Adidas said on Thursday it was mulling a sale of its struggling golf brands after the continued poor performance of its TaylorMade-Adidas Golf division impacted profitability in the second quarter.
The German activewear giant posted a net profit of 146 million euros, or $161.5 million, in the three months ended June 30, up 1.4 percent year-over-year.
Group sales increased 14.9 percent to 3.91 billion euros, or $4.32 billion. Stripping out the impact of currency fluctuations, revenues increased 5 percent, driven by continued momentum at Adidas and Reebok.
Gross margin, a key indicator of profitability, declined 90 basis points in the quarter to 48.3 percent, mainly due to lower margins at TaylorMade-Adidas Golf, where currency-neutral revenues fell 26 percent, prompting increased markdown activity.
“As a reaction to the persisting challenges at TaylorMade-Adidas Golf, the Adidas Group has initiated a major turnaround plan for its golf business,” the company said in a statement.
“In addition, the Adidas Group has engaged with an investment bank for the purpose of analyzing future options for the company’s golf business, in particular the Adams and Ashworth brands,” it added.
Adidas chief executive officer Herbert Hainer, who came under pressure from investors last year after a string of profit warnings, said he was pleased with the performance in the second quarter, which came against tough comparatives following record sales linked to last year’s soccer World Cup.
He credited the company’s five-year growth plan, unveiled in March, with delivering early positive results and said he remained upbeat for the full year.
“I am convinced that 2015 will be a successful year for the Adidas Group. The performance of our core brands, Adidas and Reebok, are exceeding our initial expectations,” he said in a conference call.
“TaylorMade-Adidas Golf is only a small part of our business, therefore the weaker-than-expected performance of our golf business will not put the group’s top- and bottom-line guidance for 2015 at risk,” he added.
Adidas confirmed its forecasts for 2015, saying group sales were expected to increase at a midsingle-digit rate on a currency-neutral basis, while net income is set to rise by 7 to 10 percent. Gross margin is set to come in between 47.5 and 48.5 percent, versus 47.6 percent in 2014.
Combined sales for the Adidas and Reebok brands in currency-neutral terms were up by double-digit rates in Western Europe, Greater China and the Middle East, Africa and Asia division.
Revenues at Adidas rose 8 percent in the quarter in organic terms, driven by double-digit sales increases at Adidas Originals and Adidas Neo.
“The second-quarter results now clearly show that our efforts and our investment in our home territory are paying off, and we expected this momentum to continue throughout the second half of the year. As a result, our business in Western Europe is projected now to grow in the double-digit rate in 2015,” Hainer said.
“We expect the same for our business in China, where we clearly don’t see an end of our growth story despite the recent economic challenges. Quite the contrary, more and more Chinese consumers are attracted by sports and a sporting lifestyle, and they are willing to spend on strong international brands such as ours,” he added.
Adidas on Thursday unveiled the latest installment in its Sport 15 communications campaign, a 90-second film called “Create Your Own Game” featuring soccer stars Gareth Bale, Thomas Müller, Mesut Özil, James Rodriguez and Lionel Messi, as well as NBA star Ricky Rubio.
Hainer said the company, which already allows customers to customize its sneakers via its Web site, was working on installing production facilities directly into stores within two years to allow consumers to make their own shoes.
“We are not there yet, but this is definitely the target where we want to go, that we can make shoes for the individual needs of the consumer who comes to us – including the shape of the foot,” he explained.
Reebok posted a 6 percent revenue increase with strong increases in the training, running and studio categories.
The Adidas Group, which this week completed the sale of its Rockport footwear segment, has mandated Guggenheim Partners to explore options for its golf business after recent attempts to kick-start the division failed to yield the hoped-for results. Its last two key product launches were met with a lukewarm response, Hainer noted.
“The current performance has shown that we need to go much deeper in order to bring TaylorMade-Adidas Golf back on track,” he said, reeling off additional steps including better pricing, promotions and trade patterns; lower supply chain and product costs, and “significant” operating overhead savings.
“There is no doubt that we will turn the TaylorMade business around,” Hainer asserted.
The group’s overall net sales on a currency-neutral basis were up 12 percent in Western Europe, 19.3 percent in Greater China and 15.6 percent in MEAA during the second quarter. They fell 0.5 percent in North America.
Adidas chief financial officer Robin Stalker said the strengthening of the dollar against the euro had a negative impact of about 150 million dollars, or $167.6 million, on operating expenses in the first six months of the year. All dollar rates are calculated at average exchange rates for the period in question.
“Obviously in’16, our purchasing will be more expensive, but we’ve got a lot of opportunities still at this early stage to mitigate that with working with our factories on efficiencies, on reengineering product and also obviously considering what opportunities we have for price increases,” he said.
Regarding the 90 basis-point decline in the second-quarter gross margin, he said 50 basis points were due to the underperformance of TaylorMade-Adidas Golf, 20 percent were caused by currency fluctuations and the remaining 20 percent by increases in supply chain costs.
Looking ahead, Hainer said he expects “the digital world” to deliver growth opportunities for athleticwear. Adidas announced late on Wednesday that it has bought Austrian-based health and fitness app-maker Runtastic for an enterprise value of 220 million euros, or $240 million at current exchange.
Hainer justified the hefty price tag by saying Runtastic has been profitable since the start and now counts 70 million registered users.
“This is a company which is growing fast, which is profitable and obviously gives us a lot of possibilities together,” Hainer said. “Definitely we want to get closer to the consumer, to get access to the 70 million consumers. At the end of the day, I am sure these consumers will buy our products.”
Shares in Adidas Group closed down 1.3 percent to 73.48 euros, or $79.91, on the Frankfurt Stock Exchange.