European "Second Half Recovery" Indefinitely Postponed As Adidas Cuts Forecast

Earlier we noted the European economic 'recovery' is rolling over rapidly, and now - confirmed by Adidas - it seems the impact of weakening JPY and weakenig USD are starting to weigh on European companies:

  • *ADIDAS CUTS 2013 NET INCOME FORECAST TO EU820M-850M RANGE (from EU890-920m)

With EURJPY at four-year highs and EURUSD back at 2013 highs, it seems the reality of currency wars are coming home to Draghi - when's the next ECB meeting?


The full Adidas Press Release:

Following today's  Executive  Board meeting,  Management  is updating its  full year  expectations to  account for  recent negative  market developments. Firstly, the further weakening of several currencies versus  the euro throughout August and September such as the Russian rouble, Japanese yen, Brazilian real,  Argentine  peso,  Turkish lira  and  Australian  dollar  have intensified the negative currency translation headwinds already highlighted by Management during the  course of  the year.  This is  estimated to  lead to  a high-single-digit percentage point  negative translation impact  in the  third quarter. Secondly,  an  unexpected  short-term distribution  constraint  as  a result of the transition  to the adidas Group's  new distribution facility  in Chekhov, close to  Moscow, is impacting  the quantity of  new product flow  to stores. While the problem is expected to  be resolved at the beginning of  the fourth quarter, this, together with the weakness of the Russian rouble,  means that the Group's 2013 goals for Russia/CIS are no longer attainable.  Finally, the continued softness in the global golf market and TaylorMade-adidas  Golf's focus on maintaining healthy inventory levels in the marketplace will lead  to a lower  sales  and  profit  contribution from  the  segment  than  originally forecasted.


Taking  all  of  these   issues  into  account,   Management  now  expects   a low-single-digit  currency-neutral   sales  increase   (previously:  low-   to mid-single digit increase) for  the full year, an  operating margin of  around 8.5%  (previously:   approaching  9.0%)   and  net   income  attributable   to shareholders to  increase at  a mid-single-digit  rate  to a  level of  €  820 million to €  850 million (previously:  € 890  million to €  920 million).  In terms of phasing, a significant portion of the negative impact will be in  the third quarter, with Management continuing to expect a strong rebound in  sales and profitability  growth in  the  fourth quarter.  adidas Group  nine  months financial results will be released on November 7, 2013.


"Despite the increased headwinds  we are facing in  the short term, we  remain confident and resolute in  pursuit of our  Route 2015 strategic  aspirations," stated Herbert Hainer, adidas Group CEO.  "Based on the strong demand for  our highlight concepts  and  innovations  in  our  key  categories,  the  upcoming initiatives for the FIFA World Cup 2014(TM) and positive customer feedback  to our spring/summer 2014 collections  both at adidas  and Reebok, momentum  will clearly return to our business in the fourth quarter and beyond."


But for all those waiting on Draghi to do something... we note note that there have been numerous expectations for yet another LTRO out of Europe either in Q4 or Q1. The issue, however, is that the first two LTRO were conceived to push the EUR higher, not lower. Which means that the traditional ECB arsenal may be quite limited to push the currency lower, unless of course the European crisis see another re-flaring, in the process of course crushing all hopes about a European recovery.

Either that, or the ECB "rumor" about a rate cut (into negative territory) is once again on the table.

What profoundly negative impact such a move would have on money markets, and overall liquidity, remains to be seen.