PARIS — Adidas beat expectations with a 10 percent rise in currency-adjusted sales over the second quarter, lifted by the soccer World Cup, and confirmed its full-year outlook.
“We delivered another strong quarter on the back of a successful World Cup activation,” noted Adidas chief executive officer Kasper Rorsted. The executive said the company sold 10 million soccer balls and 8 million jerseys, outpacing the amount of those products sold during the 2014 World Cup and highlighted the importance of the event for reinforcing the brand’s visibility.
“The FIFA world cup was a fantastic opportunity for us to showcase our brand across the world, and when you look upon social media, when you look upon the different measurements, there’s no doubt that our brand was the most visible and the most influential brand in social media throughout the World Cup,” Rorsted told journalists in a conference call.
Advertising in stadiums drove consumers to install the Adidas app on their phones and tablets, bringing the number of downloads to 2.5 million, he added.
Sales totaled 5.26 billion euros over the quarter, a 4 percent rise in euro terms. Gross margin climbed 2.2 percentage points to reach 52.3 percent, thanks to a better pricing and channel mix, Adidas said.
Organic revenue growth of 10 percent beat a consensus estimate of 8 percent, while the gross margin surpassed a consensus estimate of 50.8 percent, RBC Europe said in a research note.
The company posted 16 percent growth in North America, 15 percent in Latin America and 19 percent in Asia-Pacific, driven by a 27 percent increase in Greater China.
Sales were fueled by the Adidas brand, which posted a 12 percent rise, with double-digit growth in the sport performance activity, as well as in training, running and football categories. Reebok brand posted a 3 percent decline, as growth in classics shoes was weighed down by a decrease in sales from training and running activities.
Adidas is aiming for sales to climb at around 10 percent on a currency-neutral basis for the full year, lifted by double-digit growth in North America and Asia-Pacific.
“This release was reassuring,” said analysts at Raymond James.
“The main uncertainties were related more to top-line momentum than to margin expansion as the company’s challenge in some markets was to successfully transition from the performance of two stunning lifestyle footwear franchises [Stan Smith, Superstar] to a set of franchises,” they said.
Executives noted models like the Stan Smith and Superstar are following different growth trajectories than more clunky models, which are a rising trend.
The Stan Smith and Superstar will “continue to be around probably forever, they’ll go a bit up and a bit down — right now they are going down,” Rorsted said. The executive characterized the overall trend of those shoe models as “more stable” thanks to their appeal to a broad range of consumers — from the very young to the more “senior.”
Meanwhile clunky models and “dad” shoes are the newest trend at the moment, which likely have shorter life cycles of between one and two years, he explained, noting the challenge is to spot the trend and make the shoes at a faster pace than more ‘normal’ models.
“You’re seeing these life cycles changing much more rapidly,” he said, predicting they will last for a shorter period.
Meanwhile, a more minimalistic model, the Continental 80 sneaker has been popular with a wide range of ages.
“You’re gonna have those two trends in parallel but with very different life cycles…both drive different levels of brand heat,” he said.
The company can produce a new shoe model in about six months, thanks in part to two “speed factories” — one in Germany and Atlanta.
Still, high levels of volatility mean the company might not always hit the right product, he noted.
“We have to get most of them right, we can’t expect to get all of them right,” he said.
While fast growth in North American, China and on the Internet are driving business, Western Europe stood out as a laggard, with flat year-over-year sales performance, following three previous years of an average of 15 percent growth. The company recently reshuffled its management team in the region and is focusing on restructuring distribution there.
Rorsted declined to further expand on the difficulties there, except to say that when it came to launching new products in the region, “not all of our new products have been equally successful.”
The company attributed an increase in profitability — despite a significant increase in marketing investments — to the “scalability” of its model.
“You start seeing the first signs of scalability in our model,” Rorsted said. He predicted margins will continue to improve, citing digital expansion, increased standardization and more shared services in the business.
Executives highlighted a return to growth in North America for Reebok, where sales rose 6 percent, despite a large number of store closures, and margin improvement. The company’s turnaround efforts resulted in “very strong progress,” said Rorsted, who confirmed the label should return to profitability by 2020.
He added the company has been positioning the brand in the fitness category, noting consumers had been unclear whether it fit into the fashion category. A partnership with Victoria Beckham will result in new products for the brand later this year and next year.
Adidas has been largely unaffected by the trade war between the U.S. and China, except for the decline in the Chinese currency. Executives said they hold high hopes for the Chinese market, where sports activities are becoming increasingly popular.
“We don’t think the Chinese opportunity is coming to an end,” said Rorsted, citing the country’s expanding middle class.
Adidas confirmed full year guidance of operating margin of between 10.3 percent and 10.5 percent, which would be the highest level in the history of the company, executives said.