After working aggressively and diligently in his first 90 days on the job to simplify and accelerate processes at Adidas, CEO Bjorn Gulden is straightforward when offering a brand assessment for the company in both the short and long term.
“Adidas has all the ingredients to be the best sports brand in the world, to grow strongly and to be a good profitable company. We just need some time,” he offered in a prepared statement. “2023 will be a bumpy year with disappointing numbers, where maximizing our short-term financial results is not our goal. It is a transition year to build a strong base for a better 2024 and a good 2025 and beyond.”
Q1 constant-currency sales are flat
Despite an 86 percent drop in operating income to €60 million, still too high inventory levels, a 510-basis point contraction in gross margin to 44.8 percent from 49.9 percent despite price hikes, and double-digit reported sales declines in both Greater China and North America, there were some positive developments in the period ended March 31. Q1 net sales, flat at €5,274 million versus €5,302 million, were up 9 percent, excluding Yeezy.
| Adidas - Income | |||
|---|---|---|---|
| Q1 (€ million) | |||
| 2023 | 2022 | Change | |
| Net sales | 5,274 | 5,302 | -0.5% |
| Cost of sales | 2,911 | 2,654 | 9.7% |
| Gross profit | 2,363 | 2,648 | -10.8% |
| Royalty and commission income | 25 | 23 | 8.7% |
| Other operating income | 39 | 23 | 69.6% |
| Other operating expenses | 2,367 | 2,258 | 4.8% |
| Operating profit | 60 | 437 | -86.3% |
| Financial income | 13 | 8 | 62.5% |
| Finacial expenses | 41 | 34 | 20.6% |
| Pre-tax | 32 | 411 | -92.2% |
| Tax | 55 | 101 | -45.5% |
| Net from continuing operations | -24 | 310 | – |
| Net | -30 | 490 | – |
| Diluted EPS from continuing operations | -0.18 | 1.60 | – |
| Diluted EPS from continuing and discontinued operations | -0.22 | 2.55 | – |
| Source: Adidas | |||
Year-over-year footwear sales grew by 1 percent to €3,025 million, with the brand experiencing some momentum in its performance categories of football (soccer), running, and outdoor, with sales rising by double-digits; inventory levels have been lowered by €300 million since the start of 2023; and both the Asia-Pacific and Latin America regions reported double-digit, year-over-year revenue gains.
Yeezy impact persists
While the group continues to review options for its Yeezy inventory following its October decision to terminate its partnership with rapper and fashion designer Kanye West, it also faces litigation over its relationship with the artist now known as Ye.
If the company opts not to sell the Yeezy products, it faces a revenue loss of approximately €1.2 billion and a negative operating income impact of €500 million this year. The discontinuation of the Yeezy business hurt Q1 sales by approximately €400 million.
Adidas is “getting closer and closer to making a decision” on what to do with the unsold Yeezys, Gulden told analysts, suggesting the group’s options for the product are narrowing and that there are numerous parties interested in the inventory.
Maintains FY23 outlook
Adidas continues to anticipate full-year, currency-neutral revenues to decline at a high-single-digit rate due to persistent macroeconomic challenges and geopolitical tensions, the risk of recession in both Europe and North America, and uncertainty about a turnaround in China. These developments, coupled with Yeezy impacts, could lead the group to report a €700 million operating loss in FY23.
Sizing up Greater China
Total market revenues declined by 11.4 percent to €884 million in Q1 and were down by 9.4 percent on a constant-currency basis, although there was a double-digit sales increase in Adidas-owned stores in the market on higher demand. Q1 operating profit slipped by 25 percent to €170 million from €226 million. The brand’s market share has fallen to 11 percent from 19 percent in 2019, according to data from Euromonitor, which was partly responsible for the group’s recent strategy shift to a greater focus on soccer and running in China and sponsorship of more local athletes. Adidas China, under Adrian Siu, is reportedly making “hyperlocalization” and speed key pillars of the brand’s go-forward strategy.
Key Q1 metrics and results
Year-over-year, the constant-currency inventory level was up 27 percent to €5.675 billion despite sequential improvements in all geographic regions. Adjusted net borrowings rose by 128 percent to €6.63 billion due to lower cash and cash equivalents that created a negative cash flow from operations. Strong constant-currency sales growth in the EMEA, Asia-Pacific and Latin America pushed overall wholesale revenues up by 3 percent. Direct-to-consumer sales, hurt by the lack of Yeezy product, declined by 7 percent in Q1, with e-commerce off by 23 percent and own retail store sales improving by 11 percent.
Aside from China, North America, where the wholesale market has been weighed down by high inventory levels, was the only geography with lower Q1 sales. North America constant-currency revenues, impacted by the discontinuation of the Yeezy business, fell by 19.6 percent to €1,177 million as the region generated a €46 million operating loss compared to a €257 million profit in Q1/22.
Elsewhere, EMEA sales increased by 4 percent to €1,996 million, fueled by high-single-digit growth in wholesale, but the region’s operating profit fell by 26 percent to €317 million. Growth in wholesale and direct-to-consumer bolstered double-digit sales increases in both Asia-Pacific and Latin America. Asia-Pacific revenues rose by 15.6 percent to €567 million, and operating profit inched up 2 percent to €113 million. Latin America Q1 sales jumped by 48.7 percent to €595 million, producing a 56 percent rise in quarterly operating profit to €129 million.
Apparel sales, impacted by high industry inventory levels, fell by 3 percent to €1,909 million from €1,987 million in Q1. Meanwhile, strong growth in soccer helped the accessories segment produce an 8 percent sales gain to €340 million.
In the footwear segment, lifestyle sales were down in Q1 despite higher demand for the brand’s iconic Samba, Gazelle and Campus styles, the company said. Adidas, which has been restricting access to the models since the start of the year, intends to slowly start scaling access to the offerings through the remainder of 2023.
