It’s game on at Adidas.
The athletic company’s leadership team discussed fourth-quarter results, along with its five-year strategy, at an extensive, virtual investor and media day Wednesday.
“2020 allowed us to prove our resilience and prepare for the future despite all the unprecedented challenges that Covid-19 threw at us,” CEO Kasper Rorsted said. “It was also a year that accelerated structural trends in our industry, making the sporting goods market even more attractive. We are now in the best position to leverage the industry tailwinds by executing our new strategy, which is tailored to the world we now live in and based on a great foundation.”
A return to sales growth in Q4
After recording double-digit growth rates across Greater China, North America and Europe in October, momentum slowed as coronavirus cases spiked in many countries late last fall and into the winter.
Despite traffic falling “materially below” prior-year levels in North America, the company said, sales in the region rose 2 percent year-on-year in the fourth quarter, driven by a 4 percent improvement for the Adidas brand.
While physical retail remained largely open in North America last quarter, about half of Adidas’ stores in Europe were closed until year-end. The renewed lockdowns—combined with a tough comparison due to the launch of products related to the UEFA European Football Championship, which had resulted in 14 percent sales growth in the prior-year quarter—contributed to a 6 percent year-on-year sales decline in the region.
Greater China came out the strongest of the three as Adidas’ direct-to-consumer business experienced strong, double-digit growth there. On a currency-neutral basis, sales in the country rose 7 percent year-on-year in the fourth quarter, pulling the Asia-Pacific region to 1 percent growth.
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Adidas continued to execute on its plan to reach a healthy inventory position in the fourth quarter, reducing inventories by almost 300 million euros ($358 million). At the end of December, inventory totaled 4.4 billion euros ($5.25 billion), 8 percent higher than a year earlier, or 14 percent higher on a currency-neutral basis. Evergreen and event-related products intended for sale in the upcoming season primarily drove this increase, the company noted.
On a currency-neutral basis, Adidas recorded sales growth of 1 percent in the fourth quarter. In euro terms, however, sales fell 5 percent from $5.84 billion euros ($6.96 billion) in 2019 to $5.55 billion euros ($6.61 billion) due to the persistence of currency headwinds.
Adidas recorded a gross margin of 48.7 percent in the fourth quarter, down 0.3 percentage points from the same period a year earlier, with unfavorable currency headwinds representing the most material drag, the company said. Promotions also weighed on gross margin, it noted, but not to the same extent as previous quarters as a focus on disciplined sell-in and profitable sell-through resulted in a normalization of promotional activities.
The company reported a gross margin of 49.7 percent for 2020 as a whole, a 2.3 percentage point decline from 2019. Adidas attributed the decrease to negative currency developments and increased promotional activity. A more favorable channel mix driven by DTC growth and lower sourcing costs, it noted, provided some tailwinds.
Though operating profit fell 20 million euros to 225 million euros ($268 million) in the fourth quarter, operating expenses also declined, resulting in an operating margin of 4.1 percent, largely in line with the prior-year level of 4.2 percent.
Net income from continuing operations totaled 138 million euros ($165 million), or 0.68 euros (81 cents) per share, in the fourth quarter, down from 181 million euros ($216 million), or 0.92 euros ($1.10) per share, a year earlier.
Net income remains down
Adidas doubled down on e-commerce throughout 2020, with targeted consumer marketing, exclusive product launches and prioritized supply chain management, resulting in triple-digit growth rates during several months. Overall, e-commerce grew 53 percent in currency-neutral terms last year, reaching more than 4 billion euros ($4.77 billion) in revenues and accounting for more than 20 percent of total sales.
Led by e-commerce, Adidas’ direct-to-consumer business grew 7 percent in currency-neutral terms last year.
Except for Russia, Adidas saw double-digit sales declines in every region in 2020. Despite the significant growth Greater China experienced at the end of the year, currency-neutral sales fell 15 percent, slightly better than the 17 percent decrease in Asia-Pacific overall. Europe and North America experienced slightly smaller declines of 12 percent and 9 percent, respectively.
Full-year revenue totaled 19.84 billion euros ($23.66 billion), a 16 percent decline from 2019’s 23.64 billion euros ($28.18 billion). On a currency-neutral basis, revenue fell 14 percent.
Net income from continuing operations decreased to 429 million euros ($511 million), or 2.15 euros ($2.56) per share, in 2020, down from 1.92 billion euros ($2.29 billion), or 9.70 euros ($11.56) per share, in 2019.
Adidas’ net borrowings amounted to 3.15 billion euros ($3.75 billion) at year-end, down from 4.17 billion euros ($4.98 billion) in 2019. At the end of December, cash and cash equivalents totaled 3.99 billion euros ($4.76 billion), up 80 percent from 2019’s 2.22 billion euros ($2.65 billion), mainly driven by effective short-term cash measures and the issuance of bonds.
A return to 2019 levels
Adidas said it expects a strong top-line recovery in 2021. It projected sales to grow in the mid- to high-teens on a currency-neutral basis overall, returning the company to 2019’s sales level, or even somewhat above, according to chief financial officer Harm Ohlmeyer.
