As previously reported by SGB Media in January when the company released preliminary results for the full year 2023, Adidas AG is now reporting in its annual report that currency-neutral revenues were flat versus the prior-year level, despite the drag from the devaluation of the Argentine Peso in the fourth quarter. The company’s most recent guidance in October called for a low-single-digit decline for the year.
In reported euro terms, sales were down 5 percent to €21.43 billion in 2023, compared to €22.51 billion in 2022. The company said the reported revenues include the negative translation impact of more than €1.00 billion from unfavorable currency movements, which are expected to remain a drag on the company’s top-line development in 2024.
Adidas said the sales results for 2023 were impacted by significantly reduced sell-in to the wholesale channel as part of the company’s successful initiatives to reduce high inventory levels, as well as the discontinuation of the Yeezy business that had a negative effect on top-line revenues during the year.
This represented a drag of around €500 million on the year-over-year comparison. The two Yeezy drops positively impacted net sales in an amount of around €750 million in 2023, which compares to a total of more than €1,200 million of Yeezy revenues in 2022.
Excluding the Yeezy revenues in both years, currency-neutral revenues were up 2 percent in 2023.
Full-Year Footwear Summary
Despite the significant Yeezy impact, currency-neutral footwear sales were up 4 percent in 2023, reflecting strong double-digit growth in Football (Soccer) and Specialist and U.S. Sports. A high-single-digit increase in Originals also contributed significantly to the top-line improvement in footwear.
Full-Year Apparel Summary
Apparel revenues were down 6 percent on a currency-neutral basis, as this product category was said to be particularly impacted by the high inventory levels in the marketplace and the company’s disciplined sell-in to the wholesale channel in response to it. Nevertheless, apparel revenues in Outdoor and Basketball grew at double-digit rates.
Full-Year Accessories Summary
Currency-neutral accessories sales were up 3 percent, mainly reflecting a double-digit increase in Football.
Performance
Currency-neutral revenues in Performance grew at a mid-single-digit rate in 2023. This growth was mainly driven by high-single-digit increases in Football, Outdoor, and Specialist Sports. The company said it benefited from strong momentum for its new product introductions, such as the latest iterations of its iconic Predator, X and Copa football boots. In addition, the next generation of the Terrex Free Hiker outdoor boots and newly launched versions of the Barricade tennis shoe reportedly “resonated very well” with the consumer.
In Running, the Adizero product family in general and the introduction of the Adizero Adios Pro Evo 1 in particular led to record-breaking performances at marathon races worldwide. The company said this generated a lot of attention and strong demand for the entire franchise. As a result, the Adizero business grew more than 50 percent in 2023.
Lifestyle
Currency-neutral revenues in Lifestyle declined, reflecting the significant Yeezy impact. However, extraordinary demand and increasing supply for the company’s Samba, Gazelle, Spezial, and Campus franchises reportedly drove a mid-single-digit top-line improvement in Originals and double-digit growth in Skateboarding. In addition, Adidas posted a double-digit sales increase in the Basketball category. Its newly introduced basketball apparel collection, the brand’s signature shoes with Anthony Edwards, James Harden, and Donovan Mitchell, and the launch of its Fear of God product range in collaboration with Jerry Lorenzo, generated excitement and demand amongst consumers.
Wholesale
As a result of the company’s initiatives to reduce high inventory levels, currency-neutral sales in Wholesale declined 4 percent despite double-digit growth in Latin America and Greater China.
Direct-to-Consumer
DTC revenues grew 3 percent versus the prior year. This development was driven by strong growth in Adidas’ owned retail stores (+12 percent) due to strong double-digit growth in all markets except North America. Growth was said to be particularly strong in the company’s concept stores, reflecting the improving sell-out trends Adidas has been experiencing for its current product range. The company’s e-commerce business declined 5 percent due to the Yeezy impact. In addition, Adidas focused on reducing discounting activity and improving the overall business mix on its own online platforms. As a result, Adidas full-price sales generated through the company’s own e-commerce activities increased at a strong double-digit rate, leading to significant improvements in the full-price share of the underlying Adidas e-commerce business.
