Adidas 2005 Annual Report Download - page 121

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117
Group Gross Margin Remains at High Level
Important factors supporting our high gross margin at
brand adidas such as the increased proportion of own-retail
activities, our improving product mix as well as ongoing
efficiency improvements in our supply chain are expected to
be partly offset by higher raw material prices due to the high
oil price as well as increasing labor costs. As a result, we
expect gross margin for brand adidas to increase only mod-
estly in 2006. The gross margin of TaylorMade-adidas Golf is
also projected to increase due to expected margin improve-
ments in the metalwoods and irons categories as a result
of new product launches with higher gross margins, as well
as the lower sourcing costs in the golf ball category result-
ing from the buy-out of our golf ball manufacturing contract
with Dunlop Slazenger in 2005. However, gross margin for
the adidas Group excluding Reebok is expected to decline
to a level of between 47 and 48%, mainly as a result of our
cooperation agreement with Amer Sports Corporation. Under
this agreement, some adidas subsidiaries will continue to
generate marginal income by selling Salomon products at
gross margins lower than the Group average. Further, posi-
tive currency effects on the unhedged portion of our sourcing
costs, enjoyed in 2005, will not be repeated in 2006.
Operating Margin Remains on a High Level
For brand adidas, operating expenses as a percentage of sales
are expected to increase modestly due to higher marketing
expenditures related to the 2006 FIFA World Cup™ as well as
growing adidas own-retail activities. As a result of increased
operating expenses more than offsetting the gross margin
improvement, we expect the operating margin at brand adi-
das to decline modestly. At TaylorMade-adidas Golf, we proj-
ect profitability to grow. Improving gross margins will more
than compensate higher operating expenses as a percentage
of net sales resulting from increasing sales expenses and
marketing overhead costs to support expected future growth.
Consequently, we are projecting an operating margin of
between 10 and 10.5% for the adidas Group excluding Reebok
in 2006.
Net Income for the adidas Group Excluding Reebok to Again
Grow at Double-Digit Rates
We expect double-digit growth in net earnings of the adidas
Group excluding Reebok for the fifth consecutive year. Top-
line improvement combined with ongoing strong profitability
will be the primary driver of this positive development. In ad-
dition, the deconsolidation of the Salomon business segment
will have a positive impact on the Group’s net income growth
as a result of the negative earnings contribution in 2005.
Consequently, we expect net earnings for the adidas Group
excluding Reebok to grow at double-digit rates versus the
2005 level of € 383 million.
First-Time Consolidation of Reebok Business Impacts
2006 Results
We expect Reebok sales to reach around € 2.8 billion for
eleven months of 2006, with consolidation starting on Febru-
ary 1, 2006. This reflects a slight decline versus the prior year
due to lower sales in North America. As a result of the first-
time inclusion of Reebok, adidas Group revenues will grow at
high-double-digit rates in 2006. Reebok’s gross and operat-
ing margins are lower than the adidas Group’s margins due
to the regional mix of their business. As a result, the gross
and operating margins for the adidas Group including Reebok
are expected to decline to between 44 and 46% and around
9%, respectively. As we expect Reebok’s earnings to exceed
the additional interest expenses for the adidas Group related
to the Reebok acquisition and the negative one-time effects
resulting from the difference between the valuation of assets
versus the purchase price paid (purchase price allocation),
we forecast the first-time consolidation of Reebok to have an
accretive impact on the Group’s net earnings in 2006.
Outlook
Sales growth double-digit
Gross margin 44 to 46%
Operating margin ca. 9%
Net income growth double-digit
adidas Group 2006 Targets
Sales growth high-single-digit
Gross margin 47 to 48%
Operating margin 10 to 10.5%
Net income growth double-digit
adidas Group Excluding Reebok 2006 Targets