On his last quarterly conference call as CEO of Adidas, Kasper Rorsted touted his achievements at Adidas and largely attributed the company’s recent shortfalls to the pandemic.
In August, Rorsted, the head of Adidas since 2016, announced he would be leaving his position in 2023 following the hire of his successor; however, his departure accelerated on Tuesday when Adidas named Puma CEO Bjørn Gulden as his replacement.
Gulden takes over as CEO, effective January 1, 2023. Rorsted’s last day is November 11, with Harm Ohlmeyer, CFO, leading the company in the interim.
On the call, Ohlmeyer handled the details of third-quarter results and the company’s outlook, with Rorsted offering brief commentary at the beginning of the call.
After thanking analysts invited to listen in on the call for their collaboration with Adidas over the years, Rorsted said, “Adidas is an iconic sports brand. I’m very happy to have had the opportunity to be part of this fantastic company for the last six years.”
“As a company, we made great strides in each of those years in our business. We have substantially advanced our digital abilities and grew our online sales by a factor of more than five. In North America, the world’s largest sporting goods market, Adidas has doubled its sales. We also strengthened our leadership position in sustainability and increased diversity and inclusion throughout the company. We’ve divested in a successful way TaylorMade, CCM Hockey and Reebok so that the company is now able to fully focus solely on the Adidas brand. And I’m proud of these achievements, and I’m proud of our team.”
Rorsted lamented that Adidas had faced challenges over the last three years and signaled it was time for a leadership change. “The past three years have been marked by several external factors that disrupted our business significantly. They were challenging as they were marked by the economic consequences of the pandemic and geopolitical tensions. It required huge efforts to master these challenges. This is why enabling a restart now is the right thing to do both for the company and for me personally.”
Rorsted added, “You might know that Bjørn and I know each other quite well. Bjørn has done a tremendous job at Puma, and I’m wishing him and the entire team all the best of luck and success.”
FY Guidance Reduced On Yeezy Termination Impact
On Wednesday, Adidas delivered earnings that were in line with the forecast the company provided on October 25 and, not unsurprisingly, again lowered its expectations due to the impact of ending its partnership with Kanye West’s Yeezy brand.
Adidas now forecasts net income from continued operations of around €250 euros ($251.56 million), down from a target of around €500 million in updated guidance it provided on October 20. That matched its earlier statement issued on October 25 that ending the partnership with Kanye West (“Ye”) would cost Adidas about $250 million in profits.
Adidas also lowered its revenue forecast for the year to a low single-digit increase from a mid-single-digit increase due to Ye’s termination. The company’s gross margin is now expected to be around 47.0 percent (47.5 percent previously) in 2022, and its operating margin to be around 2.5 percent (4.0 percent previously).
On October 20, Adidas slashed its profit guidance to €500 million from €1.3 billion previously and pulled back its top-line guidance to mid-single-digit growth from mid- to high-single-digits. The downward adjustment was attributed to further deterioration of traffic trends in Greater China and inventory build-up resulting from lower consumer demand in Western markets since the beginning of September, which it expects to lead to higher promotional activity during the remainder of 2022.
“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 Ohlmeyer.
Third-Quarter Currency-Neutral Revenues Climb 4 Percent
In the third quarter, earnings fell mainly due to supply chain issues, but currency-neutral sales were up 4 percent, reflecting continued double-digit growth outside Greater China. A highlight was double-digit growth in e-commerce in the EMEA, North America and Latin America.
On the call, Adidas officials highlighted growth opportunities for 2023. Ohlmeyer said, “We are encouraged by the enthusiasm for the upcoming FIFA World Cup, which is already noticeable in our football revenue growth. And in North America, we are gearing up for an exciting upcoming basketball launch.”
Ohlmeyer further said that in 2023, Adidas expects the non-recurrence of the one-off costs of around €500 million to occur overall in 2022 to positively impact its net income in the same magnitude. The non-recurring costs relate to the wind-down of its business operations in Russia, higher clearance activity to reduce elevated inventory levels, accelerated cash pooling in high inflationary countries, a recently settled legal dispute, and higher provisions for customs-related risks.
In addition, in light of the challenging market environment, Adidas created a business improvement program to safeguard its profitability in 2023. As part of this program, the company has launched several initiatives to mitigate the significant cost increases resulting from and unfavorable currency movements. In total, the program will result in one-off costs of around €50 million in the fourth quarter of 2022, but 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.
