Adidas CEO says fat China margins to stabilize as thin U.S. margins grow | Reuters

SHANGHAI German sports apparel brand adidas AG (ADSGn.DE) expects its huge operating margin in China to shrink slightly in the long term, while its small U.S. margin grows markedly in the near term, its new chief executive officer said on Thursday.

Kasper Rorsted, on his first visit to China since taking the helm in September, said adidas’ margin in Greater China of 35 percent last year would “stabilize and slightly decline”. Meanwhile North America, with a margin of 6.3 percent last year from 2.5 percent in 2015, was playing “catch-up”.

“We expect a dramatic improvement in margins in the United States, but we expect over time also a slowdown in the margin development in China,” he said, without detailing specifics.

The firm’s Greater China sales, about half those of North America in 2013, reached 16 percent of its global total last year, just shy of North America’s 18 percent.

The sports apparel market, buoyed by supportive government policies and health-conscious consumers, has been a bright spot in China amid tougher conditions for firms from snack makers to cinema operators in the world’s second-largest economy.

Rorsted said adidas would “invest heavily” in China, where he saw huge long-term potential. The firm is on track to add 2,000 stores in China and hit 12,000 by 2020.

The company forecasts “double digit” China growth this year, though Rorsted said this would be slower than in 2016 when adidas had sales of 3 billion euros ($3.21 billion) in the market, up 28 percent on 2015 before currency fluctuations.

China’s wider retail market, however, remained tough, he said, despite an uptick in official data in the first quarter.

“What we are seeing, if you take the total industry, is a slowdown in retail,” he said.

“Brick-and-mortar traditional and fast-moving consumer goods has dramatically slowed down. Traffic in large malls has slowed down. That is one trend and right now that’s not being offset by anything,” he said, without elaborating.

Rorsted added firms in apparel and footwear, which manufacture mostly in Asia, were not going to be relocating plants to Europe or the United States any time soon – something that has been on the agenda of new U.S. President Donald Trump.

“The size is these plants is humongous… They are highly automated today and the entire supplier base is based out of Asia,” he said. “Just financially it’s illogical and so it’s highly unlikely that this will happen.”

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(Reporting by Adam Jourdan; Editing by Christopher Cushing)