PARIS — Having ended 2017 on a strong note, Adidas AG said it expects sales growth to slow this year, but profitability to continue increasing as it ramps up its infrastructure and strives to better meet the demands of female consumers.
The German sporting goods maker reported on Wednesday that sales rose 19 percent on a currency-neutral basis to 5.05 billion euros in the fourth quarter, following a 12 percent increase in the third quarter, fueled by Greater China and North America, where it has been swiping market share from its rival Nike.
Operating profit jumped to 132 million euros during the period from 41 million euros during the prior-year period.
However, the company logged a negative onetime tax impact of 76 million euros as a consequence of U.S. tax reform. As a result, Adidas posted a net loss of 41 million euros in the fourth quarter, compared with a loss of 10 million euros a year earlier.
Revenues were up 16 percent in the year as a whole, below the company’s target of 17 to 19 percent sales growth, but its operating margin increased by 120 basis points to 9.8 percent. Adidas expects the margin to rise to 11.5 percent by 2020, up from a previous target of 11 percent.
The company’s shares soared 11.2 percent to close at 187.90 euros on Germany’s blue-chip DAX index, fueled by the upbeat outlook and its announcement the previous day that it plans to buy back up to 3 billion euros’ worth of its shares by 2021, equivalent to 8 percent of its market capitalization.
“We made great progress toward achieving our mission to be the best sports company in the world,” said Kasper Rørsted, chief executive officer of Adidas, noting the contribution of e-commerce, which posted a 57 percent revenue increase in 2017.
Online sales totaled 1.55 billion euros, or around 7 percent of overall revenues, during the period, fueled by the launch of the Adidas app, which was downloaded more than one million times, he said.
The maker of Stan Smith and ZX Flux shoes expects overall revenues to rise 10 percent, when adjusted for currency swings, in 2018. The operating margin is expected to increase to between 10.3 and 10.5 percent.
Rørsted, dressed in a zipped hoodie, jeans and white Superstar sneakers, said Adidas sold 400 million pairs of shoes in 2017, up from 360 million in 2016, and was struggling to keep up with demand.
“You simply come to a point where our warehousing cannot cope with the growth we’ve had,” he said. “We’ve outgrown the infrastructure, whether it’s physical or systems infrastructure. We’re investing heavily to ensure that we are building the infrastructure for the future, but I would say it’s a positive signal.”
Delays in shipments and slow fulfillment of online orders cost Adidas one to two percentage points of growth in the United States in the second half, said Harm Ohlmeyer, chief financial officer of Adidas.
Last year, the company produced more than one million shoes made from plastic trash collected on shore under its partnership with Parley for the Oceans, and another 100,000 pairs using 3-D printing. Rørsted brandished the brand’s new model, the Deerupt, which is being launched in Paris this week.
Adidas’ apparel business, which accounts for 40 percent of revenues, has lagged in comparison, though Rørsted sees plenty of growth potential in the segment as the trend toward casual dressing gathers steam.
The executive said he has mentored three high-potential female leaders in the last year as part of a push to promote more women to senior positions within the company and improve its offering for women, which account for a quarter of its business.
“There’s an increased spending taking place on the female side and I don’t think that we have done a good enough job understanding the trends for the female consumer,” he said.
He also credited the ath-leisure trend with boosting the brand’s profile in North America, where revenues rose 27 percent in currency-neutral terms in 2017.
“I think we understood the ath-leisure part better than maybe some of our competitors do,” Rørsted said. “There’s no doubt that some of the global trends today are coming more out of America than they are out of Europe, and idols like Pharrell Williams…or Kanye West have really helped us.”
Rørsted said Adidas aims to build a 5-billion-euro business in North America by 2020, which would still be only a fraction of the estimated $15 billion that Nike made in the region last year.
Adidas last year completed the disposal of its underperforming TaylorMade golf and CCM Hockey brands. Meanwhile, U.S. revenues at the group’s loss-making Reebok brand were down 15 percent in 2017 as the division closed 39 stores as part of its ongoing turnaround.
Rørsted said Adidas had “stopped the bleeding” at Reebok and was looking forward to further improvements, with a collection designed in collaboration with Victoria Beckham in the pipeline. “We expect growth for the first time in many years in North America in 2018,” he said.
The executive also sees tremendous potential in Greater China, where sales were up 29 percent last year. He noted that the U.S. accounts for 40 percent of the global sporting goods market, with China representing only 10 percent.
“You have four times more people in China than you have in the U.S., and that market is a quarter,” Rørsted said. “If the Chinese spend per capita was the same as the U.S., the market would be 16 times bigger. That is the long-term opportunity in China. It’s a huge Asian opportunity we have ahead of us.”
In order to prepare for growth, the company has consolidated its former four Asia-Pacific markets Greater China, Japan, South Korea and Southeast Asia-Pacific into a single operating segment named Asia-Pacific.
Rørsted said Adidas would not join the British government’s boycott of the soccer World Cup in Russia this year, though he did not expect a major uplift from the event. “The times are gone when one event can make a huge impact on the overall number,” he noted.
Going forward, Rørsted said he expected the company’s bottom-line to grow three to four times faster than the top line. However, he played down the idea that Adidas would equal Nike’s operating profit margin of around 14 percent.
“In the past, we were very often criticized that we were only growing market share, only growing top line. We want to have the right balance of growing market share and growing profitability. That is what we call winning. This is not a two-horse competition that we need to compete against one of our competitors,” he said.
“The important part is we’re doing it in a sustainable way, that we’re doing it in a way that’s not a roller-coaster ride,” Rørsted added. “What we would like to do is be a predictable company to the owners of our company that drives higher margin and higher market share every year and gives a competitive return.”
Piral Dadhania, analyst at RBC Capital Markets, reiterated its “outperform” rating on the stock. “Adidas is well-positioned in an attractive, structural growth sporting goods industry, and we believe it can sustain double-digit growth rates for the next three years, despite exiting a supercycle,” he said in a research note.