Adidas Plans Ad Push to Confront Nike, Golf Unit Revamp

Aug. 7 (Bloomberg) -- Adidas, the world’s No. 2 sports gear maker, cut its profitability forecast for 2014 after first-half revenue in North America dropped amid slumping demand for golf equipment and as production and marketing costs rose. Scarlet Fu reports on “Bloomberg Surveillance.” WSL Strategic Retail CEO Wendy Liebmann also speaks. (Source: Bloomberg)

Adidas AG (ADS) plans an advertising blitz next year to stave off market share losses and will reduce costs at its golf unit as declining sales prompted the world’s No. 2 sports-gear maker to cut its 2014 profitability forecast.

Operating profit this year will be 6.5 percent to 7 percent of sales, rather than the 8.5 percent to 9 percent range predicted earlier, Herzogenaurach, Germany-based Adidas said today in a statement, blaming weak U.S. revenue, tumbling sales from golf equipment in North America and China and Russia’s dispute with Ukraine. The stock fell to a two-year low.

“It is obvious we have to go back to the training ground,” Chief Executive Officer Herbert Hainer said on a conference call with reporters. “We clearly want to improve our brand leadership.”

Adidas took investors by surprise a week ago with an initial report that included other forecast cuts as second-quarter earnings missed analysts’ estimates. Hainer is testing investors’ patience with the lower outlook and climbing marketing expenses, especially after predicting in May that Adidas would post a “strong” second quarter.

“Execution remains a serious issue for this management team,” John Guy, an analyst at Berenberg Bank, said in a note to clients today. “Golf, financial restructuring and other initiatives will continue to impact Adidas’s financial performance in 2015, so no quick fixes here.”

Adidas fell as much as 4.4 percent to 55.52 euros, the lowest intraday price since July 2012, and was trading down 4.2 percent at 2:36 p.m. in Frankfurt. The stock has dropped 40 percent this year in the worst performance on Germany’s benchmark DAX Index in 2014.

World Cup

Just three weeks ago, Adidas was celebrating the victory of its home country’s team in soccer’s World Cup. The company said its sponsorship of both teams that played in the final was sparking sales of more than 8 million replica World Cup jerseys as it aims for 2 billion euros in soccer-related revenue this year. The company’s Reebok casual exercise clothing and shoes have also been selling better.

Second-quarter net income totaled 144 million euros, Adidas said on July 31, lower than the 150 million-euro average analyst estimate. Sales rose 2 percent to 3.47 billion euros, about matching analysts’ average though held back by an 18 percent drop at the golf division. Revenue in the period fell 4.3 percent in North America, 5 percent in Asia outside China and 1.3 percent in the European emerging-economies region that includes Russia, Adidas said today.

“We left our brands exposed to attack in some markets, which has cost us market share,” Hainer said.

Marketing Costs

Spending on marketing will amount to 13 percent to 14 percent of sales next year, an increase of 1 percentage point from an earlier planned range, the company said today.

In the U.S., the effort is focused on catching up with industry leader Nike Inc. (NKE) in basketball, Cedric Rossi, an analyst at Bryan, Garnier & Co., said in a report to clients today. Adidas said on July 16 that it had signed sponsorship deals with four of the top six National Basketball Association draft picks.

In Russia, discounting and the declining value of the ruble are curtailing expansion plans. The second-quarter retail gross margin narrowed by 4.9 percentage points, Adidas said, almost 4 points of which were related to Russia and other former Soviet republics. The company now plans to open just 80 stores this year in that region, compared to an initial plan for 150 new outlets.

Golf Reorganization

Restructuring the TaylorMade golf-equipment divisions and product discounts at the unit will sap second-half operating profit by 50 million euros to 60 million euros, Adidas said. Specifics on the reorganization will come in coming weeks, Hainer said, declining to say whether job cuts are planned.

“We first will talk to our people internally,” Hainer said. “In the next week weeks we will explain it to our employees internally and then we will give you all the details.”

The shoemaker reduced its forecast for 2014 net income last week, predicting about 650 million euros, compared with the 830 million euros to 930 million euros previously anticipated. Adidas also scrapped a long-standing growth target for sales next year of 17 billion euros and an operating margin at 11 percent of revenue. Analysts surveyed by Bloomberg expect 2015 sales of 15.5 billion euros.

To contact the reporter on this story: Aaron Ricadela in Frankfurt at aricadela@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Tom Lavell

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