Adidas AG downgraded its full-year sales and profit forecasts and predicted costly disruptions from supply-chain snags will carry into the first quarter of 2022 after factory closures in Vietnam and consumer boycotts in China weighed on top-line growth in the third quarter.
The Germany-based apparel and sport-shoe maker said that the combination of headwinds had reduced revenue growth in the third quarter of the year by €600 million ($695 million).
For the current year, Adidas slightly downwardly adjusted its guidance:
- Currency-neutral revenues are still expected to increase by a rate of up to 20 percent, but growth is now anticipated to come in at the lower end of this range due to longer-than-expected sourcing disruptions impacting sales in the EMEA and North America regions as well as the challenging market environment in China.
- Gross margin is now expected to increase to a level between 50.5 percent and 51.0 percent in 2021 (previously around 52 percent) due to significantly higher supply chain costs as well as a less favorable market mix.
- Consequently, both operating margin and net income from continuing operations are also forecasted to reach the lower end of the previously communicated ranges of between 9.5 percent and 10 percent (operating margin) and between €1.4 billion and €1.5 billion (net income from continuing operations).
“We are navigating through the current worldwide supply chain constraints,” said Adidas CEO Kasper Rorsted. “Despite all challenges, we are on track to delivering a successful first year within our new strategic cycle.”
On a conference call with analysts, Adidas officials further warned pandemic-related factory closures in Vietnam and supply chain bottlenecks would impact its top-line growth by €1 billion ($1.2 billion) over the next two quarters. The negative impact on sales is expected to amount to €400 million in the fourth quarter and €600 million in the first quarter. No significant impact is expected beyond the first quarter of 2022.
Factory closures in Vietnam from July to September and a gradual re-opening since October meant Adidas had lost the capacity for 100 million items in the second half of 2021. Exacerbating the production issues is congestion at both origin and destination ports that further resulted in a third of shipments leaving Asia with significant delays.
Vietnam usually accounts for 28 percent of Adidas’ sourcing, and its factories mostly make shoes for the company. Production was shifted to China and Indonesia for 30 million units, stock from markets in Asia currently hit by lockdowns are being redeployed, and air freight investments are being made as mitigation efforts. Adidas also plans to reduce the number of products it offers at a discount and increase prices by around 5 percent going into 2022.
Adidas expects “flattish” sales in the fourth quarter, translating to about 17 percent to 18 percent sales growth for the full year. For 2022, growth is pegged at least 8 percent to 10 percent.
Third-Quarter Sales Climb 3 Percent
In the third quarter ended September 30, currency-neutral sales were up 3 percent, despite the €600 million drag from external factors. In euro terms, Adidas revenues also grew 3 percent in the third quarter to €5.752 billion. Sales just missed analysts’ consensus target of €5.83 billion.
From a channel perspective, direct-to-consumer (DTC) currency-neutral sales grew 5 percent year-over-year and nearly 20 percent compared to 2019. E-commerce revenues experienced a significant increase in full-price sales during the quarter, growing 8 percent overall year on year and 64 percent compared to 2019. Overall, DTC accounted for 35 percent of sales in the quarter, flat with year-ago levels and up five percentage points from 2019.
By region, Adidas officials said demand for the Adidas brand remained strong. Revenues in EMEA and North America both grew 9 percent currency-neutral despite the impact of significantly longer lead times due to ongoing industry-wide shipping and handling constraints. Compared to 2019, currency-neutral sales increased 7 percent in North America and 11 percent in the EMEA region. Revenues in Latin America surged 55 percent year-over-year and grew 33 percent from 2019. All three regions benefited from double-digit growth in their DTC businesses.
On the downside, sales in Asia-Pacific declined 8 percent year-over-year and 18 percent against 2019, reflecting the impact of the extensive lockdowns in the region. In Greater China, the geopolitical situation, the resurgence of COVID-related restrictions, and natural disasters weighed on the company’s top-line performance and led to a revenue decline of 15 percent. Sales in China were down 16 percent against 2019.
Adidas was hit by a consumer boycott that began earlier this year after the company, as part of a consortium of Western brands, raised concerns about forced-labor allegations in China’s Xinjiang region. Adidas has set up a dedicated studio in China to revive sales in the region, enabling fast content creation and local storytelling with more than 1,000 short stories created so far. A ramp-up of China-for-China product creation will result in about one-third of new products coming from the local creation center. Other steps include:
- scaling up digital capabilities by accelerating investments into infrastructure and hiring more than 300 digital and tech talents;
- opening more than 100 new Terrex Y-3 and Stella points of sale in key cities such as Shanghai; and
- More than 10 million units of product in China have been re-allocated to other markets.
By category, football (soccer) and outdoor stood out for the Adidas brand with double-digit growth. Football was helped by strong demand for key footwear franchises and major club jerseys. Outdoor offerings saw strong responses to sustainable and technical product launches. Lifestyle products also resonated well with customers in the quarter, supported by successful DTC-exclusive launches.
Gross Margin Pressured By Supply Chain Costs
Gross margins in the quarter slightly declined by 20 basis points to 50.1 percent as significantly higher full-price sales were offset by the negative impact from currency fluctuations, substantially higher supply chain costs as well as a less favorable market mix.
Operating expenses increased 7 percent to €2.237 billion. As a percent of sales, operating expenses increased 1.3 percentage points to 38.9 percent. Marketing and point-of-sale expenses grew 25 percent to €674 million due to investments supporting major sporting events to drive brand heat, new product introductions and building out the brand’s digital and physical platforms. As a percentage of sales, marketing and point-of-sale expenses increased 2.1 percentage points to 11.7 percent.
Operating overhead expenses of €1.562 billion were at the previous year’s level and included stranded costs related to the divestiture of Reebok in an amount of around €60 million. As a percent of sales, operating overhead expenses decreased to 27.2 percent from 27.9 percent.
Operating profit was down 8.6 percent to €672 million, just short of analysts’ consensus target of €682 million. Net income declined 10.5 percent to €479 million.
Inventories at the quarter decreased 22 percent and were down 23 percent on a currency-neutral basis. While partly due to the reclassification of Reebok as a discontinued operation, inventories were still down strong double-digits year-on-year on a like-for-like basis due to supply chain constraints.
Adidas said the divestiture process of Reebok is on track. During the third quarter, Adidas signed an agreement to sell the Reebok brand to Authentic Brands Group for a total consideration of up to €2.1 billion. The majority of the consideration will be paid in cash at closing, expected to occur in the first quarter of 2022. The majority of the cash proceeds received upon closing will be shared with shareholders. As a result of the agreement, Adidas recorded a write-up of the previously impaired Reebok trademark in the amount of €402 million net of tax within discontinued operations in Q3.
Photo courtesy Adidas
