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Germany's Adidas' revenues up 4% with growth in western markets in Q2

04 Aug '22
5 min read
Pic: Adidas
Pic: Adidas

Currency-neutral revenues of German sportswear brand Adidas increased 4 per cent in the second quarter (Q2) as it continued to see strong momentum in western markets. This growth was achieved despite continued challenges on both supply and demand. Supply chain constraints because of last year’s lockdowns in Vietnam reduced top-line growth by around €200 million in Q2 2022.

In addition, the company’s decision to suspend its operations in Russia reduced revenues by more than €100 million during the quarter. Continued COVID-19-related lockdowns in Greater China also weighed on the top-line development in Q2. From a channel perspective, the top-line increase was to a similar extent driven by the company’s own direct-to-consumer (DTC) activities as well as increases in wholesale, the company said in a media release.

Within DTC, e-commerce, which now represents more than 20 per cent of the company’s total business, showed double-digit growth reflecting strong product sell-through. From a category perspective, revenue development was strongest in the company’s strategic growth categories Football, Running and Outdoor, which all grew at strong double-digit rates. In euro terms, revenues grew 10 per cent to €5.596 billion in the second quarter (2021: €5.077 billion).

Revenue growth in the second quarter was driven by western markets despite last year’s lockdowns in Vietnam still reducing sales, particularly in EMEA and North America, by €200 million in total. In addition, the top-line development in EMEA was also impacted by the loss of revenue in Russia/CIS of more than €100 million. Nevertheless, currency-neutral sales grew 7 per cent in the region. Revenues in North America increased 21 per cent during the quarter driven by growth of more than 20 per cent in both DTC and wholesale.

Revenues in Latin America increased 37 per cent, while Asia-Pacific returned to growth. Currency-neutral revenues increased 3 per cent in this market despite still being impacted by limited tourism activity in the region. In contrast, the company continued to face a challenging market environment in Greater China, mainly related to the continued broad-based COVID-19-related restrictions. As a result, currency-neutral revenues in the market declined 35 per cent during the three-months period, in line with previous expectations. Excluding Greater China, currency-neutral revenues in the company’s other markets combined grew 14 per cent in Q2.

The company’s gross margin declined 1.5 percentage points to 50.3 per cent (2021: 51.8 per cent). Significantly higher supply chain costs and a less favourable market mix due to the significant sales decline in Greater China weighed on the gross margin development. Other operating expenses were up 19 per cent to €2.501 billion (2021: €2.107 billion). As a percentage of sales, other operating expenses increased 3.2 percentage points to 44.7 per cent (2021: 41.5 per cent). Marketing and point-of-sale expenses grew 8 per cent to €663 million (2021: €616 million).

As a percentage of sales, marketing and point-of-sale expenses were down 0.3 percentage points to 11.8 per cent (2021: 12.1 per cent). Operating overhead expenses increased by 23 per cent to a level of €1.838 billion (2021: €1.492 billion). As a percentage of sales, operating overhead expenses increased 3.5 percentage points to 32.8 per cent (2021: 29.4 per cent). The company’s operating profit reached a level of €392 million (2021: €543 million), resulting in an operating margin of 7 per cent (2021: 10.7 per cent).

The company’s net income from continuing operations slightly declined to €360 million (2021: €387 million). This result was supported by a one-time tax benefit of more than €100 million due to the reversal of a prior year provision. Consequently, basic EPS from continuing operations reached €1.88 (2021: €1.93) during the quarter.

In the first half of 2022, currency-neutral revenues were flat versus the prior year period. In euro terms, revenues grew 5 per cent to €10.897 billion in the first six months of 2022 (2021: €10.345 billion). The company’s gross margin declined 1.7 percentage points to 50.1 per cent (2021: 51.8 per cent) during the first half of the year. Other operating expenses increased to €4.759 billion (2021: €4.154 billion) in the first half of the year and were up 3.5 percentage points to 43.7 per cent (2021: 40.2 per cent) as a percentage of sales. Adidas generated an operating profit of €828 million (2021: €1.248 billion) during the first six months of the year, resulting in an operating margin of 7.6 per cent (2021: 12.1 per cent). Net income from continuing operations reached €671 million, reflecting a decline of €219 million compared to the prior year level (2021: €890 million), the release added.

Inventories increased 35 per cent to €5.483 billion (2021: €4.054 billion) on June 30, 2022, in anticipation of strong revenue growth during the second half of the year. Operating working capital increased 23 per cent to €5.191 billion (2021: €4.213 billion). On a currency-neutral basis, operating working capital was up 14 per cent. Average operating working capital as a percentage of sales decreased 0.4 percentage points to 21 per cent (2021: 21.4 per cent), reflecting an over proportional increase in accounts payable due to higher sourcing volumes and product costs.

Adidas now expects currency-neutral revenues for the total company to grow at a mid- to high-single-digit rate in 2022 (previously: at the lower end of the 11 per cent to 13 per cent range), reflecting a double-digit decline in Greater China (previously: significant decline). Due to the less favourable market mix and the impacts from initiatives to clear excess inventories in Greater China until the end of the year, gross margin is now expected to reach a level of around 49 per cent (previously: around 50.7 per cent) in 2022. Consequently, the company’s operating margin is now forecast to be around 7 per cent (previously: around 9.4 per cent) and net income from continuing operations is expected to reach a level of around €1.3 billion (previously: at the lower end of the €1.8 billion to €1.9 billion range).

Fibre2Fashion News Desk (KD)

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