Positive momentum throughout 2007 propelled the adidas share to reach an all-time high at the end of the year. The Group again improved key financial metrics, including a 7 % currency-neutral sales increase and 14 % earnings growth. 2008 will be a year where the world will be “United by Sport” at the European Championship in Austria and Switzerland, and then at the Beijing Olympics. With prominent positions at these two events and strong execution of brand strategies, the Group expects even stronger top- and bottom-line growth in 2008.
Herbert Hainer
CEO and Chairman of the Executive Board
In the following interview, Herbert Hainer, adidas Group CEO and Chairman, reviews 2007, and discusses the Group’s strategic and financial outlook.
Herbert, the adidas Group again made big strides in 2007. What do you think were the central drivers
of your strong performance?
Following the acquisition of Reebok and the big success we achieved at the FIFA World Cup™ in 2006, we knew we had
a lot to accomplish in 2007 to keep the Group’s momentum moving in the right direction. And I am extremely proud that all
our hard work has helped the Group achieve new record sales and net income levels. Currency-neutral sales grew 7 %.
Gross margin increased strongly to 47.4 %. Operating margin met our initial expectations – reaching 9.2 %. Net income
and EPS grew 14 % – and all this despite conditions that got tougher in some important markets as the year went on.
Our focus on performance and executional excellence was a big contributor to our success in 2007. We took further strides in innovation and design leadership, winning several awards, and gained market share in core sports categories such as running and football. We put increased emphasis on controlled space as a key distribution channel for future growth – which means everything from new own-retail formats and expanded franchise networks in emerging markets to creative shop-in-shop concepts in more mature markets. We also made digital communication a strategic priority for all our brands. And as we gear up for another intense year of competition both on and off the playing field, I am convinced these steps have positioned our Group to go even further, even faster.
The adidas brand exceeded your initial expectations for the year with 12 % currency-neutral sales growth.
What were the main factors behind this success?
A strong product pipeline and commitment to innovation are the fundamental factors behind adidas’ success. The brand
continued to strengthen its focus on five strategic categories – and grew in all of them. Sales outpaced industry growth
rates in all regions. The brand’s success in emerging markets, controlled space expansion
and continued dominance in
its European home market fueled a third consecutive year of double-digit currency-neutral revenue growth. Even more
important
– the segment broke new gross and operating margin records at 47.4 % and 12.9 %, respectively. This is proof
that adidas’ priorities and positioning, coupled with its ability to harness synergies from the Reebok acquisition, helped
take the brand a major step forward in operational performance. With order backlogs up 17 % – the highest level in nearly
10 years – I am confident adidas will further enhance its leading market positions around the globe in 2008.
You are an official sponsor of the UEFA EURO 2008™ and the Beijing Olympic Games. How important are these
and other major sporting events for the adidas Group?
A key competitive advantage of our Group is the tremendous experience and know-how we have gained from our long tradition
of partnering with major sporting events and leagues. We are the only sports company to ever sponsor a football World Cup.
We currently partner with a number of the top marathons around the world – including London, Boston and Berlin. And our
Group has long-term relationships with every major sports league in North America.
I firmly believe we are unrivalled in leveraging the opportunities major sporting events provide. That means not only maximizing licensed sales, but also enhancing the visibility of our top products and promotion partners to underscore the Group’s credibility and authenticity in performance sport. Although sponsoring these events comes at a cost, we have seen time and time again that the long-term benefits to brand image far exceed the short-term expenses associated with these events.
In 2008, the European Football Championship will be the perfect stage to demonstrate our Group’s dominance in the world’s favorite sport. adidas’ role as an Official Sponsor of the event and Outfitter of five participating teams will help the brand achieve a new sales record in the football category of over € 1.2 billion – generated solely from true performance products.
And at the Beijing Olympics, both of our two biggest brands will be front and center. For adidas this means being the Official Sportswear Partner to the event as well as outfitting 16 National Olympic Committees – including the hosts China. For Reebok, this means partnering with the event’s biggest local star – basketball great – Yao Ming. This event will help our Group become the market leader in China this year, as well as drive sales growth throughout the region in 2008 and beyond.
Sales for the Reebok segment in 2007 were flat, and many people in the financial community have expressed
concern about Reebok’s prospects in 2008. What are you doing to enhance the brand’s positioning and
performance
going forward?
Let me start by saying that while we are pleased with the new market opportunities and scale benefits that have already
come to our Group as a result of the Reebok integration, you are right that we still need to complete the repositioning of
the Reebok brand – especially in its two largest markets – the USA and the UK. To do this, we clearly have to maintain our
discipline and focus on Reebok. In 2007, we made major management changes at the Reebok brand. We took tough decisions
to improve US distribution – even stopping supply to the brand’s largest customer where excess inventories had led
to a significant
decline in profitability.
