It has been a busy, exciting and challenging third quarter and first nine months for the adidas Group. Despite the mounting headwinds from negative currency movements as well as a softer than originally expected performance in some of our key markets and segments, I am pleased to report that we delivered stable earnings for the first nine months. While I am disappointed we had to reduce our 2013 full year guidance in September, on balance, we continue to make good progress on our most important Route 2015 strategic initiatives.
The key financial highlights of the first nine months were as follows:
- Sales remained stable on a currency-neutral basis or declined 4% in euro terms to € 11 billion.
- Gross margin increased 2.1% percentage points to a record nine months level of 49.8%.
- Operating margin increased 40 basis points to 10.5%.
- Net income attributable to shareholders was virtually unchanged at € 796 million.
- Operating working capital as a percentage of sales increased 70 basis points to 20.6%.
- Equity ratio expanded 80 basis points to 49.3%.
To start with the negatives, three areas in particular impeded our initial growth plans in the quarter and also for the year as a whole.
Firstly, and most severely, the persistent weakening of several currencies versus the euro throughout 2013, such as the Japanese yen, Brazilian real, Argentine peso, Turkish lira, Russian rouble and Australian dollar, has put a significant strain on our reported results in euro terms. In the third quarter alone, Group sales suffered a 7 percentage point negative impact from currency movements. Accumulated for the first nine months of the year, currencies wiped out € 500 million from our top-line result.
Secondly, in one of our most important Route 2015 markets, Russia/CIS, we had an unexpected short-term distribution constraint in Q3 as a result of the transition to our Group’s new distribution facility in Chekhov, close to Moscow. This significantly impacted the quantity of new product deliveries to stores, which was a major contributor to the double-digit comp store sales decline we saw in that market during the third quarter. Our Global Operations and local management teams have worked speedily to rectify the matter, and I am pleased to report that we are making good progress on returning the shipping quantities back to normal levels. Nevertheless, as we communicated in September, due to the sales shortfall and the further weakening of the Russian rouble, we will not achieve our original goal for Russia/CIS this year.
Thirdly, due to the continued softness in the global golf market, where TaylorMade-adidas Golf is the dominant leader, we took the decision in the third quarter to be more consequent and accelerate the rebalancing of inventories to healthier levels in the marketplace. As a result, sales declined 16% currency-neutral in the segment in the third quarter and gross margins decreased over 10 percentage points due to additional markdowns and incentives. This alone had a 70 basis point negative impact on the Group’s gross margin performance in the third quarter. Again here, our actions have delivered the desired result, and I am confident we will see a solid fourth quarter driven by highly innovative recent product launches such as the SLDR driver and fairway woods, as well as our new Speedblade family of irons.
Quick and focused actions like these show our Group’s determination to always be at the forefront of creating consumer excitement in our industry. And while we had our challenges in the period under review, these were definitely outnumbered by considerable and broad-based successes in many categories and regions.
These successes include:
- The continuation of our industry-leading momentum in key emerging markets, with sales in Latin America and Greater China increasing 15% and 7% on a currency-neutral basis, respectively.
- Strong growth in our focus adidas performance categories, where running revenues in particular were up a healthy 14% currency-neutral due to groundbreaking product innovations such as Boost and Springblade.
- Continued success in sports lifestyle with Originals & Sport Style sales up 4% currency-neutral, driven by strong market share gains in the action aports category, where sales jumped over 60%, and the further roll-out of our highly successful teenage sub-brand the adidas NEO label, where sales expanded 12%.
- And finally, further strong improvements in the quality of the Reebok business. Sales grew 5% in the third quarter and gross margin expanded 6.4 percentage points to 40.4%, the highest level we have achieved with the brand. Excluding the NFL licence impact, Reebok revenues are up 3% year-to-date, and I can confirm that Reebok will grow for the year as a whole.
These positive developments clearly highlight the effective execution of our strategy to fundamentally improve the long-term sustainable profitability of our brands and our Group. And to ensure we continue to drive these kinds of results, we also have been working diligently during the year on the further implementation of organisational measures to support our goals to drive faster and more efficient decision-making processes for the adidas and Reebok brands as well as ensuring we more fully leverage the power of our Group.
Staying on the future, with strong demand for our highlight concepts and innovations, upcoming initiatives around the 2014 FIFA World Cup and positive customer feedback to our spring/summer 2014 collections from all of our brands, momentum is clearly returning to our business. We already see some notable improvements in momentum in several key markets.
Our relentless pursuit of creating premium experiences for our consumers and customers will ensure we unleash the tremendous potential we see for the Group.
In the coming months, these will include:
- A fully integrated global attack in the football category beginning in the fourth quarter and every month thereafter up to and including the 2014 FIFA World Cup in Brazil, across footwear, apparel and hardware. This will consist of our most comprehensive footwear offensive ever, including all four of our football boot silos in a creative World Cup themed pack called the Samba pack, the launch of the federation jerseys, and the always highly anticipated official match ball.
- Intensifying the roll-out and significantly increasing the volumes of our industry-changing and award-winning Boost technology into key adidas running franchises as well as the global roll-out of Springblade.
- Unleashing the potential of our interactive training and coaching technologies, which will be driven by the launch of the miCoach Smart Run. Smart Run is the most advanced and most intuitive wrist-based running device on the market today eliminating the need for cables, straps and additional sensors.
- Leveraging the return of Derrick Rose as the centrepiece of our basketball offensive, as well as broadening our activities with our portfolio of next-generation NBA stars to cultivate growth in both footwear and apparel.
- Changing the game in how athletes train in cold conditions with the new ClimaWarm+ range, developed with adidas ambassador David Beckham. By using hollow fibres that trap air to create insulation, the technology not only increases warmth but also reduces the garment’s weight, giving the athlete an optimised warmth-to-weight ratio to maximise comfort and performance.
- Continuing to amplify Reebok’s holistic fitness positioning with the further global roll-out of our FitHub concept through own retail and shop-in-shops. Designed to inspire the fit generation and to showcase the brand’s pinnacle footwear and apparel offering, Reebok FitHubs are changing consumers’ perception of the brand by solidifying Reebok’s image as THE fitness brand.
In summary, we have dealt swiftly and decisively with our challenges in 2013. There is no doubt that our industryleading innovations, strong partnership activations and keen understanding of the global consumer are clearly enhancing our position as the premium multi-sports company in the industry. I am sure you agree, from the initiatives I have shared, we have great potential to continue on our journey towards long-term sustainable value creation.
Great success is achieved by those with the ambition, desire and persistency to constantly improve, accept challenges as normal and embrace change. This mentality is at the core of the adidas Group’s philosophy and why we are fully committed to the course we set out on with our Route 2015 strategic plan. I am confident in the plan. And I am confident in our ability to execute against it.