“The numbers speak for themselves. We are currently not performing the way we should”, said Adidas CEO Bjorn Gulden. Indeed looking at the company’s 2022 financials, the numbers are grim and even the outlook looks grimmer.
Adidas recently published its 2022 financial report and guidance for 2023. According to the preliminary unaudited numbers, revenues increased by 1% in currency-neutral terms. Sales were up in all other markets except in Greater China which recorded a 36% drop.
The company generated an operating profit of €669 compared to €1,986 million in 2021, reflecting an operating margin of 3.0% compared to 9.4% in 2021.
Consequently, net income from continuing operations dropped to €254 million in 2022 compared to €1,492 million in 2021, representing an 83% decline. That is not all.
The company is left with a high inventory and the big question currently hanging over the company is what to do with the leftover Yeezy inventory reportedly valued at roughly $1.3 billion.
What actually went wrong at Adidas?
In November 2013, Adidas sales in North America, the most critical territory for sportswear sales, were down 1% for the year. Across the company, sales were flat.
In November 2013, Adidas announced an endorsement deal with Kanye West and by 2019, Adidas sales of his Yeezy brand eclipsed $1 billion annually.
In October 2022, in the wake of anti-Semitic comments, Adidas ended the partnership after a thorough review. The company ended the production of Yeezy-branded products and stopped all payments to him and his companies.
It had expected a short-term negative impact of up to €250 million on net income in 2022 given the high seasonality of the fourth quarter. But the situation now is that Adidas stands to lose over $750 million in operating profits in 2023 if it does not sell off the excess Yeezy Inventory.
“Should the company irrevocably decide not to repurpose any of the existing Yeezy products going forward, this would result in the write-off of the existing Yeezy inventory and would lower the company’s operating profit by an additional €500 million this year,” the company said. “In addition, Adidas expects one-off costs of up to €200 million in 2023.”
Right now, it appears the company is undecided.
Speaking in an earnings call on Wednesday, Adidas CEO Bjorn Gulden said “The people that are saying send the shoes to Turkey or somewhere people don’t have shoes or there has been a tragedy happening, I think you agree that these are not normal shoes. The value of the product is not the physical value of the ingredients. It is a brand and merchandise that is sold at a high price.”
“If you can’t sell and you can’t destroy, what is your option?” said Gulden. “That’s why we haven’t made a decision on it, because it’s a very complicated issue”
The company has takeaways, which have been included in its 2023 guidance. “While the company continues to review its future options for utilization of its Yeezy inventory, this guidance already accounts for the significant adverse impact of not selling the existing stock,” the company said.
- Against this background, it expects currency-neutral sales to decline at a high-single-digit rate in 2023.
- This is expected to lower revenue by around €1.2 billion and operating profit by around €500 million this year.
- If all these effects were to materialize, the company would expect to report an operating loss of €700 million in 2023.
Overall, the company believes that 2023 will be a year of transition to set the base to again be a growing and profitable company.