JP O’Meara - Head, Investor Relations
Herbert Hainer - Chief Executive Officer
Robin Stalker - Chief Financial Officer
Matthias Eifert - MainFirst Bank
Jurgen Kolb - Cheuvreux
Phillip Fry - MM Warburg
Michael Kuhn - Deutsche Bank
Louise Singlehurst - Morgan Stanley
Erwan Rambourg - HSBC
Bernd Mueller - LBBW
Sedrick Ekisiva - Kempner Capital Markets
Tony Shiret - Credit Suisse
Adidas Ag Or (OTCPK:ADDDF) Q1 2011 Earnings Call May 5, 2011 9:00 AM ET
Thank you operator and good afternoon ladies and gentlemen,. Welcome to our first quarter 2011 financial results conference call. Our presenters today are Herbert Hainer, Adidas Group CEO, and Robin Stalker, Group CFO. They will be covering our very impressive first quarter financial performance and updating you on our prospects for the remainder of the year in light of recent developments. So let’s get started and over to you Herbert.
Yes. Thanks JP and good afternoon ladies and gentlemen. As you all have seen from our communications this morning, the first quarter of 2011 is the fastest start the group has had in more than a decade. We achieved record first quarter sales of 3.3 billion euro, up 18% currency neutral, which is our highest organic quarterly growth rate in almost five years.
Group gross margin was virtually unchanged at 48.5%, a very strong result given what many of our peers in the footwear and apparel industry delivered. Despite a significant increase in marketing spend a the non-recurrence of prior year one-off gains, operating expense leveraged in the quarter helped drive net income and earnings per share up 25%.
This powerful performance shows a marked acceleration for our Group across the board and the major highlight worth noting is how clearly the global desirability of our brand shines through in these days. Every region grew at double digit rates. The only exception being other Asian market, which was nonetheless up a healthy 7% including growth in Japan.
Particularly important was the strong momentum in our three key attack markets, which as we outlined last year are central to our root 2015 strategic plan. In North America sales were up 26% currency neutral with 30% growth of Adidas and 22% growth in Reebok. The performance of Adidas in America demonstrates (the merit) of strategies we are now executing to close the gap to our major competitor.
Running, basketball and original, Adidas in the US is on fire. For example in running sales were up 65% in the quarter. And with large scale launches like the Climate Cool brand running shoe we have shown our retail partners we have some marketing metal to successfully sell through major new concepts.
In greater China we are back in full swing with sales up 36% currency neutral. Fresh inventory in the market as well as strong demand and the expansion of Adidas sports style presence where sales grew 51% in the quarter contributed to the improvement. The great news is all the feedback we have had from our partners suggests that momentum is definitely with the Adidas brand as comp store sales for our customers continue to get stronger.
In Russia and the CIS we extended our market share lead with sales climbing 44% in the quarter. Our own retail stores, which represent the majority of our business in this market so comparable stores sales up very impressive 37%. Elsewhere the start of the year has also been strong. In Western Europe revenues increased 14% on a currency neutral basis.
This was driven by double digit growth in all major markets, in particular Germany and France as well as double digit growth at Adidas and Reebok. And finally, in Latin America sales for the first quarter were up 15% on a currency neutral basis mainly due to double digit growth at Adidas. From a brand perspective without doubt Adidas, the engine of the group, has never come out of the blocks faster.
Revenues grew 18% currency neutral in the quarter and gross margin expanded 10 basis points to 47.8%. Adidas sport performance sales were up 15% currency neutral with all major categories growing at double digit rates. Adidas sports style completed its remarkable run with sales growth of 27% currency neutral. Our leadership and innovation is clearly evident in the growth drivers for the quarter.
Running products such as the RDC RS50 runner and Climate Cool brand drove sales up over 30%. In basketball the Adidas Derrick Rose and the Crazy Light has given the brand much needed momentum in basketball footwear. With Derrick Rose just crowned the youngest ever NBA Most Valuable Player, the success of our individual athlete and the brand over the last six months is creating significant interest in our next innovation installment, the Adidas Zero Crazy Light.
This is the lightest shoe ever in the category at 9.8 ounces and comes to market this June, retailing at $130 US. We also had great success in other categories such as training and outdoor. In outdoor sales grew 25% as we continued to gain market share in key markets as well as extend our offering into the merchant market.
Last but not least, one area that cannot go without mention is football where sales were unchanged despite being up against the World Cup powered Q1 2010. This was driven by an incredible 34% increase in footwear sales due to our domination on and off the field with the Adidas 0850 football boot. And ladies and gentlemen, on that front I have a world exclusive for you today.
We are now getting ready to take the game of football to the next level. Later this year we will revolutionize the game by introducing an interactive boot to global elite football. The interactive boot will feature Adidas MyCoach technology and will capture in game data through a smart bot embedded into the sole of the shoe.
