April 27, 2020 / 5:52 AM / a month ago

Adidas says worse to come as profits and sales plunge

BERLIN (Reuters) - Adidas (ADSGn.DE) warned of an even bigger hit to second-quarter sales and profits from coronavirus lockdowns, after the German sportswear firm reported first-quarter earnings were almost wiped out and said it had not yet seen a full rebound in China.

Adidas said 60% of its business was currently at a standstill, with more than 70% of its stores closed worldwide and all big sporting events - including the Tokyo Olympics and Euro soccer tournament - postponed or cancelled.

E-commerce sales, which last year represented 13% of the total, are growing fast, particularly in China, but are not enough to compensate for the loss of in-store sales.

As shops reopen in China, customers have been returning but they have not been buying as much as before the crisis, Chief Executive Kasper Rorsted told journalists, adding he only expects a full recovery there by the end of the second quarter.

“We’re not going to see an imminent return to what we had before,” he said. “We are taking all the learnings from China and building that into a recovery for the rest.”

One bright spot is that the pandemic is increasing interest in fitness and health, Rorsted said, noting record sales of yoga mats as people exercise at home.

Adidas, which was forced to suspend dividend payments as a condition for a government-backed loan earlier this month to get it through the crisis as it burns cash, said it would replace that loan with other financial options as soon as possible.

The company warned of a possible 40% fall in second-quarter sales and a drop in second-quarter operating profit that could run into the hundreds of millions of euros, with Rorsted saying it has already lost more than 1 billion euros ($1.1 billion) of sales in April.

ORDERS CANCELLED, DISCOUNTS PLANNED

The company has partially cancelled orders with suppliers for the second and third quarter after inventories jumped by more than a third in the first quarter to 4.33 billion euros.

It plans to repurpose some of that unsold stock into products to be sold in 2021 - including classic Superstar and Stan Smith sneakers - and sell the rest at a discount through partners and its own website and outlet stores.

FILE PHOTO: An Adidas store is seen closed following an outbreak of the coronavirus disease (COVID-19), in Frankfurt, Germany March 27, 2020. REUTERS/Kai Pfaffenbach/File Photo

“We do expect a promotional environment in the entire industry in the second half,” said finance chief Harm Ohlmeyer.

First-quarter operating profit plunged 93% to 65 million euros, well short of the 263 million expected by analysts on sales down 19% to 4.75 billion euros.

Adidas shares, which have fallen by more than a third since the coronavirus pandemic started, were down 1.1% at 1415 GMT.

Adidas said it had taken a hit of around 250 million euros on unsold stock it took back from retailers in greater China, purchase order cancellations and higher bad debt provisions.

For the second quarter, it has reined in operating and marketing costs compared to last year, Ohlmeyer said.

Adidas declined to provide an outlook for 2020 given the uncertainty over when stores might reopen. Rorsted expects those in North America to start reopening in mid-May and he hoped most would be back in operation globally by the end of June.

Adidas saw e-commerce sales jump 35% in the first quarter, accelerating to 55% in March.

In China, online sales have more than doubled in the first weeks of April, Rorsted said, predicting e-commerce will exceed a target for 4 billion euros in 2020 from 3 billion in 2019.

Adidas has shifted staff, stock and marketing to its online operation, launching a special campaign involving its sponsored athletes and celebrities working out at home and granting three months of full access to its running app for free.

Rival Nike Inc (NKE.N) last month beat estimates for its third quarter ended Feb. 29, with revenue up 5.1% as strong online demand offset lower sales in China.

Adidas said its cash position had deteriorated by more than 1.4 billion in the first quarter, underlining why it had taken a 2.4 billion euro government-backed loan on April 14. Its cash position was 1.975 billion euros at March 31.

FILE PHOTO: A man carries Adidas shoeboxes near the Adidas store, as the spread of the coronavirus disease (COVID-19) continues, in Berlin, Germany, April 25, 2020. REUTERS/Annegret Hilse/File Photo

The company said it would push back the presentation of a new five-year strategic plan to next March from November.

($1 = 0.9218 euros)

Reporting by Emma Thomasson; Editing by Jan Harvey and Mark Potter

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