Currency effects got sequentially worse for Adidas throughout the year

Currency effects got sequentially worse for Adidas throughout the year

Sporting goods giant Adidas says it could potentially change its business model in order to help offset significant currency issues affecting its top line and full-year guidance. This, it says, could include looking at opportunities for local sourcing.

Adidas shares dipped 0.78% yesterday (5 March) after it warned its 2014 results would be significantly impacted by currency movements.

In its fourth-quarter alone, negative currency effects cost the group nine percentage points on the top line. Group revenues grew 3% to EUR3.48bn, but on a currency-neutral basis were up 12%.

As a result, for fiscal 2014, Adidas said it expects group results to be hit significantly by weakening emerging market currencies in Russia and Argentina. This despite sales being helped by major sporting events such as the football World Cup, for which Adidas is the official partner.

CFO Robin Stalker said the impact of currency effects got sequentially worse for the group throughout the year, and that he expects these "uncontrollable and negative effects" to continue into 2014.

"From today's perspective, looking into 2014...the picture looks just as bleak. Taking all this into account, if things stay as they are we will see at least the same kind of translation negative as we saw in 2013. A mid-single-digit percentage point negative impact on growth.

"On top of that we will see additional gross margin pressures given the sharp weakening of currencies already present in 2014," he told analysts on the firm's earnings call.

Taking this into account, the effects were reflected in the group's fiscal 2014 guidance for sales to increase at a high-single-digit rate and net income to be between EUR830m and EUR930m. The latter falls short of Bloomberg analyst estimates of EUR1bn. Operating margin is expected to be at a level of between 8.5% and 9%.

Business model changes
"While on aggregate there is very little we can do in the short term to compensate for these massive currency issues, rest assured we will diligently pursue measures to offset this over time," Stalker said.

"For example, where it makes commercial sense and the consumer environment can bear it, we will selectively increase prices. In certain markets where currency pressures persist, we may choose to strategically prioritise our business or change our business model. And, in other cases, we may choose to absorb these measures for a period of time to protect and nurture our long-term credentials."

These changes in the business model, he said, will involve Adidas looking at each of its operating units and questioning its investments.

"What do we invest in? Should we invest in this?...It will involve looking at the mix of product we want to sell, maybe there are opportunities for local sourcing, where we actually buy the product from, types of distribution, and of course we continue to look at what can we do to become even more efficient on our cost base."

These measures, he said will help Adidas improve its business model and competitiveness in the market.

Despite the pressures in 2013, Stalker said that operationally it had been a good year for the group, with progress on several key Route 2015 strategic initiatives.

The five-year Route 2015 strategic plan, unveiled in 2010, forecasts sales of EUR17bn (US$23.1bn) in 2015 and an operating margin of 11%. It is designed to "prepare and transform the group for long-term sustainable growth and success".

Nonetheless, he added: "While this is extremely encouraging as we stay diligent and focused on delivering long-term sustainable growth and margin improvements, the foreign exchange and macroeconomic environment has, and will, unfortunately continue to leave its mark on our financial statement."

Russian unrest
As a result of the negative effects of the weakening Russian rouble on group results, Adidas said it was reviewing its store opening strategy in that region.

Currency isn't the only issue Adidas has had in Russia, however. In September last year, the company blamed unexpected constraints at its distribution facility in Chekhov for delaying new product flow to stores. As a result it cut its full-year guidance.

On the call today, however, CEO Herbert Hainer referred to the escalating political situation in Russia and the effect on operations in the region, which he suggested at the present time was minimal.

"Our warehouses are fully functioning and we have product in over 1,000 stores in Russia. How the first quarter will compare to last I can't give you details. 2014 started well in Russia and so far we don't see any negative impact from the political situation. Obviously it would be better if it could be solved peacefully, because as long as it goes on the consumer gets nervous, but we have not seen an impact so far."

Hainer said the company was "monitoring the situation carefully" and is in daily contact with management in Russia.

"We look at our store base in case the conflict gets bigger. We have less than 10% of our Russian business in Ukraine. All stores are open but we are in daily contact [with management] and we could definitely re-route products relatively fast and we are preparing for that. But, on the other hand, we obviously want to do business there and we haven't seen anything negative from the people there."

Concluding his remarks, Hainer offered an upbeat view of the group's overall performance.

"We may not have reached all our ambitious targets that we had originally set ourselves but we are proud we ended on a high note in the fourth quarter and we have every intention to strive for the same again in 2014."