adidas(ADDYY) - 2020 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Revenue decreased by 19% in currency-neutral and nominal terms to €4.753 billion [32] - Gross margin declined by 420 basis points to 49.3% due to declines in most markets [32] - Operating margin fell by 13.5 percentage points to 1.4% [32] - Net income from continued operations dropped by 97% to €20 million, with basic EPS down 96% to €0.13 per share [32] Business Line Data and Key Metrics Changes - North America grew by 1%, but had double-digit growth until the end of February before store closures [33] - Greater China saw a significant decline of 58%, particularly impacted around the Chinese New Year [33] - E-commerce sales increased by 35% for the full quarter, 55% in March, and triple-digit growth in early April [34] Market Data and Key Metrics Changes - Asia Pacific was the most severely impacted region with revenues down 45%, primarily due to a sales decline of around €800 million in Greater China [37] - Europe experienced a decline of 11%, while Latin America was flat and North America saw a slight increase of 1% [39] - The adidas brand was down 20%, while the Reebok brand was down 12% [35] Company Strategy and Development Direction - The company is focusing on health and sport becoming more important to consumers post-crisis, with an accelerated move towards a health-oriented global population [20][21] - There is a strong emphasis on digital transformation, with a shift towards a more direct-to-consumer (D2C) model [22][23] - The company plans to leverage e-commerce as a key growth area, reallocating resources to enhance digital sales [70][71] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the unprecedented challenges posed by the COVID-19 pandemic, with 60% of the business completely closed since mid-March [7][31] - The outlook for Q2 anticipates a revenue decline of more than 40%, with operating losses expected to be in the triple-digit minimum range [102] - There is confidence in a recovery, particularly in China, with expectations of a gradual reopening of stores in Europe and North America [105][106] Other Important Information - The company has accessed an additional €3 billion through a syndicated loan to ensure liquidity during the crisis [62][68] - Marketing investments remained stable in the first two months of the year, with a focus on e-commerce [41][53] - The company has suspended dividends and share buybacks to preserve cash [61] Q&A Session Questions and Answers Question: Can you break out the components of the 420 basis points decline in gross margin in Q1? - The decline was driven by market mix, FX, limited promotional activities, and significant costs related to cancellation of purchase orders [114][115] Question: How much of the sharp increase in e-commerce growth was driven by promotional activity versus underlying demand? - There was a mix of promotional and non-promotional revenue, with more promotions occurring in the latter part of the quarter [116][117] Question: What is the strategy for inventory with channel partners outside China? - The approach will differ from China, focusing on strategic planning and adjustments to manage inventory levels effectively [125][126]