Adidas 2002 Annual Report Download - page 85

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83
GROSS PROFIT DECLINE REFLECTS POOR MARKET CONDI-
TIONS /// The gross profit declined 11% from € 313 million
in 2001 to € 279 million in 2002. This is due to lower margins
at Salomon as a result of the lower percentage of winter
goods and Japanese sales in total revenues and higher
clearance sales in the inline skate categories. In addition,
gross profit was affected by the first-time inclusion of
Arc’Teryx sales, which carry a lower average margin than
other Salomon products. As a result, Salomon margin was
40.8%, down 3.1 percentage points from the previous year’s
level of 43.8%.
OPERATING EXPENSES DECREASE /// Operating expenses
at Salomon decreased 4% from € 251 million in 2001 to
€ 240 million in 2002. This improvement was driven by lower
marketing and R& D overheads throughout the brand, in
particular as a result of the closure of the Salomon Design
Center in Boulder/Colorado, USA. As a result of the brand’s
lower sales, operating expenses as a percentage of net sales
was constant with the prior year at 35.1%. The operating
profit for Salomon declined 38% from € 63 million in 2001
to € 39 million in 2002.
SALES GROWTH TO RETURN IN 2003 /// Because of the
strong seasonality of Salomon’s business and the often short-
term nature of orders within the winter sports industry, we do
not provide backlog information for the Salomon family of
brands. However, net sales of Salomon brand products are
expected to increase in 2003, as a result of higher Salomon
soft goods sales. Arc’Teryx will continue to drive strong
apparel growth for Salomon. In addition, surfing products will
be launched for the first time in 2003. These high-tech prod-
ucts are being developed in Perth, Australia and are expected
to boost brand awareness but deliver only low revenues in
2003. On the other hand, the winter sports and inline skate
categories are expected to remain under pressure. We expect
that, in addition to these challenging market conditions,
currency pressures will continue to impact gross margins.
Although the vast majority of Salomon products are manu-
factured in Europe, over 40% are sold in other regions, which
have all experienced currency devaluation versus the euro
in recent months. As a result, cost of sales is expected to
increase significantly in 2003, which will directly impact the
Salomon gross margin. To combat these challenges, further
cost controls have been put in place at Salomon.
SOFT GOODS SALES RISE 11% /// Hardware sales for
Salomon in 2002 were € 526 million or 77% of total sales
(2001: 80%). This represents a decline of 8% versus the
previous year’s € 571 million level. Key products in this area
include alpine skis, bindings and boots as well as cycling
products, inline skates and snowboard products. Soft goods,
which consist of Salomon, Bonfire, Cliché and Arc’Teryx
footwear, apparel and accessories, generated € 159 million
or 23% of Salomon sales in 2002 (2001: 20%), up 11% from
€ 143 million in 2001. Strong sales at Arc’Teryx and the
continued introduction of Salomon’s own apparel line led to
58% revenue growth for apparel in 2002. In the medium term,
soft goods sales are expected to grow to 50% of total Salomon
sales.
SALES GROWTH IN ALL REGIONS EXCEPT ASIA /// Despite
an overall decline in sales, currency-neutral sales grew in
three of the four Salomon regions in 2002. In Europe,
Salomon’s largest market, sales were up 3% from
€ 383 million in 2001 to € 395 million in 2002, with growth in
bike components, soft goods and winter sports more than
balancing the decline in inline skates. In North America,
sales declined 4% from € 208 million in 2001 to € 199 million
in 2002. On a currency-neutral basis, this represents an
increase of 2% and is primarily related to higher soft goods
sales in the region. In Asia, sales declined 25% (–18% cur-
rency-neutral) from € 112 million in 2001 to € 84 million in
2002, reflecting the severely depressed winter sports and
outdoor footwear markets in Japan. In Latin America, sales
declined 14% from € 4 million to € 3 million, which equates
to a 45% increase on a currency-neutral basis.
SALOMON /// CROSSMAX™ SKI