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Adidas Swallows $373M Loss, Speeds Up Digital Investments

Adidas swung to a net loss of 317 million euros ($373 million) in the second quarter compared with a profit of 532 million euros ($626 million) in the same quarter a year ago, while net sales fell 34 percent on a currency-neutral basis to 3.58 billion euros ($4.21 billion) from 5.51 billion euros ($6.49 billion) during the same period.

Sales through the company’s own e-commerce channel nearly doubled, increasing 93 percent during the quarter, with online sales now accounting for more than one-third of its total business through its own and partner e-commerce platforms.

As of August 6, Adidas has reopened 92 percent of its global stores.

In a Nutshell: The e-commerce boost couldn’t quite save the quarter for Adidas, which closed approximately 70 percent of its stores during the peak of the lockdown measures in April, but the company is already looking ahead to the third quarter with hopes for a rebound.

While store traffic remains below prior year levels, the company registered an increase in conversion rates in the quarter. As a result, the company anticipates top-line sales development in the third quarter of 2020 will improve materially compared to the second quarter, yet remain below the prior-year level. Specifically, third-quarter revenues are forecast to be down at a mid- to high-single-digit rate compared to the prior year.

Adidas will not provide a full-year outlook due to the uncertainties around the pandemic, the pace of business normalization in the reopened stores as well as the global macroeconomic environment.

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Second-quarter inventories increased 49 percent on a currency-neutral basis to 5.21 billion euros ($6.13 billion) versus the prior year level of 3.58 billion euros ($4.21 billion) due to inevitably lower-than-expected product sell-through caused by the broad-based store closures. Compared to the level on March 31, inventories increased 20 percent. Adidas expects to manage inventory down to a “normalized” level by year end.

The company recorded a combined negative impact of approximately 250 million euros ($294 million) from the increase in inventory and bad debt allowances, due to wholesale cancellations and payment deferments, as well as Reebok trademark expenses and the impairment costs of the closed retail stores.

In an earnings call, Adidas CEO Kasper Rorsted said Adidas app sales have more than quadrupled year-to-date, indicating that mobile has played a significant part in the athleticwear and footwear company’s shift to digital.

Rorsted also said “digital is more than just e-comm,” pointing to the company’s efforts to launch its first-ever rapid creation product pack in July. In just under 48 hours, Adidas design teams created a 3D-rendered product based on entirely on consumer research data. He said the rapid creation “performed very well,” highlighting the “tropical colorways” that match consumers’ interests, according to the collected data.

Cash and cash equivalents at Adidas were down 18 percent to 2.02 billion euros ($2.38 billion) versus the prior-year level of 2.45 billion euros ($2.89 million). The decline in cash generated from operating activities and the 10 percent increase in currency-adjusted operating working capital were partly offset by effective short-term cash measures and the use of existing credit lines.

The company’s total net debt amounted to 792 million euros ($933 million) as of June 30, a deterioration of 222 million euros ($261.5 million) compared to the net debt position of 570 million euros ($671.4 million) at the end of the first quarter.

Net Sales: Sales fell 35 percent to 3.58 billion euros ($4.21 billion) from 5.51 billion euros ($6.49 billion) in the second quarter, with Adidas brands sales falling a currency-adjusted 32.9 percent to 3.3 billion euros ($3.88 billion) and Reebok sales declining 43.8 percent to 228 million euros ($268 million).

In Greater China, its biggest individual market, sales were flat in the quarter, giving the Asia-Pacific region the best total performance at a currency-adjusted 15.6 percent loss to 1.57 billion euros ($1.85 billion). North America dipped 38.2 percent on a currency-adjusted basis to 763 million euros ($897 million) and Europe declined 40.2 percent to 844 million euros ($922 million) in the quarter.

Latin America had the worst decline in any market, plummeting a currency-adjusted 63.9 percent to 114 million euros ($134 million).

Net Earnings: Adidas saw net losses of 295 million euros ($350 million) in the second quarter compared with a profit of 531 million euros ($626 million) last year. As a result, basic earnings per share (EPS) from continuing operations came to a loss of 1.45 euros ($1.71 per share) in the second quarter, well below the gain of 2.33 euros ($2.74 per share) in the prior-year period.

Operating losses reached 333 million euros ($392 million), a far cry from the 643 million euros ($757 million) operating profit the company generated in the prior-year quarter. Operating profit is projected to swing back in the black in the third quarter between 600 million euros ($705.6 million) and 700 million euros ($823.2 million), provided there are no further lockdowns if infections flare up again.

The company’s gross margin decreased 2.4 percentage points to 51 percent in the second quarter from 53.5 percent in the last year’s quarter. While a more favorable channel and market mix as well as lower sourcing costs had a positive effect on gross margin, a less favorable pricing mix due to increased promotional activity as well as negative currency fluctuations weighed on the development in the quarter. In addition, an increase in inventory allowances had a negative impact on the gross profit development in a high double-digit-million euro amount.

CEO’s Take: Rorsted, whose appointment as CEO was extended earlier this week by the board of directors until July 31, 2026, also reiterated the company’s continued focus on digital transformation, which seems apt given Nike’s recent Consumer Direct Accelerate initiative launch.

“I think if you look upon our overall infrastructure, there’s no doubt that the transition to e-commerce will require us to invest more in dedicated distribution facilities so we can ensure that we can distribute to our customers because we took a two- to three-year step forward,” Rorsted said. “When it comes to systems, the more data-driven we become, the more it pays out. You can see that we have a much higher trading when we get people into the app landscape. So moving forward, you will see us consistently invest more and more systems in AI, in infrastructure that allow us to deal better with the consumer. I don’t think you’re going to have a stopping point. I think that the winning formula is the more you can invest, the better you can understand the data.”