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Adidas First-Quarter Profit Drop Shows Concerns Beyond World Cup

Adidas products
An Adidas logo sits on a FIFA World Cup Brasil football on display inside the Adidas AG sportswear store in Moscow. Sales slid in nearly all divisions as consumers paused purchasing of soccer goods ahead of this summer’s World Cup. Photographer: Andrey Rudakov/Bloomberg

Adidas AG, the world’s second-biggest sporting-goods maker, reported a decline in first-quarter earnings that showed the company has more to be concerned about than just selling goods to soccer fans at the World Cup.

Revenue at the TaylorMade golf business slumped, while the strength of the euro is blowing a hole in sales and profit at a company that gets less than a third of business from western Europe, according to figures released today.

“A 35 percent earnings-per-share decline in a quarter which should have benefited at least a little bit from the upcoming World Cup is disappointing,” Michael Kuhn, an analyst at Deutsche Bank AG, said in a note to clients.

With the World Cup set to start next month, Adidas maintained sales and profit forecasts for this year. It’s next year that’s concerning analysts. The company has forecast sales of 17 billion euros ($23.7 billion): analysts expect only 15.9 billion euros, according to the average of 26 analysts compiled by Bloomberg.

“We consider the company’s targets for 2015 to be very ambitious,” Michael Gorny, an analyst at Bankhaus Lampe, said in an April 25 research note, adding that he doesn’t expect the company to meet the goals before 2016. Adidas has also forecast an operating profit margin of 11 percent in 2015.

Revenue at TaylorMade, the source of almost 9 percent of group sales, slumped 38 percent in the first quarter -- the result of increased discounting, the company said.

“We helped the retailers a little bit with markdown and promotional activities to sell the current inventory through,” Adidas Chief Executive Officer Herbert Hainer said on a call.

Shrinking Market

The golf unit is altering product releases and shipping schedules in an effort to halt the slide, which partly reflects a shrinking U.S. market for the sport. It’s also made a number of management changes, with former golf head Mark King being named last month as president of Adidas’s North American business and Ben Sharpe becoming TaylorMade CEO.

At the same time, Adidas is squaring off with larger rival Nike Inc. for supremacy in sales of soccer cleats, uniforms, balls and leisure wear. Nike surpassed $2 billion in soccer sales for the fiscal year that ended last May and Adidas has set a goal of 2 billion euros for this year.

“It is a two-horse race” in soccer, Hainer said. Nike “definitely put some challenge on us in Europe.”

Adidas plans to start its biggest soccer “offensive” later this month as the World Cup nears, the CEO said. The global tournament, which starts June 12 in Brazil, will lead to better results starting in the second quarter, he said.

Rockport Sale?

First-quarter net income at Herzogenaurach, Germany-based Adidas dropped 34 percent to 204 million euros, missing the 218.8 million-euro average estimate in a Bloomberg survey.

Sales declined 6 percent to 3.53 billion euros, compared with the 3.61 billion-euro average estimate.

Adidas also said it hired Guggenheim Partners LLC to explore a possible sale of its Rockport casual-shoe division.

The shares were little changed at 76.88 euros as of 1:03 p.m., leaving them down 17 percent in the year to date.

At least one investor is getting restive. Union Investment, which holds a little more than 1 percent of Adidas, said this week it plans to withhold support for the company’s executive and supervisory boards at Adidas’s May 8 annual meeting.

The investment group said it wants to “shake up” the company, and is concerned about Nike’s increasing market share in Germany and Europe as a whole. Union also said that it’s “incomprehensible” that Adidas extended Hainer’s contract through 2017 while it searches for his successor.

On today’s call with reporters, Hainer said he’ll try to “get the trust of Union Investment back,” but was “surprised” at the criticism given Adidas’s strong stock performance, dividend payments and profitability in past years.

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