Textile And Garment Industry: Expected To Drive Industrial Chain Recovery In The Third Quarter

Event: adidas announced its second quarter results, Q2 revenue decreased by 35% to 3.579 billion euro, and the net loss of continuing operation was 306 million euro (2019: profit of 462 million euro). In this quarter, China's business income was flat, with double-digit growth in May and June; e-commerce continued to boom, with a growth rate of 93% in this quarter. In terms of regions, the decline in the Asia Pacific region was significantly narrower than that in the first quarter, and the business in China was basically flat, while sales in other regions fell sharply. In the second quarter, the Asia Pacific region, including China, had revenue of 1.572 billion euro, down 16% year-on-year, the best performance among all regions, with a 28.9 PCT decline on a month on month basis. The situation in other regions is grim, with Latin America (- 64%) and emerging markets (- 60%) the most serious. Europe (- 40%), North America (- 38%) and Russia (- 34%) also have significant negative effects. From the perspective of store opening, 70% of the company's stores were closed at the end of April, and the opening rate of global stores is 92%.

The gross profit margin in the second quarter was 51.0%, down 2.4 PCT on a year-on-year basis, and the decline rate was significantly narrowed. The product discount and inventory repurchase in Greater China improved significantly. The decrease of gross profit rate is mainly due to the increase of discount promotion activities and the fluctuation of exchange rate. In addition, the increase of inventory reserve and the cancellation of dealers' purchase orders also have negative effects. However, compared with the first quarter, the situation of product buyback and dealer order cancellation in Greater China region in the second quarter was significantly improved; without considering the inventory allowance, the gross profit rate increased slightly, indicating that the actual situation was good and reported to the statement side.

The results in the first half of the year have been greatly affected by the epidemic, and substantial improvement is expected in the third quarter. The operating profit in the first half of 2020 was significantly affected by the epidemic, mainly including product recovery and order cancellation in Greater China, the increase of inventory and bad debt reserves, and the provision for impairment of Direct stores and Reebok brands, with a combined negative impact of about 500 million euro. It is expected that the company's operation will have substantial improvement in the third quarter. The revenue is expected to decline in medium and high single digits, and the operating performance is expected to be between 600 million and 700 million euros.

The inventory level is high, but the operation ability is excellent, and the cash reserve is sufficient. As of June 30, inventory increased by 32% to 4.334 billion euro, which was partly offset by a decrease of 8% in accounts receivable and an increase of 23% in accounts payable. The average percentage of working capital in sales increased by only 0.8 PCT to 19.4%, indicating the company's strong operating capacity. As of June 30, the company's cash balance decreased by 18% over the previous year to 2.018 billion euro. In addition to the good control of working capital, the company also took short-term cash measures to prevent the outflow of funds. The company's inventory level has reached its peak in Q2. In the second half of the year, the company will combine with the suspension of procurement & 1100 factories and stores around the world to digest the existing inventory, and the company's inventory will return to normal level before the end of the year.