This sales rebound includes 20 to 30 percent growth in Asia-Pacific, Greater China—Adidas started counting the region independently of Asia-Pacific as of Jan.1—and Latin America; growth in the mid- to high-teens in Europe, the Middle East and Africa; and high-single-digit growth in North America.
Adidas also expects its gross margin to almost fully recover in 2021 and reach a level of 52 percent as discount levels normalize. Despite a planned increase in marketing activity, the company anticipates operating expenses will grow at a materially lower rate than revenues due to effective cost management. As a result, it is predicting it will end the year with an operating margin of between 9 and 10 percent. Overall, it is forecasting net income from continuing operations to increase to a level of between 1.25 billion euros ($1.49 billion) and 1.45 billion euros ($1.73 billion).
Though Adidas largely avoided discussing Reebok, its 2021 outlook includes about 250 million euros ($298 million) in stranded costs related to the intended divestiture.
“Some resources—IT, stores, warehouses, offices and employees—have been used by both Adidas and Reebok,” Ohlmeyer explained. “As we prepare Reebok to operate on its own, some of these shared capacities and resources, and the cost associated, will remain with Adidas.”
Though the company plans to report these costs as part of its continuing operations, Ohlmeyer said they will either be largely passed on or actively managed in 2021. As a result, he estimated that only 30 percent of the costs will recur in 2022. By 2023, he said, the costs will be fully eliminated.
2025 strategy: ‘Own the Game’
Adidas also introduced a new five-year strategy called “Own the Game.”
“It’s a growth strategy and it’s an investment strategy and it will enable us to continue to grow and gain market share in a super-attractive industry, to make sure that we build significant value to all our stakeholders, including our shareholders, and we’re convinced that by [2025] we will be a very different company, we will be stronger, we will be more sustainable and we’ll be more digital than ever,” Rorsted said.
Using 2021 as a base line, the company plans to increase sales by an average of between 8 and 10 percent on a currency-neutral basis over the four-year period between 2021 and 2025. By the end of that time frame, it is also anticipating raising gross margin to between 53 and 55 percent and operating margin to between 12 and 14 percent. Net income from continuing operations, it projected, will increase by an average of between 16 and 18 percent per year.
Adidas identified five key categories that it said will drive 95 percent of sales growth: soccer, running, training, outdoor and lifestyle.
“Our new strategy is completely rooted in sports,” Rorsted said. “Sports is our past, our present and future, and connects deeply with our purpose.”
The company also noted plans to attract more female consumers in the year ahead, with a targeted annual growth rate in the mid-teens in that sector.
Adidas plans to focus on DTC in the years ahead, projecting the segment will account for 80 percent of its planned sales growth through 2025. By that same year, it anticipates DTC channels will account for around half of its total sales.
Digital will play a major role in this strategy as the company looks to double e-commerce sales to between 8 billion euros ($9.54 billion) and 9 billion euros ($10.73 billion). As part of this plan, Adidas is looking to triple the number of consumers in its membership program to around 500 million, as well as add full-fledged omnichannel capabilities across its own-retail store portfolio.
Adidas outlined its continuing sustainability strategy, as well. By 2025, it plans to make nine out of 10 articles with sustainable materials, up from six out of 10 today. From 2024 onward, it plans to only use recycled polyester across every product. Working with its partners in the global supply chain, it expects to reduce its CO2 footprint per product by 15 percent by 2025. By 2050, it aims to achieve overall climate neutrality.
The company is also looking to make a heavy investment—more than 1 billion euros ($1.19 billion)—in digitalization, from the creation of its products to selling it to consumers. In 2025, it said, the vast majority of sales will be generated with products created and sold digitally. To achieve this, Adidas plans to expand its internal data and technology team, including hiring more than 1,000 new employees this year.
Adidas partners with Peloton and talks diversity
Also Wednesday, Adidas announced a new partnership with the fitness platform Peloton.
“Together we see great potential to surprise and delight our highly engaged communities by multiplying the power of both brands in a number of exciting ways,” Aimee Arana, Adidas’ general manager of global training, said in a statement. “Our shared values around well-being, inclusivity and community provide an incredible foundation and we look forward to bringing these brands together.”
Meanwhile, Andre Pinard, director, communities, mindset and culture at Adidas, spoke about diversity and inclusion at the Interactive Advertising Bureau’s Annual Leadership Meeting Wednesday.
While others respond to calls for change and equality by dumping money on the problem and walking away, Pinard said, “we are really challenging ourselves with this in finding a way of being able to show that impact on the ground.”
To those looking to initiate change at their own companies, he advised listening to employees first.
“You have the most powerful set of insights that you need in your organization,” Pinard said. “They’re there, they’re committed, they show up every day and they have a perspective that can help you move your brand forward or your organization forward in ways that are dynamic and, once again, that those outsiders might not have as much of a connection to.”
Pinard also recommended getting comfortable with being uncomfortable.
“There’s conversations that need to be had and that will make non-[Black, Indigenous and people of color] peers feel uncomfortable, but through that uncomfortableness, we will understand different ways of working and ways in which that we can be better together,” Pinard said.