Adidas Looks Toward Second Half

Adidas Looks Toward Second Half
The Adidas store in New York.

PARIS — Analysts said last week that Adidas AG made progress in the second quarter — thanks to expense management and restructuring — but there are still challenges ahead for the athletic giant.

The company reported a 93 percent slide in second-quarter net profits last Wednesday, but reaffirmed its 2009 outlook and said the worst is over.

Turning to the second half of the year, Adidas expects earnings to be more positive, helped by lower costs and the run-up to the 2010 World Cup. However, it cautioned that earnings per share in the second half will not reach the levels seen in the back half of 2008.

“It will be interesting to see if they can achieve the numbers they’re projecting,” said Matt Powell, an analyst with SportsOneSource. He noted that the company has been able to leverage global events in the past, but the World Cup’s South African location, far from soccer’s European and South American epicenters, might have an impact.

“The 2010 World Cup could bring a meaningful bump to sales, but we do not expect to see this until the first half of 2010,” said Christopher Svezia, an analyst with Susquehanna Financial Group, “and visibility as to the magnitude remains unclear.”

For the second quarter ended June 30, net profit fell to 9 million euros, or $12.2 million at average exchange, from 116 million euros, or $181 million, a year earlier.

Sales slid 2.5 percent to 2.46 billion euros, or $3.34 billion, hurt by reduced consumer spending across all brands and by the comparison with the same period a year earlier, when Adidas benefited from the Euro 2008 soccer tournament. On a currency neutral basis, sales declined 8 percent.

The group’s gross margin decreased 5.1 percentage points to 45 percent in the second quarter as a result of higher costs, the effect of currency devaluation, particularly the Russian ruble, as well as a “highly promotional retail environment,” Adidas said.

Despite the dramatic drop in profits, the results were ahead of expectations, as analysts had forecast a net loss of 2.2 million euros, or $3.2 million. For 2009, the company said it still expects a low- to mid-single-digit percentage drop in constant currency terms, as well as a decline in gross margin, operating margin and EPS.

“The impact of the economic downturn and repercussions on consumer spending are well documented and certainly continued to influence our performance in the second quarter,” CEO Herbert Hainer said in a statement. However, he added that business had not deteriorated further since the first quarter.

Separately, the company announced a reorganization of its executive team. Hainer will assume direct responsibility for global sales, while Erich Stamminger, a member of the group’s executive board, will oversee global brands, including Adidas and Reebok. (Reebok chief Uli Becker will report to Stamminger.)

Reebok continued to negatively impact the firm in the second quarter, with revenues down 8 percent on a currency-neutral basis. Adidas revenues declined 8.8 percent.

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