Despite challenges regarding its North American supply chain and waning interest in retro sneakers in Europe, Adidas was able to turn in a nice quarter for investors on strong growth in digital sales and unexpectedly high profits.
In a Nutshell: After releasing its Q1 results Friday, Adidas shares rose from $127.80 to $137.54, a 7.2 percent increase and a new company record.
This comes after Adidas tempered expectations earlier in the quarter when its CEO, Kasper Rorsted, told reporters that growth in North America would likely be hampered by supply chain issues. Rorsted said the company would not be able to respond quickly enough to growing demand for mid-priced footwear and apparel, hampering growth by one to two percentage points throughout the first half of the year.
Additionally, Adidas was open about the issues it faced in Europe, confirming expectations for negative growth in the region for the first half of fiscal year 2019.
Sales growth in the United States, up 3 percent, fell behind the company average of 4 percent, and Latin America sales declined 3 percent. European sales also declined by 3 percent. However, Adidas was still able to significantly improve margins and profit, beating analyst expectations for both.
Perhaps it was the German brand’s candid accounting of its own shortfalls but, although both predictions came true, Adidas stock has continued its upward swing in Q1. Its share price has risen by 25 percent in 2019, so far, and the brand expects its growth to accelerate in the latter portions of the year as its headwinds dissipate.
Sales: Revenue in the first quarter of 2019 rose by 4 percent over the comparable period, with $5.883 billion euros ($6.59 billion) in total sales, just beating analyst predictions of $5.88 billion ($6.58 billion). Adidas owed that performance to a 5 percent bump in the Adidas brand, driven by sales growth for both sport inspired and sport performance categories. Training and running styles were both popular for the brand, each increasing by high single-digits.
Reebok did not fare as well. Its sales fell 6 percent, tempered only by growth in its classics lineup. However, Adidas said Reebok was still able to improve its direct-to-consumer sales by double-digits. Company-wide, e-commerce sales grew by 40 percent in the first quarter.
Regionally, Adidas saw its greatest Q1 growth in Russia at 22 percent and Greater China at 16 percent. The greater Asia-Pacific region was also profitable for the brand, posting 12 percent growth. The strength of those sales, along with a 10 percent increase in emerging markets, led the company to stand by its outlook of a 5 percent to 8 percent increase in revenue during FY19.
Earnings: Adidas earned 3.17 euros ($3.55) per share for the first quarter, an increase of 19 percent over the comparable period last year. Its operating margin also improved 1.4 percent to 14.9 percent, pulling ahead of the 13.5 percent margins Nike reported in March. Additionally, Adidas said its gross margin improved by 2.5 percent on “lower sourcing costs, favorable currency developments and better product and channel mix.”
Thanks to widening margins, the brand’s operating profit grew by 17 percent to 875 million euros ($979.68 million), helping to offset the 14 percent increase in operating expenses incurred as a result of scalability investments and higher costs related to growing its direct-to-consumer channel.
Adidas maintained its outlook of 1.880 billion euros ($2.1 billion) to 1.950 billion euros ($2.18 billion) in net income for FY19—an increase of 10 percent to 14 percent, year-over-year.
CEO’s Take: Adidas CEO, Kasper Rorsted, credited the brand’s quick start in FY19 to its improvements in e-commerce and a growing presence in Asia.
“We had a successful start to the year, delivering double-digit sales increases in our strategic growth areas Greater China and e-commerce as well as another strong profitability improvement,” Rorsted said in a statement. “We confirm our full-year outlook and remain confident about the top-line acceleration in the second half of the year. 2019 will be an important milestone toward achieving our 2020 targets.”