’s net income attributable to shareholders, basic earnings per share increased 14% to € 2.71 in 2007 versus € 2.37 in 2006. Diluted earnings per share in 2007 also increased 14% to € 2.57 from € 2.25 in the prior year.

Continued working capital progress

Group inventories increased 1% to € 1.629 billion at the end of 2007 versus € 1.607 billion in 2006. On a currency-neutral basis, inventories grew 7%. The increase was driven by higher inventory levels in emerging markets, reflecting the Group’s high sales growth expectations for these countries in particular. Group receivables increased 3% to € 1.459 billion (2006: € 1.415 billion). On a currency-neutral basis, receivables grew 8%. This is well below sales growth in the fourth quarter of 2007.

Net borrowings reduced by nearly € 500 million

Net borrowings at December 31, 2007 amounted to € 1.766 billion, which represents a reduction of € 465 million, or 21%, versus € 2.231 billion in the prior year. This improvement was significantly better than the Group’s original target of below € 2 billion as communicated at the beginning of 2007. The Group’s strong profitability improvement and continued tight working capital management were the primary drivers of this decline. Consequently, the Group’s financial leverage also improved significantly to 58.4% at the end of 2007 versus 78.9% in the prior year.

adidas backlogs at highest level in almost 10 years

Backlogs for the adidas brand at the end of 2007 increased 17% versus the prior year on a currency-neutral basis. This improvement represents the highest growth rate in almost ten years. It was supported by adidas’ strength in all major categories. Order backlogs in Europe were positively impacted by orders for UEFA EURO 2008™ related products. In euro terms, adidas backlogs grew 12%. Footwear backlogs increased 13% in currency-neutral terms (+8% in euros). Double-digit growth in both Asia and Europe more than offset a small decline in North America. Apparel backlogs grew 20% on a currency-neutral basis (+15% in euros), driven by strong double-digit increases in Asia and Europe.

 

Footwear

Apparel

Total[1]

 

in €

currency-neutral

in €

currency-neutral

in €

currency-neutral

Europe

11

14

17

20

15

18

North America

(14)

(5)

(6)

4

(11)

(2)

Asia

22

29

23

30

22

28

Total

8

13

15

20

12

17

Year-over-year development adidas order backlogs by product category and region as at December 31, 2007

[1] Includes hardware backlogs.

 

Reebok backlogs decline

Currency-neutral Reebok backlogs at the end of 2007 were down 8% versus the prior year on a currency-neutral basis. In euro terms, this represents a decline of 14%. Footwear backlogs decreased 12% in currency-neutral terms (–18% in euros). This is the result of lower orders from mall-based retailers in North America scheduled for delivery in the first half of 2008. Apparel backlogs grew by 3% on a currency-neutral basis (–3% in euros).

 

Footwear

Apparel

Total[1]

 

in €

currency-neutral

in €

currency-neutral

in €

currency-neutral

Europe

6

9

(16)

(13)

(4)

(1)

North America

(36)

(30)

8

19

(27)

(20)

Asia

(0)

6

14

20

5

12

Total

(18)

(12)

(3)

3

(14)

(8)

Year-over-year development Reebok order backlogs by product category and region as at December 31, 2007

[1] Includes hardware backlogs.

 

Group sales to increase at a high-single-digit rate

In 2008, adidas Group sales are expected to increase at a high-single-digit rate on a currency-neutral basis, driven by growth at all brands. The adidas segment is projected to achieve high-single-digit currency-neutral sales growth in 2008. Revenues in the Reebok segment are expected to grow at a low- to mid-single-digit rate on a currency-neutral basis. Currency-neutral TaylorMade-adidas Golf sales are forecasted to grow at a mid-single-digit rate.

Gross and operating margins to improve further in 2008

The adidas Group gross margin is expected to increase modestly to a range of 47.5 to 48%. Operating expenses as a percentage of sales are expected to be higher mainly as a result of increases in the marketing working budget as a percentage of sales at both adidas and Reebok to support the brands’ presence at this year’s major sporting events. The operating margin for the adidas Group is forecasted to increase to at least 9.5% as a result of operating margin improvements in all segments.

2008 net income to grow at least 15%

Net income attributable to shareholders is projected to grow by at least 15% in 2008 versus the 2007 level of € 551 million. This represents the eighth consecutive year of double-digit net income growth. Top-line improvement and an increased operating margin will be the primary drivers of this positive development.

19% dividend increase to be proposed

At the Group’s Annual General Meeting on May 8, 2008, the adidas AG Executive and Supervisory Boards intend to propose a dividend of € 0.50 per share for the 2007 financial year (2006: € 0.42). Based on the number of shares outstanding at the end of 2007, the dividend payout will increase 19% to € 102 million (2006: € 85 million) , outpacing the earnings growth of 14% in 2007. This represents a payout ratio of 19% (2006: 18%) and demonstrates Management’s confidence in the Group’s future business performance.

Excess cash largely to be used for adidas share buyback

On January 29, 2008, adidas AG announced the launch of a share buyback program of up to € 420 million. As at March 4, 2008, adidas AG had bought back 2.1 million shares with an average purchase price of € 42.84. adidas AG intends to cancel the repurchased shares, thus reducing its stock capital. As a result, the Group’s equity ratio will decrease and earnings per share will increase. The Group’s excess cash will be largely invested in the buyback. Net borrowings will consequently be at or slightly below the prior year level.

Herbert Hainer: “We have positioned our Group for continued growth in 2008 and beyond. Our strong positions at the European Football Championships and the Olympic Games in Beijing as well as our focus on executing our brand strategies globally will propel us to new heights. We will continue to grow both our top and bottom line in 2008, achieving new record results.”