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adidas delivers double-digit bottom-line growth in Q2

Full-year outlook confirmed

Major developments in Q2 2019:

  • Revenues grow 4% currency-neutral and 5% in euro terms
  • Gross margin increases 1.2pp to 53.5%
  • Operating margin improves 0.4pp to 11.7%
  • Net income from continuing operations grows 10%
  • Basic EPS from continuing operations rises 13%

We delivered another successful quarter. Sales in our strategic growth areas Greater China and e-commerce continued to increase at a double-digit rate – and so did our bottom line.

KASPER RORSTED, ADIDAS CEO

“We remain confident about the sequential revenue acceleration in the second half of the year and confirm our top- and bottom-line outlook for 2019,” said adidas CEO Kasper Rorsted.

Currency-neutral revenues increase 4% in Q2 2019
In the second quarter, currency-neutral revenues grew 4%, reflecting growth at both brands. Revenues at brand adidas were up 4% in the quarter, driven by a high-single-digit increase in Sport Inspired. Revenues in Sport Performance declined at a low-single-digit rate as the non-recurrence of last year’s FIFA World Cup-related sales led to a strong decrease in the football category which more than offset double-digit growth in the training and basketball categories. Reebok sales returned to growth in the second quarter. Driven by the Classics category, revenues of the Reebok brand grew 3% on a currency-neutral basis. From a channel perspective, the company’s top-line increase reflects a double-digit improvement in direct-to-consumer revenues with particularly strong growth in e-commerce, where sales increased 37% in the quarter. In euro terms, the company’s revenues grew 5% in the second quarter to € 5.509 billion (2018: € 5.261 billion).

Growth in most market segments
The top-line expansion in the second quarter was driven by sales increases in most market segments: The combined currency-neutral sales of the adidas and Reebok brands expanded at a double-digit rate in Emerging Markets (+12%) and at a high-single-digit rate in Asia-Pacific (+8%), the latter driven by double-digit growth in China (+14%). Revenues in North America increased 6%, reflecting a 5% increase at brand adidas and 10% growth for Reebok. While sales in Latin America also increased at a mid-single-digit rate (+5%), revenues in Europe were flat year-over-year. Sales in Russia/CIS declined at a mid-single-digit rate (-4%) due to difficult prior year comparisons in relation to the 2018 FIFA World Cup.

Operating margin improves 0.4 percentage points to 11.7%
The company’s gross margin increased 1.2 percentage points to 53.5% (2018: 52.3%). Higher air freight costs to mitigate the supply chain shortages and a less favorable pricing mix were overcompensated by positive currency developments, lower sourcing costs as well as a better product and channel mix. Other operating expenses were up 6% to € 2.346 billion (2018: € 2.210 billion). As a percentage of sales, other operating expenses increased 0.6 percentage points to 42.6% (2018: 42.0%). Marketing and point-of-sale expenses grew 5% to € 744 million (2018: € 707 million), as the company increased its brand investments. As a percentage of sales, marketing and point-of-sale expenses were up 0.1 percentage points to 13.5% (2018: 13.4%). Operating overhead expenses increased 7% to € 1.602 billion (2018: € 1.502 billion), due to further investments into the scalability of the company’s business model as well as higher costs related to the strong growth in the company’s direct-to-consumer channel. As a percentage of sales, operating overhead expenses increased 0.5 percentage points to 29.1% (2018: 28.6%). The company’s operating profit grew 9% to a level of € 643 million (2018: € 592 million), representing an operating margin increase of 0.4 percentage points to 11.7% (2018: 11.3%). This development was mainly driven by the gross margin expansion, which more than offset the increase in other operating expenses as well as the non-recurrence of litigation gains and the release of operational provisions which were recorded in the prior year quarter.

