Record sales, the highest margin in the company’s history, and strong improvements in net income were not enough to prevent shares in Adidas tumbling this morning (13 March), as the German sporting giant warned shortages in the supply of mid-priced apparel will negatively impact sales growth in the first half of 2019, particularly in North America.
In its full-year earnings release, Adidas said that while the company is experiencing a strong increase in demand for mid-priced apparel, it will not be able to immediately cover this demand in full due to “supply chain shortages.”
The group added growth will be hit during the first half of the year, while the overall impact on the full year is likely to be between 1 and 2 percentage points.
As a result, Adidas forecasts sales to increase at a rate of between 5% and 8% on a currency-neutral basis in 2019, with growth of between 3% and 4% in the first half of 2019, followed by a sequential acceleration during the second half of the year as the company scales supply.
Shares in the company were down by 3.38% this morning.
Its latest set of results saw fourth quarter net income from continuing operations, excluding the negative one-time tax impact recorded in the fourth quarter 2017, increase 29% to EUR93m (US$105m) in the three months to 31 December 2018, compared to EUR72m in 2017.
Gross margin increased 0.5 percentage points to 52.2% from 51.7%, mainly due to the positive impacts from a better product and channel mix as well as lower input costs, which more than offset significant negative currency effects.
Net sales climbed 3.5% to EUR5.23bn from EUR5.06bn last year. On a currency-neutral basis, revenues increased 5% on top of 19% growth in the prior year period. The development reflects an increase of 5% at the group’s namesake.
Double-digit growth in Sport Inspired and in the training category, as well as high-single-digit growth in running, were partly offset by a decline in football revenues reflecting the non-recurrence of sales related to the 2018 FIFA World Cup in the prior year’s quarter. Revenues at the Reebok brand declined 1%, as the double-digit increase in Classics was more than offset by a decline in Sport.
On a currency-neutral basis, the combined sales of the Adidas and Reebok brands continued to grow at double-digit rates in Asia-Pacific (+11%), driven by a 13% increase in Greater China. Sales in North America grew 9%, on top of a 31% increase in the prior year period, driven by continued double-digit growth for the Adidas brand. Currency-neutral revenues in Latin America (-1%) and Russia/CIS (-2%) declined at a low-single-digit rate, while sales in Emerging Markets (-5%) and Europe (-6%) decreased at a mid-single-digit rate.
For the full year, Adidas said net income from continuing operations increased 20% to EUR1.71bn, compared to the EUR1.43bn the year before, excluding US tax reform.
Gross margin increased 1.4 percentage points to 51.8% from 50.4% last year, while net revenues increased 3.3% to $21.9bn from $21.2bn in 2017. Currency-neutral revenues increased by 8%, driven by a 9% improvement at the group’s namesake brand, reflecting a double-digit sales increase in Sport Inspired as well as a high-single-digit gain in Sport Performance. The latter was driven by double-digit sales growth in the training and running categories.
Meanwhile, currency-neutral Reebok brand sales were down 3% versus the prior year, as double-digit sales growth in Classics was offset by a decline in Sport. From a channel perspective, the company’s top line increase was largely driven by double-digit improvements in direct-to-consumer revenues with particularly strong support from e-commerce, where revenues grew 36% to more than EUR2bn in 2018.
From a market segment perspective, the combined sales of the Adidas and Reebok brands continued to expand at strong double-digit rates in both North America and Asia-Pacific, with both regions reporting 15% growth, the latter driven by a 23% increase in Greater China.
Currency-neutral revenues in Latin America were up 6% and sales in Russia/CIS increased 1% as the positive impact from World Cup-related sales offset the significant amount of store closures. While sales in Europe remained flat compared to the prior year level, revenues in Emerging Markets declined 3%.
“We have made great strides toward and are confirming our 2020 financial ambition. Our strategic growth drivers – Adidas North America, China and e-commerce – once again delivered double-digit growth. In 2019, we will continue to drive the execution of ‘Creating the New’ to deliver another year of quality top-line growth and overproportionate bottom-line improvements,” said Adidas CEO Kasper Rorsted.
Looking ahead, for 2019, net income from continuing operations is projected to increase to a level between EUR1.88bn and EUR1.95bn, reflecting an increase of between 10-14% compared to the prior year level of EUR1.71bn.