Ohlmeyer downplayed the termination of the Yeezy collaboration. He said the profitability of the Yeezy business had been “overstated” because its costs only included expenses directly related to the products and not central overhead costs borne by the company.
“In other words, it does not include any further central cost allocation for sourcing, digital, retail, or any other services that this part of our business has benefited from and that were essential for its success,” Ohlmeyer said. “At the same time, we will save around 300 million euros (about $301 million) related to royalties and marketing fees; in combination, this will help us to compensate the majority of the top and bottom line impact in 2023,” he continued.
Last year, the Yeezy label had a valuation of between $3.2 billion and $4.7 billion by Switzerland-based investment bank UBS. Adidas faced pressure to split with the brand as other companies did earlier following his anti-semitic comments in interviews and on social media.
Slowing Consumer Demand In Western Impact Growth
In the third quarter, revenues in euros grew 11.4 percent to €6.408 billion with currency-neutral growth of 4 percent. While high-single-digit top-line growth during the first two months of the period, deteriorating traffic trends in China and slowing consumer demand in major Western markets weighed on the revenue development in September. In addition, the decision to suspend its operations in Russia at the end of Q1 reduced revenues by more than €100 million during the third quarter, impacting Adidas’ DTC business.
From a channel perspective, DTC’s currency-neutral sales grew 6 percent year-on-year and would have grown at a double-digit rate, excluding Russia/CIS.
Within DTC, e-commerce increased by 8 percent, driven by double-digit increases in EMEA, North America and Latin America.
Wholesale revenues increased 3 percent, impacted by inventory takebacks of more than €200 million in Greater China, reflecting initiatives to clean up the full-price channel and clear excess inventory through its owned factory outlets.
From a category perspective, football (soccer) and running, Adidas’ strategic growth categories, each grew at double-digit rates. Football jersey launches ahead of the FIFA World Cup 2022 fueled growth. Running was helped by the most current iterations of Adizero and Supernova, each growing more than 50 percent during the quarter.
On the Lifestyle side, the further scaling of the Forum and Ozweego franchises led to double-digit growth for both categories. Additional limited drops, as part of the Gucci and Balenciaga partnerships, continued to drive consumer buzz.
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, up 12 percent.
In EMEA, revenues grew 7.4 percent currency-neutral (9.6 percent reported) to €2.46 billion, despite the loss of revenue in Russia/CIS of more than €100 million.
Revenues in North America increased 8.2 percent currency-neutral (25.4 percent reported) during the quarter, to €1.75 billion, driven by a double-digit DTC increase.
Asia-Pacific sales grew 14.6 percent currency-neutral (15.1 percent reported) to €579 million, while sales in the Latin America region increased 50.6 percent currency-neutral (56.4 percent reported) to €633 million.
In Greater China, sales were down 26.6 percent currency-neutral (18.9 percent reported) to €937 million as the region continues to be impacted by the challenging market environment, mainly related to ongoing pandemic restrictions. While the company’s own retail revenues in Greater China increased by 7 percent in the quarter, reflecting a robust sell-out, product takebacks reduced its sell-in at wholesale.
Gross margins Erode 100 Basis Points
Gross margins in the quarter declined 100 basis points to 49.1 percent. Broad-based price increases and favorable currency effects were offset by higher product costs and freight expenses and higher discounting and a less favorable market mix.
As a percentage of sales, other operating expenses were up 290 basis points to 41.8 percent. Overall operating expenses increased 20 percent due to the previously announced one-off costs and currency movements. In addition, investments increased in the brand, its products, the company’s digital capabilities and the consumer experience contributed to the increase.
Operating profits in the quarter declined 16.1 percent to €564 million, with operating margins declining to 8.8 percent from 11.7 percent.
Net income was reduced to €66 from €479 million.
In its October 20 update, Adidas said net income would be €179 million in Q3, and the difference from the preliminary figure reflects negative tax implications in the quarter related to Ye’s termination. The negative tax effect will be fully compensated by a positive tax effect of a similar size in Q4.
As noted in Adidas’ October 20 update, its earnings decline reflects one-off costs totaling almost €300 million on the net income level. Most of these costs reflect the company’s decision to wind down 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 have also adversely affected gross profit, operating overheads, and financial and tax expenses in the quarter.
Photo courtesy Adidas/WWD
