adidas Sees Greater Success in Greater China

In 2016, despite severe headwinds from negative currency effects, the company’s gross margin increased 0.3 percentage points to 48.6% (2015: 48.3%), as a result of the positive effects from a significantly better pricing, product and channel mix as well as lower input costs. Other operating expenses were up 13% to € 8.263 billion (2015: € 7.289 billion), reflecting an increase in expenditure for point-of-sale and marketing investments as well as higher operating overhead expenditure. The latter primarily includes further investments to spur the company’s strategic business plan ‘Creating the New’, accruals for bonus payments for employees due to the company’s strong financial performance as well as restructuring costs at Reebok and TaylorMade. As a percentage of sales however, other operating expenses decreased 0.3 percentage points to 42.8% from 43.1% in 2015. This together with the non-recurring gains related to the early termination of the Chelsea F.C. contract and the divestiture of Mitchell & Ness resulted in a 36% increase in operating profit to € 1.491 billion in 2016 (2015: € 1.094 billion, excluding goodwill impairment losses). Consequently, the operating margin increased 1.3 percentage points to 7.7% (2015: 6.5%). Net income from continuing operations was up 41% to a new record level of € 1.019 billion versus € 720 million in 2015. Basic earnings per share from continuing and discontinued operations increased 53% to € 5.08 in 2016 (2015: € 3.32).

Inventories increased 21% to € 3.763 billion at the end of December 2016 from € 3.113 billion in 2015. On a currency-neutral basis, inventories grew 19%, reflecting higher stock levels to support the company’s top-line momentum. Operating working capital increased 11% to € 3.468 billion compared to € 3.138 billion in 2015. Average operating working capital as a percentage of sales from continuing operations decreased 0.3 percentage points to 20.2% (2015: 20.5%), reflecting the top-line growth during the last twelve months as well as the company’s continued focus on tight working capital management.

Net borrowings declined to € 103 million, compared to net borrowings of € 460 million in 2015. This development is mainly a result of first conversions of convertible bonds into adidas AG shares as well as an increase in cash generated from operating activities partly offset by the utilisation of cash for the purchase of fixed assets, the dividend payment and the continued repurchase of adidas AG shares.

As a result of the strong operational performance in 2016, the company’s robust financial position as well as Management’s confidence in the long-term growth aspirations, the adidas AG Executive and Supervisory Boards will recommend paying a dividend of € 2.00 per dividend-entitled share to shareholders at the Annual General Meeting (AGM) on May 11, 2017. This represents an increase of 25% compared to the prior year dividend (2015: € 1.60). The total payout of € 403 million (2015: € 320 million) reflects a payout ratio of 39.6% (2015: 47.9%, excluding goodwill impairment losses) of net income attributable to shareholders, which is within the target range of between 30% and 50% of net income attributable to shareholders as defined in the company’s dividend policy.

During the fourth quarter, adidas continued to deliver a strong top- and bottom line performance. Revenues increased 14% on a currency-neutral basis. In euro terms, revenues grew 12% to € 4.687 billion (2015: € 4.167 billion). At the adidas brand, currency-neutral sales grew 18%, despite a tough comparison from the prior year related to the first sales of UEFA EURO 2016 related products. This development was driven by double-digit growth in the running category as well as at adidas Originals and adidas neo. In addition, high-single digit growth in the training category also contributed to the top-line improvement. Currency-neutral sales at the Reebok brand were up 3%, supported by high-single-digit sales increases in the training category and in Classics.

From a market segment perspective, combined currency-neutral sales of the adidas and Reebok brands in the fourth quarter grew at double-digit rates in key market segments such as North America (+29%), Greater China (+25%), Latin America (+22%) and Western Europe (+12%). While double-digit increases in MEAA (+14%) also supported the strong top-line development, revenues in Russia/CIS (-5%) and Japan (‑6%) were below the prior year level. Currency-neutral sales in Other Businesses declined 14% in the fourth quarter, reflecting declines at TaylorMade-adidas Golf and CCM Hockey.

In the fourth quarter of 2016, the company’s gross margin increased 1.6 percentage points to 48.8% (2015: 47.2%), as a more favourable pricing, product and channel mix as well as lower input costs more than offset the negative effects from currency headwinds. Other operating expenses as a percentage of sales increased 1.5 percentage points to 50.1% (2015: 48.6%), driven by higher operating overhead costs as a percentage of sales, also reflecting one-time costs associated with restructuring measures at Reebok. Operating profit improved to € 23 million (2015: operating loss of € 7 million, excluding goodwill impairment losses), translating into an operating margin of 0.5% (2015: negative operating margin of 0.2%). The company recorded a net loss from continuing operations of € 9 million in the fourth quarter (2015: € 17 million). Basic earnings per share from continuing and discontinued operations were negative € 0.05 in 2016 (2015: negative € 0.14).

For 2017, the company expect sales to increase at a rate between 11% and 13% on a currency-neutral basis. Currency-neutral combined revenues of the adidas and Reebok brands are expected to grow at double-digit rates in Western Europe, North America, Greater China and Russia/CIS, while currency-neutral sales in Latin America, Japan and MEAA are forecasted to improve at a high-single-digit rate each. Currency-neutral revenues of Other Businesses are expected to be below the prior year level, due to sales decreases at CCM Hockey. Currency-neutral sales at TaylorMade-adidas Golf are expected to grow at a mid-single-digit rate.

In 2017, the gross margin is forecasted to increase up to 0.5 percentage points to a level of up to 49.1% (2016: 48.6%). This, together with a forecasted decline in other operating expenses as a percentage of sales, is expected to drive an increase in operating profit of between 18% and 20%. As a result, the company’s operating margin is expected to improve between 0.6 and 0.8 percentage points to a level between 8.3% and 8.5% (2016: 7.7%). Net income from continuing operations is projected to increase at a rate between 18% and 20% to a level between € 1.200 billion and € 1.225 billion (2016: € 1.019 billion).