“adidas‘ Western markets continued to show strong momentum in the second quarter amid heightened macroeconomic uncertainty. With Asia-Pacific returning to growth, markets combined representing more than 85% of our business grew at a double-digit rate,” said Adidas CEO Kasper Rorsted. “
The German company noted the rise in currency-neutral sales came despite a more than EUR300m (US$305.7m) negative impact from macroeconomic constraints, with challenges on both supply and demand. Supply chain constraints as a result of last year’s lockdowns in Vietnam are said to have reduced top-line growth by around EUR200m in the quarter.
In addition, the company’s decision to suspend its operations in Russia reduced revenues by more than EUR100m in the period.
Continued Covid-19-related lockdowns in Greater China also weighed on top-line development. From a channel perspective, the top-line increase was to a similar extent driven by the company’s own direct-to-consumer (DTC) activities as well as increases in wholesale. Within DTC, e-commerce, which now represents more than 20% of the company’s total business, showed double-digit growth reflecting strong product sell-through.
From a category perspective, revenue development was strongest in the company’s strategic growth categories Football, Running and Outdoor, which all grew at strong double-digit rates.
In Euro terms, revenues grew 10% to EU5.6bn in the second quarter, up from EUR5.08bn last year.
Adidas sees strong demand in Western markets
Revenue growth in the second quarter was driven by Western markets despite the impact of last year’s lockdowns in Vietnam and the loss of revenue in Russia/CIS. Nevertheless, currency-neutral sales grew 7% in the region.
Revenues in North America increased 21% during the quarter driven by growth of more than 20% in both DTC and wholesale. Revenues in Latin America increased 37%, while Asia-Pacific returned to growth. Currency-neutral revenues increased 3% in this market despite still being impacted by limited tourism activity in the region. In contrast, the company continued to face a challenging market environment in Greater China, mainly related to the continued broad-based Covid-19-related restrictions. As a result, currency-neutral revenues in the market declined 35% during the three-month period, in line with previous expectations. Excluding Greater China, currency-neutral revenues in the company’s other markets combined grew 14%.
Meanwhile, Adidas reported a decline in net income from continuing operations to EUR360m from EUR387m in the prior-year period. The company said this result was supported by a one-time tax benefit of more than EUR100m due to the reversal of a prior year provision.
Gross margin declined 1.5 percentage points to 50.3% from 51.8% last time. Significantly higher supply chain costs and a less favourable market mix due to the significant sales decline in Greater China weighed on the gross margin development. This could only be partly offset by a higher share of full-price sales, first price increases, and the benefits from currency fluctuations.
“With sports back at centre stage this summer, revenues in our strategic growth categories Football, Running and Outdoor all increased by double digits. However, the macroeconomic environment, particularly in China, remains challenging. The recovery in this market is – due to continued Covid-19-related restrictions – slower than expected. And we have to take into account a potential slowdown in consumer spending in all other markets for the remainder of the year,” Rorsted added.
FY 2022 outlook
Adidas recently adjusted its guidance for FY 2022 due to the slower-than-expected recovery in Greater China since the start of the third quarter resulting from continued widespread Covid-related restrictions.
The company now expects currency-neutral revenues for the total company to grow at a mid- to high-single-digit rate in 2022 (previously: at the lower end of the 11% to 13% range), reflecting a double-digit decline in Greater China (previously: significant decline).
Gross margin is now expected to reach a level of around 49% (previously: around 50.7%) in 2022. Consequently, net income from continuing operations is expected to reach a level of around EUR1.3bn (previously: at the lower end of the EUR1.8-EUR1.9bn range).