Major developments in Q1 20181:
- Revenues grow 10% currency-neutral and 2% in euro terms
- Gross margin increases 1.5pp to 51.1% driven by pricing and product mix
- Operating margin improves 1.8pp to 13.4% despite continued brand investments
- Net income from continuing operations grows 17% to € 542 million
- Basic EPS from continuing operations up 16% to € 2.65
We had a successful start to the year that was fully in line with our expectations: Our high-quality top-line growth was driven by our strategic focus areas North America, Greater China and e-commerce.
“At the same time, we managed to grow the bottom line significantly faster than the top line while continuing to invest into creating brand desire”, said adidas CEO Kasper Rorsted.
Currency-neutral sales increase 10% in Q1 2018
adidas started into the year with currency-neutral revenues increasing 10%. This development reflects an 11% increase at brand adidas which was driven by double-digit increases in the running, football and training categories as well as at adidas Originals. Revenues at the Reebok brand decreased 3% due to declines in the training and running categories. From a channel perspective, e-commerce was once again the fastest-growing channel with an increase of 27%. In euro terms, the company’s sales were up 2% in the first quarter to € 5.548 billion (2017: € 5.447 billion).
Double-digit growth in North America, Asia-Pacific and Latin America
From a market segment perspective, on a currency-neutral basis, the combined sales of the adidas and Reebok brands grew in most market segments. Growth was particularly strong in North America (+21%) and Asia-Pacific (+15%), the latter driven by a 26% increase in Greater China. While Latin America also grew at a double-digit rate (+10%), revenues in Western Europe increased 5%, in line with the full-year outlook for this market. Sales in Emerging Markets and Russia/CIS declined 5% and 16%, respectively, as a result of the challenging market conditions.
Operating margin increases 1.8 percentage points to 13.4%
The company’s gross margin increased 1.5 percentage points to 51.1% (2017: 49.6%). This development was despite a significant currency headwind in the quarter, which was more than offset by the positive effects from a better pricing and product mix. Other operating expenses increased 2% to € 2.172 billion (2017: € 2.122 billion). As a percentage of sales, other operating expenses increased 0.2 percentage points to 39.1% (2017: 39.0%), as significantly higher marketing investments were largely offset by strong operating overhead leverage. The company’s operating profit increased 17% to a level of € 746 million (2017: € 637 million), resulting in an operating margin improvement of 1.8 percentage points to a level of 13.4% (2017: 11.7%). Net income from continuing operations was up 17% to € 542 million (2017: € 462 million). Basic earnings per share from continuing operations increased 16% to € 2.65 (2017: € 2.29).
Average operating working capital as a percentage of sales decreases
Inventories decreased 11% to € 3.224 billion (2017: € 3.609 billion). On a currency-neutral basis, inventories were down 4%. Inventories from continuing operations decreased 6% in euro terms and increased 1% currency-neutral. Operating working capital declined 1% to € 4.488 billion (2017: € 4.554 billion) at the end of March 2018. On a currency-neutral basis, operating working capital grew 9%. Operating working capital from continuing operations rose 6% in euro terms and 17% currency-neutral. Average operating working capital as a percentage of sales from continuing operations decreased 0.7 percentage points to 20.3% (2017: 21.0%), reflecting the company’s continued focus on tight working capital management.
Net cash position of € 371 million
Net cash at March 31, 2018 amounted to € 371 million (2017: net borrowings of € 859 million), representing an increase of € 1.230 billion compared to the prior year. This development was driven by a decline in short-term borrowings on the back of working capital improvements as well as, to a lesser extent, the conversion of the convertible bond.
adidas confirms outlook for FY 2018
For 2018, adidas continues to expect sales to increase at a rate of around 10% on a currency-neutral basis, driven by double-digit growth in North America and Asia-Pacific. The company’s gross margin is forecast to increase up to 0.3 percentage points to a level of up to 50.7% (2017: 50.4%). Gross margin will benefit from the positive effects of a more favorable pricing, channel and regional mix. These improvements will be partly offset by the negative impact from unfavorable currency movements as well as higher input costs. The operating margin is forecast to improve between 0.5 and 0.7 percentage points to a level between 10.3% and 10.5% (2017: 9.8%), reflecting the projected gross margin improvement as well as operating overhead leverage which is expected to overcompensate the planned increase in marketing investments. Net income from continuing operations is projected to increase to a level between € 1.615 billion and € 1.675 billion. This development reflects an increase of between 13% and 17% compared to the prior year level of € 1.430 billion, excluding the negative one-time tax impact recorded in 2017. Basic EPS from continuing operations is expected to increase at a rate between 12% and 16% compared to the prior-year level of € 7.05, excluding the negative one-time tax impact in 2017, not taking into account any decrease in the number of shares outstanding due to the company’s share buyback program.
1 Due to the divestiture of the TaylorMade (including the TaylorMade, Adams Golf and Ashworth brands) and CCM Hockey businesses, all income and expenses of the TaylorMade and CCM Hockey businesses are reported as discontinued operations. For the sake of comparability, all figures related to the 2017 financial year refer to the company’s continuing operations unless otherwise stated. However, a restatement of the 2017 balance sheet items is not permitted under IFRS.