<span style="color: #787878;">Adidas significantly reduced its sales, margin and earnings guidance for the year as it now 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.

Adidas said, “While second quarter results were somewhat ahead of expectations reflecting continued strong momentum in Western markets and a return to growth in Asia-Pacific, the company has been experiencing a slower-than-expected recovery in its business in Greater China since the start of the third quarter.”

To a lesser degree, the adjusted guidance also reflects a potential slowdown in other markets due to more challenging macroeconomic conditions.

In reporting first-quarter results on May 6, Adidas had said its FY22 outlook for revenue and net income would land at the lower end of its initial guidance as it expected the impact from pandemic-related lockdowns to cause sales for the year to “decline significantly” in China.

In the first quarter, sales in revenues in China decreased by 35 percent, reflecting the lockdowns and strong prior year comparisons.

On Adidas’ first-quarter analyst call, CEO Kasper Rorsted said China, at the time, was experiencing “the worst COVID-19 outbreak ever, with daily cases reaching four times the level than during the initial Wuhan outbreak. Forty-five cities are locked down directly or indirectly, representing around 40 percent of Chinese GDP. In total, more than 180 million people in China are directly impacted by the lockdowns.”

As a result, around 25 percent of Adidas’ owned stores and about 15 percent of the brand’s partner stores in the region in early May were closed. Rorsted said, “Given the severity of the situation, a sudden rebound seems unlikely as countermeasures, such as strict lockdowns and containment measures, are leading to a significant drop in consumer spending. The sentiment is heavily affected, with retail traffic declining significantly, even in cities less directly impacted by countermeasures.”

Rorsted added that contrary to the initial COVID-19 outbreak in early 2020, Adidas did not see a spike in e-commerce sales that helped offset the closed stores. Said Rorsted, “While hype releases continue to sell through well, our in-line businesses have been somewhat more impacted by the negative consumer sentiment.”

Lastly, Rorsted said the overall marketplace continues to be impacted by excess inventory in the marketplace.

<span style="color: #787878;">Adidas expects sales in China to return to flat growth in the second half. Rorsted said Adidas would hold special sales and offer incentives to reduce high inventory levels and to drive the improving trend. To improve engagement and conversion, Rorsted said Adidas would be looking to leverage its China-for-China product creation team to drive newness in key franchises, strengthen local storytelling, invest in elevating the retail experience, and leverage its more than 30 million loyalty members in China.

At the time, the guidance was only slightly adjusted downward because strong double-digit growth was generated in the majority of the brand’s markets in the first quarter. Rorsted stressed, “The original growth targets for EMEA, North America, Latin America, and the Asia Pacific, which represent more than 80 percent of our business, are confirmed and well underpinned by an extraordinary strong order book. And let me repeat, we expect more than 80 percent of the business to grow strong double-digits in 2022.”

A highlight of the first quarter was 13 percent combined growth in all Western markets, the highest growth rate in the region since the first quarter of 2017.

Overall, Adidas’ currency-neutral sales in the first quarter were down 3 percent as sales growth in North America (+13 percent), EMEA (+9 percent) and Latin America (+38 percent) were offset by declines in Greater China (-35 percent) and the Asia Pacific (-15 percent).

Under the updated FY22 outlook provided Tuesday, Adidas now expects:

  • Currency-neutral revenues for the total company to grow at a mid- to high-single-digit rate in 2022 (previously at the lower end of the 11 percent to 13 percent range);
  • Gross margin to be around 49.0 percent in 2022 (previously around 50.7 percent) because of the less favorable market mix due to lower-than-expected revenues in Greater China and the impact of initiatives to clear excess inventory in Greater China until the end of the year;
  • Operating margin to be around 7.0 percent in 2022 (previously around 9.4 percent); and
  • Net income from continuing operations to reach a level of around €1.3 billion (previously at the lower end of the €1.8 billion to €1.9 billion range).

<span style="color: #787878;">On Tuesday, Adidas said that it had not experienced a “meaningful slowdown in the sell-through of its products or significant cancellations of wholesale orders in any other market. Nevertheless, the adjusted guidance also accounts for a potential slowdown of consumer spending in these markets during the second half of the year due to the more challenging macroeconomic conditions.”

Adidas said that despite these headwinds, Adidas continues to expect double-digit revenue growth during the second half of the year for the total company. In addition to easier prior-year comparisons, the acceleration will be driven by Adidas’ strong product pipeline, the restocking opportunity with its wholesale customers given unconstrained supply and support from major sporting events.

Adidas also provided estimated results for the second quarter:

  • Adidas’ currency-neutral revenues grew 4 percent, driven by strong double-digit growth in North America and Latin America, and high-single-digit growth in the EMEA (also double-digit growth excluding negative Russia/CIS impact) and a return to growth in the Asia-Pacific;
  • In euro terms, sales increased 10 percent to €5.596 billion;
  • Adidas’ gross margin declined 1.5 percentage points to a level of 50.3 percent;
  • Operating margin reached 7.0 percent during the second quarter (2021 to 10.7 percent);
  • Net income from continuing operations was €360 million in Q2, down 7.0 percent from €387 million a year ago. The latest quarter was supported by a one-time tax benefit of more than €100 million due to the reversal of a prior year’s provision.

Adidas is expected to report full second-quarter results on August 4.

In a note issued following Adidas’ update, Jonathan Komp, an analyst at Baird, said the guidance adjustments appear in line with market trends as Komp recently downwardly adjusted his expectations across the active lifestyle space due to heightening macroeconomic pressures. However, the call-out of weakness in China in the third quarter was described as “somewhat disappointing,” and signals risk to other active brands such as Nike with heavy exposure in the region.

Komp wrote, “We view the update as a mixed read-through for NKE and others, given the negative implication for the potential recovery in China, but also the positive indication that sell-throughs and order trends appear to be holding up thus far.”

Adidas trades on the Frankfurt stock market, and the news came out after that market closed. In late-afternoon trading in the U.S. market, Adidas’ ADRs (American Depositary Receipts) were trading down about 6 percent.

Photo courtesy Adidas