• DEUTSCH

Income Statement

Segmental reporting comparatives updated

Following minor changes to the adidas Group’s organisational structure in the first quarter of 2010, the assignment of certain functions has been changed compared to the Group’s prior year annual financial statements. This development has a limited effect on the Group segmental structure. To ensure full comparability of Group financial results in 2010, the Group has decided to adjust the segmental reporting for 2009 retrospectively. These adjustments have no effect on total Group financial results. Details of the adjustments are available in the Notes see Note 35.

adidas Group currency-neutral sales increase 9% in 2010

In 2010, Group revenues grew 9% on a currency-neutral basis, as a result of sales increases in Wholesale, Retail and Other Businesses. This development exceeded initial Management expectations of a low- to mid-single-digit Group sales increase. Currency translation effects had a positive impact on sales in euro terms. Group revenues grew 15% to € 11.990 billion in 2010 from € 10.381 billion in 2009 see  07.

Wholesale and Retail segments drive strong sales growth in 2010

In 2010, currency-neutral sales grew in all segments. Currency-neutral Wholesale revenues increased 8% during the period due to sales growth at both adidas and Reebok. Currency-neutral Retail sales increased 18% versus the prior year as a result of adidas and Reebok sales growth. Revenues in Other Businesses were up 2% on a currency-neutral basis. Sales grew at TaylorMade-adidas Golf, Rockport and Reebok-CCM Hockey. Currency translation effects had a positive impact on segmental sales in euro terms. Wholesale revenues increased 14% to € 8.181 billion in 2010 from € 7.164 billion in 2009. Retail sales rose 25% to € 2.389 billion versus € 1.906 billion in the prior year. Sales in Other Businesses grew 10% to € 1.420 billion in 2010 (2009: € 1.293 billion).

Currency-neutral sales increase in nearly all regions

In 2010, currency-neutral adidas Group sales grew in all regions except Greater China. Revenues in Western Europe increased 7% on a currency-neutral basis, primarily as a result of double-digit sales growth in the UK, Germany and Spain. In European Emerging Markets, Group sales increased 16% on a currency-neutral basis due to growth in most of the region’s markets, in particular Russia. Sales for the adidas Group in North America grew 12% on a currency-neutral basis due to strong increases in both the USA and Canada. Sales in Greater China decreased 2% on a currency-neutral basis. Currency-neutral revenues in Other Asian Markets grew 6% due to increases in most markets. In Latin America, sales grew 14% on a currency-neutral basis, with double-digit increases in most of the region’s major markets. Currency translation effects had a positive impact on regional sales in euro terms see  11.

	07 Net sales € in millions

	08 Net sales by quarter € in millions

	09 2010 net sales by segment

	10 2010 net sales by region

Group sales up in all product categories

In 2010, Group sales grew in all product categories on a currency-neutral basis. Currency-neutral footwear sales increased 9% during the period. This development was due to growth in the football, running and outdoor categories. Apparel revenues increased 9% on a currency-neutral basis, driven by growth in football, running and basketball. Currency-neutral hardware sales increased 5% compared to the prior year, primarily due to strong growth in the football category. Currency translation effects had a positive impact on sales in euro terms see   13.

Cost of sales increases

Cost of sales is defined as the amount we pay to third parties for expenses associated with producing and delivering our products. Own-production expenses are also included in the Group’s cost of sales. However, these expenses represent only a very small portion of total cost of sales. In 2010, cost of sales was € 6.260 billion, representing an increase of 10% compared to € 5.669 billion in 2009. This development was mainly due to increasing sourcing volumes in footwear, apparel and hardware. The optimisation of sourcing processes as well as the reduction of input costs as a result of lower raw material prices at the time of sourcing had a positive impact on cost of sales.

	12 2010 net sales by product category

Group gross margin improves 2.4 percentage points

The gross margin of the adidas Group increased 2.4 percentage points to 47.8% in 2010 (2009: 45.4%) see  15  . This development was mainly due to lower input costs, less clearance sales and a larger share of higher-margin Retail sales. As a result, gross profit for the adidas Group grew 22% in 2010 to € 5.730 billion versus € 4.712 billion in the prior year see  14.

Royalty and commission income grows

Royalty and commission income for the adidas Group increased 16% to € 100 million in 2010 from € 86 million in the prior year. On a currency-neutral basis, royalty and commission income was up 12%, mainly as a result of higher licensee sales. New licensee partnerships also had a positive effect on the Group’s royalty and commission income.

Other operating income increases 10%

Other operating income includes items such as gains from the disposal of fixed assets and releases of accruals and provisions. In 2010, other operating income increased 10% to € 110 million (2009: € 100 million), mainly due to the settlement of a lawsuit and the divestiture of a trademark.

Other operating expenses as a percentage of sales down 0.2 percentage points

Other operating expenses, including depreciation and amortisation, consist of items such as sales working budget, marketing working budget and operating overhead costs. In euro terms, other operating expenses increased 15% to € 5.046 billion in 2010 (2009: € 4.390 billion), as a result of the expansion of the Group’s own-retail activities and higher marketing expenditure see  17. However, other operating expenses as a percentage of sales decreased 0.2 percentage points to 42.1% in 2010 from 42.3% in 2009 see  18.

Sales working budget increases as a percentage of sales

Sales working budget consists of expenses to support the Group’s sell-through development. Expenditures relate to advertising and promotion initiatives at the point of sale as well as store fittings and furniture. As sales working budget expenses are channel-specific, they are allocated to the Group’s operating segments. In absolute terms, sales working budget expenditures increased 28% to € 308 million in 2010 from € 241 million in the prior year. The Group’s sales working budget as a percentage of sales increased 0.3 percentage points to 2.6% in 2010 (2009: 2.3%), primarily as a result of new store openings to support the Group’s retail expansion see  19. In addition, higher expenditure at the point of sale in connection with the 2010 FIFA World Cup as well as new product launches at the Reebok brand contributed to this development.