North America
From a market perspective, currency-neutral revenues in North America declined 16 percent as this market was particularly affected by the negative Yeezy impact and the company’s conservative sell-in strategy to reduce high inventory levels.
Greater China
Currency-neutral sales in Greater China were up 8 percent, driven by strong double-digit growth in both wholesale and Adidas’ own retail stores.
Europe, Middle East and Africa
In EMEA, currency-neutral revenues were flat. A mid-single-digit increase in DTC, reflecting double-digit improvements in own retail, was offset by a decline in wholesale.
Asia-Pacific
Revenues in Asia-Pacific grew 7 percent, driven by double-digit growth in the company’s own distribution channels. In Latin America, sales increased 22 percent, reflecting double-digit improvements in both wholesale and DTC.
Gross Margin
The company’s gross margin increased 0.2 percentage points to 47.5 percent of sales in 2023, compared to 47.3 percent in 2022. The improvement was mainly driven by a more favorable business mix and lower freight costs. This was largely offset by significant negative currency effects and increased product costs. In addition, while improving throughout the year, elevated discounting levels weighed on the gross margin development in 2023.
Operating Expenses
Other operating expenses were down 2 percent to €10.07 billion in 2023, compared to €10.26 billion in 2022. As a percentage of sales, other operating expenses increased 1.4 percentage points to 47.0 percent versus 45.6 percent in the prior year.
Marketing and point-of-sale expenses decreased 8 percent to €2.53 million in 2023, compared to €2.76 billion as the company said it limited investments at the point-of-sale when promotional activity in the marketplace was high. At the same time, the company continued to invest significantly in brand campaigns around major sporting events such as the FIFA Women’s World Cup, the Rugby World Cup, the Asian Games, and the Cricket World Cup. In addition, Adidas said it connected with consumers through many grassroots activities and ran a successful Originals campaign during the second half of the year. The company supported new product introductions such as the latest iterations of its iconic footwear franchises in football, the Adizero Adios Pro Evo 1 in running, the first signature shoe launch with Anthony Edwards in basketball, as well as exclusive drops with partners such as Bad Bunny, Pharrell Williams, or Edison Chen in Lifestyle.
Furthermore, Adidas said it significantly broadened its portfolio of sports partners. New brand ambassadors include the Italian Football Federation, the Indian national cricket team, the National Olympic Committee of Poland, athletes like Rose Zhang, Gradey Dick, and Rome Odunze, as well as a significant number of teams, federations and individuals across a large number of sports categories. Operating overhead expenses increased 1 percent to €7,541 million (2022: €7,498 million). This includes one-off costs of around €200 million related to the strategic review the company conducted in 2023, as well as donations and accruals for further donations in an amount of more than €140 million. As a percentage of sales, operating overhead expenses increased 1.9 percentage points to 35.2 percent (2022: 33.3 percent).
Operating Profit
The company’s operating profit reached €268 million in 2023, compared to €669 million in 2022, reflecting an operating margin of 1.3 percent of net sales in 2023 versus an operating margin of 3.0 percent in 2022. Compared to the initial guidance provided at the beginning of 2023, according to which the company was projecting an operating loss of €700 million, the reported operating profit is around €1 billion higher than initially expected. Adidas said the outperformance was partly driven by a better operational business. In addition, the company’s decision to only write off a small portion of its remaining Yeezy inventory and sell a significant part of it in 2023 drove the better-than-expected operating profit development in 2023.
The sale of parts of the remaining Yeezy product in the second and third quarter positively impacted Adidas’ operating profit by around €300 million during 2023. At the same time, the company’s operating profit includes extraordinary expenses of more than €340 million in total, reflecting one-off costs related to the strategic review the company conducted in 2023 (around €200 million) as well as donations and accruals for further donations (more than €140 million).
Adidas’ operating profit also includes a low-double-digit million euro amount of Yeezy-related inventory write-offs, reflecting the company’s decision to only write off a small portion of its remaining Yeezy inventory.