The new Adidas MyCoach football boot will change the way we play, train and ultimately perform on the field of playing and it is a product with many years’ development. You will be hearing more about this in the coming days from our brands. Another milestone of the quarter for us was the launch of the All Adidas campaign in March.
The crucial part of our group strategy is ensuring the nurture of brands and create demand for our products through investment and excellence in marketing. Historically for Adidas we have predominantly promoted a specific event, athlete or product. However, we have never really stepped back and celebrated everything that makes Adidas and its sub-brands so extraordinary.
With All Adidas we have taken the opportunity to do just that, highlighting and celebrating every aspect of the Adidas brand from the court to the catwalk and from the stadium to the street. The raw and authentic emotion of the All Adidas campaign comes across loud and clear, connecting and resonating in particular with our young target consumer.
With the campaign Adidas will be seen by 1.25 billion digital users and we will reach almost 3/4 of all next generation youth worldwide. The response has already been very exciting from its launch on March 16 to the end of April, Adidas has gained 3.2 million new fans on Facebook and now has a total of over 16 million fans across all categories.
Our various video spots have been viewed 7.5 million times on YouTube. In addition, we have seen an increase of 26% in traffic to our adidas.com Web site. Our retailers have also noticed our efforts to drive consumer demand, which is partly reflected in the strong selling we have seen in the first quarter. In the coming months I am convinced the impact of this campaign will only get stronger, which is very important at a time when driving brand desirability is so crucial given the backdrop of increasing prices.
Moving over to Reebok, we had another great quarter with growth of 24% currency neutral and cross market increasing almost a percentage point to 37.2%. Don’t forget it was only this time last year that Reebok sales development turned positive with 1% currency neutral sales growth. So the result shows we have successfully translated the potential from new product introductions over a 12 months period.
While North America was up 22% as I already mentioned, we also saw strong growth in other regions with growth rates of over 25% in Western Europe, in European emerging market and other Asian markets. While Toning continued to be a growth driver globally year over year due to international expansion, Sicktech was a key driver of the performance in North America.
That being said, the good news for Reebok is that sell through of our Toning collections continues to be very good and we are liquidating product faster than our main competitors in stores where we are competing. Turning back to Sick, demand is extremely strong as the concept creates a new dimension of brand experience for the consumer.
Geographic sample is pure Reebok where individuals can create their own recipes for Sick, customizing their shoes online. Of the 1.2 million original recipes created on Your Reebok for our various iconic styles, almost 3/4 are Sick related. In terms of the phasing of growth over the coming months, giving that we will start to anniversary our big global push on Toning in the second quarter, the pace of growth will moderate briefly until we ramp up our new product concepts and collections for this year.
And again I’m sure these new initiatives will provide plenty of new impetus to growth as we get into the second half of 2011. One of these will be RealFlex, which just launched in the United States in mid-April. The product, just like Toning and Sicktech, again symbolizes Reebok’s attitude of making fitness and training fun and inspirational.
RealFlex features 76 independent sensors on the bottom of the shoe that each tell a position to twist and expand and support. We help athletes’ feet move more naturally. The sensors work together throughout the athlete’s stride to help provide all the benefits and ground feel of barefoot running, movement which runners around the world are embracing while at the same time helping to eliminate all the negatives that come with running on hard surfaces.
Our marketing concept for RealFlex is also very striking as we bring the 76 flexible sensors to life as individual characters working together as a team. Also it is early days yet; the initial sell through from retailers in the first two weeks has been very encouraging and I am convinced that RealFlex has all the potential to become another hit for Reebok.
Finally on the brands, let me spend a moment on (unintelligible). Sales grew 20% currency neutral in the first quarter due in particular to the very successful launch of the R11 driver. Over coming quarters I believe it is prudent to be more cautious on growth particularly given (unintelligible) - relatively high exposure to Japan, which accounts for about 20% of the segment’s sales.
While on that topic let me remind you that Japan is a very important market for our group and we were deeply saddened by the events that happened in March. We have a long history in this market with all of our brands and we have a very close connection to the Japanese consumer whose passion for innovation in design is unrivaled around the world.
Today we are the market leader in the sporting goods industry in Japan and have more than 1500 employees working there. In total, Japan makes up the high single digit percentage of group sales and is highly profitable. Since the events we have been in constant contact with our team who thankfully are all safe and well although sadly some lost family members.
The reaction of the Japanese people, our staff and our customers in the camaraderie shown by our group employees around the globe has been inspiring. One of our group values is integrity and we have seen many great examples over recent weeks of how this can be lived. Therefore I have no doubt that Japan will overcome this disaster very quickly. In the short term there will some set backs for our group.
This is mainly due to store closures, which have affected several of our retail partners and our own retail. Although the possibility of rolling power cuts through the summer months may affect business, currently we have scenarios that imply we may suffer sales declines of 15-25% over the nine month period from April to December.
