Adidas Sees Modest Q4 Sales Decline On Supply Chain Challenges

Adidas reported currency-neutral sales declined 3 percent in the fourth quarter due to supply shortages as a result of the lockdowns in Vietnam last year, the challenging market environment in Greater China and pandemic-related lockdowns in the Asia-Pacific. However, currency-neutral sales for 2021 rose 16 percent and Adidas projected will increase at a rate between 11 percent and 13 percent in 2022.

Adidas had previously predicted “flattish” sales for the fourth quarter due to pandemic-related factory closures in Vietnam and supply chain bottlenecks.

FY 2021 Major Developments 

• Currency-neutral revenues up 16 percent driven by growth in all markets;
• Excellent top-line momentum in the EMEA, North America and Latin America with double-digit increases in each region;
• Double-digit growth in direct-to-consumer (DTC) reflecting improvements in both online and offline;
• Gross margin increases to 50.7 percent driven by higher full-price sales and better inventory management;
• Operating margin increases 5.3 percentage points to 9.4 percent;  
• Net income from continuing operations grows more than €1 billion to €1.492 billion; and
• Executive and Supervisory Boards propose a dividend increase of 10 percent to €3.30 per share.

FY 2022 Outlook

• Currency-neutral sales to increase at a rate between 11 percent and 13 percent, already reflecting up to €250 million of risk in Russia/CIS business related to the war in Ukraine;
• Gross margin to increase between 51.5 percent and 52.0 percent;
• Operating margin to increase between 10.5 percent and 11.0 percent; and
• Net income from continuing operations to grow between €1.8 billion and €1.9 billion.

Kasper Rorsted, CEO of Adidas, said “Unfortunately, we release our 2021 results in unsettling times. Our thoughts and prayers are with the Ukrainian people, our teams on the ground and everyone affected by the war. We strongly condemn any form of violence and stand in solidarity with all those calling for peace. We also provide immediate humanitarian aid to those in need of support. We will continue to follow the situation closely and take future business decisions and actions as needed, always prioritizing our employee’s safety and support.

“In 2021, we delivered a strong set of results despite several external factors weighing on both demand and supply throughout the year. Wherever markets operated without major disruptions we have been experiencing strong top-line momentum. This is reflected in double-digit revenue growth in EMEA, North America and Latin America. While we continued to invest heavily into our brand, our DTC business and our digital transformation, and we improved our bottom-line by more than €1 billion. Taking it all together, 2021 was a successful first year within our new strategic cycle. In 2022, we will build on this momentum and continue to grow both our top- and bottom-line at double-digit rates amid heightened uncertainty.” 

