adidas Group: First Quarter 2007 Results: Group Sales Grow 9% on a Currency-Neutral Basis

  
    
  
  
    
      adidas Group (FWB:ADS):
    
    
      
        Group gross margin increases 1.8 percentage points to 46.8%
      
      
        Net income attributable to shareholders declines 11% in line with 
        expectations
      
      
        2007 outlook reconfirmed, net income growth expected to approach 15%
      
    
    
      First quarter adidas Group currency-neutral sales grow 9%
    
    
      During the first quarter of 2007, Group sales increased 9% on a 
      currency-neutral basis, mainly driven by sales growth in the adidas 
      segment and the inclusion of an additional month in the Reebok segment 
      versus the prior year. Currency-neutral sales grew in all regions except 
      North America, where the development was stable. In euro terms, revenues 
      grew 3% to € 2.538 billion from € 
      2.459 billion in 2006. On a like-for-like basis, including Reebok’s 
      revenues for the full three-month periods and excluding the effect from 
      the disposal of the Greg Norman Collection (GNC) wholesale business, 
      sales increased 4% in currency-neutral terms.
    
    
      “Our Group has gotten off to a strong start in 
      2007,” commented adidas AG Chairman and CEO 
      Herbert Hainer. “The Reebok integration is 
      beginning to pay off as we realize the first revenue and cost synergies. 
      adidas and TaylorMade-adidas Golf impressed with strong product launches.”
    
    
      adidas and Reebok segments drive first quarter top-line growth
    
    
      The adidas segment set the pace for the Group’s 
      organic sales growth in the first quarter of 2007. Currency-neutral adidas 
      revenues increased 7% during the first three months. In the Reebok 
      segment, currency-neutral sales increased 22% as in the first quarter of 
      2007 three months of Reebok’s revenues are 
      consolidated versus only February and March in the prior year. On a 
      like-for-like basis, comparing the full three-month periods and 
      excluding the transfer of the NBA and Liverpool licensed businesses to 
      brand adidas, currency-neutral Reebok sales declined by 5%. At TaylorMade-adidas 
      Golf, currency-neutral revenues decreased 4%. On a like-for-like 
      basis, excluding prior year GNC sales, however, sales increased 5%. 
      Currency translation effects negatively impacted sales at all brands in 
      euro terms. adidas sales in euro terms increased 2% to € 
      1.819 billion in the first quarter of 2007 from € 
      1.776 billion in 2006. Sales at Reebok increased 15% to reach € 
      524 million versus € 454 million in the prior 
      year. TaylorMade-adidas Golf sales in euro terms declined 10% to € 
      180 million in 2007 from € 201 million in 
      2006.
    
    
      Sales increase strongly in nearly all regions
    
    
      adidas Group sales grew strongly in all regions except North America 
      where sales were stable. This growth was driven by strong operational 
      developments at brand adidas as well as the consolidation of three 
      months of Reebok’s revenues in the first 
      quarter of 2007 versus only February and March in the prior year. First 
      quarter adidas Group sales in Europe grew 10% on a 
      currency-neutral basis. In North America, Group sales were stable 
      on a currency-neutral basis. Sales for the adidas Group in Asia 
      and Latin America increased 13% and 36% respectively on a 
      currency-neutral basis in the first quarter of 2007. Currency 
      translation effects negatively impacted reported sales in all regions. 
      Sales in Europe increased 8% in euro terms to € 1.149 billion 
      in 2007 from € 1.067 billion in 2006. Sales 
      in North America decreased 8% to € 698 
      million in 2007 from € 759 million in the 
      prior year. In euro terms, revenues in Asia grew 6% to € 
      501 million in 2007 from € 474 million in 
      2006. Sales in Latin America grew 25% to € 
      157 million in 2007 from € 126 million in the 
      prior year.
    
    
      Group gross margin increases by 1.8 percentage points
    
    
      The gross margin of the adidas Group increased by 1.8 percentage points 
      to 46.8% in the first quarter of 2007 (2006: 45.0%), driven by 
      improvements in all segments. This mainly reflects the non-recurrence of 
      negative impacts from purchase price allocation in the Reebok segment in 
      an amount of € 22 million, positive impacts 
      from increased own-retail activities at brand adidas as well as the 
      first cost synergies in the sourcing of both adidas and Reebok products. 
      This more than offset negative gross margin impacts at Reebok due to the 
      inclusion of an additional month of Reebok results in the first quarter 
      of 2007, as January is traditionally characterized by higher than 
      average clearance activities. An increased gross margin at 
      TaylorMade-adidas Golf also contributed to the Group gross margin 
      increase. As a result of the Group’s strong 
      underlying top-line growth and gross margin improvement, gross profit 
      for the adidas Group rose strongly by 7% in the first quarter of 2007 to 
      reach € 1.188 billion versus € 
      1.107 billion in the prior year.
    
    
      Operating profit declines 8%
    
    
      The operating margin of the adidas Group declined 1.1 percentage points 
      to 9.0% in the first quarter of 2007 (2006: 10.1%) largely due to the 
      inclusion of an additional month of Reebok results, as January is 
      traditionally characterized by higher than average operating expenses as 
      a percentage of sales, as well as timing effects in the marketing 
      working budget. The operating expense increase more than compensated 
      gross profit improvements. As a result, operating profit for the adidas 
      Group declined 8% in the first quarter of 2007 to reach € 
      229 million versus € 248 million in 2006.
    
