The pandemic caused Adidas sales to fall 34 percent in the second quarter to 3.579 billion euros. Despite this, the German sportswear giant also received its first credit rating from international bond ratings agencies. On Thursday morning, the company said that U.S.-based agencies S&P Global Ratings and Moody’s had given it an A+ and A2 rating, respectively.
Asked whether this meant that Adidas could finally step away from a German-government-backed syndicated loan, from which the company drew 500 million euros in July, chief financial officer Harm Ohlmeyer said there was no set schedule to do anything like that. Nor was there a set plan to launch a previously rumored multi-billion-euro bond.
“[Getting a rating] is not something you can do in a week,” Ohlmeyer explained. “We had a situation at the end of March, with not a lot of cash inflow and we were not a rated company. That’s a fact. If we had that rating four months ago…we probably could have gone to the capital market earlier.”
Even though Adidas has successfully issued bonds before in 2016, it was one of the few German stock market-listed companies that did not have an agency rating. Another German brand, Hugo Boss, also said this week it was looking into getting a rating.
“Right now, there is no timing to replace the [state-backed] loan,” Ohlmeyer said. But, he added, “this [rating] gives us opportunities to access the capital market and that’s what we are looking into. But right now, we go step by step.”
Around 80 percent of Adidas’ stores were closed during the second quarter, versus only 8 percent currently. The company reported an operating loss of 333 million euros in the second quarter. At the same time last year, it had made a profit of 643 million euros.
This saw the German sportswear giant finishing the first half of the year 268 million euros in the red, having seen sales drop 26.9 percent to 8.33 billion euros. Last year at the same time, Adidas had sales of 11.39 billion euros and an operating profit of 1.52 billion euros.
Nonetheless, the German sportswear brand expressed cautious optimism about developments for the rest of the year.
Although the company can’t give full-year guidance because of ongoing uncertainties around the coronavirus, it did predict improvements. “From everything we know today, our recovery will continue in Q3,” chief executive officer Kasper Rorsted said in a statement. “We are now seeing the light at the end of the tunnel.” Last week, Rorsted’s contract was extended a further five years by Adidas’ board.
July had already seen a steady improvement on June and although Adidas predicted another decline in sales for the third quarter, it should only be in mid-to-high-single digits. Numbers will remain below prior-year figures for the third quarter, Rorsted said, but operating profits should return to positive, flipping to between 600 million and 700 million in the black.
“That implies an almost a one-billion-euro improvement from the second quarter,” the ceo noted. “We have never seen such a dramatic profit development from one quarter to another.”
Market analysts from the likes of Goldman Sachs, JPMorgan, Warburg Research and Baader Bank agreed with the positive prognosis, saying that the losses were much as expected and that they too expected sequential growth over the next six months.
Rorsted also emphasized the sportswear firm’s success with e-commerce in the second quarter. Overall, the company saw 93 percent growth in this area during the second quarter, whether through its own or partner web sites, like Zalando and JD Sport. E-commerce accounted for a third of all of Adidas’ sales in the second quarter.
Online sales surged at a triple-digit-rate at the height of the global lockdown in April and May. Now that physical stores are open again, that acceleration has slowed, resuming double-digit growth.
Additionally, use of personal Adidas-linked training apps tripled, sales via Adidas’ own app quadrupled and 60 percent of online sales came from the brand’s preferential shopping service, Creators Club. The company concedes it needs to work further on its own logistics but predicts e-commerce sales will top 4 billion euros by the end of the year. That would be a rise of over a billion euros, compared to 2019.
As with other retailers, Adidas sales in the second quarter started to pick up first in mainland China, as the country was among the first nations to emerge from lockdown. Chinese sales were flat for the second quarter. But negatives in other neighboring countries meant that Asia-Pacific sales, currency adjusted, were down 15 percent to 1.57 billion euros.
Sales in Europe, totaling 844 million euros, were down 40.2 percent and North American sales were down 38.2 percent to 763 million euros. Germany returned to growth in July, Rorsted said, adding that “we are certain that North America will recover eventually,”
Reebok fared worse over the quarter, with sales sinking 42.3 percent to 228 million. Adidas, which is by far the bigger brand, lost 32.9 percent of its sales over the quarter to hit 3.29 billion euros. This reflects Reebok’s “higher exposure to the U.S. market,” the company noted. Last year at the same time, the company had net sales of 5 billion euros of Adidas products and 406 million euros of Reebok’s.
At the press conference discussing the result, the senior executives were asked again about long-running rumors that the Reebok brand was for sale. But cfo Ohlmeyer would only give an ambiguous statement, reiterating that COVID-19-related costs had not damaged Reebok’s long-term viability and that the company was “committed to this industry.”
During the press conference, Rorsted also spoke about recent controversies around diversity and racism inside the company, which employs more than 59,000 staff worldwide. These resulted in the resignation of chief human resources officer, Karen Parkin at the end of June. Rorsted has taken responsibility for human resources in the interim and is now personally leading the effort to improve the situation at Adidas. This includes a raft of measures such as community investments, scholarships and getting more Black and Latinx people on staff.
“In America, we have not made enough progress with the Black community,” Rorsted conceded. “And we are taking that very seriously. We have built a strong plan and I’ve had many conversations with people across the world, almost every single day since I’ve taken over HR. It has been a humbling experience for me. The company and I are deeply committed to correcting this situation and building a company everybody can be proud of.”