This will ultimately in turn have an over proportional impact on profits in Japan, leading to significant double digit million euro negatives, which we will have to compensate. The good news is however that our business around the globe has started the year strongly. All of our other markets are rising to the challenge to find opportunities to make up the difference.
As a result, I remain confident that despite the short-term headwinds we can meet our group’s guidance for 2011. With the strong performance in markets like Greater China, North America and Germany we can even increase our group’s sales guidance to the top end of our March target range and now expect high single digit currency neutral growth for the year.
This is driven in particular by the wholesale segment where we have increased our guidance to mid to high single digits. Obviously this growth rate might have been even higher except for the weakness we now see in Japan. As a result of the (unintelligible) - the rest of our guidance from March and the bottom line remains unchanged.
While we expect to see a significant profit dip in Japan, strength in our other markets will help to offset the negative effect. And this is why I’m very confident in our profitability guidance for the full year where we expect earnings per share to improve at the rate of 10-15%. So in summary ladies and gentlemen, I believe that 2011 is a fitting start to our journey to 2015.
The diversity of our business proves that even when new challenges emerge we can count on the tremendous strength and reach of our brand to deliver on our promises. So let me now hand you over to Robin to take you through the financials in more detail.
Thanks very much Herbert and good afternoon ladies and gentlemen. To add to what has just already been outlined, we’ve enjoyed an extremely dynamic start to 2011. The group’s top line momentum accelerated compared to the fourth quarter of 2010 with group sales increasing at the highest organic growth rate since the second quarter of 2006.
Group sales were up 18% currency neutral in the first quarter. Similar to prior quarters but to a much lower extent, the year over year appreciation of various currencies such as the Japanese yen, the Chinese renminbi, the British pound as well as various Latin American currencies against the euro had a positive impact on the group’s reports there.
In euro terms therefore group sales increased 22% to 3.3 billion euros. By segment currency neutral wholesale revenues increased 18% in the first quarter driven by strong growth in all regions. North America and Greater China were exceptionally strong, growing at 31 and 39% respectively. By brand Q1 Adidas wholesale sales increased 70% on a currency neutral basis with Adidas sports performance expanding 16% and Adidas sports style increasing 21%.
Reebok wholesale brand had sales climb to 26% on a currency neutral basis driven by the running and training categories. Gross margin for the segment was stable at 43.1% in the quarter. More favorable product mix as well as fewer clearance sales helped mitigate the headwinds from rising input costs.
In addition, shifts within the regional sales mix positively affected the wholesale gross margin development. More importantly however, due to the strong growth we were able to enjoy economies of scale during the quarter, which despite the slack gross margin drove segmental operating margin up 1.5 percentage points to 34.6%.
In the retail segment comparable store sales increased an impressive 17% during the first quarter. Including new store openings, revenues grew 22% on a currency neutral basis. All geographies contributed to this development with growth of 39% in European emerging markets and 33% in Latin America being the outstanding highlights.
By concept all formats increased at double digit rates with concept stores and factory outlets growing 25% and 16% respectively. Retail gross margin improved an impressed 300 basis points to 61.2% supported by improvements at all store formats as well as both brands. Reebok in particular saw a strong 7 percentage point improvement in retail gross margins due of course to the big improvement in product assortment over the last 12 months.
At the end of the first quarter we operated 2297 stores, a net increase of 27 stores versus December last years. During the period we opened 83 new stores and closed 56 stores while 45 stores were remodeled. In addition, 110 concept stores were reclassified as other retail formats during the quarter. Turning to the segmental operating margins for retail, we were also able to achieve significant operating leverage during the quarter.
Segmental operating margin improved 4.2 percentage points to 15.4% and segmental operating expenses declined 1.1 percentage points as a percent of sales. Finally, in our other businesses sales grew 14% currency neutral in the first quarter, which is mainly a result of the tremendous 20% sales increase at SI and tailor made (segments).
Sales at Reebok CC and hockey were flat compared to the prior period while Rockport sales were down 6% on a currency neutral basis. The gross margin of other businesses increased to 0.6 percentage points to 45.6% in the first quarter. This development was driven by better product margins in all segments.
The segmental operating margin declined 0.9 percentage points to 28.1% as the higher gross margin was more than offset by increased segmental operating expenses as a percentage of sales. This was mainly related to our effort to further roll out Rockport’s own retail activities in the US and Russia. Moving below the top line, group gross margin was virtually flat, declining a slight 10 basis points versus the first quarter of 2010.
Higher sourcing costs, which hurt gross margins by a little over one percentage point, and to a minor extent hedging exerted pressures onto gross margin development. However, we also had several factors on the positive side, which helped to offset these negatives. Firstly, the most important positive catalyst was the over proportionate growth of sales in our retail segment, which carries obviously higher margins.
