German sportswear and equipment maker Adidas AG (>> adidas AG) Monday raised its guidance for the year, after above-consensus earnings in the first quarter, but cautioned that irregularities at its Reebok India Company may weigh slightly on earnings.
In a preliminary statement, Adidas said net profit jumped 38% in the first quarter to EUR289 million, primarily due to stronger than anticipated growth in China and Japan as well as TaylorMade-adidas Golf sales, and benefited from lower expenses and a lower tax rate, Adidas said. The figure is well above the EUR237 million average forecast in poll of analysts by Dow Jones.
Group operating profit in the first quarter was up 30% to EUR409 million, while revenue jumped 14% on a constant currency basis to EUR3.8 billion, above expectations of EUR3.64 billion.
Adidas, the world's No. 2 maker of sports apparel after Nike Inc. (NKE), raised guidance, saying net profit is likely to rise by 12%-17% in 2012, compared with previous forecasts of 10%-15%. Group sales are likely to rise nearly 10% on a constant currency basis, up from growth in the mid-to-high single-digit percentage range.
Still, Adidas's gross margin--a measure of what it makes on product sales--fell for the third consecutive quarter to 47.7% from 48.4% in the first quarter of 2011.
Higher input costs--cotton, rubber and the rising cost of labor in China--have also eaten into the margins of Adidas's competitors. Last week, Puma SE (>> Puma AG Rudolf Dassler Sport) said its gross margin fell to 51.2% from 52.4% in the first quarter due to input price pressure.
For the rest of 2012, Adidas is banking on major sporting events like the London Olympics and the UEFA European Championship soccer tournament to drive sales. It also expects to benefit from a high exposure to fast-growing emerging markets, where rising incomes are pushing up demand for branded goods and clothing.
The company also said irregularities at its Reebok India Company will likely result in a pretax charge of up to EUR125 million, and may require the company to restate financial statements from last year.
"Management assures its stakeholders that it has, and will continue to, vigorously pursue a course of action to protect the Group's interests, which has already resulted in the appointment of a new local leadership team in India at the end of March," Adidas said in a statement.
Adidas said it will continue the restructuring of business activities in India with changes to commercial business practices, that may lead to an additional one-time charge of EUR70 million.
Over the past 12 months, Adidas shares have gained about 18% in value, outperforming the Euro Stoxx Consumer Goods index, which has gained 0.1%. Its shares closed Friday at EUR59.82.
-By Harriet Torry and Monica Houston-Waesch, Dow Jones Newswires; 49-69-29725-504; firstname.lastname@example.org