Adidas Stan Smith

Apparel is giving footwear a run for its money at Adidas, which in the fourth quarter saw a balanced performance from both segments after three consecutive years of footwear keeping the lead.

Adidas, whose strategy is based on building the brand from the feet up, has been caught by the shift in trends. Failure to meet a strong increase in demand for midpriced apparel due to supply-chain shortages is expected to negatively impact the company’s performance this year, particularly in North America during the first half, the company said Wednesday.

“The volume grew quicker than anticipated and we didn’t respond quickly enough to that demand signal,” Adidas chief executive officer Kasper Rørsted said during a during a press conference at the new Halftime building at the Adidas World of Sports headquarters in Germany. The executive removed Gil Steyaert as head of the Adidas global supply chain last month after just over a year in the role, and replaced him with Martin Shankland.

With sales stalling in Western Europe a market that represents one-third of Adidas’ total business the German sportswear giant said it expects the first half of 2019 to be slow. Other challenges include currency headwinds and a slowdown in key lifestyle accounts, with sales on its Originals shoe “normalizing from very, very high growth rates.”

Adidas for its full-year 2018 performance nonetheless touted 12 months of record sales and the highest margin in the company’s history.

“We’ve added 5 billion euros to our business in the last three years. That’s more than the total size of our neighbor,” Rørsted said, alluding to the firm’s historic sparring partner Puma, which is also located in Herzogenaurach, Germany. “It’s more than the total size of Under Armour,” he added.

Though the firm’s investments remain heavily focused on sports, its DNA, “the trend toward ath-leisure will continue, fueled by retro,” Rørsted predicted. “We want to be the best sports company in the world, not the best fashion company.”

Sales of the Stan Smith and Superstar business were down by 500 million euros in 2018 versus the prior year, but the executive called it a natural evolution. “Franchises go up and go down,” he said, citing among launches the Ultraboost 19, part of the Boost franchise, which in itself is “worth more than a billion euros today.”

“We have the big advantage of being a 70-year-old company. We have the deepest archives…we’ve been in all kinds of sports, and we’re taking those shoes and reinventing them,” he said.

Adidas AG reported net income from continuing operations, excluding a negative onetime tax impact, was up 29 percent to 93 million euros in the fourth quarter, with sales rising 3.5 percent to 5.23 billion euros, coming off a high base.

Net income for full-year 2018 rose 19.5 percent to 1.70 billion euros, with revenues rising 3.3 percent to 21.91 billion euros, driven by double-digit growth in North America, China and e-commerce. The company’s operating margin increased by 110 basis points year-over-year to 10.8 percent.

In terms of outlook, the German activewear giant said it expects top-line growth of between 5 and 8 percent in 2019. Its operating margin is expected to increase between 0.5 and 0.7 percentage points to a level of between 11.3 and 11.5 percent, versus 10.8 percent in 2018.

Adidas proposed a dividend of 3.35 euros a share for 2018, representing roughly 700 million euros, to be approved at the annual shareholders’ meeting, in line with last year’s payout.

On the sustainable front, meanwhile, five million pairs of shoes made from ocean plastic were sold in 2018, with around 11 million pairs expected to sell in 2019. “The one big topic at Davos [at the World Economic Forum] was plastic and the huge negative impact it has on society,” Rørsted said.

In terms of infrastructure, the company over the next few months will be moving into its stadiumlike Arena office building on its home base, designed by Behnisch Architekten and measuring around 540,000 square feet, or “40 football fields,” to complete “what we think is the coolest sports campus with, for the first time in 20 years, every Adidas employee on a single campus.”

The firm is also doubling the size of its North America headquarters in Portland, Ore., to be completed over the next two years, and in January moved into a new complex in China to accommodate all of its local employees.

On product partnerships, meanwhile, Rørsted talked about Kanye West’s contribution to big-volume launches, “making the commercial aspect of our Yeezy product more available.”

“In a normal year, we’ll probably see 20 to 30 launches of Yeezy products, three years ago we did two or three, so we changed the model, but it does not change the fact that we will continue to make very scarce launches for certain shoes and sometimes, we’ll suddenly have a different shoe,” the executive said, adding that the most impactful Yeezy launch so far was in September for the Yeezy Boost 350 V2, “in the space of 24 hours” and “almost only digital.”

Rørsted said the winding down of its licensing agreement with Dick’s Sporting Goods — the “fastest growing strategic channel in the U.S.” for Reebok, which the company hopes to return to sustainable growth and profit by 2020 — would only impact product codeveloped with the retailer under the deal. “That does not change the fact that you can continue to buy Reebok product in the Dick’s Sporting Goods stores,” he said, adding the loss is “not substantial.”