Adidas warned that its second-quarter revenues could fall by up to 40 percent as up to 70 percent of its store fleet worldwide remains closed due to coronavirus lockdowns.
The German sporting goods giant, reporting net sales in Q1 fell 19.2 percent, dispensed with full-year guidance and said it could only give a quarterly prognosis through 2020 given the extent of business disruption.
“The assumption is that we will be able to start opening stores by the end of Q2,” chief executive officer Kasper Rorsted told a press briefing on Monday, noting the company already lost approximately 1 billion euros in sales in April. “Our results for the first quarter speak to the serious challenges that the global outbreak of the coronavirus poses even for healthy companies.”
This time last year, Adidas was boasting about net income of 631 million euros. This year, the number dwindled by 97 percent to just 20 million.
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As expected, numbers were down in almost every column. Net sales came to 4.75 billion euros compared to 5.88 billion euros in the same quarter last year.
Net sales for the Adidas brand dropped by 20.3 percent to 4.27 billion euros, while Reebok’s fell 11.9 percent to 372 million. This is because Adidas does more business in China than Reebok, the company explained. Those tendencies are likely to be reversed next quarter as China opens up again.
EBITDA — or earnings before interest, taxes, depreciation and amortization — fell by 66 percent to 393 million euros compared to 1.16 billion euros in the first quarter of 2019.
Adidas’ operating profit plummeted by 93 percent to 65 million euros; in 2019, it was 875 million euros. Although sector analysts had predicted gloomy numbers, results were worse than many had suggested. At the same time, analysts from the likes of Warburg Research, Jefferies and Berenberg all expressed confidence in the German sportswear giant this week, saying they expected better results in the second half of the year and a return to growth in 2021. Many also suggested that demand for sportswear would continue and even increase significantly once lockdown measures are eased.
“People are thinking about health more than ever,” Rorsted said during the press briefing. “The underlying strengths in the sporting goods industry remain because of the focus on health.”
Rorsted and chief financial officer Harm Ohlmeyer also explained how they would tackle the next few months with a three-phase plan. Measures include ensuring financial liquidity by cutting costs where possible, understanding consumers’ post-lockdown mind-set, relocating inventory and learning from China, as the first major market to come out of lockdown, then applying those lessons to the rest of the world.
The biggest fall in sales — 44.9 percent in currency neutral terms — was in the Asia-Pacific region and most of this could be attributed to China going into lockdown, the company said. There, Adidas had sold 1.18 billion euros’ worth of product so far this year, compared to 2.13 billion euros at the beginning of 2019. Business in China made up 23 percent of Adidas’ sales last year and the company said it was seeing signs of recovery as the lockdown eases there.
The first two months of the year — before COVID-19 started to have an impact — had been positive for Adidas with 8 percent growth in revenues in January and February in all territories excluding Asia-Pacific. Most had seen double-digit growth in those two months. Product launches, like the collaboration with Beyoncé on her Ivy Park collection and Kanye West’s Yeezy line, had sold out, Rorsted noted.
By the end of the first quarter, only two territories were still showing growth. North America recorded an increase of just 0.8 percent, in currency neutral terms, to hit 1.2 billion euros, and in the far smaller market of Russia, net sales grew 9 percent to 154 million euros.
The other bright spot came in e-commerce, which saw growth of 35 percent in currency neutral terms. “It is the only store that is consistently open and it is more important than ever,” Rorsted said, stressing that the whole company was accelerating its digital transformation thanks to the pandemic.
E-commerce was rising quickly toward the end of the quarter, growing 55 percent, currency neutral, in March alone, the company reported. Although customers were slow to return to shopping in physical stores, China and South Korea had seen a faster recovery via online purchases. Adidas doesn’t specify exactly how much money it makes in online sales, but Rorsted has previously told journalists that the company wanted to achieve online sales worth around 4 billion euros, or about 10 percent of the company’s overall sales, by 2020.
That number could go even higher. More than half of Adidas’ marketing efforts are now focused on digital, and resources from different parts of the company have been shifted to work on social media and e-commerce, Rorsted said, noting that hundreds of thousands of users had signed on for Adidas’ workout plans and that it boasted 150 million views for the Hometeam campaign.
By segment, footwear sales dropped 24 percent in currency-neutral terms to 2.65 billion euros and apparel went down 17 percent to 1.8 billion euros. The much smaller segment of hardware was the only one to rise, with gains of 15 percent adding up to 295 million euros. There were record sales of yoga mats, Rorsted reported. Casual indoor shoes, like the slip-on Adilettes, were also popular.
Two weeks ago, Adidas had secured a syndicated revolving loan of 3 billion euros, most of which came from the German government’s development bank, the KfW, with the rest from a consortium of private banks, including Bank of America, Citibank and Deutsche Bank.
Analysts praised Adidas for taking the loan, saying the added liquidity would help recovery and stability. The company has already spent an estimated 1.4 billion euros in this first quarter on operating costs. Management indicated it is trying to avoid layoffs and that those costs involved products ordered three or four months ago.
Unconfirmed reports in the German media had suggested that Adidas may try to replace the government-backed loan, which runs for 15 months, with a multibillion-euro bond. The company would have needed an agency credit rating to do that and it doesn’t currently have one because, as Ohlmeyer explained, Adidas is very rarely in the bond market. “We want to pay it [the loan] back as quickly as possible,” Rorsted told journalists, but replacing the credit with a bond was not a priority right now.