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Nov 6, 2014
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Adidas shares jump as Russia, golf units cut stock surplus

By
Reuters
Published
Nov 6, 2014

BERLIN, Germany - German sportswear firm Adidas, struggling to keep pace with larger U.S. rival Nike, reported progress on Thursday at clearing a backlog of stock as sales recovered in key markets, helping its shares rise strongly.

Adidas, whose long-serving Chief Executive Herbert Hainer is under pressure after a series of profit warnings, confirmed its sales and profit forecasts for 2014 after reporting third-quarter results at the upper end of analyst expectations.

Adidas Womens Colourblock Capsule | Photo: Adidas



Hainer said he had been aggressively addressing the group's key challenges -- restructuring its golf business, scaling back expansion in Russia and seeking to revive momentum in the U.S. market, adding he will present a new strategic plan in March.

Third-quarter sales growth in western Europe accelerated to 10 percent from a currency-neutral 6 percent in the first half. The group slowed its decline in North America as growth of the core Adidas brand helped compensate for slumping golf sales.

Adidas is the kit supplier to Germany's world champion soccer team but has been losing market share to Nike which has been better a creating a buzz with its brand among fashion and sports-mad youngsters.

Equinet analyst Ingbert Faust said the improvement in Europe was encouraging given that Nike had reported strong growth in the region, raising fears of major pressure on Adidas in its home region.

"Around 12 percent growth in sales of brand Adidas is not too much short of the around 15 percent growth at Nike in the last quarter," said Faust, who rates Adidas as "buy".

Adidas cut inventory growth to 7 percent at the end of September on a currency-neutral basis from 16 percent at the end of June, as it cleared stock, particularly in Russia, where flagging consumer confidence has forced it to mark down goods.

Adidas shares, down around 39 percent this year, were up 3.3 percent at 1145 GMT, compared with a 0.2 percent rise for the German blue-chip index .GDAXI. Adidas shares trade at 16.5 times forward earnings, a discount to 24.4 times for Nike.

Hainer told a conference call for journalists that Adidas wanted to trim inventories by a rate of more than 10 percent in 2014 and to continue reducing absolute levels next year.


GROSS MARGIN TARGET CUT

Markdowns to clear stock in Russia and the golf unit weighed on the gross margin in the quarter, which fell to 47.4 percent, prompting Adidas to trim its gross margin target for the full year to 48-48.5 percent from 48.5-49 percent.

By contrast, Nike's gross margin grew to 46.6 percent in the quarter to Aug. 31 from 44.9 percent the previous three months as the company focused on higher-margin products like Flyknit soccer boots even as it spent heavily on World Cup marketing.

Adidas CEO Herbert Hainer | Photo: Adidas


To reduce its exposure to the weak rouble, Adidas, which runs more than 1,100 stores in Russia, will cut the number of net new stores it plans there to around 30 per year in 2014 and 2015, from an already reduced target of 80 per year.

Hainer said Adidas was making progress in turning around its struggling golf business, cutting 15 percent of staff. He said sales and margins at the unit should stabilise and grow in 2015.

Adidas said it expects sales to rise at a mid single-digit rate in 2015, while net income should grow at a higher rate than group sales. Adidas sales are traditionally slower in years with no major sporting events like the World Cup or Olympics.

Adidas reported a 13 percent fall in third quarter operating profit to 405 million euros ($507 million) on sales up 6 percent to 4.118 billion, slightly ahead of average analyst forecasts for 399 million and 4 billion, respectively.

Adidas also gave more details of a 1.5 billion euro share buyback plan it announced last month, seen as an attempt to placate investors and fend off moves by activist funds. It will launch a first tranche on Friday of up to 300 million euros.

But Hainer declined to comment on reports that an investor group that includes Jynwel Capital and funds affiliated with the Abu Dhabi government plan a $2.2 billion bid to buy Reebok, the fitness brand Adidas acquired in 2006.

1.00 USD = 0.628429 GBP
 

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