But the real test is still in front of us – making the Reebok brand more relevant to consumers. The brand needs simple messages that stick, and that’s why its 2008 products and marketing strategies focus on two important concepts – fit and choice. Reebok is striving to be the brand that “fits me”. This means creating the perfect fit with all its consumers, customers and business partners alike. Therefore, Reebok has sharpened its 2008 product offering by including 893 new fit initiatives throughout its collections. In addition, Reebok is customizing its product offering for key retail partners – which means more relevant products for consumers, and higher margins for Reebok. And through the launch of the brand’s global communication campaign –“Your Move”– Reebok is set to establish itself as a supporter of individual choice and a challenger of convention.
We still have a long way to go. As we announced at our Investor Day six months ago, sales will not grow for Reebok in the USA and the UK in 2008. But I do expect the order situation in these markets to improve later this year. And sales will grow in nearly all other markets – especially Russia and China – where the brand took over distribution for the first time in 2007. As a result, we not only expect sales and profitability for the segment to increase in 2008 – but more importantly, the brand perception amongst consumers around the world should also improve.
The economic climate in North America has deteriorated in recent months. How do you see the adidas Group
navigating through these challenges in 2008?
Yes, economic conditions in North America have become more difficult. Nonetheless, I am optimistic we will outperform
most of our competitors during this period of relative economic weakness. We are a regionally diversified Group, which is
one of our most significant strengths. We have been diligent in managing the adidas brand in the USA over the past few
years – which has brought adidas four years of consecutive growth in the world’s largest sporting goods market. Today,
we have a much broader distribution base and a significantly improved performance product and partnership portfolio in the
region. Therefore, I am confident that the adidas brand will again grow in North America in 2008 – although it is likely to be
at lower
levels than in recent years. At Reebok, there are still a lot of challenges – and tough market conditions don’t make
it any easier. But I am confident the brand has the right initiatives in place to position itself for growth in this market in 2009.
How do you rate the performance of TaylorMade-adidas Golf in 2007 and what priorities have you set for
this business going forward?
TaylorMade-adidas Golf strives to be the best performance golf business in the world. And nothing highlights this more than
our performance in metalwoods last year. Despite fierce competition and technological hype in golf’s most prestigious category,
TaylorMade extended its market share lead over its closest competitor to more than ten points. And adidas Golf sales
of footwear and apparel grew at double-digit rates for the fifth consecutive year. Segment like-for-like sales, excluding the
effects of the Greg Norman Collection wholesale business divestiture, grew 9 % on a currency-neutral basis, driven by
increases
in all major categories. For 2008, increasing profitability is our top priority. We believe there is no reason why
TaylorMade-adidas Golf shouldn’t be delivering a double-digit operating margin in the very near future. We sold Maxfli
because
we now have all the know-how we need to be successful in the premium golf ball category. We are focused on
growing
our core golf brands: TaylorMade and adidas Golf.
After a solid 2007, what can we expect from the Group in terms of financial performance in 2008?
We have worked hard to position ourselves for continued growth in 2008. I am confident our progress will accelerate versus
last year and we will reach new heights on both the top and bottom line. We expect high-single-digit currency-neutral sales
growth – driven by improvements at all of our brands. Gross margin will range between 47.5 % and 48 %. And our operating
margin will expand to at least 9.5 %. Through this strong operational performance, we will increase net income by at least
15 %.
Given the strong top-line target and projected net synergies for 2008, how did you arRive at your guidance
of at least 15 % net income growth, which appears conservative?
Our top priority is ensuring long-term sustainable growth and profitability increases for the Group. Maintaining a strong gross
margin is crucial, and although we see great potential in the Reebok segment and throughout our supply chain for further
improvement, rising input costs towards the end of the year will counteract some of the progress we expect. We also need
to keep investing in our brands to capitalize on both short-term opportunities and to realize our long-term strategic goals.
In 2008, we will also have costs related to the year’s major sporting events and other important brand initiatives such as
expanding our controlled space activities. In addition, our share buyback program will moderate our progress on financial
expense
reduction. Underlying improvements at all of our brands and increased net synergies relating to the Reebok
integration,
however, will more than offset these negative effects. As a result, I am proud that we will be able to deliver
earnings improvement
of at least 15 % – marking our eighth consecutive year of double-digit earnings growth.
Increasing shareholder value and returns is one of the adidas Group’s guiding principles. What are your
plans in this respect, given your recently announced share buyback program?
The best way to deliver value to our shareholders is through strong financial performance and disciplined balance sheet
management. Since completing the Reebok acquisition in the first quarter of 2006, we have reduced our net borrowings
by around € 1.2 billion. With financial leverage of 58.4 % at the end of 2007, we now have flexibility to deliver more aggressive
shareholder returns. As a result, we announced a share buyback program of up to € 420 million in January. This tool will
provide our shareholders with an even higher participation in our future financial performance through enhanced earnings
per share growth. And combining this with our total dividend increase of 19 %, we will return more to shareholders in
2008 than ever before. These initiatives clearly highlight our confidence in the health of our business, our future business
prospects
and the strong cash flows we expect to generate going forward.
Herbert, thank you for this interview.