2021 Financial Performance

• Currency-neutral sales grow 16 percent despite challenging market environment
  In 2021, Adidas was able to increase its currency-neutral revenues by 16 percent despite several external factors weighing on both demand and supply throughout the year. In total, the challenging market environment in Greater China, extensive covid-19-related lockdowns in Asia-Pacific as well as industry-wide supply chain disruptions reduced revenue growth by more than €1.5 billion during the year. From a channel perspective, the company’s top-line increase was characterized by a strong recovery from the material revenue decline in its physical distribution channels during 2020, when the global coronavirus pandemic had caused a large number of temporary store closures. As a result, wholesale revenues, as well as sales in Adidas’ own-retail stores, grew at double-digit rates in 2021. E-commerce revenues increased 4 percent during the year, on top of the exceptionally high growth in 2020 when e-commerce revenues had grown by more than 50 percent. In euro terms, the company’s revenues increased 15 percent in 2021 to €21.234 billion (2020: €18.435 billion).
• Revenue improves in all market segments
  While sales increased in all market segments in 2021, the top-line development in the regions differed significantly depending on the impact the various demand and supply challenges had on the specific region. While all markets were negatively impacted by industry-wide supply chain challenges, the company recorded particularly strong developments in markets that operated without major pandemic-related disruptions. Accordingly, currency-neutral sales in the EMEA, North Americ, and Latin America increased by 24 percent, 17 percent and 47 percent, respectively. At the same time, the challenging market environment in Greater China (+3 percent) and the extensive pandemic-related restrictions in Asia-Pacific (+8 percent) weighed on Adidas’ results in these markets.
• Gross margin at 50.7 percent driven by higher full-price sales and better inventory management
  The company’s gross margin increased 0.7 percentage points to 50.7 percent in 2021 (2020: 50.0 percent). While negative currency developments, higher supply chain costs and a less favorable channel and market mix weighed on the development in 2021, higher full-price sales and lower inventory allowances, as well as the non-recurrence of last year’s purchase order cancellation costs, were able to overcompensate the negative effects.
• Operating margin improves 5.3 percentage points 
  Other operating expenses increased 4 percent to €8.892 billion in 2021 (2020: €8.580 billion). As a percentage of sales, other operating expenses were down 4.7 percentage points to 41.9 percent (2020: 46.5 percent). Marketing and point-of-sale expenses increased 7 percent to €2.547 billion (2020: €2.373 billion) due to increased investments into the brand supporting the introduction of new products and driving consumer experience across both digital and physical platforms. As a percentage of sales, marketing and point-of-sale expenses decreased 0.9 percentage points to 12.0 percent (2020: 12.9 percent). Operating overhead expenses increased 2 percent to €6.345 billion (2020: €6.207 billion) including more than €220 million stranded costs related to the divestiture of the Reebok business. As a percentage of sales, operating overhead expenses decreased 3.8 percentage points to 29.9 percent (2020: 33.7 percent). As a result of the strong top-line increase in combination with the improved gross margin and lower operating expenses as a percentage of sales, the company’s operating profit increased 166 percent to €1.986 billion in 2021 (2020: €746 million). Consequently, the operating margin increased 5.3 percentage points to 9.4 percent compared to the prior-year level of 4.0 percent. 
• Net financial result decreases
  Financial income decreased 32 percent to €19 million in 2021 (2020: €29 million), while financial expenses were down 22 percent to €153 million (2020: €196 million). As a result, the company recorded a negative net financial result of €133 million (2020: negative €167 million). The company’s tax rate decreased 0.8 percentage points to 19.4 percent in 2021 (2020: 20.2 percent).
• Net income from continuing operations increases more than €1 billion  
  Net income from continuing operations increased 223 percent to €1.492 billion in 2021 (2020: €461 million). Both basic and diluted EPS from continuing operations also increased 223 percent to €7.47 (2020: €2.31).
• Average operating working capital, as a percent of sales, decreases 5.3 percentage points
  At the end of December 2021, inventories were down 9 percent to €4.009 billion (2020: €4.397 billion), or 12 percent lower on a currency-neutral basis. This development mainly reflects the divestiture of the Reebok business. The strong sell-through of the company’s products, successful inventory management as well as the impact from industry-wide supply chain challenges also contributed to the decline. Accounts receivable increased 11 percent to €2.175 billion at the end of December 2021 (2020: €1.952 billion) reflecting the company’s strong top-line growth. On a currency-neutral basis, accounts receivables were up 6 percent. Accounts payable were down 4 percent to €2.294 billion at the end of December 2021 versus €2.390 billion in 2020. This development reflects the normalization of payment terms as well as the divestiture of the Reebok business. On a currency-neutral basis, accounts payable decreased 6 percent. Average operating working capital as a percentage of sales decreased 5.3 percentage points to 20.0 percent for the full year (2020: 25.3 percent). 
• Accelerated investments in DTC and digital
  The company’s capital expenditure increased 51 percent in 2021 to €667 million (2020: €442 million). Investments in new or remodeled own-retail stores, the company’s e-commerce business as well as the broader IT infrastructure represented once again the majority of the expenditure.  
• Executive and Supervisory Boards propose a dividend payment of €3.30 per share
  As a result of the strong operational and financial performance in 2021, the company’s financial position and management’s confidence in its long-term growth, the Adidas Executive and Supervisory Boards will recommend paying a dividend of €3.30 per dividend-entitled share to shareholders at the Annual General Meeting on May 12, 2022. This represents an increase of 10 percent compared to the prior-year dividend (2021: €3.00).  

