adidas Group with stellar financial performance in Q1 2016

Major developments in Q1 2016:

• Group sales increase 22% on a currency-neutral basis 

• Accelerating momentum at both adidas (+26%) and Reebok (+6%) 

• Double-digit growth in all markets except Russia/CIS 

• Gross margin grows 0.3pp to 49.4%, despite unfavourable currency effects 

• Operating margin climbs 1.4pp to 10.3% 

• Underlying net income grows 38% to € 350 million 

Improved outlook for FY 2016 

• Currency-neutral Group sales to increase at a rate of around 15% 

• Gross margin to decline by only up to 50bps to a level between 47.8% and 48.3% 

• Operating margin to increase to a level between 6.6% and 7.0% 

• Net income to improve between 15% and 18% 

adidas Group currency-neutral sales increase 22% in the first quarter of 2016 

The adidas Group recorded a very strong start into the year 2016. During the first quarter, Group revenues increased 22% on a currency-neutral basis, with accelerating momentum at both adidas and Reebok. In euro terms, Group revenues grew 17% to € 4.769 billion (2015: € 4.083), the highest quarterly revenue in the Group’s history. 

From a brand perspective, currency-neutral adidas revenues grew 26%, driven by double-digit sales increases in the training, football and running categories as well as at adidas Originals and adidas neo. While adidas recorded growth in every geography, brand momentum was particularly strong in key regions such as North America, Greater China and Western Europe, where revenues were up 31%, 30% and 26%, respectively. With currency-neutral Reebok sales increasing 6% versus the prior year, the brand recorded its 12th consecutive quarter of growth. 

The brand’s performance was supported by double-digit growth in Western Europe, Greater China, Latin America, Japan and MEEA. Revenues at TaylorMade-adidas Golf decreased 1% currency-neutral, as growth at the core brands TaylorMade and adidas Golf was more than offset by sales declines at Ashworth and Adams. 

“We are off to a powerful start in 2016 with record first quarter results,” commented Herbert Hainer, adidas Group CEO. “Strong double-digit growth in key markets and key categories underlines the broad-based momentum and the strong desirability of our brands and products around the globe. I am particularly pleased with our strong development in North America. This shows that our focus on this important market is paying off. Our strong Q1 performance is the ideal platform for strong and sustainable top- and bottom-line improvements – in 2016 and beyond.” 

Double-digit revenue growth in almost all market segments 

From a market segment perspective, combined currency-neutral sales of the adidas and Reebok brands grew in all segments in the first quarter of 2016, with double-digit growth rates in Western Europe, North America, Greater China, Latin America, Japan and MEAA. Revenues in Western Europe increased 25% on a currency-neutral basis, driven by the UK, Germany, Italy, France and Poland, where revenues grew at double-digit rates each. Currency-neutral sales in North America and Greater China saw strong acceleration during the quarter, up 22% and 30%, respectively. Despite an ongoing challenging macroeconomic environment, Russia/CIS returned to growth with currency-neutral sales up 2%. In Latin America, revenues grew 19% on a currency-neutral basis, reflecting double-digit sales increases in markets such as Argentina, Mexico, Chile and Brazil. In Japan, sales were up 44% on a currency-neutral basis. Currency-neutral sales in MEAA grew 17%, driven by high-single-digit growth in South Korea as well as double-digit improvements in Australia, the United Arab Emirates and Turkey. 

Revenues in Other Businesses were up 6% on a currency-neutral basis, as strong double-digit sales growth in Other centrally managed businesses was only partly offset by sales declines at TaylorMade-adidas Golf and Reebok-CCM Hockey. 

Brand strength drives gross margin increase 

The Group’s gross margin increased 0.3 percentage points to 49.4% (2015: 49.2%). Positive effects from a more favourable pricing and product mix recorded during the first quarter were able to more than offset the severe headwinds from negative currency effects as well as lower product margins at TaylorMade-adidas Golf. 

