“We want to have a profitable Reebok by 2020. We have set targets we are confident we will reach,” Kasper Rorsted, chief executive officer of the German sportswear giant told journalists during a press briefing on Thursday. He also quashed rumors that basketball deity Shaquille O’Neal was considering buying Reebok.
Adidas reported net income from continuing operations rose 10.3 percent to 462 million euros in the second quarter. Gross profit margin — a key indicator of profitability — inched up 1.2 percentage points to 53.5 percent.
Revenues increased 4 percent on a currency-neutral basis in the first half of the year, and the company said it expects sales to increase between 5 and 8 percent in the second half.
With double-digit increases in both North and South America, Reebok saw revenue rise 3 percent in the second quarter — versus a 5 percent in the first. This was driven in part by the popularity of Reebok’s Classics range, the company said. Reebok’s half-yearly revenues remain negative though, sitting at around minus-2 percent.
Online sales advanced 37 percent over the quarter, across all regions. “E-comm has been, and will continue to be, a cornerstone in our business model,” Rorsted said. The company recently extended its premium membership program, Creators Club, into Germany and the U.K. and Rorsted noted the program, which offers exclusive releases and invitations, now has 50 million members. Adidas Live is now available in 30 countries, he added.
Adidas reported a 6 percent increase in revenues in North America and boasted that this pace would quicken as supply chain challenges there get worked out. At one stage, products had to be air-freighted to the U.S. at short notice. Although the company wouldn’t reveal exactly how much this had cost, chief financial officer Harm Ohlmeyer said it had weighed upon gross margin numbers for North America.
“That’s why you are seeing slower growth in North America than normal,” Rorsted said. There would likely be echoes of the supply chain problems felt in the third, and possibly even fourth quarter, too, he noted. “But the situation will be sorted out by the end of the year,” he noted.
Asia also continued to boost Adidas’ coffers, with 8 percent growth there headlined by healthy increases in Chinese revenues of 14 percent. Last quarter, this was 16 percent. Rorsted noted that Adidas now does about a quarter of its business in China and sources around a fifth of its product from there — even though the firm recently moved some production into Cambodia and Vietnam.
In May this year, Adidas was one of 170 footwear firms that signed a letter to U.S. President Donald Trump, asking him to reconsider tariffs on shoes from China. On Thursday, Rorsted addressed trade tensions between the two economic superpowers.
“We have consistently said we are less concerned about taxes,” Rorsted explained. While about 45 percent of Adidas’ business is done in the U.S. and China, only a minimal amount of Adidas product made in China is imported into the U.S. “What is much more severe — and that’s something we saw this week — is if we start having a currency war. That’s going to be a situation where everybody will lose.”
If the Chinese economy slows, or the Chinese currency devalues, that would impact Adidas — and any other company that does business there, Rorsted said. “There are still a lot of upsides to the Chinese market, the long-term opportunities are still there. Which is why we continue to be very bullish on China.”
Other territories did not fare as well. Income in the European market remained flat but Rorsted saw this as a success. This territory has been in decline for several quarters, but was now back to neutral, he said. Adidas believes Europe should be back to growth by the end of the year.
Sales in Russia also declined but this was to be expected as last year at this time, the country had been hosting the soccer World Cup. The lack of a major sporting event also explained a decline of 2 percent in Adidas’ sports performance products.
Investors frowned on the results. By midday in Europe, Adidas shares had lost around 6 percent in value, sitting on 268.85 euros. The previous day they had closed at 273.55. Analyst Julie Zhuang from Swiss bank UBS explained that this was because Adidas was expected to achieve at the upper end of guidance, potentially even beyond. Numbers for the second quarter were not bad, Zhuang pointed out, but not good enough to please the market. The fact that the company had simply confirmed guidance was seen as disappointing. Of 27 analysts, the majority classed Adidas shares as neutral on Thursday; only one had a sell recommendation.
Asked why Adidas had not adjusted guidance upwards, despite good numbers in key areas like gross margin, Rorsted explained that the guidance was “prudent and appropriate,” adding that if guidance is changed, it’s usually in the third quarter anyway.
“I am convinced we will see a top line acceleration in the next half,” he added, listing new product launches and events such as the beginning of the UEFA Euro 2020 soccer championship and an earlier Chinese New Year. Analyst Piral Dadhania of Royal Bank of Canada agreed, writing that all signs pointed to sequential growth for Adidas in the last half of 2019.
The outlook for revenue this year is still 23 billion euros, Rorsted concluded, which means that over four years, Adidas has expanded revenue by almost 50 percent, and 7 billion euros.
No doubt, that is something he will be repeating in speeches in Herzogenaurach on Friday, where Adidas will celebrate the official opening of its new Arena building, as well as its 70th anniversary. Celebrity guests such as Pharrell Williams, tennis icon Stan Smith and members of the rap group, Run DMC, are expected to attend.