Q4 2021 Financial Performance

• Sales in the fourth quarter impacted by supply and demand challenges
  Currency-neutral revenues in the fourth quarter declined 3 percent. Significant supply shortages as a result of the lockdowns in Vietnam last year, the challenging market environment in Greater China as well as pandemic-related lockdowns in Asia-Pacific reduced revenue growth by more than €400 million in Q4. In light of the supply shortages, the company continued to prioritize its DTC channel. As a result, DTC revenues were stable versus the prior year, reflecting a 14 percent increase compared to the 2019 level. While Adidas e-commerce revenues experienced a strong increase in full-price sales, revenues in the company’s own digital channel declined by 2 percent during the quarter reflecting the exceptionally high growth in the prior-year period. Compared to the 2019 level, e-commerce revenues grew 39 percent in the fourth quarter. In euro terms, Adidas’ revenues were flat versus the prior year at €5.137 billion (2020: €5.142 billion).
• EMEA revenues up double-digits in Q4
  From a regional perspective, revenues in North America were most impacted by the supply shortages in the fourth quarter with almost half of the total negative impact recorded in this particular market. As a result, currency-neutral revenues in North America declined 4 percent during the quarter. Nevertheless, revenues in the company’s direct-to-consumer business continued to increase in the market, reflecting the company’s DTC-led strategy. While EMEA was also impacted by the supply shortages, revenues grew 15 percent, driven by double-digit growth in DTC and wholesale. Fourth-quarter revenues in Latin America improved 9 percent, reflecting double-digit growth versus the 2019 level. Revenues in Greater China (-24 percent) and APAC (-6 percent) declined due to the supply shortages, pandemic-related restrictions and, in the case of China, challenging market environment.  
• Gross margin down 0.1 percentage points
  In the fourth quarter of 2021, the gross margin declined by 0.1 percentage points to 49.0 percent (2020: 49.1 percent). Significantly higher supply chain costs, the company recorded additional freight costs of more than €100 million this quarter alone and continued headwinds from unfavorable currency developments represented a material drag on gross margin in Q4. This impact was almost completely offset by significantly higher full-price sales. 
• Operating margin below the prior-year level
  Other operating expenses were up 7 percent to €2.501 billion during the fourth quarter (2020: €2.331 billion). As a percentage of sales, other operating expenses increased 3.3 percentage points to 48.7 percent (2020: 45.3 percent). Marketing and point-of-sale expenses increased 8 percent to €715 million (2020: €662 million) and as a percentage of sales were up to 13.9 percent (2020: 12.9 percent), reflecting higher investments to support the introduction of new products such as the UltraBoost22, NMD S1 and the latest Ivy Park x Adidas collection as well as to elevate the consumer experience. Operating overhead expenses increased 7 percent to €1.786 billion (2020: €1.670 billion) and included stranded costs related to the divestiture of the Reebok business in an amount of around €60 million. As a percentage of sales, operating overhead expenses increased to 34.8 percent (2020: 32.5 percent). Operating profit amounted to €66 million (2020: €225 million), resulting in an operating margin of 1.3 percent (2020: 4.4 percent). Net income from continuing operations reached €123 million in the quarter (2020: €143 million), supported by a positive tax benefit related to the divestiture of the Reebok business. Both basic and diluted EPS from continuing operations were €0.58 in Q4 (2020: €0.70).

2022 Outlook

• Currency-neutral sales to increase between 11 percent and 13 percent
  After the recovery from the coronavirus pandemic in 2021, Adidas expects double-digit top-line growth to continue in 2022 amid heightened uncertainty. Driven by the execution of the company’s strategy ‘Own the Game’ and its strong product pipeline currency-neutral revenues are projected to increase at a rate between 11 percent and 13 percent. This growth assumption already includes a risk of up to €250 million in the company’s Russia/CIS business, about 50 percent of Adidas’ total revenues in the region, due to the war in Ukraine and reflects the suspension of Adidas’ retail and e-commerce operations in Russia. This amount represents around 1 percentage point of growth for the total company and explains the difference to the initial outlook as provided in its Management Report at the time of the preparation of the company’s annual report.   
• Currency-neutral revenues to increase in all markets
  From a regional perspective, currency-neutral revenues are expected to increase in all markets. While currency-neutral sales in North America and Latin America are projected to grow at a mid- to high-teens rate, currency-neutral revenues are expected to grow at a rate in the mid-teens in the EMEA and Asia-Pacific. Greater China is expected to record a sales increase in the mid-single digits as the company continues to make progress with its action plan aimed at stabilizing the business and re-igniting growth. 
• Gross margin is expected to expand to between 51.5 percent and 52.0 percent
  Adidas’ gross margin is expected to continue to increase and reach between 51.5 percent and 52.0 percent. A positive channel mix effect, significant price increases as well as the positive impact from favorable currency developments will drive the gross margin improvement and are expected to outweigh significantly higher supply chain costs.
• Operating margin to increase to between 10.5 percent and 11.0 percent
  The company’s operating margin is expected to increase significantly to between 10.5 percent and 11.0 percent. In addition to the higher gross margin, lower operating expenses in the percentage of sales will benefit the company’s operating margin in 2022. This development will be supported by the non-recurrence of around 70 percent of the Reebok-related stranded costs, which accounted for more than €220 million in 2021. Driven by the strong top-line growth in combination with the margin improvements net income from continuing operations is projected to increase to a level of between €1.8 billion and €1.9 billion in 2022.

Photo courtesy Adidas x Ivy Park