In 2012, despite a high degree of economic uncertainty, we expect the global economy to grow, with the adidas Group to benefit from continued healthy demand for sporting goods. Through our industry-leading innovative strength, the extensive pipeline of new and fresh products as well as positive effects from major sporting events, we project top- and bottom-line improvements in our Group’s financial results in 2012. We forecast adidas Group sales to increase at a high-single-digit rate on a currency-neutral basis due to growth in the Wholesale and Retail segments as well as in Other Businesses. Group gross margin is expected to be around 47.5%. Pressures from higher input costs will weigh on otherwise positive effects anticipated from regional and product mix enhancements as well as product price increases. Group operating margin is forecasted to increase to a level approaching 8.0%, driven by lower other operating expenses as a percentage of sales. As a result, we project basic earnings per share to grow at a rate between 15% and 17% to a level between € 3.68 and € 3.75.
02.3
Subsequent Events
There were no major Group-specific matters between the end of the third quarter of 2012 and the finalisation of the interim consolidated financial statements on November 5, 2012, which we expect to influence our business materially going forward.
Outlook
Forward-looking statements
This Management Report contains forward-looking statements that reflect Management’s current view with respect to the future development of the adidas Group. The outlook is based on estimates that we have made on the basis of all the information available to us at this point in time. In addition, such forward-looking statements are subject to risks and uncertainties as described in the Risk and Opportunity Report of the adidas Group Annual Report 2011 (p. 145 to 162), which are beyond the control of the adidas Group. In case the underlying assumptions turn out to be incorrect or described risks materialise, actual results and developments may materially deviate from those expressed by such statements. The adidas Group does not assume any obligation to update any forward-looking statements made in this Management Report beyond statutory disclosure obligations.
Global economic growth to slow in 2012
According to the World Bank, growth of the global economy is projected to increase 2.5% in 2012 (2011: 2.7%). Expectations are that the euro area is likely to enter a recession, while Japan’s economic growth is expected to be modest. The consensus remains that the majority of the world’s economic growth will continue to be derived from the emerging markets, particularly in Asia and Latin America. These positive economic growth expectations and the outlook for consumer spending, particularly in the emerging markets, are forecasted to be supportive of our growth aspirations in 2012. In Western Europe, GDP is projected to decrease around 0.3% in 2012. The sovereign debt crisis in the euro area is expected to result in further fiscal belt tightening and austerity measures. A reduction in industrial activity will also add to the challenges of public debt, high unemployment levels and weak domestic demand in many parts of the region. In European emerging markets, significant regional markets such as Russia and Poland are forecasted to grow 3.0% and 2.5%, respectively. Russia, in particular,
is expected to continue benefiting from strong domestic consumption.
In the USA, GDP is projected to grow 2.2% in 2012, driven by domestic consumption as well as robust industrial and export activities.
Nonetheless, a relatively high and static unemployment level and concerns over the sovereign debt crisis in the euro area are likely to adversely affect business confidence and lead to cautious investment spending. In Asia, GDP is projected to grow 4.5% in 2012. Leading economic indicators point to a stabilisation in inflation and continued wage growth, which is expected to support consumer spending. Of these, GDP growth in China and India is forecasted to remain robust at 7.8% and 5.5%, respectively, albeit at lower levels than in prior years, driven by domestic demand. In Japan, industrial production and slight increases in domestic demand are projected to yield a 2.0%
increase in GDP in 2012. In Latin America, GDP growth rates are likely to moderate to a level of around 2.9% in 2012. A healthy labour market and relatively healthy private consumption rates are all forecasted to support economic activity in the region. However, inflation as well as an expected fall in exports to Europe are concerns for economic growth in the region.
