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Adidas’ Q1 Sales Dip On Supply Chain Constraints And China Weakness

Source:China Sport ShowRelease time:09-May-2022Clicks:
Article From:SGB Media
 

 
Adidas reported continued double-digit growth in Western markets in the first quarter, but overall sales were down 3 percent on a currency-neutral basis due to supply chain disruptions and a 35 percent tumble in Greater China. FY22 earnings and sales are now expected to reach the lower end of guidance due to the impact of COVID-19-related lockdowns in Greater China.
 
“In the first quarter, consumer demand for our brand and products was strong in all Western markets. Our combined sales in North America, EMEA and Latin America grew at a double-digit rate. Backed by an exceptionally strong wholesale order book and relentless focus on driving growth in our own direct-to-consumer (DTC) channels, we expect this positive development to continue for the rest of the year,” said Adidas CEO Kasper Rorsted. “In the East, we will return to growth in Asia-Pacific in the second quarter, while we expect the challenging market environment in Greater China to continue. With strong double-digit growth in the vast majority of our markets, representing more than 80 percent of our business, we are well-positioned for success in 2022. “
 
Currency-neutral revenues decrease 3 percent despite strong momentum in Western markets
Currency-neutral revenues in the first quarter declined 3 percent as Adidas faced challenges in both supply and demand. While the company continued to experience strong demand in all Western markets, supply chain constraints, as a result of last year’s lockdowns in Vietnam, reduced top-line growth by around €400 million in Q1 2022. The challenging market environment, as well as COVID-related lockdowns in Greater China and Asia-Pacific, also continued to weigh on the top-line development in these regions.
 
In light of the supply shortages, Adidas continued to prioritize its DTC channel in the quarter. As a result, DTC revenues increased 1 percent versus the prior year, reflecting a 33 percent increase compared to the 2020 level. While Adidas e-commerce revenues had a double-digit increase in the share of full-price sales, revenues in its digital channel increased 2 percent during the quarter reflecting high growth in the prior-year period. Compared to 2020, e-commerce revenues grew 50 percent in the first quarter. From a category perspective, revenue development was strongest in its strategic growth categories Football and Outdoor, which both grew double-digits. In addition, sales in Running increased at a high-single-digit rate driven by strong sell-through of its latest product releases, including UltraBoost 22 and adiStar as well as the broadening of the Solar franchise with the introduction of SolarGlide. In euro terms, revenues increased 1 percent to €5.302 billion in the first quarter (2021: €5.268 billion).
 
Revenue growth is driven by continued strong momentum in Western markets
From a regional perspective, the top-line development in the first quarter of 2022 continued to differ significantly between Western and Eastern markets. Despite supply chain constraints limiting growth by around €400 million, currency-neutral revenues in all Western markets combined increased by 13 percent during the quarter with double-digit increases in North America (+13 percent) and Latin America (+38 percent). Sales in EMEA were mostly impacted by the supply shortages with more than half of the total negative impact recorded in this market. Nevertheless, revenues grew at a high-single-digit rate (+9 percent) in the region. In the East, the company continued to face a challenging market environment in Greater China, amplified by COVID-related lockdowns across both regions. As a result, revenues in Greater China decreased 35 percent also due to strong prior-year comparables and 16 percent in Asia-Pacific.
 
Gross margin declined to 49.9 percent despite lower discounts and first impact from higher prices
The company’s gross margin in the first quarter was down 1.9 percentage points to 49.9 percent (2021: 51.8 percent). This decrease was mainly driven by a significant increase in sourcing and freight costs. In addition, the negative impact of a less favorable market mix and tough prior-year comparables in e-commerce weighed on the gross margin development. These effects could not be offset by the positive impact from a significantly higher share of full-price sales and first selective price increases, mainly on DTC exclusive products. 
 
