Adidas Quarterly Profit Misses Analysts' Estimates

07 Mar 2007 • by Natalie Aster

Adidas AG, the world's second- largest sporting-goods maker, reported fourth-quarter profit that missed analysts' estimates and said orders for its Reebok brand fell, sending the shares to the lowest in 16 months, reported Bloomberg.

Net income was 13 million euros ($17 million) compared with a 4 million-euro loss a year earlier, the company said today in a statement. That was below the 18 million-euro median estimate of 10 analysts surveyed by Bloomberg. The Adidas brand's order backlog at the end of December was 4 percent less than a year earlier, while Reebok's backlog dropped 18 percent.

``Orders for the Reebok brand are disappointing again,'' Christian Hamann, an analyst at Hamburger Sparkasse in Hamburg, said after the earnings were released. ``Reebok seems to be becoming a serious problem for Adidas.''

The Herzogenaurach, Germany-based company bought Reebok International Ltd. for $3.8 billion to help catch up with Nike Inc., the world's largest sporting-goods maker. Adidas has struggled to increase Reebok's profitability, which is below that of its eponymous brand, as it closes factories in Indonesia and invests more in new brands to draw U.S. customers.

``Reebok did not deliver the earnings accretion in 2006 that we originally anticipated,'' Chief Financial Officer Robin Stalker said at a press briefing today.

The shares dropped as much as 2.6 percent and were trading down 1.3 percent at 34.96 euros as of 10:10 a.m. in Frankfurt. A close at that level would be the lowest since Nov. 1, 2005.

Fourth-quarter sales jumped 48 percent to 2.25 billion euros. Excluding Reebok, they climbed 4.8 percent to 1.59 billion euros.

Adidas said it expects its gross margin, a measure of profitability, to widen ``strongly'' in 2007 after narrowing by 3.6 percentage points to 44.6 percent in 2006. It should reach between 45 percent and 47 percent, helped by ``improvements in all three brand segments, in particular Reebok,'' the company said.

``In 2007, helping Reebok back to growth will be our group's highest priority,'' Chief Executive Officer Herbert Hainer said at the briefing.

Profit growth is expected to ``approach'' 15 percent this year as sales increase at a ``mid single-digit'' pace, excluding currency movements, the company said.

Adidas group sales excluding Reebok for the whole of 2006 gained 14 percent to 7.55 billion euros. Sales of Reebok goods between Feb. 1, 2006, and the end of last year were 9 percent lower than in 2005 at 2.47 billion euros.

Adidas, which supplies golfers including Spain's Sergio Garcia, has increased spending in Asia to advertise its TaylorMade-adidas golf gear, sales of which rose 21 percent to 856 million euros last year. The company aims to surpass Nike and be Asia's leading sporting-goods maker by 2010, with 3.5 billion euros in sales, Hainer said March 2 in Beijing.

``We're on track to achieve that target,'' the CEO said at the time, claiming that the company is ``already the No. 1 in Japan, in India, in New Zealand, in Indonesia and in Thailand.''

At home, the German company aims to fend off Nike's efforts to take over as supplier of uniforms to Germany's national soccer team and surpass it as the world's biggest maker of gear for the sport. Sporting-goods makers use uniform sponsorships to fuel demand and gain publicity by displaying their logos on team apparel.

A five-decade relationship between Adidas and the DFB, as the German soccer federation is known, is under threat after Nike offered 600 million euros for an eight-year contract, about six times more than Adidas's accord is worth, according to the DFB.

Hainer in November told Suddeutsche Zeitung that the Nike offer was ``lunacy,'' and the company said last month it had ``effectively'' extended its agreement through August 2014.

Net income rose 26 percent to 483 million euros in 2006 as sales gained 52 percent to 10.1 billion euros. European revenue climbed 31 percent to 4.16 billion euros in 2006, while sales in North America more than doubled to 3.23 billion after the Reebok purchase. Asian revenue jumped by a third to 2.02 billion euros.

Adidas plans to pay a full-year dividend of 42 cents a share.