Secondly, due to more current inventory levels we had less clearance activities compared to the prior year. And finally, we benefitted from positive regional mix effects, which was mainly a result of the over proportionate growth in higher margin markets such as Greater China and Russia. In terms of operating margin, which on a reported basis declined slightly to 9.6%, here we actually have seen very good leverage during the first quarter on a comparable basis.
As a reminder, this time last year we benefitted from two one-off effects related to the settlement of the law suit and the sale of a trademark, each of which represented low double digit euro amounts. If we exclude these effects operating margin is up around a percentage point on a comparable basis. This was achieved despite significant increases in marketing investment to support the global launch of our new All Adidas campaign.
As we were able to leverage our impressive top line results to bring other operating expenses as a percentage of sales down 1.5 percentage points to 40.0%. Within this, marketing increased 0.3 percentage points as a percent of sales to 12.7% or grew 25% in absolute terms to 417 million euros. For the full year, marketing as a percentage of sales will we expect be slightly lower than the 30.3% of sales we invested last year.
Turning now to the items below operating profit, net financial expenses increased 70% compared to a year ago. This was due to the non-recurrence of prior year positive exchange rate variances and negative exchange rate variance in this quarter, a swing actually of 15 million euros, which more than offset lower interest expenses, which declined 16% due to the reduction of our gross borrowing.
The first quarter tax rate came down 400 basis points to 26.5%, which predominantly is due to more favorable earnings mix. As a result, first quarter 2011 net income attributable to shareholders increased 25% to 209 million euros from 168 million euro last year. This translates into basic and diluted EPS of 1 euro, up from the 80 cents a year ago. Moving to the balance sheet and cash flow, I can report continuous improvements as we maintained the discipline we demonstrated throughout the last quarters.
At the end of March group inventories were up 23% currency neutral to 2 billion euro. I’m not concerned about our inventory position neither for our brands nor on a market level. The majority of the increase currently stems from two points. First, we dramatically cut inventories on hand this time last year in view of the uncertainty in the economic environment.
Secondly, we have now rebuilt our inventory reserves to match our sales base given our strong growth in the last 12 months and also bearing in mind our growth expectations for this year. As we outlined in March, the rate of inventory increase has already started to moderate to 23% from the 34% growth reported in the fourth quarter.
As we go through the rest of the year you will see the rate of growth narrow further and the end of the year will more closely represent future sales growth expectations. Broadening the discussion to operating versus capital, the current level of 20.5% represents a decrease of 2.4 percentage points over last year as well as a new record level for our group.
While we may lose some basis points due to the planned growth of our business, I’m very confident that our tight management of working capital will ensure we continue to maximize cash flow generation as we go through 2011 and beyond. Finally ladies and gentlemen, the strong operating cash flow generation over the last 12 months contributed to the meaningful reduction of net borrowings.
At the end of March our net debt stood at 914 million euro, equating to a decrease of 444 million euro versus the prior year. This represents a ratio of net borrowings over 12 months rolling EBITDA of 0.8, which means we are comfortably within our target corridor of the ratio of below two times. At the end of the prior year period the ratio stood at 1.4. So ladies and gentlemen, the strong start to the year together with the solid trends we see from our brands affirm the confidence we have in our potential for 2011.
We are executing well and our positions in key growth markets are strong and getting stronger. Despite the tragic events in Japan, which will have a significant negative impact on profitability development, we can confirm all of our targets for the year. Now Herbert and I will be happy to take your questions.
Question and Answer Session
We have your first question from Matthias Eifert from MainFirst Bank. Please go ahead.
Hi. Matthias Eifert from MainFirst. My first question would be what is your best guess in terms of market growth we’ve see in the first quarter and to judge your outperformance, which is very impressive? The second question would be the Reebok gross margin was just more or less flat in the wholesale business but up very strongly in the own retail business.
Can you get a bit more into detail what’s the driver here? Was it all Russia because otherwise this is just the outlet stores? And also explain the performance in the wholesale business. I would have expected it to be up actually. And yes, my third question would be what was the big driver in China? How many stores were there opened in the first quarter from your third party retail partner?
Hi Matthias. This is Herbert Hainer. Let me start with the first question. I don’t have a precise number but we expect the market to grow at the single digit rate so definitely far below what we have seen as growth rates for our company in the first quarter. I think the second question was on Reebok gross margin.
Yes and Matthias, the gross margin in wholesale is purely a mix factor. Here particularly it was from UK and Latin America. But overall don’t forget the gross margin for Reebok has improved 90 basis points over the year.
And your third question on the store openings in China, it’s around 150 stores net. We have opened a little bit more but we have also closed or our franchise partners have closed a few. So it’s around 150 and we are close to 6000 stores at the moment.
Excellent. Thank you very much and keep on going.
Our next question comes from Jurgen Kolb from Cheuvreux. Please go ahead.
