Adidas raised its full-year outlook for 2021 due to stronger than expected product demand, now expecting sales to grow at a high-teens pace, with help from an approximately 50 percent sales boost in the second quarter. In particular, the German company expects the acceleration in sales to be fueled by new product releases including the circular Ultraboost sneaker and the return of the Futurecraft 4D, as well as major sporting events, including the UEFA Euro and Copa America soccer tournaments and the Tokyo Olympics.
This comes after the athleticwear and footwear company saw currency-neutral quarterly sales came in at 5.27 billion euros ($6.36 billion), up 27 percent from the year-ago quarter, as well as a net income of 502 million euros ($605 million).
In a Nutshell: Adidas estimates that first-quarter sales growth was actually hindered “by a high-single-digit rate” due to the prolonged lockdowns in Europe and industrywide supply-chain challenges. In an earnings call, CEO Kasper Rorsted said Adidas would “largely” make up for the drop in the second quarter.
Out of the market segments, EMEA was most negatively impacted by prolonged lockdowns, which decreased the store opening rate in Europe to below 50 percent in March. The company’s global store opening rate stood at 89 percent at the end of the first quarter, and improved to 91 percent as of May 7.
All goods that were stuck in the Suez Canal have been passed or diverted with an average delay of approximately two weeks, Rorsted said.
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“As a result of this disruption, there is still an overall shortage of container capacity, which could lead to further delays and or higher freight costs in the months to come, especially if we decide to make exceptional use of freight,” the CEO said in the call.
Even as some mainland Chinese consumers have boycotted the brand and others such as Nike, H&M and Burberry due to their public concerns over the forced labor of China’s ethnic minorities in the Xinjiang Uyghur Autonomous Region, Adidas saw sales in China increase a currency-neutral 156 percent in the quarter.
It will be interesting to see how the second quarter plays out for Chinese sales—Morningstar data indicated that Adidas saw a major dip in Tmall sales in April, amounting to a 78 percent drop compared to the same period last year. Rorsted didn’t comment on the expected impact of the boycotts in the quarter, noting that the market is included in the second quarter guidance for 50 percent global growth. Adidas still expects “very strong growth in China” for 2021.
Rorsted also confirmed that there has been no changes with any Chinese suppliers, despite geopolitical headwinds.
Inventories decreased 9 percent year-over-year to 3.94 billion euros ($4.8 billion) from 4.33 billion euros ($5.27 billion), largely impacted by the anticipated Reebok sale. But even aside from the planned sale, inventories were still down on a like-for-like basis.
Gross margin increased 210 basis points (2.1 percentage points) to 51.8 percent from 49.7 percent in the first quarter of 2020 as a result of healthy inventory positioning, the company said. This expansion was mainly driven by lower sourcing costs, as costs related to last year’s cancellations of purchase orders with suppliers did not reoccur, as well as a better channel and market mix. The favorable mix impact mainly reflects the exceptional growth in both global e-commerce and Greater China. This positive development was partially offset by significantly unfavorable currency developments and, to a lesser extent, a less favorable pricing mix.
While the increase in top-line outlook is big news for Adidas in 2021, the athleticwear company is standing pat on its expectations for 2021 net income. Adidas anticipates a rise in between 1.25 billion euros ($1.52 billion) and 1.45 billion euros ($1.77 billion), up from the Covid-impacted 461 million euros ($561.2 million) taken in last year.
“We didn’t upgrade the bottom-line guidance primarily for two reasons. One is supply chain challenges. Freight rates are already up significantly and might see further increases given the container shortages that we have seen, and of course the Suez Canal situation didn’t help that either,” said chief financial officer Harm Ohlmeyer in the earnings call. “In addition, we also want to ensure the availability of the products that consumers desire, we want to ensure that one and that might come with somewhat higher logistics costs, especially air freight. We want to make sure that the product is available.”
Full-year gross margin is expected to be around 52 percent, up from 50 percent in 2020. Operating margin is still expected to increase to a level of between 9 percent and 10 percent, up from 4 percent last year.
Following Adidas’ decision to sell the Reebok brand, all income and expenses of the Reebok business are reported as discontinued operations as of the 2021 first quarter. If Reebok is sold in 2021, net income would take a 200-million-euro hit ($243.34 million), while operating profit would incur costs of 250 million euros ($304.17 million).
Net Sales: Quarterly sales came in at 5.27 billion euros ($6.36 billion), up 27 percent at constant currency from 4.38 billion euros ($5.33 billion) in the first quarter of 2020. Analysts had expected sales of 5 billion ($6.08 billion), according to FactSet.
From a channel perspective, the company’s direct-to-consumer (DTC) revenues were up 31 percent and accounted for 34 percent of total sales. The company has a target to make DTC 50 percent of total sales by 2025, as part of its “Own the Game” five-year plan.
Within DTC, e-commerce sales rose 43 percent on top of 35 percent growth in the prior year quarter, thereby almost doubling over the two-year period.
Globally, revenue growth was strongest in footwear with a 31% increase and driven by double-digit gains in the training, running, outdoor and lifestyle categories.
Regionally, Greater China saw by far the biggest currency-neutral sales jump at 156 percent year over year to 1.4 billion euros ($1.7 billion) from 559 million euros ($680.4 million). China is now the second largest market for Adidas after EMEA, surpassing North America in sales. North American sales increased 8.1 percent, while EMEA increased 7.6 percent. Revenues were up 18 percent in Latin America and increased 4 percent in Asia-Pacific.
Net Earnings: The company reported net income of 502 million euros ($605 million) for the first quarter, up from 26 million euros ($31.65 million) in 2020. Basic earnings per share (EPS) from continuing operations reached 2.60 euros ($3.17), up significantly from 0.16 euros (19 cents) in the year-ago quarter.
Adidas’ operating profit grew to a level of 704 million euros ($857 million) compared to just 48 million euros ($58.43 million) last year.
CEO’s Take: Rorsted briefly highlighted the company’s wholesale business, which has recently been deemphasized across major athleticwear and footwear brands as they continue focus on driving DTC sales.
“We also saw strong growth with our key wholesale partners, particularly Finish Line, JD and Kohl’s, and look forward to continue driving our business with these accounts,” Rorsted said. “Growth would have been in the strong double-digits excluding the impact from the port congestions.”