Macro constraints hamper Adidas in Q2

HERZOGENAURACH – Currency-neutral revenues of German sportswear brand Adidas were up by 4 per cent in the second quarter (Q2) thanks to strong momentum in western markets. However, in a trading update the German business said it continued to see challenges on both supply and demand. Supply chain constraints because of last year’s lockdowns in Vietnam reduced top-line growth by around €200m in Q2 2022.

“Our Western markets continued to show strong momentum in the second quarter amid heightened macroeconomic uncertainty. With Asia-Pacific returning to growth, markets combined representing more than 85 per cent of our business grew at a double-digit rate,” said adidas CEO Kasper Rorsted. “With sports back at centre stage this summer, revenues in our strategic growth categories Football, Running and Outdoor all increased by double digits. However, the macroeconomic environment, particularly in China, remains challenging. The recovery in this market is – due to continued covid-19-related restrictions – slower than expected. And we have to take into account a potential slowdown in consumer spending in all other markets for the remainder of the year.”

Adidas said its decision to suspend operations in Russia reduced revenues by more than €100m during the quarter. Continued COVID-19-related lockdowns in Greater China also hampered top-line development in Q2. From a channel perspective, the top-line increase was to a similar extent driven by the company’s own direct-to-consumer (DTC) activities as well as increases in wholesale, the company said.

Within DTC, e-commerce, which now represents more than 20 per cent of the company’s total business, showed double-digit growth reflecting strong product sell-through. From a category perspective, revenue development was strongest in the company’s strategic growth categories.

Revenue growth in the second quarter was driven by western markets despite last year’s lockdowns in Vietnam still reducing sales, particularly in EMEA and North America, by €200m in total. In addition, the top-line development in EMEA was also impacted by the loss of revenue in Russia/CIS of more than €100m.

Revenues in Latin America increased 37 per cent, while Asia-Pacific returned to growth. Currency-neutral revenues increased 3 per cent in this market despite still being impacted by limited tourism activity in the region. In contrast, the company continued to face a challenging market environment in Greater China, mainly related to the continued broad-based COVID-19-related restrictions. As a result, currency-neutral revenues in the market declined 35 per cent during the three-months period, in line with previous expectations. Excluding Greater China, currency-neutral revenues in the company’s other markets combined grew 14 per cent in Q2.

The company’s gross margin declined 1.5 percentage points to 50.3 per cent (2021: 51.8 per cent). Significantly higher supply chain costs and a less favourable market mix due to the significant sales decline in Greater China weighed on the gross margin development. Other operating expenses were up 19 per cent to €2.501bn (2021: €2.107bn). As a percentage of sales, other operating expenses increased 3.2 percentage points to 44.7 per cent (2021: 41.5 per cent). Marketing and point-of-sale expenses grew 8 per cent to €663m (2021: €616m).

As a percentage of sales, marketing and point-of-sale expenses were down 0.3 percentage points to 11.8 per cent (2021: 12.1 per cent). Operating overhead expenses increased by 23 per cent to a level of €1.838bn (2021: €1.492bn). As a percentage of sales, operating overhead expenses increased 3.5 percentage points to 32.8 per cent (2021: 29.4 per cent). The company’s operating profit reached a level of €392m (2021: €543m), resulting in an operating margin of 7 per cent (2021: 10.7 per cent).

The company’s net income from continuing operations slightly declined to €360m (2021: €387m). This result was supported by a one-time tax benefit of more than €100m due to the reversal of a prior year provision. Consequently, basic EPS from continuing operations reached €1.88 (2021: €1.93) during the quarter.

Inventories increased 35 per cent to €5.483bn (2021: €4.054bn) on June 30, 2022, in anticipation of strong revenue growth during the second half of the year. Operating working capital increased 23 per cent to €5.191bn (2021: €4.213bn). On a currency-neutral basis, operating working capital was up 14 per cent.