Thanks. Just a quick one on the input cost issue - obviously it was a big driving topic right now. You had some first impacts I guess in the first quarter. Can you quantify as to how high this impact was on the first half? Secondly, the new products especially at Reebok, the product margin that you’re achieving with these products, are they higher, more attractive than what we had initially at Toning?
And lastly on the topic of less clearance sales, which obviously were a driver of the gross profit margin in the last quarters, how do you see this element developing in the next quarter because I think we’re anniversarying also here quite good development from last year. So is that going to be a drag in the coming quarters?
Okay Jurgen, let me start with question number three and two and Robin will talk on the first one. So less clearance, this is definitely coming from two reasons. On the one hand it is our distribution policy that we try to bring the right product into the right distribution channel where the consumer is for this kind of product.
And secondly, it is due to the good sell through rate, which we generate within the retail stores. Therefore we have less clearance and I don’t see any slow down on the sell through rate because we are supporting heavily our concept as I said with either the All Adidas campaign or individual measurements for the individual product field, basketball shoes, Derrick Rose, etcetera.
So therefore I don’t think that we will see an increase in clearance sales. On the product margin for Reebok you can expect that Sicktech or RealFlex are more ore less in the same margin range as Toning because they are more or less at the same price level. Where we will increase our margin further is by expanding it to our products from the US into the European or the Asian markets because here we enjoy higher margins. But this is what we have said from the very beginning and we do it constantly quarter by quarter.
And as far as the impact on rising input prices in the first quarter, we estimate that that has cost us about 1% of gross margin in the first quarter.
Okay. Very good. And maybe a quick follow up on the new football boot, obviously that sounds interesting. Any additional comments that you can make here?
Good Jurgen. I know how passionate you are about football. We will introduce it in the first quarter in 2011 and it is as I said based on the MyCoach system, which allows now the individual player to measure his mileage so how many kilometers or miles he ran during the game, how fast he is, how his acceleration is, what to a certain extent you can do today on the (unintelligible) level already that you measure speed or you measure the total mileage.
But this can now be done by every individual even if he plays in the T class or R class I guess today when you start.
Very good. Please send some (unintelligible). Thanks guys.
Of course I will.
Our next question comes from Phillip Fry from MM Warburg. Please go ahead.
Hello gentlemen. Congratulations for your figures and some questions on the reasons - actually if I’m looking at strong performance since (fourth quarter) I have the impression that the All Adidas campaign is substantially higher marketing efficiency than usual. Would you elaborate on that one and how you expect that to continue? And then I have two follow up questions.
Thanks very much that you think our advertising is that good that it makes immediately an impact but I think it’s too early because as I said, we launched it on the 16th of March. And it’s too early to really see in the first quarter the impact already on sales. We saw the impact on the interest where people went on to YouTube, Facebook, etcetera, etcetera.
But the mapping and the growth rates, the very impressive growth rates of style are coming because we really bring collections and products out to the market, which are highly anticipated by the consumer and highly respected and in demand. This is part of the more individual measurement or (unintelligible) - selective distribution channels.
We have cleaned up the market in the US as you might now with our SuperStart 12 months ago and now we see the impact of that distribution policy in China where we don’t sell original products to every franchisee, building up our own stores, etcetera, etcetera and I think this is the success that we enjoy by our Sports Style division. And at the end of the day I think the Adidas brand has never been stronger in demand than it is today.
That sounds very promising. I guess that’s why you’re taking your confidence for the fervor and focus on Sports Style.
This is definitely correct and as you can imagine I also know a few older members for the next (unintelligible).
Quite an advantage. And if I look at wholesale and retail basically or the licensed and retail sides, if you would have allocate basically the proportion of your like for like phase in retail that is driven by the strength of the product and what you have in terms of conceptual changes at a retail level, what would you see currently as the main driver? And how far are you in the implementation of basically the changes that might be represented in (light of) last year?
Good. I guess you hit it very well. First and foremost we definitely have better collections, better products, higher demand from the consumers. This you can see in our retail sales numbers. But the second point is definitely the impact Michael and his team are making.
We definitely get more professional in how we are dealing with our retail business, what we have to stock in store, how we replenish, how we read the data, how fast we can get them analyzed and bringing products into the stores who are demanded by the consumers. And this altogether you can see in the numbers.
Sounds good. And one last question on use of cash as you are continuing to generate cash at a very high rate, could you imagine if you basically say you are virtually debt free at the year end that you consider stepping up your pay out ratio guidance above the 40% rate that you had? Or would you rather prefer to build a kind of war chest?
What we have always said is we want to let the sales participate. But I think it’s definitely too early. We will be happy if we would be debt free at the end of the year as you said and then we have to see what we are doing. But I think we still have room to play within the range of 20-40% in our dividend.
Well, I hope you can surprise us with that one as well and thanks for your answers.
Our next question comes from Michael Kuhn from Deutsche Bank. Please go ahead.
