Bloomberg News

Adidas Cuts Margin Forecast as North America Sales Drop

August 07, 2014

Adidas AG (ADS), the world’s No. 2 sports gear maker, cut its profitability forecast for 2014 after first-half revenue in North America dropped amid slumping demand for golf equipment and as production and marketing costs rose.

Operating profit will total 6.5 percent to 7 percent of sales, rather than the 8.5 percent to 9 percent range predicted earlier, the Herzogenaurach, Germany-based company said today in a statement. The first-half margin narrowed to 7.5 percent of revenue from 9.7 percent a year earlier.

Adidas took investors by surprise a week ago with an initial report showing second-quarter earnings missing analysts’ estimates, partly because of the ruble’s drop amid Russia’s dispute with Ukraine. Chief Executive Officer Herbert Hainer is testing investors’ patience with the lower forecasts and climbing marketing expenses. Hainer predicted in May that Adidas would post a “strong” second quarter.

“Costs are moving higher across the board for the second half and into 2015,” John Guy, an analyst at Berenberg Bank with a sell recommendation on the stock, said today in a report to clients. “Execution remains a serious issue for this management team.”

Adidas fell as much as 2.6 percent and was trading down 2.2 percent at 56.76 euros at 9:38 a.m. in Frankfurt. The stock has fallen 39 percent this year, the worst performance on Germany’s benchmark DAX Index, dragged down by a 19 percent slide since Adidas released the initial profit report July 31.

World Cup

Just three weeks ago, Adidas was celebrating the victory of its home country’s team in soccer’s World Cup. The company said its sponsorship of both teams that played in the final was sparking sales of more than 8 million replica World Cup jerseys as it aims for 2 billion euros in soccer-related revenue this year. The company’s Reebok casual exercise clothing and shoes have also been selling better.

The shoemaker is struggling with a downturn in the golf market, its dependence on conflict-stricken Russia and surrounding countries for more than 13 percent of sales, and the heavy spending needed to compete with market leader Nike Inc. (NKE:US) in the U.S.

“We take full responsibility to rectify our shortfalls swiftly,” Hainer said in today’s statement. Adidas will “take corrective steps to bring more stability to our future earnings.”

North America

Second-quarter net income totaled 144 million euros, Adidas said on July 31, missing the 150 million-euro average analyst estimate. Sales increased 2 percent to 3.47 billion euros, about matching analysts’ average though held back by an 18 percent drop at the golf division. First-half sales in North America dropped 14 percent, and fell 7.3 percent in Asia outside China, Adidas said today.

The shoemaker reduced its forecast for 2014 net income last week, predicting about 650 million euros, compared with the 830 million euros to 930 million euros it previously anticipated. Adidas scrapped a long-standing growth target for sales next year of 17 billion euros and an operating margin of 11 percent of revenue. Analysts surveyed by Bloomberg expect 2015 sales of 15.5 billion euros.

Adidas said it plans to close stores and delay openings in Russia, a market where 2013 sales exceeded 1 billion euros. Adidas had previously planned to end this year with more than 100 net new stores in the country, spokeswoman Katja Schreiber has said.

To contact the reporter on this story: Aaron Ricadela in Frankfurt at aricadela@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Tom Lavell, James Boxell


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