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UPDATE 3-Adidas warns on profit due to Russia, weak golf business
July 31, 2014 / 7:30 AM / in 3 years

UPDATE 3-Adidas warns on profit due to Russia, weak golf business

* Sees 2014 net income c650 mln euros vs 830-930 mln before

* Drops 2015 goals, to curb Russia expansion, revamp golf arm

* Marketing spending to rise over next 18 months

* Shares drop as much as 16 percent to two-year low (Adds detail, background, updates shares)

By Emma Thomasson

BERLIN, July 31 (Reuters) - Adidas, the world’s second-biggest sportswear firm, cut its revenue and profit targets for this year and scrapped them for next, blaming a plunge in sales at its golf business and its exposure to a weak Russian market.

Shares in the German group tumbled as much as 16 percent to a two-year low on Thursday as it unveiled plans to overhaul TaylorMade, the biggest maker of golf bags, clubs, clothing and shoes in the world, and cut back investments in Russia, where it makes about 7 percent of sales.

The stock, already hurt by the firm’s market share losses to bigger U.S. rival Nike and its exposure to weak emerging market currencies, is now down almost 36 percent this year.

“The profit warning could almost have been predicted but the extent of it is catastrophic,” said Ingo Speich, a fund manager at Union Investment which is the 10th-biggest investor in Adidas with a 1.2 percent stake.

“Unfavourable conditions are no excuse. Nike is stealing Adidas’ thunder in important markets,” said Speich, who has often been critical of Adidas leadership in recent months, particularly of a decision to extend the contract of long-serving chief executive Herbert Hainer to 2017.

Nike, which has been encroaching on Adidas’ home territory of western Europe and making gains in soccer, extended its lead to take 15 percent of the global sportswear market in 2013 compared with 10.8 percent for Adidas, according to Euromonitor.

Adidas, which had been basking in the glow of the soccer World Cup after the victory of its sponsored team Germany, said it would fight back by increasing marketing in the next 18 months, particularly in North America and western Europe.

“We will assert ourselves much more aggressively in the marketplace,” said CEO Hainer.

Adidas already made a bold move earlier this month to fend off Nike’s threat to its leadership in soccer, agreeing a record $1.3 billion shirt deal with Manchester United to oust its U.S. arch-rival from the former English champions.

CUTS TO GOLF, RUSSIA BUSINESS

Adidas said second-quarter sales rose 2 percent to 3.47 billion euros ($4.6 billion), a rise of 10 percent on a currency-neutral basis, while attributable net income was 144 million, slightly above analysts’ average forecasts.

The firm said currency effects, higher marketing spending for the World Cup as well as a big fall in golf sales had offset otherwise strong underlying quarterly growth in most major categories and markets for its Adidas and Reebok brands.

It now expects a mid-to-high single-digit sales increase for 2014, before currency effects, down from a previous target for a high single-digit rise. It also forecast net income of around 650 million euros, versus between 830 and 930 million before.

Analysts had forecast 2014 net income of 830 million euros and sales of 14.7 billion, according to Thomson Reuters StarMine SmartEstimates, while 2015 revenue was seen at 15.7 billion, well below the 17 billion target Adidas scrapped on Thursday.

At 1135 GMT, Adidas shares were down 13 percent to 60.84 euros, their biggest one-day fall since 1997.

Adidas cut its expectations for its TaylorMade golf business after sales fell 18 percent in the quarter as the division suffered in part from slow sales of old stock.

It plans more steps to cut inventory in the second half and will launch a restructuring programme to align costs with lower expectations for the golf industry, which has been losing popularity in its top market, the United States.

California-based TaylorMade, a brand Adidas bought in 1997 to help it compete with Nike, made sales of 1.3 billion euros in 2013 or almost 9 percent of the group total.

Adidas also said it was scaling back investment in Russia, where it runs more than 1,000 stores, due to a fall in the rouble since the start of the Ukraine crisis and increasing risks to consumer sentiment and spending there.

“Current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” it said, adding it would significantly reduce its store opening plan for 2014 and 2015 and increase the number of store closures.

Adidas had said as recently as last month it had not seen any impact on its business in Russia - beyond the translation effect of the weaker rouble.

Adidas said it was also introducing new organisational structures for its global brands and sales divisions under recently appointed Eric Liedtke and Roland Auschel, which it said should drive faster decision making.

Hainer, CEO since 2001, admitted Adidas had not always had enough flexibility to react to adverse market conditions.

“By cleaning up markets, investing with more conviction in our growth opportunities and driving more agility through our new organisational set-up, we will return the group to a higher and more consistent level of earnings growth in the mid to long term,” he said in a statement.

($1 = 0.7469 Euros)

$1 = 0.5927 British Pounds Additional reporting by Kathrin Jones and Harkan Ersen in Frankfurt; Editing by Erica Billingham and Mark Potter

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