August 8, 2019 / 5:57 AM / 14 days ago

Shares in off-pace Adidas slip as it pays to fix sourcing shortages

BERLIN (Reuters) - Adidas (ADSGn.DE) shares stumbled on Thursday after the German sportswear company said profitability will be squeezed in the second half of the year by higher sourcing costs and price cuts to try to revive sales growth in Europe.

The Adidas logo is pictured during celebrations for German sports apparel maker Adidas' 70th anniversary at the company's headquarters in Herzogenaurach, Germany, August 9, 2019. REUTERS/Andreas Gebert

Adidas shares were 6.3% lower at 1354 GMT. The stock had rallied in recent weeks on hopes Adidas might lift its outlook, after German rival Puma (PUMG.DE) raised its sales and profit forecasts following a strong second quarter.

In March, Adidas warned that supply chain issues would hit first half sales growth, citing problems meeting North America demand for mid-market clothing.

Chief Executive Kasper Rorsted said the shortages should be over by the end of the year and have no impact in 2020.

But the use of air freight to mitigate them would weigh on the gross margin in the second half, finance chief Harm Ohlmeyer told analysts.

“Given the recent rerating in the shares since April and narrowing valuation gap versus peers, the lack of a sales or earnings beat is unusual, and brand momentum remains concerning,” Credit Suisse analysts wrote of Adidas, which celebrates its 70th anniversary on Friday.

Second-quarter sales rose a currency-adjusted 4% to 5.51 billion euros ($6.18 billion), shy of average analyst forecasts for 5.54 billion as the company saw a strong decline in the soccer category a year on from the World Cup.

Operating profit rose 9% to 643 million euros, also lagging average analyst forecasts for 651 million.

Rorsted said he was more worried about a currency war between the United States and China than tariffs on Chinese-made shoes, after Washington branded Beijing a currency manipulator.

“There is no winner in a currency war, eventually everybody will lose as it will lead to a slowdown in the world economy,” Rorsted told journalists, noting that a fall in currencies of its two top markets would be tough as the firm reports in euros.

While few Adidas products for the U.S. market are still produced in China, a move by other players to shift production from China to countries like Vietnam will also push up sourcing costs in the second half, Ohlmeyer added.

EUROPE RETURNS TO GROWTH

Adidas quarterly sales were flat in Europe, recovering from a 3% fall in the first quarter after the firm took steps to reduce its reliance on its Originals fashion line and boost sales of sports performance gear, with new product launches.

Rorsted said Europe should return to growth by the end of the year, saying new shoe launches had been well received, such as 1980s-style Nite Jogger sneakers, Pulseboost running shoes and movie collaborations with Marvel and Toy Story.

Ohlmeyer said price cuts in Europe would weigh on the gross margin in the second half, when Adidas also expects its foreign exchange hedges to be less favourable.

Adidas is opening a new building in its German home town of Herzogenaurach on Friday, with athletes and celebrities including Pharrell Williams and rappers Run DMC due to attend.

It has eroded Nike’s dominance of the U.S. market in recent years, pushing retro styles and teaming up with singers such as Williams, Kanye West and Beyonce.

Nike has responded by ramping up spending on marketing, with its sales rising a currency-adjusted 10% in the quarter ended May 31, as its grew faster than Adidas in China and Europe.

Adidas said it was confident sales would accelerate in the second half, allowing it to confirm a full-year outlook for currency-neutral sales growth of 5-8% and net income from continuing operations of between 1.88 and 1.95 billion euros.

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Rorsted noted that Adidas was facing a tough comparison in the third quarter due to the launch last September of popular Yeezy sneakers designed by Kanye West.

Sales of its long-struggling Reebok brand rose 3%, driven by the popularity of retro styles. But Rorsted dismissed interest in the brand from former basketballer Shaquille O’Neal, saying Adidas was not in talks to sell it.

(This story has been refiled to correct to “it” not “its”, paragraph 18)

Reporting by Emma Thomasson; Editing by Michelle Martin/Keith Weir/Alexander Smith

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