BERLIN — Lead by the Adidas brand and a favorable financial picture, Adidas-Salomon AG scored a strong first quarter, with net earnings and sales posting double-digit gains.
Despite the ongoing worldwide economic, political and medical crises, chairman and chief executive officer Herbert Hainer on Wednesday reconfirmed Adidas-Salomon’s 2003 targets, calling for currency neutral sales growth of about 5 percent, a 10 to 15 percent rise in net earnings and gross margins of 42 to 43 percent.
In the first quarter ended March 31, the Herzogenaurach, Germany-based active sportswear group saw net earnings increase 19 percent to $56.6 million, based on current exchange rates.
During a conference call with analysts Wednesday, Hainer said this is the highest first-quarter improvement in six years. The strong performance was attributed to improved group tax rates, a decline in financial expenses and lower average borrowings, as well as a doubling of minority interests because of strong results from Adidas South Korea. Gross margins also improved to 42.5 percent, up from 41.8 percent for the quarter in 2002.
Adidas brand sales lead group growth, increasing 6 percent to $1.56 billion. Excluding currency fluctuations, Adidas sales were up 16 percent, the brand’s highest gain in more than four years, according to the company.
In North America, group sales declined 15 percent to $449.55 million, although this was a sales increase of 4 percent on a currency neutral basis. Adidas brand sales in North America were down 12 percent in euros for the period, but grew 8 percent in U.S. dollars.
Europe, which generates 50 percent of group sales and an even higher percentage of earnings, Hainer noted, was "the star of Q1." Sales in Europe, excluding currency fluctuations, were up 12 percent, with Italy, France, Germany and the UK contributing to the positive performance, he said. In Italy, where Adidas took full control of its operations last year, sales surged more than 50 percent for the quarter.
European footwear sales were up 10 percent, or 22 percent on a currency neutral basis. Apparel sales declined 3 percent, a gain of 6 percent in currency neutral terms. Asia remained the strongest-growing sales region for the group, with sales up 8 percent to reach $311.9 million or 21 percent, excluding currency fluctuations.The order backlog "is more of a mixed picture," Hainer acknowledged. Adidas brand order backlogs declined 2 percent for the quarter, which equates to a 9 percent increase on a currency neutral basis. Footwear backlogs were down 1 percent, or up 11 percent on a currency neutral basis, and apparel orders were down 3 percent, an increase of 7 percent in currency neutral terms.
"We had three consecutive quarters of double-digit growth in North America, and we had expected this trend to continue," said Hainer. "But U.S. consumers reacted [negatively] to the war in Iraq and continued economic uncertainty."
He said there was less traffic in the malls and huge price competition, "but we weren’t willing to give in and reduce prices and hurt our margins."
The result was cancellations and a decline in orders, although the downturn in apparel primarily reflects a later ordering schedule. "In 2003, we’ve taken a full month out of the order process," Hainer pointed out.
He said the company needs to maximize product sell-through in the next few quarters by increasing point-of-sale activities in all channels of distribution and through advertising campaigns set for the third and fourth quarters.
Concerning SARS, Hainer said the company is monitoring the situation carefully, and that sales have been impacted over the last few weeks in Hong Kong and China. Adidas is confident "we can manage it on the sales side."
"On the production side, we have worked out contingency plans to shift to other countries if necessary," he said. "But there’s been no impact so far with either our employees or suppliers."
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