adidas Powers Ahead in Greater China with Excellent 28% Growth Performance in Q3
In the third quarter of 2017, sales in Greater China increased 28% on a currency-neutral basis, underpinned by continued excellent momentum from both adidas and Reebok brands.
"adidas' excellent double-digit growth performance in Greater China over the past quarter provides renewed proof of adidas’ enduring and growing appeal among Chinese consumers, as well as the continuing success of our Creating the New 2020 strategy," said Colin Currie, Managing Director of adidas Greater China. “Looking to the remainder of 2017, we will continue with our focus on 'Creativity in Sports,’ doubling down in critical areas such as bringing brand concepts to life with our consumers, delivering unparalleled retail experiences, expanding in future and key cities and executing on our digital strategy.”
During the third quarter, adidas continued to deliver a strong financial performance with currency-neutral revenues up 12%. This development mainly reflects a 13% increase at brand adidas, which was driven by double-digit increases in the running and outdoor categories as well as at adidas Originals and adidas neo. Revenues at the Reebok brand grew 1%, as the planned efforts to clean up Reebok’s distribution in the US marketplace are having an increasingly negative impact on the brand’s top-line development. From a channel perspective, the company’s revenue growth was driven by increases in all distribution channels, with particularly strong support from eCommerce, where revenues grew 39%. In euro terms, sales for the company were up 9% in the third quarter to € 5.677 billion (2016: € 5.222 billion).
“The company’s strategic growth areas – North America, Greater China and eCommerce – were again the main drivers of our strong top-line performance during the third quarter. We are even more pleased with the quality of our growth, which is clearly reflected in the exceptional profitability improvement in Q3,” said adidas CEO Kasper Rorsted. “We delivered another set of strong results and are fully on track to achieve our ambitious 2017 financial targets.”
On a currency-neutral basis, the combined sales of the adidas and Reebok brands grew in all regions except Russia/CIS. Greater China (+28%) and North America (+23%) increased at double-digit rates each, driven by the adidas brand, which continues to enjoy particularly strong momentum in these key regions as reflected in growth rates of 29% and 31%, respectively. Currency-neutral revenues in Western Europe (+7%) and Latin America (+8%) increased at a high-single-digit rate each. Currency-neutral revenues in MEAA and Japan increased 6% and 3%, respectively. Sales in Russia/CIS declined 17%, reflecting the ongoing challenging consumer sentiment as well as additional store closures during the third quarter. Revenues in Other Businesses, comprising adidas Golf, Runtastic and Other centrally managed businesses, were up 14% on a currency-neutral basis, driven by double-digit increases at adidas Golf.
The company’s gross margin increased 2.4 percentage points to 50.4% (2016: 48.1%). This development was mainly due to the positive effects from a better pricing and product mix, which more than offset higher input costs as well as unfavourable currency developments. Other operating expenses increased 8% to € 2.129 billion (2016: € 1.963 billion), reflecting an increase in expenditure for point-of-sale and marketing investments as well as operating overhead expenditure. As a percentage of sales, however, other operating expenses decreased 0.1 percentage points to 37.5% (2016: 37.6%). The company’s operating profit increased 35% during the third quarter to a level of € 795 million (2016: € 591 million), resulting in an operating margin increase of 2.7 percentage points to 14.0% (2016: 11.3%). Net income from continuing operations was up 35% to € 549 million (2016: € 407 million) and basic earnings per share from continuing operations grew 33% to € 2.70 (2016: € 2.03). Losses from discontinued operations, net of tax, mainly related to the divestiture of the TaylorMade and CCM Hockey businesses, amounted to € 22 million (2016: € 20 million). As a result, net income attributable to shareholders increased 36% to € 526 million (2016: € 386 million), resulting in basic earnings per share from continuing and discontinued operations of € 2.59, up 34% compared to € 1.93 in 2016.
In the first nine months of 2017, revenues increased 16% on a currency-neutral basis and in euro terms, to € 16.162 billion (2016: € 13.983 billion). From a brand perspective, currency-neutral revenues for brand adidas grew 17%. Reebok sales were up 6% on a currency-neutral basis versus the prior year. The gross margin increased 0.9 percentage points to 50.1% (2016: 49.2%), reflecting the positive effects from an improved pricing and product mix, which more than offset unfavourable currency developments as well as higher input costs. Royalty and commission income increased 5% to € 86 million (2016: € 82 million). Other operating income declined 59% to € 85 million (2016: € 206 million), mainly due to the non-recurrence of extraordinary gains related to the early termination of the Chelsea FC contract and the Mitchell & Ness divestiture. Other operating expenses were up 13% to € 6.323 billion (2016: € 5.620 billion). The company’s operating profit grew 26% to € 1.938 billion (2016: € 1.541 billion), representing an operating margin of 12.0% (2016: 11.0%), an increase of 1.0 percentage points compared to the prior year. Net income from continuing operations grew 26% to € 1.358 billion (2016: € 1.078 billion), resulting in a 25% increase in basic earnings per share from continuing operations to € 6.71 (2016: € 5.37). In the first nine months of 2017, adidas incurred losses from discontinued operations of € 217 million, net of tax (2016: losses of € 48 million). As a result, net income attributable to shareholders increased 11% to € 1.139 billion (2016: € 1.027 billion) while basic EPS from continuing and discontinued operations grew 10% to € 5.63 (2016: € 5.13).
Inventories increased 7% to € 3.441 billion (2016: € 3.203 billion). On a currency-neutral basis, inventories grew 11%. Inventories from continuing operations increased 13% (+16% currency-neutral). Operating working capital increased 6% to € 4.502 billion (2016: € 4.228 billion) at the end of September 2017. On a currency-neutral basis, operating working capital grew 11%. Operating working capital from continuing operations rose 14% (+19% currency-neutral). Average operating working capital as a percentage of sales from continuing operations decreased 1.0 percentage points to 20.3%, reflecting the strong top-line development during the last twelve months as well as the company’s continued focus on tight working capital management.
Against the background of the strong financial performance in the first nine months of 2017, adidas has confirmed its outlook for the financial year 2017, which the company had previously increased with the announcement of its preliminary second quarter results on July 27, 2017. The company continues to expect sales to increase at a rate between 17% and 19% on a currency-neutral basis in 2017. Net income from continuing operations is projected to increase at a rate between 26% and 28% to a level between € 1.360 billion and € 1.390 billion.
In addition to the strong revenue growth, the excellent bottom-line improvement will be driven by a gross margin increase of up to 0.8 percentage points to a level of up to 50.0%. Other operating expenses as a percentage of sales are forecasted to be below the prior year level of 42.7%, driven by leverage from both expenditure for point-of-sale and marketing investments as well as lower operating overheads as a percentage of sales. These positive effects will be partly offset by the significant decline in other operating income, mainly reflecting the non-recurrence of the one-time gain related to the early termination of the Chelsea FC sponsorship that was included in the prior year. As a result, operating profit is expected to increase between 24% and 26%, reflecting an operating margin improvement of up to 0.6 percentage points to a level of up to 9.2%. Due to an increase in the average number of shares following conversions of convertible bonds into adidas AG shares, basic earnings per share from continuing operations are expected to increase at a rate between 25% and 27%.
