Adidas is taking action following a weaker-than-expected first half of the year.
The Herzogenaurach, Germany-based sporting goods firm on Thursday revealed a restructuring of its ailing golf business, which will include job cuts. The group will also resort to bigger marketing spending for the remainder of the year and 2015, which will see “the biggest campaign so far for the Adidas brand,” according to Herbert Hainer, the group’s chief executive officer.
But the actions did little to calm investors’ fears. Adidas shares fell 4.5 percent Thursday to close at 55.50 euros, or $73.81.
On a conference call with journalists, Hainer said there was “no doubt that our group endured external pressures over the last 18 months” that negatively impacted its results. But he acknowledged “that part of this underperformance is due to our executional mistakes,” and promised to “rectify them swiftly.”
“You know I’m a striker. I want to win. But we need to go back to the training ground, and that is exactly what we will do,” he said.
Hainer cited the FIFA World Cup as a model for future marketing initiatives. “Football is an example of what we can achieve when we are focused and committed. We are very successful when we talk directly to the consumers; they like our stories, and the World Cup is proof,” he said.
In light of the upcoming campaign, the company’s marketing spending is slated to increase to 13 percent of sales in 2014 versus 12 percent previously, rising to 14 or 15 percent of sales in 2015.
Hainer said a new and “leaner” marketing and sales team has been in place since Aug. 1, including a general manger for each category, which Adidas didn’t have before. “Equipped with more responsibility and full ability of action,” the team will be in charge of the campaign’s implementation.
Detailing direct gains from the World Cup, the ceo noted that the group sold 14 million pieces of the Brazuca match ball along with eight million jerseys, and that, following the sports event, he expects record sales of 2 billion euros, or $2.7 billion, in the football category, which spiked 41 percent in the second quarter.
Consultants estimate that during tournament years, large sports brands allocate between 30 and 40 percent of their total annual profits to marketing, and Adidas is said to have paid an additional 350 million euros, or $481.2 million, to be official FIFA sponsor.
But even sponsoring this year’s winning team was not enough to spur Adidas’ lackluster sales.
In the six months ending June 30, net income dropped 27 percent to 351 million euros, or $477 million, while sales slipped 2 percent to 6.9 billion euros, or $9.45 billion, the company said.
On a currency-neutral basis, sales were up 5 percent.
They were significantly affected by poor retail sentiment and slow liquidation of old inventory in the golf market, which Hainer identified as “our biggest challenge.” The category was down 30.6 percent in the first half compared with the year-ago period.
Dollar figures are converted from euros at average exchange rates for the period in question.
Hainer said there would be job cuts in the TaylorMade-Adidas Golf division, but he would not communicate any details before discussing them internally. Overall, he stated the division’s restructuring would cost the group between 50 million and 60 million euros, or $66.82 million and $80.18 million, in operating profit.
Golf hit Adidas hardest in the U.S., the segment’s largest market. In total, first-half sales fell 14.3 percent in the region, making it the group’s weakest area, while Western Europe was up 5.7 percent, driven by sales increases in Germany, Spain, France, the U.K. and Poland.
Latin America advanced 2 percent, or 25.4 percent on a currency-neutral basis, thanks to gains in Argentina, Brazil, Mexico and Colombia.
In a surprise statement issued last week, the sporting goods firm had already lowered full-year guidance, saying it now expected a mid- to single-digit increase in currency-neutral sales (previously high-single digit) and net profits at around 650 million euros, or $887 million, versus a range of 830 million euros to 930 million euros, or $1.13 billion to $1.27 billion, previously.
The correction sent Adidas shares down 15.4 percent that day.
The company reported further that in what was supposed to be a “strong second quarter,” profit fell 15.2 percent to 145 million euros, or $198.9 million, while sales grew 2.4 percent to 3.46 billion euros, or $4.75 billion, heavily impacted by currency fluctuations, continued weakness in the golf market, tensions in Russia and Ukraine and high marketing costs related to the FIFA World Cup.
On the bright side, e-commerce grew robustly, gaining 59 percent in the second quarter.
Hainer said in Russia, where second-quarter sales logged a double-digit increase but were challenged by the devaluation of the ruble, the group has decided to reduce the net number of store openings from 150 to 80 in 2014, with a similar figure to be expected for 2015, and that this would result in a negative operating profit swing of 50 million euros, or $67 million, for the company by yearend.
Closings of unprofitable locations are also on the agenda but, in general, he explained, “we will open more and invest more in Russia, which is our third-largest market.
“Emerging markets bring good business and good growth,” Hainer added.
Asked how he wants to boost the group’s share price, the executive said: “The plan is clear. We need to increase our operational results. At the end of the day this is what drives the share price and brings investors’ confidence back.”
He noted the group had no plans to set up a share buy-back program.
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