Sporting goods industry growth to continue in 2012 In the absence of any major economic shocks, we expect the global sporting goods industry to expand in 2012, albeit with significant regional variation. Following macroeconomic trends, consumer spending on sporting goods in the emerging economies will outperform the more developed markets. A contraction in private consumption in many mature markets is forecasted for 2012 and will detract from expansion of the industry in those regions. While growth rates will moderate compared to 2011, the sporting goods sector is expected to continue to grow rapidly in the emerging economies. Furthermore, the global sporting goods industry has been positively impacted by two of sport’s largest events in 2012 – the UEFA EURO 2012 and the London 2012 Olympic and Paralympic Games. In Europe, the sporting goods industry is expected to grow modestly, with considerable differences between the region’s markets. In many markets, sporting goods retail activity is forecasted to be negatively affected by austerity measures, low wage growth and reduced consumer spending compared to 2011. However, the region hosted both the UEFA EURO 2012 (Poland and Ukraine) and the London 2012 Olympic and Paralympic Games (UK), which have supported growth and provided momentum for the industry in 2012. In North America, industry growth rates are expected to moderate compared to the prior year, in line with overall consumer
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spending expectations. From a category perspective, basketball, running (particularly lightweight running) and training are seen as significant sporting goods drivers for the year. In Greater China, wage growth and domestic consumption are set to continue to propel sporting goods sales. The trend towards international brands is also expected to continue, as local players struggle with declining brand image as well as inventory and product ageing issues. In other Asian markets, the sporting goods industry is forecasted to grow in 2012, however with some regional deviation. Japan’s sporting goods industry is expected to expand compared to 2011, albeit at a moderate rate, given that overall consumer confidence and spending are projected to remain low. Most of the other major Asian emerging markets are expected to see robust sporting goods sales growth in 2012, as domestic demand increases and rising wages drive purchases of discretionary items. The sporting goods industry in Latin America is projected to grow in 2012, with a healthy labour market and wage growth expected to continue.
adidas Group currency-neutral sales to increase at a high-single-digit rate in 2012
We expect adidas Group sales to increase at a high-single-digit rate on a currency-neutral basis in 2012 (previously: at a rate approaching 10%). The slight reduction relates to lower sales expectations at Reebok and Rockport as well as negative impacts due to the NHL lockout. Despite the high degree of uncertainty regarding the global economic outlook and consumer spending, Group sales development will be favourably impacted by our high exposure to fast-growing emerging markets as well as the further expansion of Retail. In addition, this year’s major sporting events will provide positive stimulus to Group sales. As Official Sponsor of the UEFA EURO 2012 in Poland and Ukraine, the adidas brand benefited from additional sales in the football category. And as the Official Sportswear Partner of the London 2012 Olympic Games and Team GB, the adidas brand was the most visible brand during the event. This event not only provided an excellent platform to increase the brand’s presence in the important UK market, but also to present its performance credentials globally.
Currency-neutral Wholesale revenues expected to increase at a mid-single-digit rate
We project currency-neutral Wholesale segment revenues to increase at a mid-single-digit rate compared to the prior year. Our growth expectations are supported by order backlog development, positive retailer and trade show feedback as well as the positive impact from the major sporting events. Currency-neutral adidas Sport Performance sales are forecasted to increase at a mid-single-digit rate due to growth in most categories, particularly football, running, basketball and outdoor. adidas Sport Style revenues are projected to increase at a low-double-digit rate on a currency-neutral basis as a result of the expanded distribution scope and continued momentum in our product lines, in particular adidas Originals. Currency-neutral Reebok sales are expected to decrease mainly due to the negative impact from the discontinuation of the NFL licence agreement and the shift of the US-related NHL licensed apparel business into the Reebok-CCM Hockey segment, effective from January 1, 2012. The negative impact from the commercial irregularities discovered at Reebok India Company will also contribute to this development.
Retail sales to increase at a low-teens rate on a currency-neutral basis
adidas Group currency-neutral Retail segment sales are projected to grow at a low-teens rate in 2012. Expansion of the Group’s own-retail store base and comparable store sales are expected to contribute at a similar rate to the revenue growth. The Group expects a net increase of its store base by around 50 to 100 adidas and Reebok stores in 2012. We plan to open around 300 new stores, depending on the availability of desired locations. New stores will primarily be located in emerging markets in Eastern Europe. Approximately 200 to 250 stores will be closed over the course of the year. Around 100 stores will be remodelled. Comparable store sales are expected to increase at a mid- to high-single-digit rate compared to the prior year. As a result of the improvements in concept store operations, we project concept store growth rates to be slightly better than those of factory outlets.
