DEAR SHAREHOLDERS,
In 2018, we again used the power of sport to change lives and create a real difference. We lead the way in sustainability and human rights. We break down barriers to give girls better access to sport. We inspire people to be the best version of themselves. The list goes on, and it will only get longer.
We are getting closer to becoming the best sports company in the world. But in the end, our consumer will let us know if we have made it by showing and sharing their love for our products. This is why consumer obsession and brand desire sit at the heart of our strategic business plan, ‘Creating the New’.
Record sales, the highest margin in our history, strong net income improvements – 2018 was a successful year for our company. We now have until 2020 to fully implement Creating the New, the right strategy to succeed in the highly attractive industry we are in.
We are making great strides toward our 2020 financial ambition, which makes for a clear goalpost: We need to continue driving our top and bottom line for the last two years of our current strategy cycle. In the coming year, we will zoom in on our strategic choices and acceleration topics, as outlined in Creating the New.
CREATING THE NEW WITH SPEED, CITIES, AND OPEN SOURCE
Our strategic choices Speed, Cities, and Open Source will make us faster, help us deliver products with impact, and bring meaningful innovation to the market.
Speed is how we deliver. Our aim is to always offer the products our consumer wants, where they want them, when they want them. Our demand-led proposition will drive consumer sentiment, full-price sell-through, and customer satisfaction, which, in turn, reaffirms our consumer obsession. One proof of this is the success we enjoyed when celebrating key sporting moments with limited-edition shoes. Produced in our Speedfactory in Atlanta, USA, the AM4NHL running shoe honored the Washington Capitals’ first-ever Stanley Cup win. Similarly, the AM4MN football cleats debuted at Super Bowl LII.
Cities is where we deliver. In 2018, we strengthened our presence in our six key cities: New York, Los Angeles, Paris, London, Shanghai, and Tokyo. Last year, we saw another improvement in brand desire which helped us to extend our market share in our key cities. We will continue to zero in on key trade zones within these cities, focusing on how we deploy product, retail, and activation initiatives, with the intention of creating one holistic brand experience for our consumers. Some 2018 highlights: In Los Angeles, we shook up the NBA All-Star Weekend with a two-day festival celebrating basketball culture through creativity, innovation, music, community, sport, and style. To mark the 15th anniversary of the Oyster card in London, we launched a range of limited-edition trainers that sold out instantly. In Shanghai, we opened a new Brand Center store, our latest and most modern brick-and-mortar to date.
Open Source is how we create. We invite athletes, consumers, and partners to collaborate with our brands. Our creative collaborations with Pharrell Williams, Kanye West, Victoria Beckham, and Stella McCartney, among others, continued to drive brand desire and growth. By partnering up with the world’s best athletes and teams, we build communities of advocates. A prime example was the FIFA World Cup in Russia where our teams and players – and our official match ball, Telstar, took center stage at the most popular sports event in the world. Though sadly we did not get to cheer for an adidas team in the final, we closed the event as ‘the most influential brand at the World Cup’ with a total of 147 million video views and a 24% engagement rate.
ACCELERATION THROUGH PORTFOLIO, ADIDAS NORTH AMERICA, ONE ADIDAS, AND DIGITAL
To amplify the impact of our strategy on brand desire, growth, and profit, we are executing against an acceleration plan consisting of four pillars: Portfolio, adidas North America, ONE adidas, and Digital.
Every entity must contribute to the success of our company, be it a brand, channel, or market. By regularly revisiting the performance of our portfolio, we identify opportunities for improvements and develop action plans to sharpen the business. For instance, through the ‘Muscle Up’ plan we continued to set the stage for the Reebok brand to realize its full potential and become more profitable.
The biggest market in the sporting goods industry is also the biggest opportunity for our company. With a relatively small market share compared to our other regions, North America is a priority market where we are strategically increasing investments into people, assets, and infrastructure. In 2018, we continued to gain market share, increasing our adidas brand business by 17% year-on-year.
Excellence in operations is vital for creating flexibility and generating operating leverage. Through a set of initiatives across three areas – brand leadership, marketing effectiveness, and operating efficiency – ONE adidas enables us to work smarter and more efficiently, ultimately leading to a more scalable business model.
The role of digital is clear: Through sport, we have the power to change lives and, to change lives, we have to create direct relationships with consumers. The best way to accelerate building those direct relationships is through digital. Digital transformation, however, is not only fundamentally changing the way we interact with our consumer – it touches every part of the business. Gearing up for the future, we are driving digital transformation across the entire organization. In 2018, our global e-commerce business continued to be our fastest-growing sales channel, with a 36% increase.
SUSTAINABILITY IS AN INTEGRAL PART OF OUR BUSINESS MODEL
Few companies are able to embed sustainability authentically into their business model. We are proud to say adidas is one of them, as evidenced by the five million pairs of shoes made with Parley Ocean Plastic in 2018, up from one million pairs the year before. What’s more, 100% of all cotton we sourced globally was sustainable cotton.
Our ongoing work to protect human rights continues. We tackle social issues in our supply chain, are deeply involved in human rights in sports along with safeguarding women’s rights, which is both an internal and external focus for us as a company.
For the 19th year in a row, adidas was included in the Dow Jones Sustainability Indices, a family of benchmarks evaluating the sustainability performance of the largest 2,500 companies listed in the Dow Jones Global Total Stock Market Index. adidas was assessed for its performance in corporate economic, environmental, and social dimensions and rated overall industry leader in the ‘Textiles, Apparel and Luxury Goods industry’ category. We were also ranked #1 in the 2018 Corporate Human Rights Benchmark, which measures the human rights performance of the top 100+ global companies across industries.
2018 FINANCIAL RESULTS
Our efforts are mirrored in strong financial results in 2018. We achieved record sales of € 21.9 billion, reflecting a currency-neutral increase of 8% and nominal growth of 3%. Despite currency headwinds, our gross margin climbed 140 basis points to 51.8%.
We increased investments into our brands while strictly managing costs. As a result, we fed the gross margin improvement through to the operating margin, which expanded to a level of 10.8%, the highest operating margin in the history of our company. Our net income from continuing operations grew six times as fast as our top line in nominal terms, up 20% to € 1.7 billion. Again, a new record.
Our strategy Creating the New includes a strong commitment to returning cash to you, our shareholders, through both dividends and share buybacks. In 2018, we clearly delivered on this promise. We completed the first tranche of our multi-year share buyback program, buying back 5.1 million shares for a total of € 1 billion. Also taking into consideration the dividend payment of € 528 million for the financial year 2017, paid out in May 2018, we returned more than € 1.5 billion to our shareholders.
2019 OUTLOOK
Staying true to our core belief, through sport we have the power to change lives, we will continue to create value in 2019. And we will do this by executing upon our strategic choices and acceleration topics with diligence. Regarding our financial performance, we are targeting a currency-neutral sales increase between 5% and 8%. By further leveraging our scalable operating model, net income is expected to once again grow significantly faster than revenues to a level of around € 1.9 billion. Operating margin is expected to increase to at least 11.3%. These figures will keep us firmly on track toward our 2020 financial ambition.
IN CLOSING
Our mission is to be the best sports company in the world. This mission sets the bar for how we operate as a company and how we, as adidas employees, show up to work every day. But one thing is for sure: We are only as good as what our consumers, athletes, teams, partners, shareholders, and the media say about us. When all our stakeholders call us the best, market share, leadership, and profitability will follow.
Going forward, we will focus on what matters: connecting with our consumer and playing to win as one strong global team. Together, we will tackle any challenge with confidence.
Thank you for your ongoing support.
Sincerely yours,
