Coronavirus pandemic weighs on adidas’ results in first nine months of 2020

In the first nine months of 2020, revenues decreased 18% on a currency-neutral basis and 20% in euro terms to € 14.297 billion (2019: € 17.802 billion). From a brand perspective, currency-neutral revenues for brand adidas decreased 18%, while Reebok revenues declined 20%. This development was mainly driven by broad-based store closures due to the global spread of the coronavirus pandemic in the first half of the year. Gross margin was down 3.0 percentage points to 50.0% (2019: 53.0%). A more favorable channel mix due to the exceptional e-commerce growth as well as lower sourcing costs had a positive effect on gross margin. This was countered by a less favorable pricing mix due to increased promotional activity and negative currency fluctuations which weighed on the development in the first nine months of 2020. In addition, an increase in inventory allowances as well as purchase order cancellation costs had a negative impact on the gross margin development. Other operating expenses declined 6% to € 6.717 billion (2019: € 7.149 billion) as a result of the company’s decision to proactively reduce costs in light of the coronavirus pandemic. As a percentage of sales, other operating expenses increased 6.8 percentage points to 47.0% (2019: 40.2%). The company recorded an operating profit of € 526 million (2019: € 2.416 billion), resulting in an operating margin of 3.7% (2019: 13.6%). The operating profit development was significantly impacted by several coronavirus-related charges in the first half of 2020. These mainly consisted of product takebacks in Greater China, purchase order cancellations, the increase in inventory and bad debt allowances as well as the impairment of retail stores and the Reebok trademark, with a combined negative impact of around € 500 million. During the nine-month period, adidas reported a net income from continuing operations of € 291 million (2019: € 1.737 billion). Basic as well as diluted EPS were € 1.47 (2019: € 8.76).

Inventories decreased 10% compared to the level as at June 30

Inventories increased 27% to € 4.676 billion versus the prior year level of € 3.677 billion (+35% currency-neutral). This increase reflects the inevitably lower-than-expected product sell-through caused by the broad-based store closures during the first half of the year as well as traffic remaining below prior year levels after stores reopened. Compared to the level as at June 30, 2020, inventories decreased 10%, or more than € 500 million, as the company’s inventory normalization is progressing according to plan. The year-over-year increase in inventories was partly offset by a 20% decline in accounts receivable (-14% currency-neutral) as adidas continued to put emphasis on cash collection. Accounts payable decreased 27% (-26% currency-neutral). Overall, operating working capital increased 22% to € 5.573 billion (September 30, 2019: € 4.569 billion) and was up 33% on a currency-neutral basis. Average operating working capital as a percentage of sales increased 5.1 percentage points to 23.2% (September 30, 2019: 18.1%).

Cash position of € 3.2 billion at quarter-end

Cash and cash equivalents were up 37% to € 3.224 billion versus the prior year level of € 2.349 billion. The decrease in cash generated from operating activities due to the unfavorable underlying development of sales and operating working capital was more than offset by effective short-term cash measures, the utilization of credit lines and the issuance of bonds. Net debt amounted to € 1.092 million at the end of the first nine months (September 30, 2019: net cash of € 342 million).

Similar top-line development expected in fourth quarter as experienced in Q3

In Q4, uncertainties around the further development of the coronavirus pandemic as well as the global macroeconomic environment remain high. adidas has continued to successfully execute on its product launch plans since the start of the quarter. However, the number of coronavirus cases in several of its major markets have been on the rise recently, leading to new lockdown measures in several countries. As a result, the company’s global store opening rate has fallen to 93% most recently, down from 96% at the end of September. In addition, stricter social distancing guidelines had an adverse impact on store traffic, particularly in Europe. Overall, the company’s top line is predicted to develop similarly in Q4 as it did in Q3, implying a low- to mid-single-digit currency-neutral revenue decline. This development is against a strong comparison base from the prior year, when the launch of UEFA Euro 2020 merchandise and earlier shipments due to a different timing of Chinese New Year contributed to Q4 growth. Despite the strong comparison base in Greater China, adidas expects its business in this market to return to growth in the fourth quarter.

As a result of the company’s focus on profitable sell-through and disciplined sell-in, gross margin is expected to be around the prior year level in Q4. Consequently, operating profit is anticipated to be between € 100 million and € 200 million. This outlook assumes no additional major lockdowns, a store opening rate above 90% and no further material slowdown of global store traffic.

“While at the beginning of the quarter we were on track for growth in Q4, a worsening of the pandemic in many regions of the world is again requiring our patience and support. However, this is not taking us by surprise. Thanks to our prudent approach, we are now well-prepared to cope with these short-term uncertainties,” said adidas CEO Kasper Rorsted. “At the same time, we are even better positioned to benefit from the long-term industry growth drivers accelerated by the pandemic such as health and wellbeing, athleisure and digitization.”