    
      Income before taxes decreases by 13%
    
    
      Income before taxes for the adidas Group declined 13% to € 
      191 million in the first quarter of 2007 from € 
      220 million in 2006. The decline in the Group operating profit as well 
      as increased net financial expenses contributed to this development. Net 
      financial expenses increased 36% to € 38 
      million from € 28 million in the prior year 
      as a result of lower financial income in 2007 compared to the first 
      quarter of the prior year.
    
    
      Net income attributable to shareholders down 11% in line with 
      expectations
    
    
      The Group’s net income attributable to 
      shareholders declined 11% to € 128 million in 
      the first quarter of 2007 from € 144 million 
      in 2006 as a result of a decline of the Group’s 
      operating profit, increased net financial expenses as well as a slightly 
      higher tax rate, which increased 0.5 percentage points to 32.4% in the 
      first quarter of 2007 from 31.8% in the prior year. The Group’s 
      minority interests, however, declined by 78% to € 
      1 million in the first quarter of 2007 from € 
      6 million in the prior year due to the take-over of the adidas joint 
      venture partner in Korea, effective September 1, 2006.
    
    
      Basic and diluted earnings per share decline 11%
    
    
      In line with the decrease of the Group’s net 
      income attributable to shareholders, basic earnings per share declined 
      11% to € 0.63 in the first quarter of 2007 
      versus € 0.71 in 2006. Diluted earnings per 
      share in the first quarter of 2007 also declined 11% to € 
      0.60 from € 0.67 in the prior year. The 
      dilutive effect mainly results from approximately sixteen million 
      additional potential shares that could be created in relation to the 
      outstanding convertible bond, for which conversion criteria were met for 
      the first time at the end of the fourth quarter of 2004.
    
    
      Working capital progress continues
    
    
      Group inventories decreased 3% to € 1.536 billion 
      at the end of the first quarter of 2007 versus € 1.586 billion 
      in 2006. On a currency-neutral basis, inventories increased 3% which is 
      below sales growth expectations for the adidas Group. Group receivables 
      decreased 6% (–1% currency-neutral) to € 1.777 
      billion at the end of the first quarter of 2007 versus € 
      1.898 billion in the prior year, clearly below sales growth in the 
      quarter.
    
    
      Net borrowings reduced by € 432 million
    
    
      Net borrowings at March 31, 2007 were € 2.519 
      billion, down 15% or € 432 million versus € 
      2.952 billion in the prior year. Strong bottom-line profitability and 
      continued tight working capital management were the drivers of this 
      reduction.
    
    
      adidas backlogs grow 7% on a currency-neutral basis
    
    
      Backlogs for the adidas brand at the end of March 2007 increased 7% 
      versus the prior year on a currency-neutral basis. This represents a 
      significant sequential improvement of 6 percentage points versus the 
      prior quarter, driven by notable increases in Europe and North America. 
      The increase acknowledges the strong product pipeline for the second 
      half of the year. In euro terms, adidas backlogs grew 2%. Footwear 
      backlogs increased 5% in currency-neutral terms (stable in euros). Mixed 
      development in North America was more than offset by growth in Asia and 
      in Europe’s emerging markets. Apparel 
      backlogs grew 12% on a currency-neutral basis (+7% in euros), driven by 
      a solid increase in Europe and double-digit growth in both North America 
      and Asia.
    
    
      Reebok backlog development positive for first time since 
      consolidation within the Group
    
    
      Backlogs for the Reebok brand at the end of the first quarter increased 
      3% versus the prior year on a currency-neutral basis, showing the first 
      positive quarter-end development since the consolidation of the business 
      within the adidas Group. In euro terms, this equates to a decline of 3%. 
      Footwear backlogs declined 9% in currency-neutral terms (–14% 
      in euros), mainly due to decreases in North America and Europe. Apparel 
      backlogs grew by 16% on a currency-neutral basis (+9% in euros), driven 
      by strong growth in North America and Asia.
    
    
      2007 outlook reconfirmed
    
    
      Based on the solid performance in the first quarter, Group revenues for 
      the full year are projected to grow at mid-single-digit rates in 2007. 
      Growth in the remaining quarters will be weighted towards the second 
      half as the positive effects of the 2006 FIFA World Cup™ 
      will not be repeated in the second quarter of 2007. Sales at brand 
      adidas are expected to increase at a mid-single-digit rate on a 
      currency-neutral basis in 2007. Revenues at Reebok are forecasted to 
      improve at low-single digit rates compared to the prior year. 
      Currency-neutral TaylorMade-adidas Golf sales will grow at 
      mid-single-digit rates on a like-for-like basis. The Group gross margin 
      is expected to be in the range of between 45 and 47%, driven by 
      underlying improvements in all three brand segments and the 
      non-recurrence of a € 76 million non-cash 
      accounting charge related to purchase price allocation, which negatively 
      impacted the Reebok gross margin in 2006. The Group’s 
      operating margin is forecasted to be around 9%, which will be modestly 
      higher than in 2006. Gross margin improvements at all brands will drive 
      this development, largely offset by higher operating expenses at Reebok, 
      TaylorMade-adidas Golf and within HQ/Consolidation. Net income 
      attributable to shareholders for the adidas Group is expected to grow at 
      a double-digit rate, approaching 15%.
    
    
      Herbert Hainer stated: “The positive Reebok 
      backlog development is encouraging as we begin to make progress on the 
      revitalization of the brand. We still have a way to go, and will 
      maintain discipline and focus to ensure we bring about sustainable and 
      long-term profitable growth at Reebok. For the Group, we are on track 
      and ready to drive strong top-and bottom-line growth in 2007 despite the 
      lack of major sport events.”
    
    
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