adidas Business Performance

In 2007, sales growth in the adidas segment exceeded Management’s initial expectations, while profitability developed in line with expectations. Currency-neutral sales in the adidas segment increased 12 %. In euro terms, sales grew 7 % to € 7.113 billion in 2007 from € 6.626 billion in 2006. Gross margin increased 1.2 percentage points to 47.4 % (2006: 46.2 %), mainly driven by the realization of cost synergies related to the Reebok acquisition and own-retail expansion. Gross profit grew 10 % to € 3.370 billion in 2007 from € 3.059 billion in 2006. As a result of the positive gross margin development, which more than offset a slight increase in operating expenses as a percentage of sales, operating margin increased 1.0 percentage points to 12.9 % (2006: 11.9 %). Operating profit increased 17 % to € 920 million in 2007 versus € 788 million in 2006.

ADIDAS AT A GLANCE
€ in millions

ADIDAS NET SALES BY QUARTER € in millions

adidas 2007 Net Sales by Division

TRANSFER OF LICENSED BUSINESSES HAS ONLY MINOR IMPACT ON OPERATIONAL PERFORMANCE
The transfer of the NBA and Liverpool licensed businesses from Reebok to brand adidas in the first half of 2006 had only a minor effect on sales growth in the adidas segment. Sales related to these businesses accounted for around one percentage point of total sales growth in the adidas segment.

CURRENCY-NEUTRAL SEGMENT SALES GROW 12 %
Revenues for the adidas segment grew 12 % on a currency-neutral basis. This development clearly exceeded Management’s initial expectation of a mid-single-digit sales increase. Both apparel and footwear revenues increased strongly. Hardware sales, however, declined. Currency translation effects negatively impacted segment revenues in euro terms. Sales grew 7 % to € 7.113 billion in 2007 from € 6.626 billion in 2006.

ADIDAS DIVISIONS REALIGNED
During 2007, adidas realigned its business into two divisions.  see adidas Strategy The Sport Performance division accounted for 80 % of adidas sales (2006: 78 %). The Sport Style division, which merged our Sport Heritage and Sport Style activities to sharpen brand image and improve consumer targeting in sports lifestyle, comprised 20 % of segment sales (2006: 22 %).

SPORT PERFORMANCE UP 14 % ON A CURRENCY-NEUTRAL BASIS
Sales in the Sport Performance division increased 14 % on a currency-neutral basis in 2007. The key categories identified by brand management as medium-term growth drivers  see adidas Strategy contributed the majority of this increase, with particularly strong growth in the running and training categories. In euro terms, Sport Performance sales improved 10 % in 2007 to € 5.608 billion from € 5.100 billion in the prior year.

SPORT STYLE INCREASES 3 % ON A CURRENCY-NEUTRAL BASIS
Sales in the Sport Style division increased 3 % on a currency-neutral basis in 2007. Sales in Originals increased moderately compared to the prior year. While revenues in the Metropolitan category declined, sales in the Urban and Coastal categories increased. Y-3 and the launch of Porsche Design also contributed to divisional growth. In euro terms, Sport Style sales declined 1 % to € 1.455 billion in 2007 (2006: € 1.470 billion).

CURRENCY-NEUTRAL ADIDAS SALES GROW IN ALL REGIONS
In 2007, adidas sales increased in all regions on a currency-neutral basis. Revenues in Europe grew 8 %. Strong performance in the region’s emerging markets, in particular Russia, was the primary driver of this development. Currency-neutral adidas sales in North America increased 5 %. Revenues grew in both the USA and Canada. adidas sales in Asia improved 17 % on a currency-neutral basis, due to double-digit increases in all major markets except Japan. Sales growth in China was particularly strong. In Latin America, sales grew 39 %, again making it the fastest-growing region within the adidas segment. All markets in this region grew at double-digit rates. Currency translation effects negatively impacted sales in euro terms in all regions. Sales in Europe grew 7 % in euro terms to € 3.526 billion in 2007 from € 3.302 billion in 2006. Revenues in North America decreased 3 % to € 1.275 billion in 2007 from € 1.321 billion in 2006. Sales in Asia increased 11 % to € 1.703 billion in 2007 from € 1.538 billion in 2006, and revenues in Latin America improved 34 % to € 568 million in 2007 versus € 425 million in the prior year.

adidas 2007 Net Sales by Region

adidas 2007 Own-Retail Sales by Channel

adidas Own-Retail Stores

CURRENCY-NEUTRAL OWN-RETAIL SALES UP 28 %
In 2007, own-retail sales increased 28 % on a currency-neutral basis. In euro terms, revenues grew 22 % to € 1.229 billion from € 1.009 billion in 2006. This increase was driven by new store openings and mid-single-digit increases in comparable store sales. adidas own-retail activities made up 17 % of brand sales in 2007, up from 15 % in the prior year. The store base at the end of 2007 comprised 542 concept stores, 317 factory outlets and 142 concession corners. During the year, adidas opened 128 concept stores and 61 factory outlets. The majority of new stores were opened in emerging markets with under-developed retail infrastructure. The number of concession corners was 61 below the prior year, mainly due to the transfer of concession corners in the Philippines to a distributor. Major openings in 2007 included Sport Performance Concept Stores in Beijing, Buenos Aires and Istanbul as well as Originals Concept Stores in Shanghai, Montreal and Liverpool.

GROSS MARGIN IMPROVES TO 47.4 %
The adidas gross margin increased by 1.2 percentage points to 47.4 % in 2007 from 46.2 % in 2006. This development was in line with Management’s initial expectation of a gross margin improvement. The increase was primarily driven by cost synergies resulting from the combination of adidas and Reebok sourcing activities, which positively impacted the segment’s cost of sales. Improvements due to increased own-retail activities also contributed to this development. As a result, adidas gross profit grew 10 % to € 3.370 billion in 2007 versus € 3.059 billion in 2006.

ROYALTY AND COMMISSION INCOME UP 8 %
In 2007, adidas royalty and commission income grew by 8 % to € 80 million from € 74 million in 2006. This increase was a result of higher external licensee sales. Higher average royalty rates also supported growth. In addition, increased intra-Group royalties received from the TaylorMade-adidas Golf segment due to strong adidas Golf sales contributed to this development. adidas royalty and commission income relates, for example, to royalty income for cosmetics, watches and glasses.

ADIDAS GROSS MARGIN BY QUARTER in %

ADIDAS OPERATING PROFIT BY QUARTER € in millions

OPERATING EXPENSES AS A PERCENTAGE OF SALES GROW MODESTLY
adidas operating expenses as a percentage of sales grew 0.2 percentage points to 35.6 % in 2007 (2006: 35.4 %). Higher operating overhead costs related to the continued expansion of adidas own-retail activities and one-time costs associated with the realization of cost synergies from the Reebok acquisition contributed to this increase. In euro terms, operating expenses grew 8 % to € 2.530 billion in 2007 from € 2.345 billion in 2006.

OPERATING MARGIN INCREASES TO 12.9 %
In 2007, the adidas operating margin increased 1.0 percentage points to 12.9 % (2006: 11.9 %). This development was in line with initial Management expectations of an operating margin improvement. The increase was the result of positive gross margin development in the segment which more than offset slightly higher operating expenses as a percentage of sales. Operating profit for the adidas segment increased 17 % to € 920 million versus € 788 million during the same period in the prior year.