Yes. Good afternoon gentlemen. A few questions from my side - first of all, coming back to CS section on the gross margin of retail and wholesale, we have seen a trend of closing the gap of the margin difference in retail over the last quarter. The trend was not so pronounced in wholesale.
So do you see a chance of closing that gap in the foreseeable future or will the margin difference remain? And then secondly on a few cost positions, marketing costs went obviously up due to the All Adidas campaign but the other operating expenses in the non-operating segments are also up quite significantly by almost 1/3.
Is it also a relatively flexible position from quarter to quarter or is this a sustainable cost increase trend? And maybe also some more details on that so what cost increases are behind that trend? And two more questions - one on the tax rate, which was obviously lower due to the better regional mix.
Is that a sustainable trend or more a quarter driven thing? And finally, the US dollar has obviously lost ground against the euro recently, which should be positive for you. So what are your current hedge amounts and hedge rates and have you hedged bigger portions than usual in the current marketplace? Thank you.
Okay Michael, thanks for those questions. We definitely confirm that our expectations are further improvement in the Reebok gross margin, which I’ve said often how we see the opportunities for the Reebok gross margin to continue to improve towards the Adidas brand. We should see that also in the future so definitely that gap will not remain as it is.
Secondly question about the operating overhead increase, well, our retail also has some influence on that. I think the development of the operating overhead excluding the marketing and working budget has been very positive. You’ve seen us leverage here where the percentage has come down. And if you also think of the currency effects because some of the currencies we’re trading obviously had a negative effect on the euro.
I think that’s a positive development for our operating expenses. The third point on the tax rate, no we’re not expecting to enjoy as much of a benefit in the future quarters as you have seen in the first quarter. But we’re also reasonably confident that our total year tax rate definitely won’t be higher than it was at the end of last year. There may be some opportunity to be a little bit lower than the last year’s rate.
Your fourth point was about the currency and our hedge position. As you know, the hedge positions for 2011 by this time of the year we have closed those. And these hedge rates for 2011 don’t really benefit from anything that is happening in the market at the moment. These are things we did last year. And so the hedge rate this year is slightly worse than we enjoyed in 2010.
However, the trends in the market clearly give us some opportunity perhaps to enjoy a better hedge rate next year when we’re hedging for 2012.
So are you locking in hedging portions for 2012? And maybe bigger as I mentioned than usual there?
We have a very strict policy on how much we want to be hedged at the time where we set our pricing at the 50-80%. And in a period where the dollar is weakening I know that that is advantageous for us. Yes, we tend to hedge or close the hedging a little bit more, that’s correct.
Okay. And then back to costs because I mean on HQ levels among the operating segments the operating expenses went up from 320 to 407 million. So even as percentage of sales that’s an increase so that brought the question about. And I cannot imagine this is driven only by retail expansion.
Michael, I think you have to look at all of our costs together because we’re continuing to go through reorganizations between the various operating units at our headquarters. You should be looking at the total development of operating expenses. We give you also the total development of marketing. There I think you’re looking at a good picture.
Okay. Thank you.
Our next question comes from Louise Singlehurst from Morgan Stanley. Please go ahead.
Hello. Good afternoon. A couple of questions for me please - just firstly on the US. Obviously you’re making very good inroads when we look at some of the market data coming out for both Adidas brand and Reebok. Can you give us any of the feedback from the new launches that you’ve had so far this quarter from the wholesalers and your ability to take market share or floor space should I say?
And then secondly on China, there is a bit of a mixed view with domestic brands quite slowing down and obviously the order books decelerating. Can you just give us a picture of how the market is developing and your expectations for Adidas this year? Thanks.
First on the US, I can tell you that as we have seen on the numbers for the Adidas brand in the US that more or less all our new concepts, which we brought in either on the original side or on the basketball side (unintelligible) - supported by advertising, all were doing very well. Sell through rates are good.
The same to a big portion of our Running brand and I definitely do see this continue going forward. The same has happened to Reebok. Flex launched just two weeks ago to very encouraging first results. But I think it’s still too early after two weeks but all I hear from the US market and what I see in talking to the key retailers is very promising for both brands also going forward.
In China I mean we have seen the last I think four or five quarters always clearly outlined our plan to clean up the market for Adidas in China and then to restart. And I think you see the fruits of our strategy now. (Unintelligible) - there are mix issues in some of the local brands. The market is definitely not growing as fast as we are growing at our 36%. And not everybody is winning in the market and I definitely think that we have the strongest momentum at the moment.
Thank you. Just as a follow up, can you let us know when the Reebok Classic will be launched in the US please?
So first and foremost, we still have Classics in the business in US but we will bring Classic Light for example and new products, these will come in the coming months.
Thank you very much.