Net Income (Loss)
Financial income doubled to €79 million in 2023, compared to €39 million in 2022. This development was said to mainly reflect higher interest income and changes in the fair value of financial instruments. Financial expenses were down 12 percent to €282 million compared to €320 million in 2022, mainly due to lower net foreign exchange losses.
As a result, the company recorded a net financial result of negative €203 million in 2023 versus a negative €281 million in 2022.
The company’s tax rate increased to 189.2 percent in 2023, compared to 34.5 percent in 2022. As a result of the significantly lower income before taxes, non-deductible expenses had a more significant impact on the tax rate than usual. In addition, the tax rate development reflects higher withholding taxes, which were not creditable and, therefore, had to be expensed. Going forward, the company expects the tax rate to normalize again as its operating profit improves.
The net loss from continuing operations was €58 million, or a loss of €0.67 per share in 2023, compared to net income of €254 million, or earnings of €1.25 per share in 2022, which was said to reflect the extraordinarily high tax rate.
Balance Sheet
Inventories decreased by almost €1.5 billion, or 24 percent, to €4.53 billion at year-end, compared to €5.97 billion at the prior year-end date. The decrease was reportedly the direct result of the company’s successful initiatives around inventory management, including significantly reducing buying volumes and tactically repurposing existing inventory. On a currency-neutral basis, inventories decreased 22 percent.
Accounts receivable decreased 25 percent to €1.91 billion at the end of December 2023, compared to €2.53 billion at year-end 2022. Adidas said this development mainly reflects the company’s “disciplined sell-in efforts to reduce inventory levels in the market” as well as a more effective collection compared to the prior year. On a currency-neutral basis, receivables were down 23 percent year-over-year.
Accounts payable were down 22 percent to €2.28 billion at the end of December 2023, compared to €2.91 billion qt year-end 2022. The company said this mainly reflects the lower sourcing volumes. On a currency-neutral basis, accounts payable decreased 21 percent.
Average operating working capital as a percentage of sales increased 1.6 percentage points to 25.7 percent for the full year 2023 versus 24.0 percent in 2022, reflecting the slight increase of average operating working capital against the backdrop of lower net sales in 2023 compared to 2022.
CAPEX
The company’s capital expenditure decreased 27 percent to €504 million in 2023 from €695 million in 2022. Investments in new or remodeled owned retail or franchise stores, as well as shop-in-shop presentations of Adidas products in customers’ stores, reportedly represented almost half of the total. The remainder consisted mainly of investments in IT and logistics.
“Although by far not good enough, 2023 ended better than what I had expected at the beginning of the year,” commented Adidas AG CEO Bjørn Gulden. “Despite losing a lot of Yeezy revenue and a very conservative sell-in strategy, we managed to have flat revenues. We expected to have a substantial negative operating result, but achieved an operating profit of €268 million. With a very disciplined go-to-market and buying process, we reduced our inventories by almost €1.5 billion. With the exception of the U.S., we now have healthy inventories everywhere.”
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Fourth Quarter Results
Currency-neutral revenues in the fourth quarter declined 2 percent, including a drag of around 5 percentage points related to the devaluation of the Argentine Peso. In addition, the lack of any Yeezy business weighed on the year-over-year comparison in an amount of around €100 million. During the quarter, the company said it also continued its “disciplined sell-in to the wholesale channel to reduce high inventory levels,” particularly in North America.
In euro terms, revenues declined 8 percent to €4.81 billion in Q4, compared to €5.21 billion in the prior-year corresponding quarter, including the negative translation impact of around €300 million from unfavorable currency movements.
Footwear
Despite the significant Yeezy impact, currency-neutral footwear sales were up 8 percent in the fourth quarter driven by strong double-digit growth in Originals and Skateboarding. This development reflects the continued scaling of the Adidas Samba, Gazelle, Spezial, and Campus franchises in light of very strong consumer demand.
