Adidas 2002 Annual Report Download - page 68

EUROPE AND ASIA DRIVE GROSS MARGIN GROWTH /// On
a regional basis, gross margin improvement was driven by
Europe and Asia, reflecting strong gains within brand adidas
as described above. In Europe, the gross margin grew 2.0
percentage points from 37.5% in 2001 to 39.5% in 2002. In
Asia, the gross margin increased 0.5 percentage points from
47.5% in 2001 to 48.0% in 2002. In North America, the gross
margin declined 0.6 percentage points from 37.3% to 36.8%.
Strong improvements at brand adidas as a result of lower
clearance sales at better margins and increased own-retail
activities could not fully compensate for declines at Taylor-
Made-adidas Golf and Salomon. In Latin America, the gross
margin declined 0.9 percentage points from 40.8% to 39.9%,
impacted by negative currency developments.
OPERATING EXPENSES AS A PERCENTAGE OF SALES
INCREASE IN LINE WITH MANAGEMENT EXPECTATIONS ///
Operating expenses, including selling, general and adminis-
trative expenses (SG&A) and depreciation and amortization
(excluding goodwill), grew 10% from € 2.1 billion in 2001 to
€ 2.3 billion in 2002. As a percentage of net sales this equates
to 35.9% which is 1.1 percentage points higher than the 2001
level of 34.8%. The increase was expected and reflects the
incremental expenses related to key strategic initiatives for
brand adidas, including additional marketing expenses for the
2002 FIFA World Cup™, the expansion of own-retail activities
and start-up costs associated with the purchase of the
remaining shares of adidas Italy. Total incremental costs
were lower than the initially projected € 100 million. As a
result, operating expenses for brand adidas increased
11% from € 1.5 billion in 2001 to € 1.7 billion in 2002. At
TaylorMade-adidas Golf, operating expenses grew 24% from
€ 218 million in 2001 to € 271 million in 2002. At Salomon,
operating expenses declined 4% from € 251 million in 2001
to € 240 million in 2002, following major efforts to implement
leaner structures in both marketing and R&D activities.
66 REPORTING MANAGEMENT DISCUSSION & ANALYSIS /// GROUP BUSINESS PERFORMANCE
GROUP GROSS MARGIN GROWS /// The adidas-Salomon
gross margin grew 0.7 percentage points from 42.6% in 2001
to 43.2% in 2002. This was above the 41 to 43% target range
communicated by Management in early 2002. As a result,
Group gross profit rose 8% from € 2.6 billion in 2001 to
€ 2.8 billion in 2002.
GROSS MARGIN GAINS DRIVEN BY BRAND adidas /// The
improvement in the Group’s gross margin was the result of a
1.0 percentage point gain at brand adidas from 38.2% in 2001
to 39.2% in 2002. Drivers of this increase were the expansion
of adidas own-retail activities, a lower level of clearance
sales, higher clearance margins and, most importantly, an
improving product mix. The improving euro/US dollar
exchange rate also impacted these figures. However, of the
total 1.0 percentage point gain, we estimate the currency
impact to be less than 0.2 percentage points. Offsetting this
improvement were gross margin declines at Salomon and
TaylorMade-adidas Golf. At Salomon, gross margin was down
3.1 percentage points from 43.8% in 2001 to 40.8% in 2002,
highlighting the continued weakness of the winter and inline
skate markets. The TaylorMade-adidas Golf gross margin also
declined as a result of the heavily discounted golf market
offering in North America in the first half, as well as the first-
time inclusion of the lower-margin golf ball business from
Maxfli and Slazenger Golf.
GROSS MARGIN in %
1998 41.9
1999 43.9
2000 43.3
2001 42.6
2002 43.2
| | Target range 41 to 43%
GROSS PROFIT € in millions
1998 2,124
1999 2,352
2000 2,528
2001 2,601
2002 2,819