Adidas Group First Quarter 2013 Results

• Group sales stable on a currency-neutral basis

• Gross margin grows 2.4 percentage points to record level of 50.1 percent

• Net income attributable to shareholders up 6 percent to €308 million ($400.4 mm)

• Adidas Group confirms full year guidance

• TaylorMade-Adidas Golf sales increase 13 percent currency-neutral

• Group operating margin up 1.1 percentage points

• Net borrowings down 72 percent to €180 million ($234 mm) at quarter-end

• Inventories decrease 2 percent on currency-neutral basis

Adidas Group currency-neutral sales remain stable in the first quarter of 2013

In the first quarter of 2013, Group revenues were stable on a currency-neutral basis as a result of sales increases in Retail and Other Businesses. Currency translation effects had a negative impact on sales in euro terms. Group revenues decreased 2 percent to €3.751 billion ($4.9 bn) in the first quarter of 2013 from €3.824 billion in 2012.

Group sales supported by growth in Retail and Other Businesses

In the first quarter of 2013, currency-neutral Wholesale revenues decreased 3 percent due to double-digit sales declines at Reebok. Currency-neutral Retail sales increased 6 percent versus the prior year, driven by sales growth at both Adidas and Reebok. Revenues in Other Businesses were up 9 percent on a currency-neutral basis, driven by double-digit sales increases at TaylorMade-Adidas Golf.

Currency translation effects had a negative impact on segmental sales in euro terms. Wholesale revenues decreased 5 percent to €2.481 billion ($3.2 bn) in the first quarter of 2013 from €2.614 billion in 2012. Retail sales grew 4 percent to €722 million ($938.6 mm) versus €693 million in the prior year. Sales in Other Businesses rose 6 percent to €548 million ($712.4 mm) (2012: €517 million).

“Our Group has delivered a solid performance in the first quarter of 2013,” commented Herbert Hainer, Adidas Group CEO. “We delivered stable revenues, despite running against high prior year comparisons due to the sell-in of event-related products for the London Olympics and the European Football Championships as well as facing a continuation of macroeconomic challenges in Europe. And, we delivered strong margin progress which is our top priority for the year. Our relentless focus on quality sales growth resulted in our highest-ever quarterly gross margin, above 50 percent for only the second time in our history.”

First quarter net sales development by segment

1) Rounding differences may arise in totals.

Currency-neutral sales increase in most regions

In the first quarter of 2013, currency-neutral Adidas Group sales grew in all regions except Western Europe and Other Asian Markets. Revenues in Western Europe decreased 6 percent on a currency-neutral basis, as growth in France and Poland was more than offset by sales declines in Spain, Italy and the UK. In European Emerging Markets, Group sales increased 3 percent on a currency-neutral basis due to sales growth in the Middle East, South Africa and Russia/CIS. Sales for the Adidas Group in North America grew 3 percent on a currency-neutral basis, driven by 5 percent growth at Adidas and 19 percent growth at TaylorMade-Adidas Golf. Sales in Greater China increased 6 percent on a currency-neutral basis. Currency-neutral revenues in Other Asian Markets declined 4 percent, as double-digit increases in South Korea were more than offset by sales declines in Japan. In Latin America, sales grew 12 percent on a currency-neutral basis, with double-digit increases in most of the region’s major markets. Currency translation effects had a mixed impact on regional sales in euro terms.

First quarter net sales development by region

1) Rounding differences may arise in totals.

Group gross margin increases 2.4 percentage points

The gross margin of the Adidas Group increased 2.4 percentage points to 50.1 percent in the first quarter of 2013 (2012: 47.7 percent). The positive impact from a more favourable pricing, product and regional sales mix as well as a larger share of higher-margin Retail sales contributed to this development. Gross profit for the Adidas Group grew 3 percent in the first quarter of 2013 to €1.881 billion ($2.44 bn) versus €1.826 billion in the prior year.

Operating margin improves 1.1 percentage points

Group operating profit increased 8 percent to €442 million ($574.6 mm) in the first quarter of 2013 versus €409 million in 2012. As a result, the operating margin of the Adidas Group improved 1.1 percentage points to 11.8 percent (2012: 10.7 percent). This was primarily due to the positive effects from the increase in gross margin, which more than offset higher other operating expenses as a percentage of sales. Other operating expenses as a percentage of sales rose 1.2 percentage points to 39.5 percent in the first quarter of 2013 from 38.4 percent in 2012. In euro terms, other operating expenses increased 1 percent to €1.482 billion (1.93 bn) (2012: €1.467 billion), as a result of higher marketing expenditure as well as the expansion of the Group’s own-retail activities. Thereof, sales and marketing working budget expenditures amounted to €437 million ($568.1 mm), which represents an increase of 3 percent versus the prior year level (2012: €426 million).

Financial income down 47 percent

Financial income decreased 47 percent to €4 million ($5.2 mm) in the first quarter of 2013 from €8 million in the prior year, mainly due to a decrease in interest income.

Financial expenses decrease 30 percent

Financial expenses decreased 30 percent to €19 million ($24.7 mm) in the first quarter of 2013 (2012: €28 million). The decrease in interest expenses mainly contributed to the decline.

