March 13, 2019 / 6:46 AM / 9 days ago

Supply chain problems to slow Adidas' sales growth

HERZOGENAURACH, Germany (Reuters) - Adidas expects supply chain issues to curb sales growth in the first half of the year, particularly in North America, where it has doubled its business in the last three years to take market share from bigger rival Nike.

Adidas has put a big focus on the U.S. market in recent years, teaming up with celebrities such as Kanye West and Pharrell Williams, poaching designers from Nike and pushing retro styles that have proved more popular than Nike’s basketball shoes.

But Chief Executive Kasper Rorsted said on Wednesday its suppliers - mostly in Asia - have not been able to keep up, especially as the company has expanded from high-end products into more mid-priced clothing ranges in the U.S. market.

“The volume grew quicker than anticipated and we didn’t respond quickly enough to that demand signal,” Rorsted told a news conference as Adidas presented 2018 results.

Those supply issues will knock 200 to 400 million euros, or 1-2 percentage points, off currency-neutral group sales growth in 2019, which is likely to slow to between 5 and 8 percent in 2019 from 8 percent in 2018.

In contrast, Nike has forecast sales growth for 2019 approaching low double digits as it rolls out a steady stream of popular new products, and German rival Puma a currency-adjusted 10 percent.

Shares in the German sportswear brand, up 22 percent in the last year, initially fell more than 5 percent but pared loses to trade down 2.2 percent by 1512 GMT.

Adidas produces 457 million pieces of apparel a year, sourcing most of them from Cambodia, China and Vietnam. Rorsted said the shortages had nothing to do with U.S. trade tensions with China.

FILE PHOTO: General view of a match ball with Adidas logo at the Euro 2016 semi final in Lyon, France REUTERS/Carl Recine/File Photo

YEEZY BOOST

The company expects sales growth of just 3-4 percent in the first half of the year, speeding up in the second half as it ramps up supplies by reallocating factory capacity and prioritizing the U.S. market.

Rorsted removed Gil Steyaert as head of the Adidas global supply chain last month after just over a year in the role, and replaced him with Martin Shankland.

“The overall outlook is very solid for 2019, although top line growth will be rather back-end-loaded and this might be a temporary drag on Adidas shares,” wrote Macquarie analysts.

Currency-neutral sales rose 9 percent in North America in October to December to account for about a quarter of the total, helped by the launch of new “Yeezy” shoes designed by Kanye West.

Until recently, Adidas has only produced small quantities of Yeezy sneakers, but it is now increasing production and Rorsted said it expects to launch about 20-30 Yeezy products a year, with the partnership becoming more commercially relevant.

Adidas said it should reach an operating profit margin of between 11.3 percent and 11.5 percent in 2019, up from 10.8 percent in 2018, with the return of the Reebok brand to profit helping it hit a target originally set for 2020 a year early.

Fourth-quarter sales rose by a currency-adjusted 5 percent to 5.234 billion euros ($5.91 billion), ahead of average analyst forecasts for 5.2 billion, while attributable net profit came in at 108 million, versus consensus for 88 million.

Sales rose 13 percent in greater China, but fell 6 percent in Europe, where Nike has been growing fast.

Adidas said it expected to revive growth in Europe in the course of 2019, forecasting a slight increase in currency-neutral revenues for the region.

FILE PHOTO: An Adidas logo is seen at the new Futurecraft shoe unveiling event in New York City, New York, U.S. April 6, 2017. REUTERS/Joe Penney/File Photo

Rorsted said that Adidas had relied too much in Europe on a short-term trend for fashion shoes, like its retro Stan Smith and Superstar, with global sales of those models down half a billion euros in 2018 from the previous year.

To recover in Europe, he said Adidas is investing heavily in marketing, including with sponsorship deals like the one it struck with English soccer side Arsenal.

“We want to be the best sports company in the world, not the best fashion company,” Rorsted said.

Reporting by Emma Thomasson; Editing by Kirsten Donovan and Keith Weir

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