49 adidas Group 2012 outlook
Currency-neutral sales development (in %): Previous guidance 1)
adidas Group increase at a high-single-digit rate increase at a rate approaching 10%
Wholesale mid-single-digit increase mid-single-digit increase
Retail low-teens increase low-teens increase
Comparable store sales mid- to high-single-digit increase mid- to high-single-digit increase
Other Businesses high-teens increase high-teens increase
TaylorMade-adidas Golf high-teens increase high-teens increase
Rockport mid-single-digit increase high-single-digit increase
Reebok-CCM Hockey strong double-digit increase strong double-digit increase
Gross margin around 47.5% around 47.5%
Operating margin approaching 8.0% approaching 8.0%
Basic earnings per share € 3.68 to € 3.75 € 3.68 to € 3.75
Average operating working capital as a percentage of sales around 20.8% moderate increase
Capital expenditure € 400 million to € 450 million € 400 million to € 450 million
Store base net increase by around 50 to 100 stores net increase by around 50 to 100 stores
1) As published on August 2, 2012.
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Currency-neutral sales of Other Businesses to grow at a high-teens rate
In 2012, revenues of Other Businesses are expected to increase at a high-teens rate on a currency-neutral basis. TaylorMade-adidas Golf currency-neutral sales are projected to grow at a high-teens rate compared to the prior year. Sales development should be positively impacted by product innovation in core categories such as metalwoods, irons and wedges. Currency-neutral revenues at Rockport are now forecasted to increase at a mid-single-digit rate (previously: at a high-single-digit rate). The moderate decrease in the sales expectations is mainly related to Rockport’s wholesale activities.
Improvements in the brand’s product portfolio as well as own-retail expansion will be the main contributors to Rockport’s full-year growth. Currency-neutral sales at Reebok-CCM Hockey are expected to grow at a strong double-digit rate. This development mainly reflects the shift of the US-related NHL licensed apparel business from the Wholesale and Retail segments into the Reebok-CCM Hockey segment effective from January 1, 2012.
adidas Group sales expected to increase in all regions
We expect Group currency-neutral revenues to increase in all our regions in 2012, however at varying growth rates. In Western Europe, the positive effects from this year’s major sporting events will continue to outweigh the highly challenging macroeconomic environment, which is projected to negatively impact consumer spending. In European Emerging Markets, the expansion of and increasing sophistication in our own-retail activities, particularly in Russia/CIS, are forecasted to have a positive influence on Group sales.
In North America, we expect solid growth despite the discontinuation of the NFL licence agreement. With the adidas brand, we will continue to build on the momentum we have created in this market over the past two years as we further strengthen our product offering, distribution scope as well as consumer engagement initiatives. In Greater China, following strong double-digit sales increases in 2011, we expect further growth in line with our Route 2015 aspirations. This development will be primarily driven by expanding and solidifying our distribution footprint, including the further roll-out of adidas Originals and the adidas NEO label. In Other Asian Markets, the negative impact from the commercial irregularities discovered at Reebok India Company will be more than offset by a strong performance in the region’s other markets such as South Korea and Japan. Lastly, in Latin America, Group sales development is projected to be positively impacted by the solid momentum of the region’s sporting goods industry. However, trade barriers in certain markets continue to weigh on growth prospects.
2012 Group gross margin to be around 47.5%
In 2012, the adidas Group gross margin is forecasted to be around 47.5% (2011: 47.5%). As in the prior year, gross margin development will be negatively impacted by increasing input and labour costs year-over-year. However, these negative influences will be largely offset by positive regional mix effects, as growth rates in high-margin emerging markets are projected to be above growth rates in more
mature markets. In addition, a larger share of higher-margin Retail sales as well as product price increases will positively influence Group gross margin development.
Group other operating expenses to decrease as a percentage of sales
In 2012, the Group’s other operating expenses as a percentage of sales are expected to decrease modestly (2011: 41.4%). Sales and marketing working budget expenses as a percentage of sales are projected to decrease slightly compared to the prior year. Marketing investments centre around key sporting events such as the UEFA EURO 2012 and the London 2012 Olympic Games to leverage the outstanding visibility of the adidas brand during these events. Further, we will continue to support Reebok’s growth strategy in the men’s and women’s fitness category and will also invest in growing our key attack markets North America, Greater China and Russia/CIS. Operating overhead expenditure as a percentage of sales is forecasted to decline in 2012.
