Major developments in Q2 2016
- Group sales increase 21% on a currency-neutral basis, driven by ongoing strong momentum at adidas (+25%) and Reebok (+7%)
- Top-line growth accelerates in Western Europe (+29%) and North America (+26%); Greater China (+30%) is fastest-growing region
- Gross margin grows 0.5pp to 48.8%
- Operating margin climbs 3.4pp to 9.4%
- Net income from continuing operations almost doubles to € 291 million
Improved outlook for FY 2016
- Currency-neutral Group sales to increase at a high-teens rate
- Gross margin to be at a level between 48.0% and 48.3%
- Operating margin to increase to a level of up to 7.5%
- Net income to improve to a level between € 975 million and € 1.0 billion
adidas Group currency-neutral sales increase 21% in the second quarter of 2016
During the second quarter, the adidas Group continued to deliver an outstanding financial performance. Group revenues increased 21% on a currency-neutral basis, driven by strong momentum at both adidas and Reebok. In euro terms, Group revenues grew 13% to € 4.422 billion (2015: € 3.907 billion).
From a brand perspective, the adidas brand grew 25% on a currency-neutral basis, driven by double-digit sales increases in the key performance categories running, football and training as well as at adidas Originals and adidas neo. With the exception of Russia/CIS, where revenues grew at a mid-single-digit rate, adidas recorded double-digit growth in every geography. Revenues developed particularly strongly in the key regions North America, Greater China and Western Europe, where sales increased by 32%, 30% and 30%, respectively. Reebok revenues increased 7% during the quarter, with double-digit growth in Western Europe, Greater China, Russia/CIS and Japan. The development was supported by double-digit sales increases in Classics as well as mid-single-digit improvements in the training and running categories. Revenues at TaylorMade-adidas Golf grew 7%, driven by double-digit growth at TaylorMade.
“We are putting the consumer at the heart of everything we do. We inspire them with unique experiences. We engage with them through marketing initiatives unheard of before. And we excite them with the most innovative and stylish products. As a result, the desirability of our brands and products is greater than ever before. This is fuelling the outstanding momentum we are enjoying across all regions and categories. And this will continue! It is the perfect platform to drive sustainable top- and bottom-line improvements for the years to come,” commented Herbert Hainer, adidas Group CEO.
Revenue growth in all market segments
From a market segment perspective, combined currency-neutral sales of the adidas and Reebok brands grew in all segments in the second quarter of 2016, with double-digit growth rates in Western Europe, North America, Greater China, Japan and MEAA. Revenues in Western Europe increased 29% on a currency-neutral basis, driven by the UK, Germany, Italy, Poland, France and Spain, where revenues grew at double-digit rates each. Growth trends in North America and Greater China were equally strong, as reflected in currency-neutral sales increases of 26% and 30%, respectively. Revenues in Russia/CIS accelerated, up 7% on a currency-neutral basis. In Latin America, revenues grew 8% on a currency-neutral basis, reflecting double-digit sales increases in markets such as Mexico, Peru, Colombia and Uruguay. In Japan, sales were up 21% on a currency-neutral basis. Currency-neutral sales in MEAA grew 14%, driven by double-digit growth in South Korea, Turkey, Australia, South Africa and Thailand.
Revenues for Other Businesses grew 6% in the second quarter. Double-digit sales increases in Other centrally managed businesses as well as high-single-digit growth at TaylorMade-adidas Golf were only partly offset by sales declines at CCM Hockey.
Further gross margin improvement despite significant currency pressure
In the second quarter of 2016, the Group’s gross margin increased 0.5 percentage points to 48.8% (2015: 48.3%). The severe headwinds from negative currency effects were more than offset by a more favourable pricing, product and channel mix as well as higher product margins at TaylorMade-adidas Golf.
Profitability climbs significantly
During the second quarter, the Group’s other operating expenses increased 12% to € 1.935 billion (2015: € 1.720 billion). The increase reflects higher expenditure for point-of-sale and marketing investments, as well as an increase in operating overhead costs as a result of higher sales expenditure. As a percentage of sales, however, other operating expenses decreased 0.3 percentage points to 43.8% (2015: 44.0%), reflecting the Group’s strong top-line improvement. Other operating income grew significantly to € 159 million from € 33 million in the second quarter of 2015. This development mainly reflects two extraordinary gains in the second quarter related to the early termination of the Chelsea F.C. contract as well as the divestiture of the Mitchell & Ness business. While the early termination of the Chelsea F.C. contract lifted both other operating income and operating profit by a mid- to high-double-digit million euro amount, the divestiture of Mitchell & Ness did not have an impact on the Group’s profitability in the second quarter since the proceeds – as previously announced – were re-invested to accelerate initiatives that are part of the company’s ‘Creating the New’ strategic business plan. The Group’s operating profit increased 77% to € 414 million compared to € 234 million in the second quarter of 2015. This translates into an operating margin of 9.4%, an increase of 3.4 percentage points compared to the prior year level of 6.0%. As a consequence, the Group’s net income from continuing operations increased 99% to € 291 million (2015: € 146 million). The Group’s net income attributable to shareholders, which in addition to net income from continuing operations includes the result from discontinued operations, also grew 99% to € 291 million from € 146 million in the second quarter of 2015. Basic EPS from continuing and discontinued operations doubled to € 1.45 (2015: € 0.73). Diluted EPS from continuing and discontinued operations grew 96% to € 1.42 (2015: € 0.73).
