Adidas' Challenges Riding the Pine

The German sporting goods maker has struggled for years to get back in the game against industry leader Nike. The financial outlook before its annual shareholders' meeting offers no hope of a quick turnaround.
CEO Herbert Hainer could use a boost, too.

For years, activists from the environmental group Greenpeace were the high point of every Adidas shareholders’ meeting. They pepped up the sporting goods maker’s harmonious gatherings with loud protests against polluting factories and chemicals in clothing and shoes.

But the banner-toting activists, who nowadays occasionally praise the changes at Europe’s largest sports shoe company, are no longer the toughest critics Adidas faces.

These days, it’s once happy shareholders who are taking the company’s managers to task.

Investors are irked that Mr. Hainer has failed to tackle many of the problems plaguing Adidas.

At last year’s meeting, there were isolated calls for Chief Executive Herbert Hainer to resign after releasing another batch of poor results. There could be more people demanding his head on Thursday at the convention center in the northern Bavarian city of Fürth.

Mr. Hainer has led Adidas for 14 years – longer than any other chief executive of the 30 companies in Germany’s DAX stock index. But that doesn’t mean his job has become routine, on the contrary. Mr. Hainer has deeply disappointed investors in the past two years. Now he’s trying to make good in the next two years before his contract runs out.

“We’ve become less attractive because we haven't concentrated enough on the needs of our customers,” he said recently in a moment of reflection.


Adidas Nike Puma Under Armour Key Figures 2014 - Comparing the competition-01


This year actually started off well, with sales in the first quarter surging 17 percent to €4.1 billion, or $4.6 billion. Profits grew over the same period 8 percent to €221 million, helped in part by the weak euro.

Mr. Hainer is hoping to sell those figures to shareholders as the beginning of the long-awaited turnaround at Adidas. The executive wants sales to grow by 9 percent each year through 2020, with profits targeted to jump 15 percent annually.

To achieve that, Mr. Hainer wants to make Adidas, headquartered in the sleepy hamlet of Herzogenaurach, faster, more urbane and more open to outside ideas. That’s at least what he announced in March, dubbing his strategy “Creating the New.” Investors have responded with a decidedly wait-and-see approach, as the company’s shares have bounced in a tight range around €75 in recent weeks.

That reticence isn’t surprising, as Mr. Hainer missed all of his own targets last year. The worst for shareholders was seeing profits collapse by almost 40 percent to just €490 million. Sales in 2014 managed a meager 2-percent increase to €14.5 billion.


Adidas Key Figures 2014 - business numbers-01


But it wasn’t just weak revenues pressuring earnings: There were also writedowns worth €78 million mostly attributed to Adidas unit Rockport. The company was hit hard by the devaluation of the Russian ruble, Argentine peso and Brazilian real, which cost €170 million.

As if that weren’t bad enough, Mr. Hainer also had to bin his “Route 2015” targets last year. Back in November 2010, he set the goal of revenues of €17 billion this year, but it became clear last summer that that wasn’t going to happen.

Investors are irked that Mr. Hainer has failed to tackle many problems plaguing Adidas. In particular, the golf division remains a drag on earnings, contributing to a 12-percent drop to €1.6 billion last year in accessories. The weak golf business caused operating profit overall to fall by €200 million.

The crucial North American market also remains a huge problem. Sales tanked 7 percent to around €3 billion. That stood in sharp contrast to U.S. rival Nike, which sells in a quarter as much as Adidas does in an entire year in the region. But the Americans are still managing to grow in their home market, as evidenced by the 6-percent increase in sales in its fiscal third quarter.

“We’ve invested too little in America in the past,” admitted Mr. Hainer.


Adidas Nike Under Armour Sporting Goods Market in the U S 2-01


Nike eclipsed Adidas in size years ago, but the Oregon-based world No. 1 has managed to increase that gap.

A decade ago, Nike’s turnover was around €6 billion more than that of Adidas. Particularly worrying for Adidas shareholders, that gap has since grown to €10 billion.

Making matters worse, U.S. unit Reebok, which Adidas bought in 2006, continues to underperform. Sales have shrunk by €400 million from €2 billion since the Germans took control. Mr. Hainer is now betting on turning around Reebok as a fitness brand.

Disappointment abounds elsewhere: Operating margins, targeted five years ago to hit 11 percent in 2015, wallowed in 2014 at just 6.6 percent. Robin Stalker, chief financial officer of Europe’s largest shoemaker, has promised only a 7-percent margin this year.

Gross margins also dropped last year by 1.7 percentage points to 47.6 percent. A widely used figure in the sporting goods industry, it shows how much a firm earns after stripping out production costs.

There were several reasons for the decline in gross margins in 2014: Price increases at Asian factories, rebates in crisis-hit Russia and price decreases in the golf sector.


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Still, Adidas doesn’t look bad compared to other smaller rivals.

Local rival Puma, also based in Herzogenaurach, had a gross margin of 46.6 percent last year. Even Nike only managed 45.9 percent.

But with business suffering, Adidas’ net cash position tumbled from €295 million to negative €185 million by December 31 of last year. Another warning signal for investors is that cash flow from operating business sank for the second year in a row, tanking 36 percent to €530 million in 2014.

Investors will at least still see dividends hold steady at €1.50 per share, but the much lower profit means the distribution rate has climbed from 37.4 percent to more than 50 percent.

Mr. Hainer is promising better times after tomorrow's shareholder meeting. But with his departure already announced in two years time, he won’t be around to see if his next five-year plan also misses its targets in 2020. That doesn’t seem to bother him, however.

“It’s not my plan, it was teamwork that we all stand behind,” he said.


Joachim Hofer is a Handelsblatt correspondent in Munich. To contact him: [email protected]