Photographer: Alex Grimm/Bongarts/Getty Images

Adidas's Hainer Seeks to Build Investor Bridges Amid Turnaround

  • Reebok owner sees `significant increase' in expenses by 2020
  • Shares fall 3.1% as strong dollar also weighs on profit

Adidas AG, the sportswear maker seeking a new chief executive officer, gave investors another cause for concern as it said rising labor and raw-material costs will weigh on profitability over the next four years.

The shares fell 3.1 percent to 88.41 euros after the German owner of the Reebok brand said it expects a “significant increase” in sourcing costs by 2020 and that gross margins next year will narrow by 50 to 100 basis points. Adidas predicted stable operating margins in 2016, with higher production costs and the strength of the dollar being offset by increased supply-chain efficiency, price increases and cost savings.

“This has long been everyone’s concern which the company didn’t address before,” said Zuzanna Pusz, an analyst at Berenberg. “With double-digit labor cost inflation, a stronger U.S. dollar and increased marketing costs, it is still somewhat unclear how they will have enough operating leverage to keep the Ebit margin stable as promised for 2016.”

The forecast took the shine off a year of recovery at the company, which raised its full-year revenue and profit targets last month. CEO Herbert Hainer, who is due to leave when his contract ends in 2017, said Tuesday he’s exploring Adidas’s portfolio to establish which units fit with long-term plans, as his strategy comes under the spotlight by shareholders with a reputation as agitators for change.

The shares have risen 53 percent in 2015, rallying after a 38 percent slump in 2014.

Speaking with reporters at Adidas’s Herzogenaurach, Germany headquarters Tuesday, Hainer said no part of the company is immune from his strategic attentions. The CCM ice-hockey unit has attracted interested parties, though no active sale process is underway, he said.

Adidas’s strategy was already the subject of debate when Egyptian billionaire Nassef Sawiris became its biggest shareholder in October. Like fellow investor Southeastern Asset Management Inc., Sawiris is known for actively pushing for change at some companies he holds stakes in. Adidas is maintaining a dialogue with investors, said Hainer, 61, as he seeks to effect a turnaround during his final stretch as CEO.

“We want them to be happy with our plans so they buy and hold the stock,” Hainer said, adding that he speaks two or three times a year with investors including Southeastern, Groupe Bruxelles Lambert SA and BlackRock Inc. “I’ve never spoken with Mr. Sawiris,” partly because of coordinating schedules. “Of course we’re going to talk with him.”

As recruiter Egon Zehnder leads a search for his successor, Hainer vowed again to stay with the company until his contract ends in March 2017.

Southeastern, which holds about 3 percent of the shares, has said an external candidate would be best placed to help the German company in its market-share battle with Nike Inc. Should that happen, Hainer said he didn’t expect either of the two main internal candidates -- board members Eric Liedtke and Roland Auschel -- to leave.

Hainer said orders for next year are robust and that sales in the key North American market would rise by 10 percent or more, compared with a forecast of mid-single-digit currency-adjusted sales this year.

“Our order books are full -- I haven’t seen them so full in my 15 years here,” Hainer said. Next summer’s Olympic Games in Brazil and European soccer championship in France will help spur demand for sneakers and clothing, he said.

Analyst Pusz said Adidas’s top-line growth has been “very encouraging” and investors’ perception of Hainer’s turnaround effort won’t suffer if momentum continues.

(Earlier versions of the story corrected the year-to-date share price movement and the spelling of an executive’s name)

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