Adidas, the world’s second-biggest sportswear firm, cut its profit margin target for 2014 yesterday, saying it would increase spending on marketing and an expansion of its own-run stores a week after it issued a profit warning.
The German group is now targeting an operating margin of 6.5-7.0 per cent for 2014, from a previous 8.5-9.0 per cent and down from 8.7 per cent in 2013, excluding goodwill impairments.
The reduction in the margin – a measure of operating income as a proportion of sales – comes after Adidas said last week it needed to increase investment in a bid to catch up with market leader Nike.
Adidas last week cut sales and net income targets for 2014 and scrapped its goals for 2015, blaming the move on poor performance at its golf business and volatile emerging market currencies, particularly the Russian rouble.
Among the 2015 targets Adidas abandoned was a goal for an operating margin of 11 per cent, still below the 13 per cent US group Nike saw in its fiscal year to May 31.
Adidas, which has been losing ground to Nike in developed markets, said it now expects operating expenses as a percentage of sales to increase from the 42.3 per cent recorded last year, compared with previous guidance for them to stay flat, as it increases spending on marketing and opening more own-run stores.
The same factors contributed to a fall in second-quarter operating margin to 6.3 per cent from 7.4 per cent a year ago.
Adidas announced last week it would fight back more aggressively against Nike and other competitors, building on its success at the football World Cup after the victory of its sponsored team Germany by increasing marketing in the next 18 months.
Currency-adjusted sales from its own retail outlets rose a currency-neutral 22 per cent in the first half to €1.75 billion, while wholesale sales rose 5 per cent to €4.44 billion.
Adidas, said all regions had contributed to that increase, with western Europe up 13 per cent, eastern Europe up 14 per cent – driven by a double-digit rise in Russia – and Latin America up 33 per cent.
Adidas said last week it was scaling back investment in Russia, where it runs more than 1,000 stores, citing a fall in the rouble since the start of the Ukraine crisis.
Adidas shares, which tumbled after last week’s profit warning and are down almost 38 per cent this year.
Citi analysts, who rate the stock “neutral”, said they remained sceptical on the stock given the planned reduction of stores in Russia, the higher marketing costs and also ongoing adverse currency trends.
“We continue to fear that earnings growth trends could remain muted despite the recently lowered EBIT (earnings before interest and taxation) base,” they wrote in a note.
In North America, group sales rose 1 per cent as a good performance by the core Adidas brand and Reebok fitness were offset by an 18 per cent fall for its TaylorMade golf unit.