Net income from continuing operations grows 10%
The company’s net income from continuing operations increased 10% to € 462 million (2018: € 418 million). This includes a negative impact from the adoption of IFRS 16 of € 7 million, reducing year-over-year net income growth by approximately 2 percentage points. Basic EPS from continuing operations reached € 2.33 including the IFRS impact, an increase of 13% year-over-year (2018: € 2.06).

adidas with strong bottom-line growth in the first half of 2019
In the first half of 2019, revenues increased 4% on a currency-neutral basis, which is in line with the 3% to 4% guidance provided at the beginning of the year in light of the supply chain shortages the company has been experiencing following a strong increase in demand for mid-priced apparel. In euro terms, revenues grew 5% to € 11.392 billion (2018: € 10.809 billion). From a brand perspective, currency-neutral revenues for brand adidas grew 5%, while Reebok revenues declined 2%. Gross margin was up 1.8 percentage points to 53.5% (2018: 51.7%). The improvement reflects the positive effects from more favorable currency developments and lower sourcing costs as well as an improved product and channel mix, which overcompensated higher air freight costs and a less favorable pricing mix. Other operating expenses grew 8% to € 4.663 billion (2018: € 4.337 billion) and were up 0.8 percentage points to 40.9% (2018: 40.1%) as a percentage of sales. This increase was driven by higher marketing expenditures, investments into the scalability of the company’s business model as well as higher costs related to the strong growth in the company’s direct-to-consumer channel. The company’s operating profit grew 13% to € 1.518 billion (2018: € 1.338 billion), representing an operating margin of 13.3% (2018: 12.4%), an increase of 0.9 percentage points compared to the prior year. Net income from continuing operations grew 14% to € 1.093 billion (2018: € 960 million), resulting in a 17% increase in basic earnings per share from continuing operations to € 5.50 (2018: € 4.71). The adoption of IFRS 16 has reduced year-over-year net income and EPS growth by approximately 2 percentage points in the first six months of the year.

Average operating working capital as a percentage of sales decreases
Inventories increased 5% to € 3.579 billion (2018: € 3.425 billion). On a currency-neutral basis, inventories were also up 5%. Operating working capital decreased 2% to € 4.248 billion (2018: € 4.318 billion). On a currency-neutral basis, operating working capital was down 2%. Average operating working capital as a percentage of sales decreased 1.9 percentage points to 18.3% (2018: 20.1%), reflecting a double-digit increase in payables. This development is a direct result of the adidas non-trade procurement initiative, which is leading to improved payment terms with the company’s vendors.

Net cash position of € 362 million
Net cash at June 30, 2019 amounted to € 362 million (June 30, 2018: net cash of € 89 million), representing a year-over-year increase of € 273 million. This development was driven by the increase in cash generated from operating activities, partly offset by the utilization of cash for the purchase of fixed assets, the dividend payout as well as the repurchase of adidas AG shares. 

adidas confirms outlook for FY 2019
For 2019, the company continues to expect sales to increase at a rate of between 5% and 8% on a currency-neutral basis. Following the 4% revenue growth during the first six months, adidas continues to project a sequential acceleration during the second half of the year. The company’s gross margin is forecast to increase to a level of around 52.0% (2018: 51.8%) in 2019. The operating margin is expected to increase between 0.5 percentage points and 0.7 percentage points to a level between 11.3% and 11.5% (2018: 10.8%). This, together with continued top-line growth, is expected to once again drive a double-digit-rate improvement of the company’s bottom line: Net income from continuing operations is projected to increase to a level between € 1.880 billion and € 1.950 billion, reflecting an increase of between 10% and 14% compared to the prior year level of € 1.709 billion.1  

Supervisory Board extends contracts of Karen Parkin and Harm Ohlmeyer
At its meeting yesterday, the adidas AG Supervisory Board extended the mandates of Executive Board members Karen Parkin, responsible for Global Human Resources, and Harm Ohlmeyer, Chief Financial Officer, by five years beyond 2020 until 2025. Karen Parkin and Harm Ohlmeyer have both been members of the adidas AG Executive Board since 2017. 

“I am very pleased to announce that Karen and Harm have extended their contracts as Executive Board members of adidas AG. They have been instrumental in driving the success of our long-term strategy Creating the New that runs until 2020. Together with CEO Kasper Rorsted, Roland Auschel, Eric Liedtke and Martin Shankland, they form a strong Executive Board team that will ensure the company’s long-term sustainable success,” stated Igor Landau, Chairman of the Supervisory Board of adidas AG.
 

Additional Comment

Excluding the impact from the application of the new reporting standard IFRS 16. Based on lease contracts as of January 1, 2019, the change in recognition of lease obligations under the new reporting standard is projected to have a negative impact of around € 35 million on the company’s net income from continuing operations. Including this accounting effect, net income from continuing operations is currently expected to increase to a level between € 1.845 billion and € 1.915 billion. This equals a year-on-year increase of between 8% and 12% compared to the prior year level of € 1.709 billion.