During the first half of 2006, Group sales increased 49% on a currency-neutral basis, strongly supported by the first-time consolidation of the Reebok business segment. Sales for the adidas Group excluding Reebok increased 16% on a currency-neutral basis driven by higher sales in all regions. In euro terms, Group revenues grew 53% to EUR 4.887 billion in the first half of 2006 from EUR 3.190 billion in 2005. Sales for the adidas Group excluding Reebok grew 19% in euro terms to EUR 3.800 billion in 2006 from EUR 3.190 billion in the prior year.
"The adidas Group had an outstanding first half of 2006 crowned by our strong showing at the World Cup," commented adidas AG Chairman and CEO Herbert Hainer. "adidas and TaylorMade-adidas Golf's top-line performance was impressive and Reebok delivered sequential improvement in line with our expectations."
Brand adidas and TaylorMade-adidas Golf drive first half year sales growth
The adidas segment was the main driver for the Group's organic sales growth in the first half of 2006. Currency-neutral adidas revenues increased 15% during the first six months, positively impacted by the 2006 FIFA World Cup(TM). Increases in nearly all Sport Performance categories as well as double-digit growth in the Sport Heritage and Sport Style divisions also contributed to this growth. The Reebok segment added EUR 1.050 billion to adidas Group sales. At TaylorMade-adidas Golf, currency-neutral revenues increased 28%. This positive performance was driven by strong double-digit growth in nearly all major categories as well as the first-time inclusion of the Greg Norman apparel business. Currency translation effects positively impacted sales in euro terms. adidas sales in euro terms increased 17% to EUR 3.308 billion in the first half of 2006 from EUR 2.816 billion in 2005. TaylorMade-adidas Golf sales in euro terms grew 32% to EUR 464 million in 2006 from EUR 351 million in 2005.
Strong double-digit sales increases in all regions
First half adidas Group sales in Europe grew 27% on a currency-neutral basis, mainly reflecting the first-time consolidation of the Reebok segment as well as increases at brand adidas. This represents an improvement of 28% in euro terms to EUR 2.004 billion in 2006 from EUR 1.569 billion in 2005. In North America, Group sales during the first half increased 99% on a currency-neutral basis, reflecting the first-time consolidation of the Reebok segment as well as double-digit increases at both adidas and TaylorMade-adidas Golf. In euro terms, sales increased 110% to EUR 1.592 billion in 2006 from EUR 757 million in 2005. Sales for the adidas Group in Asia increased 34% on a currency-neutral basis in the first half of 2006, driven by strong double-digit increases at adidas and TaylorMade-adidas Golf as well as the first-time consolidation of the Reebok segment. In euro terms, revenues in Asia grew 36% to EUR 964 million in 2006 from EUR 708 million in 2005. In Latin America, currency-neutral sales increased 62% in the first half of 2006. This development mainly reflects strong increases at brand adidas as well as the first-time consolidation of the Reebok segment. In euro terms, sales grew 78% to EUR 241 million in 2006 from EUR 136 million in 2005. For the adidas Group excluding Reebok, first half currency-neutral sales grew 8% in Europe and 18% in North America. Revenues for the adidas Group excluding Reebok in Asia and Latin America increased 21% and 41%, respectively, on a currency-neutral basis in the first half of 2006.
Group gross profit increases 42%
The gross margin of the adidas Group declined 3.7 percentage points to 44.8% of sales in the first half of 2006 (2005: 48.5%), mainly reflecting the first-time consolidation of Reebok. Due to its strong presence in North America, where average gross margins are lower than in other regions, Reebok carries a significantly lower gross margin than the Group average. In addition, Reebok's first half gross profit includes negative impacts from purchase price allocation in an amount of EUR 49 million. For the adidas Group excluding Reebok, gross margin decreased 0.5 percentage points to 48.0% in the first half of 2006, mainly as a result of lower margins arising from the cooperation agreement with Amer Sports Corporation. Under this agreement, some adidas subsidiaries continue to generate marginal income by selling Salomon products at gross margins lower than the Group average. In addition, a decline of the TaylorMade-adidas Golf gross margin due to a short-term promotional sales initiative in the metalwoods category impacted this development. However, as a result of the Group's strong top-line growth, gross profit for the adidas Group rose strongly by 42% in the first half of 2006 to reach EUR 2.191 billion versus EUR 1.547 billion in the prior year. Excluding Reebok, gross profit also grew strongly by 18% to EUR 1.823 billion in the first six months of 2006.
