German sportswear giant Adidas confirmed its outlook for 2019 and boasted that it was on track for another record year.
Adidas said growth may accelerate before the end of the year and at a press conference on the results, chief executive officer Kasper Rorsted told journalists it would most likely lie around 6.5 percent for the full year.
The company suggested that fourth-quarter numbers may be even better, having resolved various challenges that have weighed on accounts for the first part of the year. These include returning European markets to growth, the end of the supply chain problems and the resulting air freight costs. These had likely cost the company between 200 million euros and 400 million euros, Rorsted said, but would have no significant impact on the full-year results.
Despite some pressure on margins due to increased operating costs in the third quarter, the company predicts net income will rise between 10 and 14 percent by the end of the year, to between 1.88 and 1.95 billion euros.
“[We] remain confident about a significant top-line acceleration during the fourth quarter,” chief executive officer Kasper Rorsted said in a statement. “2019 will be a record year, despite some challenges.” The company is also on track to achieve its 2020 target of a compound annual growth rate in net income of between 22 and 24 percent, he said.
JP Morgan analyst Melanie Flouquet noted that the company had performed slightly better than expected and Royal Bank of Canada’s Piral Dadhania reported that Adidas was “well positioned,” noting that margins should continue to improve. Adidas shares fell on the news, but as DZ Bank analyst Herbert Sturm explained, there were no big surprises to stimulate for the market. The fact that the company had simply confirmed guidance once again was seen as disappointing.
Sales were up in all sectors, with 8 percent growth in the sports performance sector and 4 percent growth in sports-inspired products. Apparel revenues accelerated 13 percent while footwear slowed. Adidas’ chief financial officer Harm Ohlmeyer explained that this was less about sales trends and more about logistics.
Apparel had risen so fast because supply chain problems had been mitigated. Footwear sales rose 1 percent compared to 8 percent the previous year. Executives blamed the company’s biggest ever launch of Kanye West’s Yeezy footwear line in 2018.
The Yeezy drops were also blamed for how badly Adidas’ online sales fared compared to the previous year. They rose 14 percent versus 76 percent the same quarter in 2018.
In terms of territories, “all contributed to our growth profile, for the first time in a long time,” Rorsted boasted. Adidas reported 13 percent sales growth in Russia and other Eastern European countries. There was also growth of 10 percent in North America and Adidas finally saw European numbers swing positive with growth of 3 percent.
The newfound success in Europe was being driven by a number of factors, Rorsted explained. That includes the success of Adidas Originals collections, new stores such as recently opened flagships in London and Paris, new franchises such as the one signed this summer with the Arsenal soccer team, as well as events like the ongoing UEFA European soccer club championships, the most watched annual sporting competition on the planet, with television audiences of around 3.7 billion. The final is in July 2020.
In the quarter, the company also reported 8 percent growth in Asia-Pacific, with 11 percent in greater China. While unrest in Hong Kong had impacted Adidas’ stores in that city, it had not had significant effect on the company overall. “We do less than 1 percent of our business in Hong Kong,” Rorsted pointed out.
Trade tensions between China and the U.S. were also kept at bay because although 23 percent of Adidas’ business is done in China, 19 percent of manufacturing capacity also happens there. “Tariffs will have a different impact depending on your manufacturing landscape,” Rorsted said. “That’s why for us it has less impact — because we have more than 30 percent of our manufacturing capacity in countries like Vietnam.”
Rorsted and Ohlmeyer voiced concern about a currency war starting, although Ohlmeyer warned that if tariffs remained high in the longer term, there would likely be “slight price increases” in the sector. Adidas has not raised prices for the fourth quarter yet, Ohlmeyer confirmed, but “we are watching it. And if they [the tariffs] are here to stay, then of course the industry will react,” he warned. Price increases would be “the most likely scenario.” Should Adidas, the second largest sporting goods manufacturer in the world, raise prices, it would have a significant knock-on effect on the sector.
Reebok was driven by double-digit increases in Russia and North America, and growth in the sports and training segments.
The company’s operating costs rose in the quarter due to marketing expenses, attempts to better balance costs throughout the year, and expenses incurred in improving “direct to consumer” and online sales. As Rorsted pointed out, Adidas has one of the highest marketing investments relative to revenue in the sector. “And we will continue this,” he added.