Adidas announced preliminary results for the third quarter and reduced its full-year 2022 guidance.
The company’s new outlook takes into account a further deterioration of traffic trends in Greater China as well as a significant inventory build-up as a result of lower consumer demand in major Western markets since the beginning of September, which is expected to lead to higher promotional activity during the remainder of 2022.
Adidas’ revised outlook also reflects one-off costs impacting the company’s bottom-line results in the third and fourth quarters of the year.
The revised guidance follows a move by Adidas to slash its outlook on July 26.
Based on preliminary numbers, Adidas’ currency-neutral revenues grew 4 percent during the third quarter. Currency-neutral sales in Greater China declined at a double-digit rate, reflecting continued widespread COVID-19-related restrictions and significant inventory takebacks.
Excluding Greater China, currency-neutral revenues in Adidas’ other markets continued to grow at a double-digit rate during the quarter. In euro terms, the company’s sales increased 11 percent to €6.408 billion in Q3.
Adidas’ gross margin for the third quarter declined 1.0 percentage points to a level of 49.1 percent, and operating margin reached 8.8 percent during the third quarter (2021: 11.7 percent).
Net income from continuing operations was €179 million in Q3 (2021: €479 million). The bottom-line development during the quarter reflects one-off costs totaling almost €300 million on the net income level. The majority of these expenses reflect the company’s decision to initiate the wind-down of its business operations in Russia. In addition, non-recurring costs related to accelerated cash pooling in high inflationary countries, a recently settled legal dispute and higher provisions for customs-related risks also adversely effected the company’s gross profit, operating overheads, financial and tax expenses in the quarter.
As a result of the deteriorating traffic trend in Greater China, higher clearance activity to reduce elevated inventory levels, up 63 percent on a currency-neutral basis at the end of Q3, and as total one-off costs of around €500 million on the net income level in 2022, the company reduced its full-year guidance.
Adidas now expects currency-neutral revenues for the total company to grow at a mid-single-digit rate in 2022, previously mid- to high-single-digit rate, reflecting double-digit revenue growth during the fourth quarter. This growth will be driven by Adidas’ product pipeline, support from the FIFA World Cup 2022 and easier prior-year comparables.
The company’s gross margin is forecasted to be around 47.5 percent in 2022, previously around 49.0 percent. Consequently, Adidas’ operating margin is forecasted to be around 4.0 percent in 2022, previously around 7.0 percent. Net income from continuing operations is expected to reach around €500 million, previously around €1.3 billion.
In 2023, Adidas forecasts the non-recurrence of the one-off costs of around €500 million occurred in 2022 to positively impact the net income development in the same order of magnitude. In addition, in light of the challenging market environment, Adidas established a business improvement program to safeguard its profitability in 2023.
As part of this program, Adidas launched several initiatives to mitigate the significant cost increases resulting from the inflationary pressure across the company’s value chain and unfavorable currency movements. In total, the program, which will result in one-off costs of around €50 million in the fourth quarter of 2022, is expected to compensate for cost headwinds of up to €500 million in 2023. In addition, it is expected to deliver a positive profit contribution of around €200 million next year.
On July 26, Adidas significantly reduced its sales, margin and earnings guidance for the year and expects revenues in Greater China to decline at a double-digit rate during the remainder of the year. Previously, Adidas had assumed that in the absence of any major lockdowns as of Q3, China’s currency-neutral revenues would be flat during the second half.
At the time, Adidas said it expected currency-neutral revenues for the total company to grow at a mid- to high-single-digit rate in 2022, down from a previous forecast at the lower end of the 11 percent to 13 percent range. Net income from continuing operations expectation was reduced to around €1.3 billion, down from a previous forecast at the lower end of the €1.8 billion to €1.9 billion range.
Photo courtesy Adidas
