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Adidas Group (ADDDF.PK)

Q1 2010 Earnings Conference Call

May 04, 2010 09:00 pm ET

Executives

JP O’Meara

Herbert Hainer - CEO

Robin Stalker

Analysts

Uwe Weinreich - UniCredit

Jürgen Kolb - CAI Cheuvreux Germany

Andreas Inderst - Exane BNP Paribas

Matthias Eifert - MainFirst Bank

Michael Kuhn - Deutsche Bank

Antoine Belge - HSBC

Christopher Svezia - Susquehanna Intl. Group

Cedric Lecasble - Kepler Capital Markets

Presentation

JP OMeara

Good afternoon, ladies and gentlemen. Welcome to our first quarter 2010 financial results conference call. I am JP O’Meara and I head up the IR Activities here at the adidas group. Our presenters today are Herbert Hainer, adidas Group’s CEO; and Robin Stalker, Group CFO. Today, they would be covering the Group’s first quarter financial performance, and updating you on our outlook for the remainder of the year. So, let’s get started and over to you, Herbert.

Herbert Hainer

Thanks, JP and good afternoon ladies and gentlemen. After the hard work of last year to reshape our organization, we began 2010 with confidence and the full belief that our product and marketing strategies could make a real difference in an improving economic environment. And without doubt, the strength and power of our brands was visible on every playing field in the first quarter.

We generated record first quarter sales of €2.7 billion, an increase of 4% currency neutral, driven by growth in all segments. Our profitability improved substantially, with gross margin up 3.5 percentage points to 48.6%. And through operating expense leverage and benefits from the cost saving initiatives we put in place last year, first quarter net income jumped to €168 million from €5 million 12 months ago.

By segment, wholesale revenues increased 1% currency neutral disclose being dampened by difficult retail conditions in several markets. However, there were some bright spots with sales growth of 16% in both North and Latin America and 4% in Western Europe offsetting declines in Greater China, European emerging markets and other Asian markets.

Gross margin in the wholesale segment improved 50 basis points in the first quarter to 43.1%. The recovery in consumer spending that gained traction in many regions as the quarter progressed into late February and throughout March was definitely encouraging. And this is really visible in our retail segment’s performance. Sales were up 16% currency neutral, with comparative store sales increasing 7%, which is certainly much better than we had anticipated. On a brand basis, adidas and Reebok comp store sales increased 5% and 15% respectively.

North America and European emerging markets grew 15% and 26% respectively and we’re particularly strong as the consumer recovery in the US and Russia gathered pace. On a store format basis, we saw big improvements in our concept stores and other retail formats. Comparable concept store sales increased 12% and other retail formats, which include e-commerce, grew 43%, with online sales almost doubling.

This translated into a significant profitability increase as the retail segment’s gross margin grew 3.7 percentage points and operating margin expanded 7.6 percentage points over the prior year. This demonstrates the leverage we have in our retail operation. And taking this together with the work we are doing in 2010 to create greater efficiency and improve our retail competency, I am convinced we will be able to continue to drive higher returns in our retail investments over the medium term.

For those of you not yet familiar with our new reporting structure, the wholesale and retail segments comprise the business of the adidas and Reebok brands. So let’s take a few minutes to talk about the key highlights of each brand for the quarter.

First adidas, revenues grew 4% currency neutral in the quarter and gross margin expanded 70 basis points to 47.7%. In the football category, we picked up just where we left off in 2009, leveraging our involvement with the FIFA World Cup 2010, and utilizing our convincing portfolio of products to incredible success. So much so, we generated record first quarter sales in the category with growth of 26% currency-neutral. And let me assure you, we still have plenty more to come ahead of the kick-off to the event with the new F50 football boot coming to market next week.

While adidas is passionate about football and no event is bigger and more anticipated than the FIFA World Cup, there was still a lot more to the brand’s performance in the first quarter. In running, our Supernova and Response families grew at strong double-digit rates, with the Supernova Adapt and Response Trail 16 receiving Runner’s World Editor’s choice award. In addition, strong marketing initiatives made the new adidas miCoach platform a big draw to our retail stores.

In outdoor, sales grew 4% currency-neutral with sales in one of our most important target categories, Mountain Sports, up over 60%. Finally, in basketball, our international business and our high performance TechFit offering both grew at double-digit rates. And in March, we extended our global partnership with the NBA giving adidas exclusive rights to all NBA apparel in Europe beginning with the 2010, 2011 NBA season.

Another stand-out performance for the adidas brand in the first quarter was the Sport Style division. Sales increased 22% currency-neutral to over half a billion euro, representing our highest growth rate in nearly three years. And this comes on top of 12% currency-neutral growth in the same period last year. To be successful in sports lifestyle, it is critical to continuously engage the consumer with unique and creative concepts that keep them coming back to the brand day after day, year after year. And collections such as Star Wars and Originals by Originals are just some examples of how we achieved this during the quarter.

Read the rest of this transcript for free on seekingalpha.com