- Footwear revenues were up 1 percent in euro terms to €2.55 billion in the fourth quarter.
Apparel
Apparel revenues declined 13 percent in currency-neutral terms during the quarter, which was mainly the result of a significant decline in Football due to strong jersey sales in the prior year’s quarter related to the FIFA Football World Cup 2022. In addition, apparel sales continued to be impacted by elevated inventory levels, particularly in North America, and the company’s disciplined sell-in to the wholesale channel in response to it.
- Apparel revenues were down 18 percent in reported euro terms to €1.91 billion in the fourth quarter.
Accessories & Gear
Sales of accessories declined 1 percent in the fourth quarter, which was also mainly related to difficult comparisons with the prior year due to the FIFA Football World Cup in 2022.
- Accessories & Gear revenues were down 5 percent in reported euro terms to €350 million in Q4.
Channel Review
From a channel perspective, the company’s top-line development in the fourth quarter reflects declines in both wholesale and DTC, which were both mainly related to declines in North America.
- Wholesale: Fourth quarter Wholesale segment revenues were down 8 percent in currency-neutral terms, or down 13.2 percent in reported euro terms to €2.45 billion.
- Direct-to-Consumer: Overall DTS sales were down 2 percent in currency-neutral terms, or down 6.9 percent in reported euro terms to €2.33 billion.
Sales in Adidas owned-retail stores increased 9 percent, which was said to reflect double-digit improvements in EMEA, Greater China and Asia-Pacific. Across all regions, the strong growth in Adidas’ owned retail stores was reportedly driven by the company’s concept store fleet, where sales grew at a double-digit rate in the fourth quarter.
At the end of the quarter, Adidas had 744 Concept stores, 96 Concession Corners, and 1,085 Factory Outlet stores, with 50 new stores opened in the quarter.
E-commerce revenues decreased 12 percent during the quarter due to the year-over-year Yeezy impact. In addition, the company said it continued to successfully focus on reducing discounting in the channel. As a result, the full-price share of the underlying Adidas business on the company’s owned online platforms increased by around 10 percentage points compared to the prior year.
EMEA
In EMEA, revenues declined 7 percent in currency-neutral terms, partly due to difficult comparisons with the prior-year quarter related to the FIFA Football World Cup 2022. However, double-digit growth across the company’s owned retail stores shows the strong sell-out momentum the company experienced in the region in the fourth quarter. Total sales in euro terms were €1.86 billion for the quarter, a 10 percent decline.
Operating profit in the EMEA region was down 39 percent year-over-year to €209 million, compared to €340 million in the prior-year quarter.
North America
Currency-neutral sales in North America decreased 21 percent, reflecting disciplined wholesale sell-in and the company’s initiatives to clear excess inventory. In reported euro terms, sales fell 25 percent to €1.16 billion. The region swung to a €9 million operating loss in Q4, compared to an operating profit of €43 million in Q4 2022.
Greater China
Ultimately, Greater China posted a revenue increase of 37 percent, reflecting strong growth in wholesale and owned retail. Revenues, measured in euro terms, increased 25 percent to €670 million in the quarter. The Greater China region swung to an operating profit of €2 million in Q4, compared to a €215 million operating loss in Q4 2022.
Asia Pacific
While overall sales were flat in currency-neutral terms in Asia-Pacific, the company recorded double-digit growth in its DTC business. Revenues in reported euro terms declined 6 percent to €570 million. Operating profit in the region was up 18 percent year-over-year to €120 million, compared to €101 million in the prior-year quarter.
Latin America
As a result of the significant devaluation of the Argentine Peso, currency-neutral sales in Latin America increased just 1 percent year-over-year, driven by significant growth in DTC. Revenues in reported euro terms were down 12 percent to €479 million in the quarter. Operating profit in the region was down 26 percent year-over-year to €72 million, compared to €98 million in the prior year quarter.