Income before taxes as a percentage of sales increases 1.2 percentage points

Income before taxes (IBT) for the Adidas Group increased 10 percent to €427 million ($555.1 mm) from €389 million in 2012. IBT as a percentage of sales improved 1.2 percentage points to 11.4 percent in the first quarter of 2013 from 10.2 percent in 2012. This was a result of the Group’s operating margin increase and lower net financial expenses.

Net income attributable to shareholders up 6 percent

The Group’s net income attributable to shareholders increased to €308 million in the first quarter of 2013 from €289 million ($375.7 mm) in 2012. This represents an increase of 6 percent versus the prior year level. The Group’s tax rate increased 2.0 percentage points to 27.5 percent in the first quarter of 2013 (2012: 25.5 percent), mainly due to a less favourable earnings mix.

Basic and diluted earnings per share reach €1.47

In the first quarter of 2013, basic and diluted earnings per share amounted to €1.47 (2012: €1.38), representing an increase of 6 percent. The weighted average number of shares used in the calculation of both basic and diluted earnings per share was 209,216,186 (2012 average: 209,216,186) as there were no potential dilutive shares in the quarter.

Group inventories decline 2 percent currency-neutral

Group inventories decreased 2 percent to €2.346 billion ($3.0 bn) at the end of March 2013 versus €2.395 billion in 2012. On a currency-neutral basis, inventories were also down 2 percent, reflecting the Group’s ongoing strong focus on inventory management.

Accounts receivable increase 3 percent currency-neutral

At the end of March 2013, Group receivables increased 3 percent to €2.328 billion ($3.0 bn) (2012: €2.253 billion). On a currency-neutral basis, receivables were also up 3 percent. The reduction in allowances for doubtful debts contributed to this development.

Net borrowings decrease €460 million

Net borrowings at March 31, 2013 amounted to €180 million, which represents a decrease of €460 million, or 72 percent, versus €640 million at the end of March 2012. The decrease was driven by the strong operating cash flow development over the past 12 months. Currency translation had a positive effect of €37 million. The Group’s ratio of net borrowings over 12-month rolling EBITDA decreased to 0.1 at the end of March 2013 versus 0.5 in the prior year.

Adidas Group confirms guidance for the full year 2013

Adidas Group sales are forecasted to increase at a mid-single-digit rate on a currency-neutral basis in 2013. Currency translation is expected to negatively impact top-line development in reported terms. Despite a high degree of uncertainty regarding the global economic outlook and consumer spending, Group sales development will be favourably impacted by the Group’s high exposure to fast-growing emerging markets as well as the further expansion of Retail. In addition, the Group’s strength in innovation will lead to major product launches throughout 2013, which will more than offset the non-recurrence of sales related to the UEFA EURO 2012 and the London 2012 Olympic Games. In terms of phasing, sales growth is projected to be weighted towards the second half of the year.

In 2013, the Adidas Group gross margin is forecasted to increase to a level between 48.0 percent and 48.5 percent (2012: 47.7 percent). Improvements are expected in all segments. Group gross margin will benefit from positive regional and channel mix effects, as growth rates in high-margin emerging markets and Retail are projected to be above growth rates in more mature markets and Wholesale. In addition, improvements in the Retail segment as well as at the Reebok brand will positively influence Group gross margin development. However, these positive effects will be partly offset by less favourable hedging terms compared to the prior year as well as increasing labour costs, which are expected to negatively impact cost of sales.

In 2013, the Group’s other operating expenses as a percentage of sales are expected to decrease modestly (2012: 41.3 percent). Sales and marketing working budget expenses as a percentage of sales are projected to be at a similar level compared to the prior year. Marketing investments to support new product launches at all brands, as well as the expansion of Reebok’s activities in the fitness category, will be offset by the non-recurrence of expenses in relation to the UEFA EURO 2012 as well as the London 2012 Olympic Games. Operating overhead expenditure as a percentage of sales is forecasted to decline modestly in 2013. Higher administrative and personnel expenses in the Retail segment due to the planned expansion of the Group’s store base will be offset by leverage in the Group’s non-allocated central costs.

In 2013, the Group expects the operating margin for the Adidas Group to increase to a level approaching 9.0 percent (2012 excluding goodwill impairment losses: 8.0 percent). Improvements in the Group’s gross margin as well as lower other operating expenses as a percentage of sales are expected to be the primary drivers of the improvement. The Group tax rate is expected to be at a level between 28.0 percent and 28.5 percent and thus more favourable compared to the prior year tax rate of 29.3 percent excluding goodwill impairment losses. As a result of these developments, earnings per share are expected to increase at a rate of 12 percent to 16 percent to a level between €4.25 and €4.40 (2012 excluding goodwill impairment losses: €3.78). This represents net income attributable to shareholders of €890 million to €920 million.

Herbert Hainer stated: “The strong first quarter results confirm our expectations to deliver another year of double-digit earnings growth and strong cash flow generation. Given the strong reception to our latest product innovations and our full pipeline for the second half of 2013, I am confident our earnings momentum will accelerate in line with our expectations as we move through the year.”

(15/05/2013)