Outlook

In 2020, we expect growth of the global economy and consumer spending to reaccelerate only slightly in light of various uncertainties, yet still to provide a supportive backdrop for robust expansion of the sporting goods industry. Through our extensive pipeline of innovative products, powerful brand-building activities and tight control of both our inventory levels and our cost base, we project significant revenue growth and strong bottom-line improvements in 2020. We forecast sales to increase at a rate between 6% and 8% on a currency-neutral basis. Gross margin is projected to decline slightly compared to the prior year level of 52.0%, which is expected to be more than compensated by operating leverage. Consequently, operating margin is expected to increase between 0.2 percentage points and 0.5 percentage points to a level between 11.5% and 11.8%. As a result, net income from continuing operations is forecast to increase between 10% and 13% to a level between € 2.100 billion and € 2.160 billion. The company’s outlook for 2020 does not reflect any impact from the coronavirus outbreak and is subject to change depending on further developments in this regard.

FORWARD-LOOKING STATEMENTS

This Management Report contains forward-looking statements that reflect Management’s current view with respect to the future development of our company. The outlook is based on estimates that we have made on the basis of all the information available to us at the time of completion of this Annual Report. In addition, such forward-looking statements are subject to uncertainties which are beyond the control of the company. see Risk and Opportunity Report In case the underlying assumptions turn out to be incorrect or described risks or opportunities materialize, actual results and developments may materially deviate (negatively or positively) from those expressed by such statements. adidas does not assume any obligation to update any forward-looking statements made in this Management Report beyond statutory disclosure obligations.

GLOBAL ECONOMIC GROWTH to STABiLIZE IN 2020¹

Global GDP growth is projected to reaccelerate slightly to 2.5% in 2020. Amid recent de-escalation of trade tensions, investment and trade are forecast to gradually improve, while monetary policy is expected to stay accommodative. Nevertheless, moderating activity in major economies and financial market turbulences remain existing downside risks. In addition, differences between the pace of growth in developed and developing economies affect the global GDP projection. Developing economies are forecast to see an increase of growth at 4.1%, underlined by continued monetary policy support and a stabilization of oil and other commodity prices. In contrast, growth in developed economies is projected to slow to 1.4%, reflecting continued weakness in manufacturing and limited room for additional monetary policy accommodation. On a global level, additional downside risks include an escalation of trade tensions and geopolitical conflicts as well as a lasting outbreak of the coronavirus. Associated uncertainty might dampen consumer confidence, trade and growth.

SPORTING GOODS INDUSTRY EXPANSION TO CONTINUE IN 2020

In the absence of any major macroeconomic shocks, we expect the global sporting goods industry to grow at a mid-single-digit rate in 2020. Industry growth will continue to be driven by North America and Asia-Pacific, the biggest markets by size globally. Most other markets also look set to continue their expansion at robust rates, contributing to a growing industry. Growth in developing economies is predicted to be further supported by a growing middle class and progressing urbanization. In developed economies, robust labor markets should fuel resilient consumption and support consumer spending on sporting goods. Globally, demand for athletic performance products should be continuously supported by increasing sports participation rates and rising awareness for health and wellness. In addition, demand for athletic casual and activewear products is expected to be further driven by increasing sportswear penetration rates, as sports-inspired apparel and footwear (‘athleisure’) keeps evolving as a structural component of the broader fashion landscape. Sustainability is expected to further gain in importance, as consumers show increasing demand for sustainable companies and products. Collaborations between sportswear brands and non-athlete influencers will remain an industry growth driver. Within the supply chain, increased efficiency in manufacturing and speed-to-market capabilities should further benefit sales growth and inventory levels, as consumers’ demands can be met faster and more precisely. On the distribution side, the significant expansion of the e-commerce channel is set to continue amid further investments into consumer insights generation and the creation of premium shopping experiences. Last but not least, major sporting events such as the UEFA EURO 2020 and the 2020 Olympic Games in Tokyo will support industry growth. For the sporting goods sector too, risks related to escalating trade tensions and geopolitical conflicts as well as the coronavirus outbreak remain.

