Adidas expects Yeezy partnership termination to impact 2022 results

In the third quarter, Adidas’ currency-neutral revenues increased 4 percent. In euro terms, the company’s revenues grew 11 percent to 6.408 billion euros.

Net income of 66 million euros, the company added, negatively impacted by several one-off costs totaling almost 300 million euros as well as extraordinary tax effects in Q3.

The company expects the termination of Yeezy partnership to impact 2022 results.

“The market environment shifted at the beginning of September as consumer demand in western markets slowed and traffic trends in Greater China further deteriorated. As a result, we saw a significant inventory buildup across the industry, leading to higher promotional activity during the remainder of the year which will increasingly weigh on our earnings,” said Adidas CFO Harm Ohlmeyer in a statement.

Review of Q3 performance at Adidas

While the company experienced high-single-digit top-line growth during the first two months of the period, the company said, deteriorating traffic trends in Greater China as well as slowing consumer demand in major western markets weighed on the revenue development in September.

In addition, the company’s decision to suspend its own operations in Russia at the end of Q1 significantly reduced revenues by more than 100 million euros during the third quarter, particularly impacting the company’s direct-to-consumer (DTC) business.

From a channel perspective, the company’s top-line development was driven by growth in DTC where currency-neutral sales grew 6 percent year-on-year. Excluding Russia/CIS, revenues in the company’s own distribution channels were up at a double-digit rate. Within DTC, the company’s e-commerce revenues increased 8 percent driven by strong double-digit increases in EMEA, North America, and Latin America.

Wholesale revenues during the quarter, up 3 percent, were impacted by inventory take backs of more than 200 million euros in Greater China. From a category perspective, revenue growth was the highest in categories such as football and running, both growing at strong double-digit rates.

From a regional perspective, revenue growth was driven by the company’s western markets and APAC, which combined continued to grow at a double-digit rate of 12 percent. In EMEA, revenues grew 7 percent despite the loss of revenue in Russia/CIS of more than 100 million euros.

Revenues in North America increased 8 percent during the quarter driven by a double-digit increase in the company’s DTC channel. In APAC and Latin America, revenue growth accelerated by 15 percent and 51 percent respectively, year-on-year.

The company’s top-line development in Greater China continues to be severely impacted by the challenging market environment, mainly related to the ongoing covid-19-related restrictions. While the company’s own retail revenues in Greater China increased 7 percent in the third quarter, the significant product takebacks reduced the company’s sell-in and resulted in a revenue decline of 27 percent for the market as a whole during the three-month period.

Adidas posts 1 percent increase in nine-month revenues

Currency-neutral revenues on prior year level in the first nine months of 2022 increased 1 percent driven by double-digit growth in North America and Latin America as well as high-single-digit growth in EMEA. In euro terms, revenues grew 8 percent to 17.306 billion euros.

The company’s gross margin decreased by 1.5 percentage points for the period to 49.7 percent during the first nine months of 2022.

Adidas generated an operating profit of 1.393 billion euros during the first nine months of the year, resulting in an operating margin of 8 percent. Net income reached 736 million euros and basic earnings were 3.83 euros.

Adidas outlook impacted by termination of the Adidas Yeezy partnership

On October 20, 2022, Adidas reduced its full year guidance as a result of the further deterioration of traffic trends in Greater China, higher clearance activity to reduce elevated inventory levels as well as total one-off costs of around 500 million euros, which are expected to negatively impact the company’s net income from continuing operations in 2022.

Following the decision on October 25, 2022, to terminate the Adidas Yeezy partnership, the company now incorporates the related top and bottom-line impact into its guidance for FY 2022, reflecting the high seasonality of the Adidas Yeezy business geared towards the fourth quarter.

Adidas now expects currency-neutral revenues for the total company to grow at a low-single-digit rate in 2022. The company’s gross margin is now expected to be around 47 percent in 2022. The company forecasts its operating margin to be around 2.5 percent in 2022 and net income to reach a level of around 250 million euros.