Higher administrative and personnel expenses in the Retail segment due to the planned expansion of the Group’s store base will be offset by leverage in the Group’s non-allocated central costs. We expect the number of employees within the adidas Group to slightly decrease versus the prior-year level. The adidas Group will continue to spend around 1% of Group sales on research and development in 2012. Areas of particular focus include customisation and digital sports products at adidas, as well as supporting the expansion of Reebok’s fitness positioning.
Operating margin to continue to expand
In 2012, we expect the operating margin for the adidas Group to increase to a level approaching 8.0% (2011: 7.6%), despite a projected negative impact of up to € 70 million on the Group’s operating profit related to the reorganisation and changes to commercial activities at Reebok India Company. Lower other operating expenses as a percentage of sales are expected to be the primary driver of the operating margin improvement.
Basic earnings per share to increase to a level between € 3.68 and € 3.75
Net income attributable to shareholders is expected to increase at a rate between 15% and 17% to a level between € 770 million and
€ 785 million. This equates to basic earnings per share between
€ 3.68 and € 3.75 (2011: € 3.20). Top-line improvement and an increased operating margin will be the primary drivers of this positive development. In addition, we expect lower interest rate expenses in 2012 as a result of a lower average level of gross borrowings. The Group tax rate is expected to be slightly less favourable compared to the prior year, at a level around 28.5% (2011: 27.7%).
Average operating working capital as a percentage of sales to be around 20.8%
In 2012, average operating working capital as a percentage of sales is expected to be around the prior-year level of 20.8% (previously: to increase slightly). This is mainly due to the Group’s strict discipline in inventory management.
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Investment level to be between € 400 million and € 450 million
In 2012, investments in tangible and intangible assets are expected to amount to € 400 million to € 450 million (2011: € 376 million).
Investments will focus on adidas and Reebok controlled space initiatives, in particular in emerging markets. These investments will account for around 40% of total investments in 2012. Other areas of investment include the Group’s logistics infrastructure such as the construction of our biggest distribution centre worldwide near Osnabrueck, Germany, and the increased deployment of SAP and other IT systems in major subsidiaries within the Group. All investments within the adidas Group in 2012 are expected to be fully financed through cash generated from operating activities.
Excess cash to be used to support growth initiatives In 2012, we expect continued positive cash flow from operating activities. Cash will be used to finance working capital needs, investment activities, as well as dividend payments. We intend to largely use excess cash to invest in our Route 2015 growth initiatives and to further reduce our dependency on external financing sources.
In order to ensure long-term flexibility, we aim to maintain a ratio of net borrowings over EBITDA of less than two times as measured at year-end (2011 ratio: –0.1).
Update to Route 2015 targets
In September, at its Investor Day in Carlsbad, California, the adidas Group confirmed its expectations to achieve sales of € 17 billion and an operating margin of 11% by 2015. It also provided an update to its Route 2015 targets by segment and by brand. For the adidas brand, the 2015 goal was increased by € 600 million to € 12.8 billion. adidas Sport Performance sales are now projected to reach € 8.9 billion (previously:
€ 8.5 billion), with the increase in expectations driven by record-breaking football sales and momentum in the running and basketball categories. Additionally, sales expectations for adidas Sport Style were increased to € 3.9 billion, up from € 3.7 billion, due to the continuing strong global resonance of adidas Originals and the solid performance of the adidas NEO label. At the Reebok brand, taking into account the strategic decisions to discontinue the NFL contract, reduce exposure to lower-profit markets such as India and Latin America, as well shift the reporting of US-related NHL sales to Reebok-CCM Hockey,
€ 8.5 billion), with the increase in expectations driven by record-breaking football sales and momentum in the running and basketball categories. Additionally, sales expectations for adidas Sport Style were increased to € 3.9 billion, up from € 3.7 billion, due to the continuing strong global resonance of adidas Originals and the solid performance of the adidas NEO label. At the Reebok brand, taking into account the strategic decisions to discontinue the NFL contract, reduce exposure to lower-profit markets such as India and Latin America, as well shift the reporting of US-related NHL sales to Reebok-CCM Hockey,