Adidas Leans on Digital, Loyalty Scheme

Activewear giant Adidas said Tuesday it is making rapid progress to become more of a direct-to-consumer company, generating 40 percent of sales in the third quarter from such channels, up from 30 percent in the year-ago quarter.

E-commerce sales in 2020 should amount to more than 4 billion euros — enough to make that theoretical company the fifth largest activewear player in the world, chief executive officer Kasper R?rsted told a press conference Thursday to elaborate on third-quarter results.

Sales in the online channel advanced 51 percent in currency-neutral terms in the three months ended Sept. 30. Tilting the business model toward direct-to-consumer “positions us for a very strong 2021,” he asserted.

The no-nonsense, fast-talking executive also touted the benefits of focusing on the brand’s most loyal consumers, noting that members of its loyalty program — now numbering 150 million — spend more and shop more frequently. Member sales account for about two-thirds of all revenues in Europe and the U.S.

According to Adidas tallies, members have a 2.4-times higher lifetime value compared to nonmembers.

Detailing a strong rebound in most markets after pandemic-related shutdowns, Adidas said third-quarter sales slipped 3 percent to 5.96 billion euros, and net income fell 10.8 percent to 578 million euros.

While the numbers beat consensus forecasts, Adidas warned that the second wave of coronavirus infections would dent fourth-quarter numbers. It is forecasting revenues in its final quarter of the year to follow the trend of the third quarter — a low- to mid-single-digit currency-neutral revenue decline. Operating profit is expected to amount to between 100 million and 200 million euros. “This outlook assumes no additional major lockdowns, a store opening rate above 90 percent and no further material slowdown of global store traffic,” Adidas said.

More than 90 percent of Adidas stores were open in the third quarter, and while traffic remained below year-ago levels, “conversion rates stayed elevated as consumers that visited stores had a clearer buying intent,” the company said, also noting that its wholesale business improved sharply as the group focused on fewer, larger and digital-savvy accounts.

“Our focus on healthy inventories, profitable sell-through and disciplined sell-in clearly paid off,” R?rsted said, noting that inventories were 10 percent lower in the third quarter versus the second.

The company said gross margin slipped 2.1 points to 50 percent due to adverse foreign exchange rates and promotional activities.

Operating profits fell 11.6 percent to 794 million euros, but the company trumpeted a 1.1 billion euro improvement in operating profits between the second and third quarters.

Sales for the Adidas brand declined 2 percent, while Reebok — still the subject of disposal rumors — dipped 7 percent.

R?rsted declined all comment on the speculation about Reebok and said “we continue to work on our 2025 business plan” that is to be tabled at an investor day next March. He noted Reebok was profitable in the 2018 and 2019 fiscal years and that third quarter weakness was due to the brand’s limited exposure in the running and outdoor categories, dynamic during pandemic lockdowns, and to its higher exposure to the U.S. market.

During the call, R?rsted said the company has not slowed down on its cadence of novelties and cited healthy sales of Adidas Superstar and Ultraboost sneakers, Reebok’s Legacy model and Beyoncé’s second Adidas x Ivy Park collection, which sold out in 24 hours in the U.S.

The Adidas Originals business “continues to do well” and is likely to continue doing so, the executive said, predicting that there will not be a complete return to work even when a vaccine is found, supporting the sporty-casual juggernaut.

“Despite the climate, there is a huge appetite for new products,” he said.

By contrast, demand for anything related to team sports, apart from soccer jerseys, was anemic with stadiums and pitches still largely closed.

Adidas has 113 “hype drops” programmed for the balance of the fourth quarter, “more than one a day,” R?rsted noted. Among the key product volleys are its Futurecraft Strung sneaker and a strong outerwear offer. Given that gyms are still closed in some territories, Adidas is banking on the fact that exercise and sports will remain largely outdoor activities.

While almost all geographies demonstrated recovery, sales in Greater China decreased 5 percent “after initial pent-up demand faded,” Adidas said.

R?rsted touted double-digit growth in China in d-t-c channels, but weakness at its franchise partners due to low inventory.

“We expect China to return to solid growth in the fourth quarter,” he noted.

Europe, by contrast, returned to growth, posting a 4 percent gain in currency-neutral terms, while Russia/CIS advanced 11 percent. R?rsted said about 40 percent of its store network in Europe is now closed with wide lockdowns in effect in several countries, including France, the U.K. and the U.K.

In North America, sales eased 1 percent. Adidas noted that it logged sale growth in the first two months of the third quarter, suggesting “consumer spending was temporarily supported by fiscal stimulus.”

The pandemic disrupted retail and other operations in Latin America and emerging markets, where revenues dropped 13 percent and 10 percent, respectively.

“While at the beginning of the quarter we were on track for growth in Q4, a worsening of the pandemic in many regions of the world is again requiring our patience and support,” R?rsted cautioned. “At the same time, we are even better positioned to benefit from the long-term industry growth drivers accelerated by the pandemic such as health and wellbeing, ath-leisure and digitization.”

Separately on Tuesday, Adidas said it had replaced the syndicated revolving loan facility with KfW, Germany’s state-owned development bank, and secured a new 1.5 billion-euro syndicated loan with several of its partner banks through 2025. The banks include Deutsche Bank and HSBC as joint coordinators.

The company had received the approval of the German government for the KfW loan earlier this year to bridge the situation caused by the pandemic. Adidas noted it has paid back the 500 million euros drawn in July, including interest and fees.

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