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Reebok to become profitable before 2020, says Adidas CEO

Adidas AG CEO Kasper Rorsted said March 14 that Reebok, the company's struggling U.S. footwear brand, would become profitable before 2020.

During a conference call with analysts, Rorsted indicated that the U.S. athletic footwear brand's revival may be running ahead of schedule.

A large-scale consolidation of Reebok's operations in the U.S. during 2017 helped stop the business from bleeding cash, he said. The company added that Reebok's sales grew 4% year over year in 2017, and gross margin increased 4 percentage points to 40.7%.

Adidas executives told reporters that apart from centralizing Reebok's operations by moving them to a single location in Boston, 35 of the brand's stores were shut to rationalize the business.

"The challenge we have about Reebok is not the growth but to get the profitability back into the brand," Rorsted said. "We believe that Reebok will contribute to our growth and profit before 2020."

Adidas purchased Reebok for $4.3 billion in 2005 and in 2016 delivered a four-year turnaround plan for the business.

Adidas executives also underlined the negative impact on the group of the political climate in Russia. CFO Harm Ohlmeyer told reporters that the company had to shut around 180 Adidas and Reebok stores in the country due to economic sanctions imposed on Russia. The company reported a 13% drop in revenue in the region, but Rorsted said the company would not boycott the Russia-hosted 2018 FIFA World Cup soccer tournament.

Meanwhile, the executives said a $3 billion share buyback program stemmed from the company's decision to not make significant acquisitions in the near future. "As we are generating more cash, and since we do not see a significant acquisition in [the] near term, the best return to our shareholders was a share buyback plan," Ohlmeyer said.

The executives said they expected Adidas' North America, Asia-Pacific and e-commerce businesses to be the primary growth drivers in the coming years. Overall sales grew nearly 25% in North America, 25.9% in Greater China and 57% in its digital business.

Adidas has about 10,000 franchise stores in China and expects a 20% increase in that number by 2020. Rorsted said he believed that a bulk of the growth in the country will come through digital tie-ups with Alibaba Group Holding Ltd. and Tencent Holdings Ltd.

Adidas said it was combining its various Asian operations under a single Asia-Pacific business headquartered in Shanghai. The transformation of its Asia-Pacific operations is expected to be completed by the end of 2018.