Yeezy Boost Contributes to Strong Q3 for Adidas

The German activewear giant increased its outlook following a 25 percent increase in profits in the period.

Sustained hunger for hype sneaker releases has helped keep Adidas on track, coming off a better-than-expected third quarter fueled in part by the million-strong launch of the Yeezy Boost 350 V2 in September, the biggest digital release in the company’s history.

The German sporting goods company on Wednesday raised its full-year guidance, citing double-digit increases in the period in strategic growth areas — North America, Greater China and e-commerce — despite severe currency headwinds and a significant increase in marketing investments.

E-commerce sales in the three months ended Sept. 30 spiked 76 percent, versus 27 percent in the first half, and generated around 7 percent of total sales. Dragging on the performance was sluggish growth in Western Europe, impacted by factors including aggressive competition, overpricing of key sneaker franchises and a slow reaction to trends in the market.

“A growth driver in the past was the Adidas Originals channel, but we are a sports company. We should have done a better job of developing the sports channel in Europe, similar to what we’ve done in the U.S., to have a more balanced profile,” Adidas chief executive officer Kasper Rorsted said during a conference call with journalists.

Double-digit and high-single-digit growth in the Sport Inspired and Sport Performance categories, respectively, fueled a 10 percent sales increase at Adidas in the quarter, while revenues at Reebok fell 5 percent, impacted by declines in the Training and Running segment.

The media mentions and search interests for the Yeezy Boost 350 V2 “surpassed any previous Yeezy release, which helped us drive e-commerce traffic, generating millions of visitors to the site,” Rorsted said.

He also highlighted a new loyalty program, Creators Club, launched by the Adidas brand in the U.S., and giving customers access to a “set of specials,” which is set to be rolled out to additional markets in the coming months.

With a line of “next generation” Ultra Boosts due to launch in early 2019, including a series of special-edition and collaborative releases in key cities across the world, the Ultra Boost franchise continues to grow in the strong double digits.

The brand’s archives continue to be “a great asset,” Rorsted said. Recently launched hits include the Yung-1 Triple Black based on the brand’s Falcon Dorf shoe from the Nineties and the first rerelease of the Continental 80 from the late Eighties.

But the 4-D-printed shoe is also a major “game changer” for the brand, Rorsted added, with the volume at retail increased by a factor of 10. “We’ve had lines outside stores for recent 4-D releases like the AlphaEdge,” he said.

Adidas continues to make strong progress in the digital space, Rorsted said, with the Adidas app, now available in 17 countries, generating close to 5 million downloads by the end of the third quarter.

But the company is also looking to “bring the brand alive in physical retail through focused investments.” Adidas year-to-date closed 327 stores and opened approximately 137 doors “where opportunities have emerged.”

In terms of brick-and-mortar success stories, Rorsted flagged the recently opened Shanghai Brand Center on East Nanjing Road in Shanghai, built “from concept to opening” over the space of six months. “That speaks to the speed with which things are happening in Asia, compared to the rest of the world,” he said.

In the first days of trading, the store has attracted more than 10,000 visitors per day, with a number of lineups for limited releases. “It has set the benchmark,” Rorsted noted. “Until a week ago, our Fifth Avenue store was the best in the world. Now you have to go to China to see the best store in the world.”

Adidas AG posted a net profit of 659 million euros in the third quarter, up 25 percent year-on-year, while sales rose 3 percent to 5.87 billion euros, compared to 5.67 billion in the same period last year.

Net income in the nine months spiked 40 percent to 1.59 billion euros, with sales rising 3.2 percent to 16.68 billion euros.

Under its revised guidance, the group’s net income from continuing operations is now expected to increase at a rate of between 16 percent and 20 percent in 2018, to between 1.66 billion euros and 1.72 billion euros. This compares to a previous forecast of between 1.61 billion euros and 1.67 billion euros, representing an increase of between 13 percent and 17 percent.

Currency neutral revenues in 2018 are projected to grow between 8 percent and 9 percent, below the previous forecast of around 10 percent, with lower-than-expected growth in Western Europe dragging on its performance.

The company’s gross margin is now projected to increase by up to 100 basis points to a level of up to 51.4 percent.

Based on the solid results and underlying earnings growth at Adidas “that has surpassed expectations for the past few quarters,” Piral Dadhania, analyst with Royal Bank of Canada, said he views the company’s market share opportunity in North America and evolving distribution model as “positive in the long term.”

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