	14 Gross profit € in millions

	15 Gross margin in %

	16 Gross margin by quarter in %

Marketing working budget grows as a percentage of sales

Marketing working budget consists of items such as expenses for promotion partnerships, advertising and public relations to support brand strength. As marketing working budget expenses are not distribution channel-specific, they are not allocated to the segments. In absolute terms, marketing working budget increased 25% to € 1.288 billion in 2010 from € 1.028 billion in the prior year. The Group’s marketing working budget as a percentage of sales increased 0.8 percentage points to 10.7% in 2010 (2009: 9.9%) see   20. This was mainly due to higher expenditures at brand adidas in order to leverage its presence as official sponsor at the 2010 FIFA World Cup. In addition, increased promotion and marketing initiatives for new product concepts at the Reebok brand impacted this development.

Operating overhead expenses decrease as a percentage of sales

Group operating overheads include overhead costs related to marketing, sales, logistics, research and development as well as central administration. Almost half of overhead expenses are related to personnel costs. In absolute terms, operating overhead expenses were up 11% to € 3.450 billion in 2010 versus € 3.121 billion in 2009. This was primarily a result of the expansion of the Group’s own-retail activities, as well as an increase in logistic and warehouse costs. However, due to increasing Retail sophistication as well as operational leverage, operating overhead expenses as a percentage of sales decreased 1.3 percentage points to 28.8% in 2010 from 30.1% in the prior year.

Number of Group employees up 7%

At the end of December 2010, the Group employed 42,541 people. This represents an increase of 7% versus the prior year level of 39,596. New hirings related to the expansion of the Group’s own-retail store base were the main driver of this development. On a full-time equivalent basis, the number of employees increased 6% to 36,444 at the end of 2010 (2009: 34,437).

	17 Other operating expenses € in millions

	18 Other operating expenses in % of net sales

	19 Sales working budget in % of net sales

	20 Marketing working budget in % of net sales

EBITDA grows 49%

The Group’s earnings before interest, taxes, depreciation and amortisation as well as impairment/reversal of impairment losses on property, plant and equipment and intangible assets (EBITDA) increased 49% to € 1.159 billion in 2010 (2009: € 780 million) see  22. Depreciation and amortisation expense for tangible and intangible assets with limited useful lives declined 12% to € 263 million in 2010 (2009: € 299 million). This development was mainly a result of lower impairment charges in 2010 compared to the prior year as well as the decrease in capital expenditure in 2009. In accordance with IFRS, intangible assets with indefinite useful lives (goodwill and trademarks) are tested annually and additionally when there are indications of potential impairment. In this connection, no impairment of intangible assets with unlimited useful lives was incurred in 2010 and 2009.

	21 Other operating expenses by area € in millions

	22 EBITDA € in millions

	23 Operating profit € in millions

	24 Operating profit by quarter € in millions

	25 Operating margin in %

Operating margin improves 2.6 percentage points

Group operating profit increased 76% to € 894 million versus € 508 million in 2009 see  23. As a result, the operating margin of the adidas Group improved 2.6 percentage points to 7.5% in 2010 (2009: 4.9%) see  25. The operating margin improvement was primarily due to the higher gross margin as well as lower other operating expenses as a percentage of sales.

Financial income up 28%

Financial income increased 28% to € 25 million in 2010 from € 19 million in the prior year, mainly due to an increase in interest income as well as positive currency exchange rate effects.

Financial expenses decrease 34%

Financial expenses decreased 34% to € 113 million in 2010 (2009: € 169 million) see  26. The non-recurrence of prior year negative currency exchange rate effects as well as lower interest expenses contributed to the decline.

Income before taxes as a percentage of sales increases 3.3 percentage points

Income before taxes (IBT) for the adidas Group increased 125% to € 806 million from € 358 million in 2009 see 27. IBT as a percentage of sales improved 3.3 percentage points to 6.7% in 2010 from 3.5% in 2009. This was primarily a result of the Group’s operating margin improvement and lower financial expenses.

Net income attributable to share-holders more than doubles

The Group’s net income attributable to shareholders increased to € 567 million in 2010 from € 245 million in 2009 see  29. This represents an increase of 131% versus the prior year level. Higher IBT was the primary reason for this development. The Group’s tax rate decreased 2.0 percentage points to 29.5% in 2010 (2009: 31.5%), mainly due to the non-recurrence of prior year charges related to the write-down of deferred tax assets.

	26 Financial expenses € in millions

	27 Income before taxes € in millions

	28 Income before taxes by quarter € in millions

Net income attributable to non-controlling interests increases

Net income attributable to non-controlling interests rose to € 1 million in 2010, from € 0 million in 2009. This increase was primarily due to higher profits at our joint venture in Israel.

Earnings per share reach € 2.71

Following the full conversion of the Group’s convertible bond in the fourth quarter of 2009, the Group has no dilutive potential shares anymore. As a result, diluted earnings per share equal basic earnings per share. In 2010, basic and diluted earnings per share amounted to € 2.71 see  31. In the prior year period, basic earnings per share amounted to € 1.25 and diluted earnings per share to € 1.22. The weighted average number of shares used in the calculation was 209,216,186 in 2010. In the prior year period, the number amounted to 196,220,166 for the calculation of basic earnings per share and 209,238,099 for the calculation of diluted earnings per share.

	29 Net income attributable to shareholders € in millions

	30 Net income attributable to shareholders by quarter € in millions

	31 Diluted earnings per share in €

	32 Diluted earnings per share by quarter in €