adidas Group with stellar financial performance in the first half of 2016
In the first half of 2016, Group revenues increased 21% on a currency-neutral basis, due to strong double-digit growth at adidas and mid-single-digit sales increases at Reebok. In euro terms, sales increased 15% to € 9.191 billion (2015: € 7.990 billion). All market segments posted currency-neutral sales increases, with double-digit growth across all regions except Russia/CIS, where revenues grew at a mid-single-digit rate. Despite significant pressure from negative currency effects, the Group’s gross margin improved 0.4 percentage points to 49.1%, driven by a more favourable pricing and product mix. Capitalising on the strong top-line development, the Group was able to generate significant operating leverage, with other operating expenses as a percentage of sales down 0.8 percentage points to 42.0%. These operating improvements in combination with the extraordinary gain related to the early termination of the Chelsea F.C. contract resulted in a strong increase in the Group’s operating margin. At 9.8%, the operating margin was up 2.4 percentage points versus the prior year level excluding last year’s goodwill impairment losses. Consequently, net income from continuing operations, excluding goodwill impairment losses in the prior year, increased 60% to € 641 million. At € 3.13, diluted EPS from continuing and discontinued operations grew 65%, excluding goodwill impairment losses in the prior year.
Average operating working capital as a percentage of sales decreases significantly
The Group’s inventories increased 20% to € 3.514 billion (2015: € 2.927 billion). On a currency-neutral basis, inventories grew 24%, reflecting higher stock levels to support the Group’s top-line momentum. Accounts receivable increased 4% to € 2.356 billion. On a currency-neutral basis, receivables were up 8%, reflecting the Group’s strong growth during the second quarter. Operating working capital was up 15% to € 4.013 billion (2015: € 3.485 billion). Average operating working capital as a percentage of sales decreased 1.2pp to 20.4% (2015: 21.6%), reflecting the strong top-line development during the last twelve months as well as the company’s continued focus on tight working capital management.
Net borrowings increase to € 1.028 billion
Net borrowings amounted to € 1.028 billion (2015: € 957 million), representing an increase of € 71 million. This development was mainly a result of the utilisation of cash for the purchase of fixed assets and the acquisition of Runtastic. The Group’s ratio of net borrowings over EBITDA amounted to 0.6, which is below the Group’s mid-term target corridor of below two times.
adidas Group increases guidance for the full year 2016
In light of the strong brand momentum and the outstanding financial performance in the first half of 2016, the Group has increased its 2016 financial outlook. adidas Group sales are expected to increase at a rate in the high teens (previously: to increase at a rate of around 15%) on a currency-neutral basis in 2016. The top-line development will be supported by double-digit growth in all regions except Russia/CIS, where sales are now forecasted to grow at a mid-single-digit rate.
In 2016, the projected increase in costs for the Group’s Asian-dominated sourcing as a result of less favourable US dollar hedging rates and rising labour expenditures is expected to weigh on the adidas Group’s gross margin. However, these negative effects are now projected to be almost completely offset by the positive effects from a more favourable pricing, product and regional mix as well as further enhancements in the channel mix, which is driven by the continued expansion of the company’s controlled space activities. Higher product margins at TaylorMade-adidas Golf compared to the prior year are also expected to positively impact the Group’s gross margin development. As a result, the Group’s gross margin is expected to be at a level between 48.0% and 48.3% compared to the prior year level of 48.3% (previously: decline of up to 50 basis points).
The Group’s other operating expenses as a percentage of sales are expected to decrease compared to the prior year level (2015: 43.1%). Due to the stronger than expected top-line growth, expenditure for point-of-sale and marketing investments as a percentage of sales is projected to be below the prior year level of 13.9%. In addition, operating overhead expenditure as a percentage of sales is also forecasted to be below the prior year level (2015: 29.2%). The company now expects the operating margin for the adidas Group to increase to a level of up to 7.5% (previously: to increase to a level of around 7.0%) compared to the prior year level of 6.5%.
As a result of the increased top-line expectations and improved operating margin outlook, net income from continuing operations excluding goodwill impairment is now projected to increase at a rate between 35% and 39% (previously: to increase at a rate of around 25%) to a level between € 975 million and € 1.0 billion (2015: € 720 million).
I am proud to confirm that we are in great shape. 2016 will be a year of records for the adidas Group. But we will not stop there. In the years to come, we will continue to grow across all categories, channels and geographies and drive our profitability to new heights.