Operating profit improves 18%
The operating margin of the adidas Group declined 2.6 percentage points to 8.6% of sales in the first half of 2006 (2005: 11.2%). This mainly reflects the first-time consolidation of Reebok, which carries a significantly lower operating margin than the Group average, and includes negative impacts from purchase price allocation on the cost of sales and operating expenses in a total amount of EUR 57 million in the first half of 2006. For the adidas Group excluding Reebok, the operating margin decreased 0.6 percentage points to 10.6% in the first six months of the year (2005: 11.2%), reflecting the Group's lower gross margin and, to a lesser extent, higher marketing expenditures related to the 2006 FIFA World Cup(TM). However, as a result of strong sales growth, operating profit for the adidas Group rose 18% in the first half of 2006 to reach EUR 420 million versus EUR 357 million in 2005. Excluding Reebok, operating profit for the adidas Group grew by 13% to EUR 403 million in the first half of 2006 from EUR 357 million in the prior year.
Income before taxes up 4%
As a result of the operating improvements in the adidas and TaylorMade-adidas Golf segments and despite a significant increase of net financial expenses due to the financing of the Reebok acquisition, income before taxes for the adidas Group increased 4% to EUR 348 million in the first half of 2006 from EUR 335 million in 2005.
Net income from continuing operations grows 4%
The Group's net income from continuing operations increased 4% to EUR 234 million in the first half of 2006 from EUR 224 million in 2005. The Group's strong sales increase was the main driver of this improvement. In addition, net income was also positively impacted by a lower tax rate, which declined 0.4 percentage points to 32.9% in 2006 (2005: 33.3%) mainly due to a more favorable earnings mix throughout the Group.
Net income attributable to shareholders up 32%
The Group's net income attributable to shareholders increased 32% to EUR 226 million in 2006 from EUR 171 million in 2005. This improvement reflects the outstanding performance of the adidas and TaylorMade-adidas Golf segments. The non-recurrence of losses from discontinued operations related to the Salomon business in 2005 also had a positive impact on this strong development.
Basic earnings per share increase 19%
On June 6, 2006, adidas AG conducted a share split with each existing adidas AG share being divided into four shares. 2005 earnings per share figures have been restated accordingly. The Group's basic earnings per share increased 19% to EUR 1.11 in the first half of 2006 versus EUR 0.93 in 2005. Diluted earnings per share in the first half of 2006 increased 20% to EUR 1.06 from EUR 0.88 in the prior year. The dilutive effect mainly results from approximately 16 million additional potential shares that could be created in relation to the outstanding convertible bond, for which conversion criteria were met for the first time in 2004.
Inventories and receivables increase due to Reebok consolidation
Group inventories increased 53% to EUR 1.754 billion in 2006 versus EUR 1.148 billion in 2005, mainly as a result of the first-time inclusion of EUR 426 million in inventories related to the Reebok business. On a currency-neutral basis, this increase was 58%. Inventories for the adidas Group excluding Reebok grew 16% (+20% currency-neutral), mainly reflecting the Group's growth expectations for the remainder of the year as well as inventory increases resulting from short-term delays in adidas store openings in several emerging markets. Group receivables grew 61% (+66% currency-neutral) to EUR 1.679 billion at the end of the first half of 2006 versus EUR 1.040 billion in the prior year, mainly due to the first-time inclusion of receivables totaling EUR 517 million related to the Reebok business. Receivables for the adidas Group excluding Reebok increased 12% (+15% currency-neutral), which is lower than the strong sales growth during the second quarter of 2006.
