Behind Adidas Semiannual Report: Success Depends On Greater China, Discount May Continue

In the second quarter, for every three euros Adidas earned, one euro came from Greater China.

After the publication of a semi annual report with a loss of 333 million euro, the capital market seemed quite satisfied with the report card of Adidas, and even the stock price rose for two consecutive days.

From the figures, Adidas can successfully "stable" live, from the Greater China assists is crucial. In the second quarter of 2020, Adidas gets roughly one point of revenue from the euro zone in China.

"Asia Pacific is already our largest, fastest growing and most profitable market," said Gao Jiali, managing director of Adidas Asia Pacific, at the opening of Adidas Asia Pacific headquarters in Shanghai in March 2019. At that time, Beckhams, Adidas Greater China and global executives gathered together.

Previously, in March 2018, they integrated Greater China, Japan, South Korea, Southeast Asia and the Pacific into a unified Asia Pacific market. That is, from then on, Adidas no longer released the Greater China results alone. In this teleconference on the release of financial reports in the first half of 2020, in the face of analysts' questioning about the specific performance of China, Roth also chose to avoid.

However, we can work out a rough figure based on the published data, especially the past growth rate.

Adidas financial report shows that in the second quarter of fiscal 2016, Greater China achieved revenue of 685 million euro, compared with 865 million euro in the same period of 2017 fiscal year. Since then, the Greater China region has grown by 27% in the second quarter of fiscal year 2018 to about 1.099 billion euros. 12% in the same period, which is about 14% after the same period in 2019.

Combined with the fact that Adidas mentioned in the financial report that the sales in Greater China were the same as last year, we can judge that the revenue of Greater China in the second quarter of fiscal year 2020 is about 1.253 billion euro.

Considering that the global revenue of Adidas in the second quarter was 3.579 billion euro, it can be calculated that about 35% of the revenue of Adidas came from Greater China in the quarter just ended. That's 23% in the same period last year.

In other words, in the second quarter, for every 3 euros Adidas earned, 1 euro came from Greater China. Last year, the ratio was about 4 euro, and 1 euro came from Greater China.

In addition, only Asia, Europe and Russia / CIS region had positive operating profit margins in the second quarter, while the European market was large but the operating profit margin was only 2.7%, while the volume of Russia / CIS was very small, only Asia had the largest volume and the operating profit margin was 31%.

Operating interest rates in North America and Latin America are negative.

Therefore, from the perspective of operating profit, the Asian market, or greater China, is more significant for Adidas to survive the epidemic.

According to Roth, adidas' sales growth in China reached double digits in May and June, but the growth slowed down in July. "The positive impact of the pent up demand explosion is weakening, and the passenger flow is still lower than last year.".

They also expect the company's overall gross margin to continue to fall this year and discounts to continue. In other words, we will continue to see Adidas with constant discounts in the second half of this year.

In fact, Adidas seems to have been worse this quarter from the perspective of revenue and other data.

Excluding exchange rate factors, adidas' revenue fell 35% in the second quarter to 3.579 billion euros. Among them, Adidas brand decreased by 33%, Reebok brand decreased by 42%. In the first quarter, it was only 19%.

In terms of region, North America decreased by 38%, Latin America by 64%, Europe by 40%, and even Asia, which was the first to recover from the epidemic, fell by 16%.

In addition, inventory growth reached a new high of 49%. As a result of frequent sales promotion and inventory accumulation, the gross profit rate decreased by 2.4 percentage points to 51%.

As a result, Adidas achieved an operating loss of 333 million euros in the quarter. The operating interest rate was negative 9.3%, down 21%. Continuing operations resulted in a net loss of EUR 3.06 and a negative EPS of EUR 1.45.

Why did the seemingly dismal performance get positive feedback from capital markets? Adidas' cash flow and inventory management plan may have given investors some confidence.

In April, Adidas planned to get high loan aid from the German government and banks. In a just released second quarter financial conference call, Adidas chief financial officer harm ohlmeyer said they used the funds in July. And that's just part of their cash flow control plan.

Both enterprises and individuals, cash flow control can be divided into two parts: open source and throttling.

Among Adidas's short-term cash flow management measures, open source measures include promoting e-commerce, giving priority to China and other open markets.

The measures include adjusting orders to reduce the amount of payment payable, reducing discretionary expenses on operating costs and reducing management compensation, canceling market activities, stopping retail expansion and transformation, and suspending it project investment.

In addition, there are other measures such as withdrawing loans from foreign banks.

Under this policy, Adidas accounts receivable decreased by 31% in the second quarter, while accounts payable increased by 23% year-on-year. As a result, cash and cash equivalents were basically maintained at 2 billion euros at the end of the first quarter.

They didn't run out of cash in the second quarter. The marketing budget fell by 25% due to the suspension of marketing work related to cancelled events such as the Champions League and the Olympic Games. But digital marketing has increased.

In terms of gross profit margin, the increase in inventory and bad debt provisions and the impairment of retail stores and Reebok trademarks recorded a total negative impact of about 250 million euros. Excluding these factors, the operating loss will be much less than EUR 333 million, and the gross profit margin will also rise slightly.

It is easy to understand that the higher inventory allowance has seriously affected the gross margin. At the end of the second quarter, their inventories rose 49% to a new high of 5.213 billion euros.

But Adidas's Global CEO believes that inventories have peaked and they will clear them by the end of the year.

To this end, they released a detailed inventory plan on the official website. The measures include changing evergreen funds to 2021 product sales; opening more than 1000 self owned factory discount stores as stores, online sales activities throughout the year, and small proportion of inventory being digested by retail partners.

In other words, Adidas plans to digest inventory mainly through its own channels, rather than through third-party channels.

Roth also made special mention of cyber week and double 11, the promotional festivals after the Thanksgiving holiday. "Most of the online discounts are in the second half of the year and are expanding every year. In the past, in order to meet the demand, we will order products. This year, we will mainly use the existing stock. " He said.

When it comes to cash flow, debt is an unavoidable topic.

Adidas net debt at the end of the quarter was EUR 792 million, an increase of EUR 222 million compared with the end of the first quarter. Compared with the same period last year, it has also deteriorated. However, in the longer term, the debt amount is actually lower than that in 2016 and 2017, and the equity debt ratio is about 30%.

In fact, for all sports brands, the epidemic is a baptism, which needs to be upgraded.

The first thing is to further improve the status of e-commerce. At the beginning of 2017, Adidas will focus on digitalization. Adidas's e-commerce revenue increased by 93% in the second quarter, accounting for more than a third of its total business. There were three-digit increases in April and may.

Interestingly, during this earnings call, Roth expressed a very similar view to Calvin McDonald, CEO of lululemon's latest earnings call not long ago. Calvin McDonald believes that Omni channel consumers will spend more time and money on the brand and will be more loyal to the brand.

Roth said, "a customer we know is more valuable to us, and the life cycle of a member is twice as long as that of an ordinary consumer.".

Driven by the epidemic, Adidas training app users tripled from March to May. So far, their official app sales have more than quadrupled this year, with members buying more than 6% of online sales.

"In the second quarter, we added millions of members, which will help Adidas develop in the future," rothed was confident.

In addition to the obvious structural change from fashion and e-commerce to e-commerce, Roth believes that there is an increasingly important change in the consumption channel from fashion and e-commerce. It is imperative to improve the flexibility of the workplace. More and more companies plan to work remotely permanently.

"Sitting at home, you don't wear a suit and tie, but you tend to wear Adidas sneakers, which undoubtedly paves the way for us.".