Our next question comes from Erwan Rambourg from HSBC. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions. Erwan Rambourg from HSBC. Congratulations on the results. Three quick follow ups if I can - you have actually maintained the range in terms of EPS despite the Japanese catastrophe. You indicate that you’re expecting Japan to be down 15-25% in the months to come.
What would have been your outlook on Japan without the catastrophe for me to try to work out what’s the sort of underlying upgrade in the figures? Secondly, just going back to Louise’s question about China, meeting with the few lower tier local Chinese players, they seem to say that the volumes are slowing but the ASP trends are actually going up.
And ASPs are in the high single digits to low double digits range. Where do you see ASPs going for your brands? And then thirdly, a follow up on Reebok - you’re mentioning higher gross margins coming from ex-US growth. And I remember you were saying a few years back that the gross margin expansion would also come from the expansion into apparel. Can you give us an update on how the apparel push is going for Reebok and what the next steps are?
So let me start with the first one on Japan. As you know, we don’t give any individual numbers for countries, only for our six regions, which we have defined. Second question on China, our ASPs definitely go up because as I said on the one hand, the momentum we have for sell through rate and we’re bringing new, fresh product into the marketplace, which are highly innovative as I have said.
So on the basketball side and the football side and this in general has slightly higher retail prices so we also see our ASPs going up. And the higher gross margin for Reebok as I always have said for the expansion into the Greater Asian market and retail in apparel, apparel I think we have seen already the first new concepts for EasyTone apparel, which we are bringing and further accelerating on the women’s side during the course of 2011.
And this will continue so yes, we definitely will do what we have said over the last several quarters, bringing new concepts on the footwear side and then bringing new, innovative products on the apparel side as well.
Sorry, just going back to Japan, had you seen growth up until the catastrophe? And basically how do you plan to grow for the full year?
Of course as you can see that we have grown in Japan already in the first quarter, which I mentioned during my speech. So yes, we were up. So you can imagine that we would have planned for growth in Japan.
Okay. All right. Thank you.
Our next question comes form Bernd Mueller from LBBW. Please go ahead.
Good afternoon gentlemen. A couple of questions from my side - I want to come back to the Reebok gross margin please and timing of the rollout for example of RealFlex and other new, innovative Reebok products.
Could you perhaps give us a little bit more detail about the phasing as to when you would plan to launch which product categories in the international market please so that we can get a feel of the phasing about the development of the Reebok gross margin? That’s the first question please. And second one is more a housekeeping question.
I thought if I’m not mistaken that the write off in the first quarter came down by roughly 1/4 to 15 million. So has there - did I miss something? Have you had any extraordinary factors in last year’s first quarter or perhaps you can give a little bit more detail on that one? And the last question that I have is talking about selective price increases.
Perhaps you can elaborate a little bit more on that one as to when in terms of timing you plan to raise selectively prices. Is that still from Q4 going onwards or have any changes occurred in this one? Thanks a lot.
So let me start with the first question on Reebok. In general we have a delay of six months after we introduce a product into the US market and then bringing it to the international market. The same happens with RealFlex. We’ve just started in April two weeks ago and it will come at the end of the third quarter, beginning of the first quarter then with RealFlex into the European market and Asian markets as we have done with Toning and Sick as well.
The selected price increases is your question number three. We will start or we have started on a very small basis but we will continue to go forward with selective price increases through the various categories. We’re looking very closely into where the percentage price levels are, what is the competition doing, where do we have leverage, etcetera. And this will continue over the next 6-12 months.
There is not one starting point and there is not one across the board price increase. We’re looking very carefully into it when and by how much we can increase our prices.
So if I understood your second question you’re talking about one-offs last year in terms of the posts. We had two, that was the settlement of some litigation and the sale of a small trademark. Each of these were double digit millions in value and therefore obviously the other income went down significantly this year. Does that answer your question?
Sorry Robin to come back but if I haven’t miscalculated I found that the depreciation and amortization in the quarter has come down quite considerably. And I was just asking myself have any one-off impacts occurred last year at the same time or has anything changed this year that I may have missed in that respect?
There is nothing in there that is anything special from last year. We have moved from a year over year (unintelligible) - assets held for sale. But no significant differences in depreciation. Feel free to contact the IR guys and they can help you with the calculation.
Perfect. Thank you very much gentlemen and yes, thumbs up.
Our next question comes from Sedrick Ekisiva from Kempner. Please go ahead.
Sedrick Ekisiva, Kempner Capital Markets. Good afternoon gentlemen. I had some follow ups on Reebok. Last time you gave some figures if I got it right, you told us that the Basics had come down to about 20% total sales off a very high number before the introduction of new, innovative products such as Toning.
Could you maybe help us a little bit to understand the dynamics within Reebok to give us some kind of color on the weight of Toning impact at this stage and what your expectations are going forward on RealFlex? That’s the first question. The second question is linked to sourcing. You’re mentioning the additional headwinds in (retail spacing).
