[UPDATED] Reebok And North America Drove Adidas’ Q1 Rebound

Adidas Group CEO Herbert Hainer had said that the company’s Q1, ended March 31, 2015, would not disappoint investors, and on May 5, the once-beleaguered CEO kept his word.

The company posted a 28 percent, or 6.7 percent currency-neutral, gain year-over-year in sales in North American markets in the first quarter — also up substantially from the fourth quarter’s 3 percent sales gain in the region, or a 4.2 percent loss in currency-neutral terms.

The Germany-based firm has also shown signs of a turnaround at Reebok, posting 15 percent year-over-year sales gains, or 9 percent in currency-neutral terms. This is also an improvement against Q4’s 1.6 percent loss in sales, or 0.6 percent increase in currency-neutral terms.

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Revamping the struggling TaylorMade-Adidas Golf unit, however, continues to pose challenges. The unit did post a 6 percent sales gain year-over-year but continued to decline, by 8.6 percent, in currency-neutral terms.

Net Income: First quarter net income was up 8.1 percent year-over-year, to 223 million euros, or $252 million based on the average currency exchange rate for the period.

EPS: Earnings per diluted share from continuing operations were 1.15 euros, or $1.30, up 18.2 percent from the year-ago same quarter’s EPS.

Net Revenue: The company said its net sales for Q1 totaled 4.1 billion euros, or $4.6 billion based on the average currency exchange for the period, up 17.3 percent, or 9 percent on a currency-neutral basis, from the year-ago quarter’s net sales.

Adjustments: Adidas Group recorded goodwill-impairment losses related to the Latin America and Russian operating segments of 18 million euros, or $20.34 million, during the first quarter. Net sales were not affected by the impairment. However, net income for the quarter improved 16.9 percent, to 241 million euros, or $272 million, excluding the impairment (compared with 2014’s Q1).

Executive Insights: “Our running business performed very strongly during the first three months of the year. While both footwear and apparel sales improved by double digits, the overall sales increase was definitely driven by the introduction of the Ultra Boost.”

“Focusing on building our brand and connecting with the target consumer will be the ultimate catalyst to get the youth athlete to wear Adidas basketball footwear and for the long-term success of this category.” – Herbert Hainer, during the May 5 conference call.

Looking Ahead: The company confirmed its guidance for 2015.

Analyst Insights: “While improvements in the core business should be the focus near-term as evidenced by a strong start to the year, we continue to remain watchful over the gross margin dynamic in 2016,” said Susquehanna Financial Group LLLP analyst Christopher Svezia in a note. “Recall while Adidas reports in euros, it sources around 90 percent of [cost of goods sold] in USD which is hedged around 12 months in advance. This dynamic will lead to some gross margin favorability in FY15 (better topline from currency tailwinds) but once hedges roll off next year, the company will have to pay the piper through higher [cost of goods sold].”