German sportswear group Adidas has reported a loss for the second quarter as net sales tumbled by more than a third amid temporary store closures related to the Covid-19 pandemic.
In a trading update today (6 August), Adidas said it incurred a net loss from continuing operations of EUR306m (US$362.2m) for the three months to 30 June, compared to income of EUR462m in the prior-year period.
Operating loss totalled EUR333m, compared to a profit of EUR643m last time, resulting in a negative operating margin of 9.3%. Adidas said several coronavirus-related charges impacted operating profit development in the period, including an increase in inventory and bad debt allowances as well as the impairment of retail stores and the Reebok trademark, with a combined negative impact of around EUR250m.
Meanwhile, second quarter revenues decreased 34% in currency-neutral terms. In Euro terms, revenues decreased 35% to EUR3.58bn from EUR5.51bn last year.
At the high point of the worldwide lockdown measures in April, almost all stores outside of Asia-Pacific or more than 70% of the company’s global store fleet were closed.
Sales at the company’s namesake brand fell 33%, while Reebok revenues were down 42%, reflecting the brand’s higher exposure to the US market.
At the same time, the company experienced what it called exceptional growth in online sales, which accounted for more than one-third of its total business, through its own as well as partners’ e-commerce platforms. Sales through the company’s own e-commerce channel surged 93% during the quarter.
While sales in Greater China were flat for the second quarter, reflecting double-digit growth in May and June, currency-neutral sales in Asia-Pacific were down 16% in the period. The pandemic weighed on the second quarter sales developments most severely in Latin America (-64%) and Emerging Markets (-60%), but also had a significant negative impact in Europe (-40%), North America (-38%) and Russia/CIS (-34%).
Gross margin decreased 2.4 percentage points to 51% from 53.5% a year ago. While a more favourable channel and market mix as well as lower sourcing costs had a positive effect on gross margin, a less favourable pricing mix due to increased promotional activity as well as negative currency fluctuations weighed on development. In addition, an increase in inventory allowances had a negative impact on the gross profit development in a high double-digit-million Euro amount.
Despite store traffic remaining below prior year levels, Adidas has registered an increase in conversion rates, as consumers that visit stores tend to have a clearer buying intent.
For the first half of 2020, revenues decreased 26% on a currency-neutral basis and 27% in euro terms to EUR8.3bn from EUR11.39bn in the prior-year period. From a brand perspective, currency-neutral revenues for brand adidas decreased 26%, while Reebok revenues declined 27%.
Gross margin was down 3.4 percentage points to 50.1% as a more favourable channel as well as lower sourcing costs were offset by a less favourable pricing mix due to increased promotional activity and negative currency fluctuations.
During the six-month period, Adidas incurred a net loss from continuing operations of EUR286m, compared to income of EUR1.09bn last year. Operating loss was EUR268m.
The company said several coronavirus-related charges significantly impacted o perating profit development in the period. These mainly consisted of product takebacks in Greater China, purchase order cancellations, the increase in inventory and bad debt allowances as well as the impairment of retail stores and the Reebok trademark, with a combined negative impact of around EUR500m.
“The past quarter brought unprecedented challenges for our business as large parts of the world were in lockdown,” said Adidas CEO Kasper Rorsted. “We addressed the challenges and went after opportunities, as reflected in our e-com business nearly doubling in Q2. We are now seeing the light at the end of the tunnel as the normalisation in the physical business continues, with the vast majority of our stores being operational again.”
Adidas did not provide for the full year but said it expects its top-line development in the third quarter to improve materially compared to the second quarter, yet to remain below the prior year level.
Specifically, third quarter revenues are forecast to be down at a mid- to high-single-digit rate compared to the prior year. The operating result is anticipated to turn into a profit of between EUR600-EUR700m, reflecting an improvement of around EUR1bn compared to the loss generated during the second quarter.
The anticipated sequential recovery in the third quarter assumes that the company’s global store fleet will be operational throughout the quarter in the absence of any major lockdowns, with traffic in physical stores continuing to gradually improve.
Adidas this week extended the appointment of CEO Kasper Rorsted by another five years.