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SBD Global/August 8, 2014/Finance

Adidas Sees 16% Slide In Net Profits During Second Quarter Due To Currency Effects

Hainer says part of underperformance is due to executional mistakes.
Adidas shareholders saw a 16% "slide in net profits in the second quarter of the year as the group repeated its warning that currency effects, conditions in Russia and poor golf sales were taking their toll," according to Alice Ross of the FINANCIAL TIMES. Adidas CEO Herbert Hainer said, "Missing our goals is something we take very seriously as a management team and we definitely reflect critically on. We clearly recognize that part of this underperformance is due to our executional mistakes." While overall net sales rose 2.4% between April and June from the same period last year to €3.5B, the group "was less profitable," with operating profit dipping 12.7% to €220M. Adjusted for currency effects, sales were up 10%. The group said its adidas brand in particular "had benefited from the World Cup in Brazil," with sales up 14% on a currency neutral basis in the second quarter and 6.5% in real terms. Sales "rose across all geographical markets on a currency neutral basis" (FT, 8/7). REUTERS' Emma Thomasson reported adidas "had already flagged plans to increase marketing spending last week when it cut sales and net income targets" for '14 and scrapped its goals for '15. Citi analysts, who rate the stock "neutral," said that "they remained sceptical, given the planned reduction of stores in Russia, higher marketing costs and adverse currency trends." They wrote in a note, "We continue to fear that earnings growth trends could remain muted despite the recently lowered EBIT (earnings before interest and taxation) base." Hainer said that adidas, which runs more than 1,000 stores in Russia, "now aims to add only 80 this year, down from a planned 150, with a similar number expected for 2015 due to higher risks to consumer sentiment and spending over the Ukraine crisis." That move, as well as more discounting of stock in Russia, "would trim" about €50M ($67M) from operating profit in the second half. A "planned restructuring of the golf unit" would mean a hit of €50M-€60M ($67M-$80M) (REUTERS, 8/7). In N.Y., Monica Houston-Waesch reported adidas "will provide specifics on the campaign, slated to start in the first half of 2015, early next year." Analysts expect "to have more clarity then on which costs are exceptional and which are recurring." Berenberg analyst John Guy said, "It is one thing to invest successfully in your brands, its another to buy growth. We are positive on brand investment so long as the returns look sensible" (WALL STREET JOURNAL, 8/7).
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