The Strategist

Adidas doubled operating profit thanks to restructuring

08/01/2016 - 16:18

For the fourth time since the beginning of the year, Adidas has raised its annual profit forecast. The company’s management is expecting a profit of 1 billion euros by the end of 2016.

One of the main reason for the improved forecast was premature termination of a contract with Chelsea FC. Through this, the English football club agreed to pay compensation of $ 57 million. Preliminary data for the II quarter of 2016 also look encouraging: the company increased its operating profit to 291 million euros, which is 99% compared to a year earlier. Net income for the first quarter increased by 57.8%, reaching 351 million euros.

From the beginning, the company's shares have risen by 67%. For comparison, the shares rose 56% over 2015.

The good performance is largely obliged to restructuring that was initiated by the leadership after 2014, when the company's net profit declined by 37.6% to 490 million euros.

Within the programme, marketing expenses in 2015 were increased by 13-15%, and the company has injected 2 billion euros in the European and North American areas.

At the same time, Adidas has attempted to revive its apparel segment and equipment for golf. However, in May 2016 the company decided to get rid of golf clubs and golf balls production, focusing on brand clothes and shoes for golfers. Experts believe that Adidas would fetch approximately EUR 270 million out of the three major business for the golf equipment production - TaylorMade, Adams and Ashworth.

In 2015, the company continued restructuring and announced plans to close about 330 stores worldwide. In 2016, Adidas announced returning of its production from Asia to a robot factory in Germany.

Experts point out that the German company keeps focusing on casual wear segment. Number of new developments is being reduced since the company is relying on contracts with celebrities, letting Nike to press forward in the technological direction. So, one of the company’s most successful models of shoes were Yeezy Boost, developed in 2015 in collaboration with Kanye West.

Now, the battle between Nike and Adidas for the title of the world's largest producer of sporting goods is almost over.

Adidas lost leadership on the US market as early as 1980, with the beginning of active development of Nike and Reebook. However, before the 1990s, Adidas still maintained its leadership in the European market, and occupied the first place among the world's manufacturers of sportswear.

Death of the company’s founder Adolf Dassler and sale to Bernard Tapie, who moved the production to Asia and concluded several significant advertising contracts with celebrities, did not change anything. In 1992, the company has not been able to pay interest on a loan and was resold once again.

At the end of 2015, Adidas net profit rose 29% to 640 million euros ($ 711.6 million). During the same period, Nike has increased its net profit by 22% to $ 3.3 billion.