Operating margin up due to gross margin increase and operating leverage 

During the first quarter, the adidas Group continued to invest strongly in marketing and point-of-sale-activation, up 8% year-over-year, with the overall objective to spur revenue growth and drive long-term brand desirability. This, together with higher operating overhead expenditure resulted in a 13% increase in the Group’s operating expenses, amounting to € 1.924 billion (2015: € 1.700 billion) at quarter-end. As a percentage of sales, however, other operating expenses decreased 1.3 percentage points to 40.3%, reflecting the Group’s strong top-line improvements as well as a different phasing of the Group’s marketing investments in 2016 compared to the prior year. The Group’s operating profit grew 35% to € 490 million from € 363 million in 2015, representing an operating margin of 10.3%, up 1.4 percentage points from the prior year level (2015: 8.9%). This development was due to the gross margin increase as well as the positive effect of lower operating expenses as a percentage of sales. Consequently, the Group’s net income from continuing operations was up 38% to € 350 million (2015: € 255 million). The Group’s net income attributable to shareholders, which in addition to net income from continuing operations includes the result from discontinued operations was up 47% to € 351 million (2015: € 239 million). Basic EPS from continuing and discontinued operations increased 50% to € 1.75 (2015: € 1.17) and diluted EPS from continuing and discontinued operations increased 46% to € 1.71 (2015: € 1.17). 

Successful working capital management continues 

Group inventories increased 16% to € 2.939 billion at the end of March 2016 versus € 2.539 billion in 2015. On a currency-neutral basis, inventories grew 25%, reflecting higher stock levels to support the Group’s top-line momentum. The Group’s accounts receivable were up 2% to € 2.517 billion at the end of March 2016 (2015: € 2.456 billion). On a currency-neutral basis, receivables increased 11%. Operating working capital rose 10% to € 3.883 billion at the end of March 2016 compared to € 3.520 billion in 2015. Average operating working capital as a percentage of sales from continuing operations decreased 1.7 percentage points to 20.2% (2015: 21.9%), 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 € 809 million 

Net borrowings at March 31, 2016 amounted to € 809 million, compared to net borrowings of € 542 million in 2015, representing an increase of € 267 million. This development is mainly a result of the utilisation of cash for the purchase of fixed assets, the acquisition of Runtastic and the share buyback programme. The Group’s ratio of net borrowings over EBITDA amounted to 0.5 at the end of March 2016, 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, which is reflected in the better than expected first quarter performance, the Group has increased its 2016 financial outlook. adidas Group sales are now expected to increase at a rate of around 15% (previously: between 10% and 12%) on a currency-neutral basis in 2016. The top-line expansion will be supported by double-digit growth in all regions except Russia/CIS. 

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 projected to be largely offset by the positive effects from a more favourable pricing, product and regional mix at both adidas and Reebok and further enhancements in the Group’s channel mix, driven by the continued expansion of controlled space activities. Higher product margins at TaylorMade-adidas Golf are also expected to help limit the overall gross margin compression. As a result, the Group now expects to be able to limit the gross margin decline to a maximum of 50 basis points (previously: decline between 50 and 100 basis points) compared to the prior year level of 48.3%. 

The Group’s other operating expenses as a percentage of sales are expected to decrease compared to the prior year level of 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 slightly below the prior year level of 13.9% (previously: around the prior year level). 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 by up to 50 basis points to a level between 6.6% and 7.0% (previously: to remain at least stable) compared to the prior year level of 6.5%. The forecasted decline in gross margin will be more than offset by lower other operating expenses as a percentage of sales.

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 15% and 18% (previously: between 10% and 12%) compared to the prior year level of € 720 million.

Herbert Hainer stated: “This quarter’s accomplishments show that we flew off the starting blocks in 2016. The outstanding performance was supported by the implementation of our strategic business plan ‘Creating the New’. Based on this long-term strategy and our new operating model we are closer to the consumer than ever before. Our product and marketing initiatives are resonating extremely well with consumers across all regions and in performance and lifestyle categories alike. This gives us every confidence that 2016 will be a record year and will lay the foundation for the long-term success of the Group.”