Net borrowings at EUR 2.829 billion
Net borrowings at June 30, 2006 were EUR 2.829 billion, up 361% or EUR 2.216 billion versus EUR 613 million in the prior year. This increase was primarily driven by the payment of around EUR 3.2 billion for the acquisition of Reebok International Ltd., paid on January 31, 2006, as well as the payment of around EUR 170 million for the buyback of Reebok's major properties in the USA and Europe.
Brand adidas full year sales guidance increased
Backlogs for the adidas brand at the end of the second quarter of 2006 increased 9% versus the prior year on a currency-neutral basis. In euro terms, this represents an increase of 6%. Footwear backlogs grew 3% in currency-neutral terms (flat in euros), driven by improvements in the Sport Performance categories tennis and training as well as in Sport Heritage. Apparel backlogs grew 13% on a currency-neutral basis (+10% in euros), reflecting particular improvement in the Sport Performance categories football, running and tennis as well as in Sport Heritage. The transfer of the NBA and Liverpool business from Reebok to adidas also had a positive impact of approximately 2 percentage points on the development of brand adidas backlogs. Hardware orders, which grew at double-digit rates mainly due to improvements in the football category, also contributed to this positive development. As a result of strong first half year performance, the positive order book and vigorous growth expectations for adidas own-retail activities, the adidas Group is increasing its full year sales guidance and now expects low double-digit currency-neutral sales growth for brand adidas in 2006.
Mid-single-digit sales decline of Reebok business anticipated for 2006
Backlogs for the Reebok brand at the end of the second quarter of 2006 decreased 13% versus the prior year on a currency-neutral basis. This marks the second sequential quarterly improvement. In euro terms, this represents a decrease of 16%. Footwear backlogs declined 12% in currency-neutral terms (-15% in euros), mainly due to decreases in Reebok's lifestyle product offering. Apparel backlogs were down 16% on a currency-neutral basis (-19% in euros), primarily as a result of changing order patterns in Reebok's licensed apparel business and the transfer of the NBA and Liverpool business from Reebok to adidas. This transfer had a negative impact of approximately 3 percentage points on Reebok's order backlog development. Consequently, Reebok sales for eleven months of 2006, with consolidation starting on February 1, 2006, are expected to decline at mid-single-digit rates versus the prior year on a like-for-like basis.
TaylorMade-adidas Golf to Grow at Double-Digit Rates
For TaylorMade-adidas Golf, double-digit sales growth on a currency-neutral basis is expected in 2006, positively impacted by the first-time inclusion of the Greg Norman apparel business. On a like-for-like basis excluding Greg Norman, double-digit currency-neutral sales growth is now forecasted in 2006 as a result of the strong first half year performance and the positive customer feedback.
Double-digit sales and earnings growth expected in 2006
The adidas Group continues to expect excellent top- and bottom-line performance this year. For the combined adidas Group, strong double-digit sales growth is forecasted, based on a revenue increase of around 40% related to the first-time consolidation of Reebok. As a result of the strong first half year performance, and in view of the positive adidas backlog development as well as expectations for adidas own-retail activities, currency-neutral sales growth for the adidas Group excluding Reebok is now projected to be between 10 and 12%. The gross margin for the adidas Group including Reebok is expected to be in a range of between 44 and 46% in 2006 (between 47 and 48% excluding Reebok). The Group's operating margin is forecasted to be around 9% (between 10 and 10.5% excluding Reebok). Net income attributable to shareholders for the adidas Group is expected to grow at double-digit rates, approaching EUR 500 million in 2006 versus the 2005 level of EUR 383 million, primarily driven by top-line improvement as well as ongoing strong profitability. Reebok is forecasted to have an accretive impact on the Group's net earnings already in 2006.
Herbert Hainer stated, "We have a pipeline full of operational initiatives for the remainder of the year, and we are on track for continued success. In light of our strong performance in the first half of the year, we are confident that we will achieve our ambitious full year targets."