Operating profit of €437 million resulted in an operating margin of 8.2 percent
Other operating expenses were up 10 percent to €2.258 billion (2021: €2.047 billion). As a percentage of sales, other operating expenses increased 3.7 percentage points to 42.6 percent (2021: 38.9 percent). Marketing and point-of-sale expenses increased 19 percent to €641 million (2021: €541 million) reflecting additional investments in brand campaigns and the support of new product launches. As a percentage of sales, marketing and point-of-sale expenses were up 1.8 percentage points to 12.1 percent (2021: 10.3 percent). Operating overhead expenses were up 7 percent to €1.617 billion (2021: €1.506 billion) driven by investments in its DTC business and its digital capabilities. As a percentage of sales, operating overhead expenses increased 1.9 percentage points to 30.5 percent (2021: 28.6 percent). The company’s operating profit amounted to €437 million (2021: €704 million) in the quarter, reflecting an operating margin of 8.2 percent (2021: 13.4 percent).
 
Net income from continuing operations reaches €310 million
The company’s net income from continuing operations decreased to €310 million (2021: €502 million), while basic EPS from continuing operations reached €1.60 (2021: €2.60).
 
Inventories and operating working capital increase
Inventories increased 15 percent year on year to €4.542 billion (2021: €3.938 billion). In currency-neutral terms, inventories increased 12 percent compared to the prior year. Operating working capital was up 8 percent to €4.643 billion (2021: €4.297 billion). On a currency-neutral basis, operating working capital increased 4 percent. Average operating working capital as a percentage of sales decreased to 20.4 percent (2021: 23.7 percent), reflecting a double-digit increase in payables due to a significantly higher sourcing volume in anticipation of strong double-digit growth in the second half of the year.
 
Adjusted net borrowings of €3.690 billion
Adjusted net borrowings at March 31, 2022 amounted to €3.690 billion (March 31, 2021: €3.290 billion), representing a year-over-year increase of 12 percent. This development was mainly driven by the decrease in cash generated from operations as well as the company’s strong shareholder return activities during the past twelve months.
 
Outlook for FY 2022 updated to reflect the impact of new lockdowns in Greater China
Despite several external factors continuing to weigh on industry-wide demand and supply, Adidas confirms its top-and bottom-line outlook for 2022. While the company continues to expect currency-neutral revenues to increase by a rate of between 11 percent and 13 percent, growth is now anticipated to come in at the lower end of this range due to the severe impact of COVID-related lockdowns in China. Consequently, net income from continuing operations is also forecasted to reach the lower end of the previously communicated range of between €1.8 billion and €1.9 billion.
 
Because of the less favorable market mix due to lower-than-expected revenues in Greater China, the company’s gross margin is now expected to be around the prior year’s level of 50.7 percent in 2022 (previously: between 51.5 percent and 52.0 percent). As Adidas continues to invest in the brand, its products DTC and digital to support double-digit growth in all other markets in 2022 and long-term market share gains worldwide, the company also expects its operating margin to come in at around the prior year’s level of 9.4 percent (previously: between 10.5 percent and 11.0 percent). 
 
Due to the recent widespread COVID-related lockdowns in China, which have led to a large number of store closures and traffic declines even in parts of the country not directly impacted by the pandemic, revenues in Greater China are now expected to decline significantly in 2022. At the same time, the original growth targets for EMEA (mid-teens growth), North America, Latin America (both mid-to-high-teens growth), and Asia-Pacific (mid-teens growth), which combined represent more than 80 percent of the company’s business, are confirmed and well underpinned by a strong order book. The momentum in all Western markets and the return to double-digit growth in the company’s Asia-Pacific region are expected to compensate for the lockdown-related revenue decline in Greater China. 
 
Adidas expects to return to growth in the second quarter despite a continued sales decline in Greater China and around €200 million negative impact from supply chain constraints. In the second half of the year, net sales are expected to grow more than 20 percent driven by unconstrained supply combined with strong momentum in Western markets, accelerated demand in Asia-Pacific, a pipeline of products, and major sporting events. 
 
Rorsted concluded, “In this environment, characterized by severe external challenges, it is imperative to stay focused on our strategic objectives. While we will remain agile, we will not jeopardize our long-term growth opportunity for short-term profit optimization. We will continue to invest into our brand and partnerships, into our DTC business and digital capabilities to support top-line acceleration and market share gains in our growth markets in 2022.”

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