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What Drove Adidas’ ‘Strong’ Q3 Rebound

Following a 317 million euros ($373 million) net loss in the second quarter, Adidas saw a “strong recovery” in Q3 with third-quarter top- and bottom-line results close to prior year level.

In a Nutshell: With more than 90 percent of its own-retail stores operational—most of which had been closed for several weeks during the second quarter—Adidas recorded a strong sequential revenue improvement in Q3. The company said store traffic continued to improve yet remained significantly below prior year levels. At the same time, though, conversion rates stayed elevated as consumers who visited stores had a clearer buying intent, it added.

Despite the consistently high store operating rate, growth in Adidas’ e-commerce channel continued at a currency-neutral rate of 51 percent, accompanied by a strong increase in full-price sales. The company’s overall direct-to-consumer business grew 13 percent in currency-neutral terms and made up 35 percent of total sales in the third quarter.

Adidas said its wholesale business also improved sharply yet remained below the prior year level. This in part reflected a “disciplined stance on shipments in light of the prevailing uncertainties related to the global coronavirus pandemic,” it added.

Inventories increased 27 percent year over year to 4.676 billion euros ($5.52 billion), reflecting the lower-than-expected product sell-through driven by broad-based store closures during the first half of the year and below-average traffic. Inventories decreased 10 percent, or more than 500 million euros ($590 million), from the end of Q2, as Adidas’ inventory normalization progressed “according to plan.”

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Cash and cash equivalents were up 37 percent from the prior-year-period—down 18 percent from the previous quarter—from 2.349 billion ($2.77 billion) to 3.224 billion ($3.81 billion). The rise came largely from effective short-term measures, the utilization of credit lines and the issuance of bonds. These measures offset the decrease in cash generated from operating activities due to the unfavorable underlying development of sales and operating working capital. Net debt amounted to 1.092 million euros ($1.29 million) at the end of the first nine months, compared to net cash of 342 million euros ($404 million) as of Sep. 30, 2019.

Looking ahead, Adidas said uncertainties remain regarding the further development of the coronavirus pandemic. The rising number of cases in several major markets have led to new lockdown measures, pruning its open-store rate to 93 percent from 96 percent at the end of September.

Net Sales: In total, Q3 revenues dipped 3 percent in currency-neutral terms. Sales at the Adidas brand declined 2 percent, while Reebok revenues slid 7 percent.

Adidas reported a sequential recovery compared to the second quarter in all market segments. Currency-neutral sales rose in by 4 percent in Europe and 11 percent in Russia and the Commonwealth of Independent States.

In North America, Adidas recorded a slight decline of 1 percent despite positive sales growth over the first two months of the quarter as stimulus checks temporarily propped up consumer spending.

Asia-Pacific sales slid 7 percent, with Greater China recording a 5 percent decline after initial pent-up demand faded. While the company’s DTC sales in Greater China grew more than 30 percent, franchise revenues decreased year over year, thanks to a “disciplined approach to sell-in,” Adidas said.

The overall environment remained tough in Latin America, where sales fell 13 percent versus the comparable 2019 frame and in the company’s Emerging Markets, which saw a 10 percent decline. In these cases, the pandemic continued to disrupt operations and several stores remained closed.

Overall, the athleticwear company predicted its top line will develop similarly in the fourth quarter as it did in Q3, implying a low- to mid-single-digit-currency-neutral revenue decline. This is against a strong comparison basis from 2019, when the launch of UEFA Euro 2020 merchandise and earlier shipments due to a different timing of Chinese New Year contributed to fourth-quarter growth. Despite the strong comparison base in Greater China, Adidas said it expects its business in this market to return to growth in the next quarter.

Net Earnings: Adidas recorded a net income of 578 million Euros ($682 million), compared to 644 million euros ($760 million) in 2019. As a result, basic earnings per share from continuing operations amounted to 2.80 euros ($3.30), a decline from 2019’s 3.26 euros ($3.85).

Assisted by decreases in expenses—including a 23 percent decline in marketing and point-of-sale expenses—Adidas’ operating profit improved by more than 1.1 billion euros ($1.3 billion) to a level of 794 million euros ($937 million). This represented a double-digit operating margin of 13.3 percent.

Adidas’ gross margin decreased 2.1 percentage points to 50 percent in the third quarter. A more favorable channel mix driven by the disproportionate growth of the direct-to-consumer business as well as a more favorable market mix supported this measure, but were more than offset by negative currency developments and continued promotional activity.

Due to its focus on profitable sell-through and disciplined sell-in, Adidas expects gross margin will land near the prior-year level in the fourth quarter. Consequently, it anticipated an operating profit between 100 million euros ($118 million) and 200 million euros ($236 million). The outlook assumes no additional major lockdowns, a store opening rate above 90 percent and no further material slowdown of global store traffic.

CEO’s Take: CEO Kasper Rorsted addressed the impact the recent coronavirus spike has had on Adidas’ business.

“While at the beginning of the quarter we were on track for growth in Q4, a worsening of the pandemic in many regions of the world is again requiring our patience and support. However, this is not taking us by surprise,” he said. “Thanks to our prudent approach, we are now well-prepared to cope with these short-term uncertainties. At the same time, we are even better positioned to benefit from the long-term industry growth drivers accelerated by the pandemic such as health and wellbeing, athleisure and digitization.”