Given the hedging evolution and given your expectations or your assumptions for the year, could you tell us maybe in terms of saving when you could imagine or hope that sourcing, everything being equal, would turn positive? When should we expect that if raw materials stay where they are? Thank you very much.
Okay. Let me start with the first question on Reebok Basics. I guess you talk about originals. Here it is the same as we have done with Adidas. We cleaned up the market as we told you, taking out a lot of old models and now bringing new products into the market. And as we have said just a few minutes ago we will start in summer with the Classic Light, which is the first innovative concept on the Classic side and that follow up in the future with newer concepts.
You might have seen or heard that we have a relationships with Speed now in the US who is helping us bring new products into the market, helping us to get the new consumer groups, etcetera. We will give you more color to that when we go forward in the future quarters. On Toning, Sick and RealFlex, Toning I must say we’re still very happy because as I said during my speech that the sell through rates are still holding up of course not as high as they have been in the peak period last year.
But considering the situation that there is definitely high older inventory from one of our competitors in the market, our products still do very well. Sick is definitely a home run in the US especially kids’ Sick has surprised us positively with the retail price of $75 US selling very well. Flex as I said, introduced two weeks ago started very well. But I think it’s too early after two weeks to call it already a home run. But all that we have seen so far is encouraging.
As far as sourcing goes, our view on sourcing is that as far as we can see it at the moment, this remains a negative for us. We clearly have described the situation in 2011 and the hedging situation we have here.
These are negatives for us in this period but obviously we’re finding ways to compensate with that and we’re presuming that our sales price increases that we’re introducing in the second half of this year will also help compensate for this. If we look out further yes, it’s encouraging that some of the sourcing cost increases seem to be coming back down again.
And we also see some positive trends in the weakness of the dollar, which may help us in hedging in the future. But at the moment I think it’s far too early to speculate on anything in terms of a net positive for sourcing. We in our estimations continue to review a contingency list as a negative.
Okay. That’s good. Maybe just on the eventual capacity constraints of capacity addition given the strong demand worldwide and the performance from most of the players, yours being particularly impressive, how do you see capacity moving? And is there any pressure today?
So we have a very longstanding relationship with most of all our suppliers and you most probably know that. So we have built up capacity within the last 12 months for the growth rates, which we anticipate.
We have shared our Root 2015 plan with all our suppliers at the supplier summit in November last year in Vietnam and got commitment from all our suppliers that they will invest to help us to achieve our growth rate. So I don’t see any major constraints. We definitely didn’t have anyone in the first three months and nor would I do for the remainder of the year I don’t see any issues.
Thank you very much.
Our next question comes from Tony Shiret from Credit Suisse. Please go ahead.
Hi gentlemen. First of all, well done. Really good figures - questions. First of all, Reebok - looking at the product pipeline, I know you’ve only just launched Flex but it seems to be a sort of sequential type of process, your product launches here. Do you have any shoes following Flex you could tell us about? That’s the first question.
Second question on the retail side business, your retail comps in Adidas of 17% gross margin and that’s retail is up 210 basis points. Can you tell us what the split of the Adidas comp between price and volume was and what your ascribe the 210 basis point improvement in the retail gross margin to be? Thanks.
And last question - looking longer term talking about root 2015, you didn’t really say anything very much about US high school market in your presentation and how you’re progressing with driving your penetration into that market. Is there anything you can say at the moment? That’s it.
So Tony, let me take questions number one and number three and Robin will talk on the retail comps. So following Flex first and foremost we are happy that we have now a certain (success) from Toning and Sick and we’re introducing our Flex and we have to exploit it. Of course we are working on further concepts as well but it’s too early to talk about that already.
But be assured that we have the right people in place in Reebok as we have told you over the last several quarters who are bringing permanently fresh, innovative products to the market. But we also have to make sure that we exploit and execute the concepts, which we have in the market right now, in the most successful way.
There is still work to do with all our concepts, spreading it out to the international markets. Third question on the US, I mean we told you a year ago that our strategy for the US within root 2015 is to win back the high school kids and this is what we all do, what we target for. When you look at our product assortment, when you look for example to our advertising, then you saw how we have advertised quite hard with growth in the basketball areas.
This is clearly targeting to that high school kid and we can see the success already in the malls with the two customer sales and this is where the high school kids are shopping. So we are definitely on the right direction and we are executing on our plan winning back the high school kids in the US.
So turning to the regional gross margin, we believe it’s volume and mix, most of it price and the vast majority is definitely coming from the volume.
I just wondered what the (unintelligible) - comparable store sales were for Adidas between volume and price.
I can’t share it with you Tony at the moment but it’s something you might discuss with the IR guys.
Thanks so much.
Okay guys. Thank you very much for your attention today and that concludes our first quarter conference call. As you know, our AGN is next week at our next event. I wish you all a very nice afternoon.
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