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Adidas: Rising Costs in Asia Cut into Profits

March 3, 2016
The German athletic company is seeking to improve its standing in the U.S., where it’s slipping further behind No. 1 sneaker brand Nike Inc.

German sport-shoe maker Adidas AG expects the fastest sales growth in five years to be tempered by shrinking profitability as it pays more to purchase goods in Asia.

Announcing its results for last year, the company forecast 10 to 12%  growth for 2016 in local-currency revenue. Gross profit as a percentage of sales will narrow as much as 1 percentage point, it said.

The forecasts come less than a month after the sneaker maker raised its sales and earnings outlook, giving an additional boost to the shares after the appointment of Henkel’s Kasper Rorstedto succeed Herbert Hainer as chief executive officer. Sales will be helped by this summer’s European soccer championships and Copa America tournament, though profitability is being nipped as Adidas pays more to produce sneakers in Asia, a problem that’s affecting the whole industry.

“The sporting-goods outlook remains very healthy and Adidas is well positioned to take advantage,” Piral Dadhania, an analyst at RBC Capital Markets, said in a note. After a 43% share-price gain in the past year, Dadhania sees “limited additional upside in the absence of clear margin-improvement initiatives.”

Adidas shares eased 0.9% to 98.03 euros in early afternoon trading in Frankfurt.

Nike Battle

The company said it expects the operating margin to remain static this year as marketing costs increase. Adidas is seeking to improve its standing in the U.S., where it’s slipping further behind No. 1 sneaker brand Nike Inc., and to increase growth in athletics shoes, which define its brand.

“The big hope is that he’s going to close the marketing gap with Nike,” said Berenberg analyst Zuzanna Pusz.

Hainer, CEO since 2001, will hand the reins to Rorsted on Oct. 1. Speaking at his final annual results conference in Herzogenaurach, Hainer said he’ll introduce his successor to employees and retailers when the outgoing Henkel chief joins Adidas’s executive board in August. Rorsted dined with Adidas’ executive and supervisory boards this week, he said.

Golf Review

Hainer reiterated that Adidas will complete a review of its struggling golf business this month. Revenue of TaylorMade-Adidas Golf dropped 13 percent, excluding currency shifts, in 2015, declining to 902 million euros.

As part of a renewed focus on the women’s market, the company plans to start selling subscription “surprise boxes” of sneakers, clothing and accessories for women called Avenue A, Hainer said.

Adidas is also taking steps to deal with activist investors. Itsaid Wednesday it plans to give board seats to Nassef Sawiris, Egypt’s richest man, and a representative of Groupe Bruxelles Lambert SA, the investment firm backed by Albert Frere. Frere and Sawiris were the two biggest shareholders in Lafarge before it merged with Holcim to create the world’s biggest cement maker.

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