Gross margin increased 5.5 percentage points to 44.6 percent
In the fourth quarter of 2023, the gross margin increased by 5.5 percentage points to 44.6 percent (2022: 39.1 percent). This increase was driven by a better business mix, lower freight costs, and reduced discounting. In addition, lower inventory provisions contributed to the gross margin improvement. These positive developments were partly offset by significant unfavorable currency effects, higher product costs and the negative Yeezy impact.
Operating Loss of €377 million
Other operating expenses were down 10 percent to €2,551 million during the fourth quarter (2022: €2,825 million). As a percentage of sales, other operating expenses decreased 1.3 percentage points to 53.0 percent (2022: 54.3 percent). Marketing and point-of-sale expenses decreased 13 percent to €666 million (2022: €767 million), and, as a percentage of sales, were down to 13.8 percent (2022: 14.7 percent). Operating overhead expenses decreased 8 percent to €1,885 million (2022: €2,058 million). As a percentage of sales, operating overhead expenses decreased 0.4 percentage points to 39.2 percent (2022: 39.5 percent). During the quarter, the company recorded one-off costs of around €50 million related to the strategic review the company had conducted in 2023. As a result, Adidas recorded an operating loss of €377 million (2022: operating loss of €724 million), resulting in a negative operating margin of 7.8 percent (2022: negative operating margin of 13.9 percent). This includes a negative impact of around €100 million related to the significant devaluation of the Argentine Peso in the fourth quarter.
Net loss from continuing operations amounted to €401 million in the quarter (2022: net loss from continuing operations of €482 million). Both basic and diluted EPS from continuing operations were negative €2.36 in the fourth quarter of 2023 (2022: negative €2.69).
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Outlook
Currency-neutral sales to increase at a mid-single-digit rate in 2024.
In 2024, macroeconomic challenges and geopolitical tensions are projected to persist. Against this backdrop, Adidas plans to return to top-line growth by scaling its successful franchises, introducing new ones, and leveraging its significantly better, broader, and deeper product range. Improved retailer relationships, more impactful marketing initiatives, and the company’s activities around major sports events are also expected to contribute to the sales increase. As a result, the company expects currency-neutral sales to grow at a mid-single-digit rate in 2024. This top-line guidance assumes that Adidas will sell the remaining Yeezy inventory at cost, resulting in sales of around €250 million in 2024. This compares to Yeezy revenues of around €750 million in 2023.
Underlying Adidas business to grow at a double-digit rate in the second half
Excluding the Yeezy revenues in both years, the top-line guidance reflects currency-neutral growth at a high-single-digit rate in the underlying Adidas business. The company expects the sales development to accelerate throughout the year, as growth in the first half will still be negatively impacted by initiatives to bring down elevated inventories in the North American market. In the second half of the year, the company projects the underlying Adidas business to grow at a double-digit rate.
Underlying Adidas business to grow significantly in almost all market segments in 2024
From a market perspective, currency-neutral revenues in the underlying Adidas business, excluding the Yeezy revenues in both years, are expected to grow significantly in all markets except North America. Currency-neutral sales in North America are expected to decline at a mid-single-digit rate in 2024. This is mainly the result of the company’s continued disciplined sell-in to the wholesale channel during the first half of the year as part of its initiatives to reduce high inventory levels in this particular market. In contrast, Adidas expects underlying revenues in Greater China and Latin America to grow at a double-digit rate in currency-neutral terms in 2024. Currency-neutral revenues in Europe, the Emerging Markets, and Japan/South Korea are expected to grow at a high-single-digit rate versus the prior-year level.
Operating profit of around €500 million projected
Unfavorable currency effects are projected to weigh significantly on the company’s profitability in 2024, as they are expected to continue to adversely impact both reported revenues and gross margin development. Taking the expected translational and transactional FX headwinds into account, Adidas expects to generate an operating profit of around €500 million in 2024. While the company continues to increase its marketing and sales investments, the top-line growth and an improving gross margin are projected to drive the bottom-line development in 2024. As the sale of the remaining Yeezy inventory is assumed to occur at cost, the product sale is expected not to affect the company’s operating profit this year.
Image courtesy Adidas
