Adidas to spend on marketing, new stores to hit margins

Berlin: Adidas, the world’s second-biggest sportswear firm, cut its profit margin target for 2014 on Thursday, saying it would increase spending on marketing and an expansion of its own-run stores a week after it issued a profit warning.

The German group is now targeting an operating margin of 6.5-7.0 percent for 2014, from a previous 8.5-9.0 percent and down from 8.7 percent in 2013, excluding goodwill impairments.

The reduction in the margin - a measure of operating income as a proportion of sales - comes after Adidas said last week it needed to increase investment in a bid to catch up with market leader Nike.

Adidas last week cut its sales and net income targets for 2014 and scrapped its goals for 2015, blaming the move on poor performance at its golf business and volatile emerging market currencies, particularly the Russian rouble.

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Among the 2015 targets Adidas abandoned was a goal for an operating margin of 11 percent, still below the 13 percent U.S. group Nike saw in its fiscal year to May 31.

Adidas, which has been losing ground to Nike in developed markets, said it now expects operating expenses as a percentage of sales to increase from the 42.3 percent recorded last year, compared with previous guidance for them to stay flat, as it increases spending on marketing and opening more own-run stores.

The same factors contributed to a fall in second-quarter operating margin to 6.3 percent from 7.4 percent a year ago.

Adidas announced last week it would fight back more aggressively against Nike and other competitors, building on its success at the football World Cup after the victory of its sponsored team Germany by increasing marketing in the next 18 months, particularly in North America and western Europe.

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While almost two-thirds of its sales are made through third-party retailers, Adidas has also been investing in opening more of its own shops, particularly in emerging markets, because they are more profitable.

Currency-adjusted sales from its own retail outlets rose a currency-neutral 22 percent in the first half to 1.75 billion euros (1.38 billion pounds), while wholesale sales rose 5 percent to 4.44 billion.

“MUTED EARNINGS TRENDS”

Adidas, which already reported last week that second-quarter sales rose a currency-adjusted 10 percent to 3.47 billion euros, said all regions had contributed to that increase, with western Europe up 13 percent, eastern Europe up 14 percent - driven by a double-digit rise in Russia - and Latin America up 33 percent.

Adidas said last week it was scaling back investment in Russia, where it runs more than 1,000 stores, citing a fall in the rouble since the start of the Ukraine crisis and increasing risks to consumer sentiment and spending there.

Adidas shares, which tumbled after last week’s profit warning and are down almost 38 percent this year, were off 1 percent at 0705 GMT, compared with a 0.5 percent weaker German blue-chip index .GDAX.

Citi analysts, who rate the stock “neutral”, said they remained sceptical on the stock given the planned reduction of stores in Russia, higher marketing costs and ongoing adverse currency trends.

“We continue to fear that earnings growth trends could remain muted despite the recently lowered EBIT (earnings before interest and taxation) base,” they wrote in a note.

In North America, where Adidas has struggled to make inroads into Nike territory, group sales rose 1 percent as a good performance by the core Adidas brand and Reebok fitness were offset by an 18 percent fall for its TaylorMade golf unit.

Reuters