Adidas spending on marketing, stores to hit margins

By Emma Thomasson

BERLIN (Reuters) - Adidas, the world's second-biggest sportswear firm, will ramp up spending on marketing following a profit warning last week as it seeks to halt the advance of market leader Nike.

The German group said it planned to boost marketing spending to about 13 percent of sales in 2014 and to 13-14 percent in 2015, but would aim to compensate for that with stronger sales growth and tighter cost control.

While Adidas declined to give a figure, the rise amounts to an extra 100-200 million euros given Adidas spent 12.4 percent of its 2013 revenue of 14.5 billion euros (11.51 billion pounds) on sales and marketing. Nike spent 10.8 percent of sales of $27.8 billion on marketing in its 2013/14 financial year.

Adidas said it would provide more details when it presents a new five-year strategic plan in the first quarter of 2015.

The higher spending, along with investment in more of its own stores, prompted Adidas to cut its target for operating margins - operating profit as a percentage of sales - to 6.5-7.0 percent for 2014 from 8.5-9.0 percent previously. That is well below the 13 percent Nike saw in its fiscal year to May 31.

Chief Executive Herbert Hainer said Adidas had left its brands exposed to attack in some markets, such as its home turf of western Europe, where Nike has been stealing market share.

"We know consumers love our brands when they hear our stories. Therefore, we will be bringing even more of these to life on the streets, screens and stores in the future," Hainer told a media conference call on Thursday.

Hainer said the new marketing drive was illustrated by a record $1.3 billion shirt deal it sealed with Manchester United last month and the signing of four of the top six National Basketball Association (NBA) draft players.

Adidas had already flagged plans to increase marketing spending last week when it cut sales and net income targets for 2014 and scrapped its goals for 2015, blaming a poor performance at its golf business and volatile emerging market currencies, particularly the Russian rouble.

SHARES FALL AGAIN

Adidas shares, which tumbled after the profit warning and are down almost 38 percent this year, were off 4 percent at 11:24 AM BST at a new two-year low, underperforming a flat German blue-chip index.

Citi analysts, who rate the stock "neutral", said they remained sceptical, given the planned reduction of stores in Russia, higher marketing costs and adverse currency trends.

"We continue to fear that earnings growth trends could remain muted despite the recently lowered EBIT (earnings before interest and taxation) base," they wrote in a note.

Hainer said Adidas, which runs more than 1,000 stores in Russia, now aims to add only 80 this year, down from a planned 150, with a similar number expected for 2015 due to higher risks to consumer sentiment and spending over the Ukraine crisis.

That move, as well as more discounting of stock in Russia, would trim about 50 million euros from operating profit in the second half. A planned restructuring of the golf unit would mean a hit of 50-60 million euros.

Adidas last week cut its net income forecast for 2014 to around 650 million euros from between 830 and 930 million.

While almost two-thirds of its sales are made through third-party retailers, Adidas has been opening more of its own shops, particularly in emerging markets such as Russia, because they are more profitable.

Sales from its own outlets, adjusted for currency changes, rose 22 percent in the first half to 1.75 billion euros ($2.3 billion), while wholesale sales rose 5 percent to 4.44 billion.

Adidas, which already reported that second-quarter sales rose a currency-adjusted 10 percent to 3.47 billion euros, said all regions had contributed to that increase, with western Europe up 13 percent, eastern Europe up 14 percent - driven by a double-digit rise in Russia - and Latin America up 33 percent.

In North America, where Adidas has struggled to make inroads into Nike territory, group sales rose 1 percent as a good performance by the core Adidas brand and Reebok fitness were offset by an 18 percent fall at its TaylorMade golf unit.

(Editing by Maria Sheahan and David Clarke)