Adidas-Salomon Sales Up 3%, But US Business Is Hurting

Second quarter net sales Adidas-Salomon grew 3% on a currency-neutral basis with a positive underlying performance at all brands. However, as currency fluctuations affected this figure significantly, reported Group sales actually decreased 8% from euro 1.5 billion in 2002 to euro 1.4 billion in 2003. As a result, currency-neutral Group sales increased 8% in the six months ending June 30, 2003. In euro terms, revenues declined 3% or euro 84 million from euro 3.1 billion in 2002 to euro 3.1 billion in 2003. In the second quarter, the Group's North American business fell 19.5%. In North America, order backlogs declined 12%.

Herbert Hainer, COB/CEO of Adidas-Salomon, stated: "In the first half year, markets changed fast and got tougher. This challenged us to respond quickly and to push even harder in all our markets. All of our operating measurements moved visibly in the right direction. The positive underlying sales developments coupled with a strong reduction in our financial expenses helped drive our earnings for the first half of the year up significantly."

Sales at brand Adidas drove Group performance in the first half of 2003. Currency-neutral adidas revenues increased by 10%. Drivers of this growth were strong developments in the Sport Performance categories running and training as well as the Sport Heritage division. At Salomon, underlying sales grew 5% as a result of solid growth in soft goods, alpine skis and bicycle components. And at TaylorMade-Adidas Golf, currency-neutral sales decreased 3%. This development hides strong underlying sales improvement in the second quarter due to growth in RAC irons as well as in both footwear and apparel. Excluding euro 17 million of Slazenger Golf sales in the first half of 2002 from a license agreement that was not renewed in 2003, underlying sales for TMAG rose by 1%.

In euro terms, Adidas sales in the first half year declined by less than 1% from euro 2.6 billion in 2002 to euro 2.5 billion in 2003. Salomon sales declined 1% from euro 194 million to euro 191 million. And TMAG decreased 18%, from euro 379 million to euro 311 million.

In Europe, currency-neutral sales for Adidas-Salomon increased 10% in the first half year compared to the prior year, reflecting particularly strong development in Italy, France, Germany and the UK as well as the emerging markets. Underlying Group sales in Asia rose 8% year-over-year with growth driven by vigorous increases at Adidas in Japan, South Korea and China as well as double-digit growth at Salomon in the second quarter. In North America, underlying 2003 first half year sales for the Group were up 1% despite the very difficult retail environment. Latin American currency-neutral sales improved by 41% versus the previous year due to higher sales in Argentina and Brazil. In the reporting currency, however, sales grew 7% in Europe, declined 5% and 17% in Asia and North America respectively and were stable in Latin America.

Adidas order backlogs grow currency-neutral despite difficult retail situation in North America

Despite continued difficult market conditions in North America and tough comparisons with the prior year, underlying order backlogs at the end of the second quarter of 2003 for brand adidas grew 4%. Currency translation effects had a strong impact on these backlog figures. On an underlying basis, total footwear backlogs were stable and apparel orders grew 7%. The currency-neutral backlogs by region developed as follows: In Europe, orders improved 10%, with footwear up 7% and apparel backlogs increasing 12%. In Asia, backlogs grew 18%. Footwear backlogs rose 3% and apparel orders increased 44%. In North America, order backlogs declined 12%, which is in line with the guidance Management provided for the market at the end of the quarter. Footwear backlogs fell 11% and apparel orders decreased 14%. In euro terms, backlogs in Europe and Asia grew 8% and 4% respectively and declined in North America by 23%.

As a result of lower sales in the reporting currency, Adidas-Salomon gross profit decreased 8% during the second quarter from euro 675 million in 2002 to euro 623 million in 2003 despite a stable gross margin at 44.8%. In the first half of 2003, Group gross profit declined 2% to euro 1.3 billion versus euro 1.4 billion in 2002. The gross margin, however, improved 0.3 percentage points to 43.5% (2002: 43.2%) largely due to currency effects.

Operating expenses, including SG&A, depreciation and amortization (excluding goodwill), were reduced by 7% in the second quarter from euro 606 million in 2002 to euro 561 million in 2003. As a percentage of sales, however, operating expenses grew by 0.1 percentage points from 40.2% in 2002 to 40.3% in 2003 due to a positive one-time effect of euro 23 million in the second quarter of 2002 associated with the resolution of an outstanding legal dispute and a sale of real estate. As a result, operating profit for the quarter declined 10% from euro 69 million in 2002 to euro 62 million in 2003. In the first half, operating expenses were reduced by 3% or euro 37 million from euro 1.2 billion in 2002 to euro 1.2 billion in 2003. As a percentage of net sales this equates to 37.7%, which is 0.2 percentage points lower than the 2002 level of 37.9%. Therefore, Group operating profit increased 6% from euro 167 million in 2002 to euro 178 million in 2003 and operating margin increased 0.5 percentage points from 5.3% in the first half of 2002 to 5.8% in 2003.

In the second quarter of 2003, financial expenses were reduced by 64%, from euro 27 million to euro 10 million. The main factors contributing to this development were the financial stabilization of emerging markets such as Argentina, Turkey and Brazil which had negatively impacted the financial result in the prior year. Net income grew 27% during the second quarter, reaching euro 32 million in 2003 versus euro 25 million in 2002 and taking earnings per share to euro 0.71 compared to euro 0.56 in the prior year. In the first half, financial expenses declined 40% from euro 46 million in 2002 to euro 28 million in 2003. Income before taxes increased 22% from euro 121 million to euro 148 million in 2003. The Group tax rate improved by 0.3 percentage points from 40.1% in the first half of 2002 to 39.8% in 2003. Minority interests were up 30% to euro 6 million (2002: euro 4 million) due to strong results from adidas South Korea. Net income for the first six months increased 22% from euro 68 million in 2002 to euro 83 million in 2003, and EPS was euro 1.83 in 2003 versus euro 1.50 in 2002.

Group inventories were reduced by 5% from euro 1.4 billion at the end of the first half of 2002 to euro 1.3 billion in 2003. On a currency-neutral basis, inventories increased 1%, which is below sales growth expectations for the third quarter. Receivables decreased year-over-year by 4% to euro 1.2 billion in 2003 versus euro 1.3 billion in 2002. On a currency-neutral basis, receivables increased by 4%, which approximates the Group's second quarter currency-neutral sales growth. As a result of these working capital improvements, net borrowings at June 30, 2003 were euro 1.6 billion, down 14% or euro 266 million versus euro 1.8 billion in the prior year.