OUTLOOK FOR 2020 SUBJECT TO CHANGE DUE TO CORONAVIRUS OUTBREAK IN CHINA

The company’s outlook for 2020 as outlined in this report is subject to change depending on the further developments related to the coronavirus outbreak. In the first three weeks of 2020, our business in Greater China – which represents around two-thirds of our Asia-Pacific revenues and has a slightly higher profitability level than the segment’s average – performed strongly. However, since then we have been experiencing a material negative impact on our operations in China. We have a dedicated task force team in place to assess the situation, develop mitigation actions and ensure the personal safety as well as financial security of our employees and their families, which is the company’s number one priority. Since the start of the crisis, we have been working closely with the Chinese authorities to take measures to contain the epidemic and show our solidarity with the people directly affected. As a result of a significant number of store closures – both own- and partner-operated – and a pronounced traffic reduction within the remaining store fleet, business activity in Greater China has been around 85% below the prior year level since Chinese New Year on January 25, with a corresponding revenue and bottom-line impact. In addition, the company’s supply chain in China has been facing disruptions. adidas’ global sourcing activities, however, have not been materially impacted so far, as production in the country is predominantly for the local market. Similarly, while we have seen some traffic declines in other markets – predominantly Japan and South Korea – we have not yet observed any major business impact outside of Greater China.

As the situation keeps evolving, the magnitude of the overall impact on our business in 2020 cannot be quantified reliably at this point in time. Accordingly, the company’s outlook for 2020 as follows and outlined in this report does not reflect any impact of the coronavirus outbreak.

CURRENCY-NEUTRAL SALES TO INCREASE BETWEEN 6% AND 8% IN 2020

We expect sales to increase at a rate between 6% and 8% on a currency-neutral basis in 2020. Despite continued uncertainties regarding the global economic outlook, the company’s sales development will be favorably impacted by rising consumer spending, increasing penetration of sportswear (‘athleisure’) and growing health awareness in most geographical areas. In addition, the further expansion and improvement of our controlled space initiatives, in particular through our own e-commerce channel, is expected to contribute to sales growth.

CURRENCY-NEUTRAL REVENUES TO INCREASE IN ALL MARKET SEGMENTS

In 2020, we expect currency-neutral revenues to again increase in all market segments. While currency-neutral sales are projected to grow at a low-double-digit rate in North America and Russia/CIS, currency-neutral revenues in Asia-Pacific and Emerging Markets are expected to grow at a high-single-digit rate. Sales in Europe and Latin America are forecast to improve at a mid-single-digit rate in currency-neutral terms.

GROSS MARGIN EXPECTED TO DECLINE SLIGHTLY

In 2020, the gross margin is forecast to decline slightly compared to the prior year level of 52.0%. The gross margin development will be significantly burdened by the adverse impact from unfavorable currency developments as well as negative effects from higher sourcing costs. These headwinds will largely be compensated by a better channel mix as well as normalized use of air freight after last year’s supply chain shortages were successfully mitigated.

OPERATING MARGIN TO EXPAND TO A LEVEL BETWEEN 11.5% AND 11.8%

In 2020, the operating margin is projected to increase between 0.2 percentage points and 0.5 percentage points to a level between 11.5% and 11.8%. The anticipated slight decline in gross margin is expected to be more than offset by leverage on other operating expenses. This, together with the continued top-line growth, is expected to drive a double-digit-rate improvement of the bottom line. Net income from continuing operations is projected to increase to a level between € 2.100 billion and € 2.160 billion, reflecting an increase of between 10% and 13% compared to the prior year level of € 1.918 billion.

AVERAGE OPERATING WORKING CAPITAL AS A PERCENTAGE OF SALES TO increase slightly

In 2020, average operating working capital as a percentage of sales is projected to increase slightly compared to the significantly better-than-expected prior year level of 18.1%. 

CAPITAL EXPENDITURE TO INCREASE TO AROUND € 800 MILLION

In 2020, capital expenditure is expected to increase to around € 800 million (2019: € 711 million). Investments will mainly focus on controlled space initiatives of the adidas and Reebok brands in both physical retail and e-commerce, the company’s IT and logistics infrastructure as well as the further development of state-of-the-art corporate facilities in Herzogenaurach and Portland.

MANAGEMENT TO PROPOSE DIVIDEND OF € 3.85

As a result of the strong operational and financial performance in 2019, our robust financial position as well as Management’s confidence in our short- and long-term growth aspirations, the adidas AG Executive and Supervisory Boards will recommend paying a dividend of € 3.85 per dividend-entitled share for 2019 (2018: € 3.35) to shareholders at the Annual General Meeting (AGM) on May 14, 2020. The total payout of € 752 million (2018: € 664 million) reflects a payout ratio of 39.2% of net income from continuing operations (2018: 38.9%), based on the number of shares outstanding as at the date of preparation of the consolidated financial statements. This is within the target range of between 30% and 50% of net income from continuing operations as defined in our dividend policy. see Our Share