Due to partly home-grown problems in China, sluggish demand in many countries and rising costs, adidas lowered its business guidance for 2022 for the third time. The head of the group, Kasper Rorsted, who will leave office at the latest in the coming year, will leave his unknown successor with a house with many construction sites. The manager started with a lot of advance praise. According to experts, the forecast, which has been lowered again, puts pressure on the supervisory board to soon be able to present a new boss. The share price, which was already weak recently, slipped to its lowest level in many years after the forecast was cut.
In this year alone, the market capitalization has fallen by almost 60 percent to just 20 billion euros. Since Rorsted took office in October 2016, the price has fallen by around a third. Jefferies analyst James Grzinic wrote that investors are likely to be discouraged by the speed with which the recently lowered annual targets have crumbled due to the lack of demand.
JPMorgan analyst Chiara Battistini noted that the new targets implied a 40 percent cut in its operating profit estimate this year. If there is a surplus, their expectations even drop by 60 percent. Responsible for this are one-off effects, among other things because of Russia, but also heavy pressure on margins and increasing inventories, which are now likely to be kicked off with a lot of advertising. In the ten years of monitoring the sector, the mood has never been so negative.
In addition to a weak business development in China, there is now also a sluggish development in the western markets of the sports goods group and excessive inventories, commented analyst Antoine Riou from Societe Generale. The Herzogenaurach urgently need a new group leader, he remarked with a view to the outgoing Rorsted.
On the subject of rising inventories, Christian Salis of Hauck Aufhäuser Investment Banking wrote that a recent warning from Nike made it clear that increased inventories were hurting profitability in the global sportswear market. However, adidas is also confronted with company-specific problems.
adidas continues to be very concerned about the China business, in which the group is very heavily involved. On the one hand, the German manufacturer, like its competitors Nike and PUMA, is struggling with the government’s strict corona policy, which is putting a strain on consumption. However, adidas had also made its own mistakes in the country and thus opened up the field for domestic companies, as Rorsted admitted in the “Handelsblatt” in the summer. In addition, there has been tension between the Western world and China over human rights for some time, which has led to calls for a boycott of Western brands in the country.
In addition to the problems in China, the sharp rise in energy prices in many Western countries is now causing consumers to buy fewer consumer goods that they do not urgently need. This all resulted in a weak third quarter for adidas. The group is now sitting on high inventories and will probably have to sell the goods with special offers. Like other sporting goods manufacturers, adidas had increased its warehouses in the past in view of delivery bottlenecks and logistics problems in order to be able to meet the then strong demand.
The adidas management now only expects a profit of around 500 million euros in the continued operations for 2022, as adidas surprisingly announced on Thursday after the stock exchange closed in Herzogenaurach. Here the forecast had previously been around 1.3 billion euros. The heavily capped profit target is also due to one-off expenses, for example for the withdrawal from Russia – as well as sales promotions to reduce high inventories.
In terms of sales, the Group expects a currency-adjusted increase in sales in the mid-single-digit percentage range for 2022. adidas recently announced an increase in the mid to high single-digit percentage range. The gross margin, which has received a lot of attention in the industry, should now only reach 47.5 percent. That is one and a half percentage points less than the last target. Gross margin measures what percentage of sales is left over after all manufacturing costs have been deducted. According to the new forecast, operating profit should only reach four percent of sales – instead of seven percent as previously thought.
At the beginning of the year, adidas had targeted an increase in the operating margin to between 10.5 and 11.0 percent. Currency-adjusted sales should increase by 12 to 14 percent after climbing 16 percent to 21 billion euros last year. The company had originally expected profit from continuing operations to increase to between EUR 1.8 billion and EUR 1.9 billion. Last year the value was almost 1.5 billion euros.
In the third quarter, adidas sales increased 11 percent year-on-year to EUR 6.4 billion. However, a large part of the growth was due to the weak euro, which means that more sales flow into the balance sheet for sales generated abroad. Adjusted for currency effects, the increase in sales was only four percent. In China, currency-adjusted sales even fell “in the strong double-digit percentage range,” adidas reported. This is due to the ongoing extensive Covid-19 restrictions as well as significant inventory withdrawals.
The Group’s operating margin fell from 11.7 to 8.8 percent year-on-year. Due to high one-off effects, including the withdrawal from the Russian business, profits from continuing operations fell by 63 percent to 179 million euros. In order to reach the sales target for the year, currency-adjusted sales in the fourth quarter must again increase by a double-digit percentage. The drivers of this growth should be the product range, the FIFA World Cup 2022 and an advantageous basis for comparison to the previous year, the statement said.
Looking ahead to 2023, adidas expects that the non-recurrence of one-off expenses of around EUR 500 million incurred in 2022 will have a positive impact on earnings development thereafter. In addition, adidas has launched several programs to mitigate the significant cost increases resulting from inflationary pressures across the value chain and from the weak euro.
According to the information, the various initiatives will lead to one-off expenses of around EUR 50 million in the fourth quarter. They should compensate for cost disadvantages of up to half a billion euros in 2023. In addition, the program is intended to make a positive contribution of around EUR 200 million to increasing corporate profits. Rorsted’s departure was announced in August. There is no successor yet. The search had “begun,” it said about two months ago. The Dane will continue to hold office for as long.
The manager has been running adidas since 2016. At that time he had moved to Herzogenaurach from the Düsseldorf consumer goods group Henkel. He was there for his restructuring successes and his focus on yield known. At adidas, he heralded a change in strategy, sold the Taylormade, CCM Hockey and Reebok brands and concentrated the group entirely on the adidas brand. Critics repeatedly accused him of choking off creativity in the group. For example, adidas has recently missed out on some trends and made competitors like the US group Lululemon strong.
adidas share price plummets after forecast was lowered again
The shares of finally fell via XETRA on Friday by 9.53 percent to 103.86 euros.
The previous evening, adidas lowered its business forecast for 2022 for the third time due to problems in China, some of which were homemade, sluggish demand in many countries and rising costs.
“Significantly reduced profit targets, no new CEO in sight and the risk of losing the highly profitable Yeezy brand – there is hardly any support for the stock,” said Pusz.
Goldman leaves adidas on “neutral” – target 145 euros
The US investment bank Goldman Sachs initially left the rating for adidas to “neutral” with a target price of EUR 145 after lowering the company forecast again. The company is struggling with a gloomy development in China, analyst Richard Edwards wrote in an initial reaction on Friday. There would also be one-off costs and higher provisions.
FRANKFURT / NEW YORK (dpa (AFX))
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