adidas sales declined in nominal terms, but were around the prior-year level on a currency-neutral basis. The sporting goods manufacturer confirmed its forecasts for the year as a whole.
As a result, currency-adjusted sales are expected to continue to decline in the high single-digit percentage range and the maximum reported operating loss will be EUR 700 million if all negative factors related to the Yeezy remainders occur.
In the period from January to March, the DAX group generated an operating profit of 60 million euros, significantly less than the 437 million euros in the same quarter of the previous year. Operating margin deteriorated to 1.1 from 8.2 percent. After tax, the loss from continuing operations was 24 million euros, after a profit of 310 million a year earlier. Earnings per share were minus 0.18 euros after plus 1.60 euros. After taxes and third parties, the loss was 39 million euros (previous year 482 million euros). Sales fell nominally to 5.274 billion euros from 5.3 billion.
adidas sees bright spots in the China business
adidas posted further sales declines in China in the first quarter, but sees bright spots. On the one hand, the decline in sales in the first quarter was in the single digits at 9.4 percent. The decline was the eighth consecutive quarter, but in previous quarters the percentage decline had been in double digits, reaching 50 percent in constant currency in the fourth quarter and about 36 percent for the full year 2022.
CEO Björn Gulden also pointed out that adidas had double-digit sales growth in China in the so-called “sell-out”, i.e. direct sales to end customers, which was reflected in their own retail stores. “That was better than expected and makes us optimistic for the rest of the year,” says Gulden. In addition, China was one of the markets where it is currently important to reduce inventories first. China is also said to be one of the three markets impacted by revenue losses as a result of the Yeezy partnership termination, along with North America and EMEA.
In the same quarter of the previous year, adidas had lowered its full-year margin forecasts and lowered its sales and profit expectations to the lower end of the forecast ranges due to the sales slump in China in connection with corona-related restrictions.
adidas with small progress in destocking
adidas is making small progress in destocking. At the end of March, the value of adidas inventories was around 5.68 billion euros, after 5.973 billion euros at the end of December and 6.33 billion euros at the end of September. Adjusted for currency effects, however, they were still 27 percent above the previous year’s figure of EUR 4.54 billion. In the fourth quarter, the year-on-year increase, adjusted for currency effects, was 49 percent, after 63 percent in the third quarter
Progress in destocking is critical to then returning to profitability by selling products at full price.
“Our inventories are still too high, but already 300 million euros lower than at the beginning of the year,” said CEO Björn Gulden. “We continue to work hard to normalize our stock levels throughout the year. This is vital for us to drive discounts down.” North America and China in particular are affected by high inventories – here the company has launched special initiatives to reduce them significantly.
The reasons for the high inventories, which affect the entire sporting goods industry, are above all the disrupted supply chains in the past, which initially meant that goods were missing, so that the sporting goods and other manufacturers ordered the goods earlier in order to have enough goods in stock at important dates. At adidas, the Yeezy partnership is also ending.
For comparison: Inventories at the smaller competitor Puma were around 2.15 billion euros at the end of March, after 2.25 billion euros at the end of December. However, they were still almost 33 percent above the previous year’s value of 1.62 billion euros.
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According to CEO Arne Freundt, Puma still sees the second quarter as a burden due to inventories, but sees itself on the right track to “normalize” them in the further course of the year, also in the USA and China.
At Nike, inventories for the comparable quarter ended February were still $8.9 billion, up 16 percent from the year-ago quarter. They were $9.3 billion at the end of December, up 43 percent year-on-year. At the end of August, Nike inventories were $9.7 billion.
This is how the adidas share reacts
Better than feared quarterly figures catapulted adidas shares to their highest level since mid-August 2022 on Friday. Around noon they gained 7.94 percent to 168.84 euros at the top of the DAX by a wide margin. With a price increase of around a third, they have been the biggest winners in the leading index, which comprises 40 stocks, since the beginning of the year after Rheinmetall. Overall, analysts were positively surprised by the key figures, sales in the first quarter and the operating result.
The sporting goods manufacturer had a weak start to the year, but did not do as badly as feared, wrote analyst Volker Bosse from Baader Bank. Canadian bank RBC’s Piral Dadhania spoke of an “encouraging quarter”.
This sounded even more positive at Deutsche Bank or at the analysis company Jeffries: Although the sporting goods manufacturer is in the middle of the transformation process and is currently burdened by concerns about demand in the USA and Europe, according to James Grzinic, business has gone better than the annual planning for organic sales growth would have led to expect . “Group-wide, with the exception of North America, sales exceeded expectations,” emphasized the Jefferies analyst. adidas could therefore exceed the forecast in 2023.
After the better than expected numbers, analyst Adam Cochrane from Deutsche Bank Research even complained that the annual targets were only maintained and not increased. He also called the still outstanding decision on the stocks of the “Yeezy” brand disappointing. However, this is also a complicated matter.
Options for leftover Yeezy stock are narrowing
adidas is in the process of narrowing down options for the remaining Yeezy stock, but hasn’t made a decision yet, according to CEO Björn Gulden. The options are narrowing, he will not give any “water level reports” as part of the decision-making process, but will communicate when this has fallen, Gulden said in the media conference call. He also couldn’t say whether the shoes would be destroyed or not, ultimately the group wanted to avoid that.
In March, Gulden discussed several options for the remainder of the Yeezy design collection in the conference call. Destroying the shoes, for example by burning them, would raise sustainability issues. Giving away is not an option because the market value of the shoes is immensely higher than the physical value.
Selling and donating the proceeds is an option. Depending on the distribution channel, however, the designer Kanye West (Ye) is entitled to a proportionate license fee if the shoes are sold, but not if the shoes are destroyed. Gulden did not want to say how many pairs of shoes it was. It is worth 500 million euros. The shoes are now all “near the right location”.
adidas CFO: No provisions required for US class action lawsuits at this time
According to CFO Harm Ohlmeyer, adidas sees “currently no need for provisions” for a possible legal dispute in connection with class action lawsuits by shareholders in the USA. “We unequivocally reject all of these unsubstantiated allegations and will take all necessary action to vigorously defend ourselves,” Ohlmeyer said on the media conference call. There is no need for provisions in the income statement, “because we believe that we are well positioned here. So there is no income statement effect for the time being,” said Ohlmeyer.
adidas shareholders have filed at least one class-action lawsuit in the United States, accusing the group of allegedly misleading the public in connection with its now-terminated business relationship with musician/designer Kanye West (Ye), with whom adidas developed the popular Yeezy design sneaker collection released. adidas failed to inform its investors early on about West’s anti-Semitic statements and his “extreme behavior”. In addition, adidas failed to take “reasonable precautions to limit negative financial risk should the partnership be terminated due to West’s conduct.”
According to the class action lawsuit, filed a week ago in the US District Court in Oregon, former adidas CEO Kasper Rorsted and CFO Ohlmeyer were involved in disseminating false and misleading statements about adidas’ relationship with West, which changed its name to Ye has.
FRANKFURT (Dow Jones) / FRANKFURT (dpa-AFX Broker)
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