While still facing hurdles in its recovery and path to profitability in 2025, Adidas began to show some positive developments in Q2 that included improved sell-throughs for some products and a €400 million boost from the sale of surplus Yeezy shoes that will reduce the group’s expected FY23 loss.
CEO Bjørn Gulden was pleased with the Q2 developments, which also included a higher-than-forecast operating profit of €176 million but remained cautious. Adidas has concerns about the chances for a recession in both Europe and North America and uncertainty about the ability of the Greater China recovery to persist.
“The market is still very volatile; we continue to see a lot of uncertainty for the rest of the year,” Gulden said in a statement. “[…] Our story is the same as we said at the beginning of the year: We are using 2023 to clean inventories, work on future products, improve the way we work, build better partnerships, and lay the foundation for a better 2024 and a good and profitable Adidas in 2025 and 2026. 2023 is not about trying to show short-term results.”
A closer look at Q2 results
Total revenues fell by 4.5 percent to €5.34 billion from $5.60 billion for the quarter ended June 30, but they benefitted from the June drop of Yeezys. A second drop through wholesale partners commenced this week. Wholesale revenues declined by 10 percent to €2.99 billion despite double-digit growth in Greater China and Latin America. Direct-to-consumer sales accounted for 44 percent of Q2 revenues or €2.35 billion. Own retail sales rose 19 percent to €1.12 billion; e-commerce sales increased 14 percent to €1.23 billion.
| Adidas - Income | ||||
|---|---|---|---|---|
| 2023 | 2022 | Change | ||
| Q2 (€ millions) | ||||
| Net sales | 5,343 | 5,596 | -4.5% | |
| Cost of sales | 2,625 | 2,781 | -5.6% | |
| Gross profit | 2,719 | 2,815 | -3.4% | |
| % of net sales | 50.9% | 50.3% | 0.6 pp | |
| Royalty and commission income | 21 | 27 | -22.2% | |
| Other operating income | 18 | 51 | -64.7% | |
| Other operating expenses | 2,582 | 2,501 | 3.2% | |
| Marketing and PoS expenses | 617 | 663 | -6.9% | |
| Operating overhead expenses | 1,965 | 1,838 | 6.9% | |
| Operating profit | 176 | 392 | -55.1% | |
| % of net sales | 3.3% | 7.0% | -3.7 pp | |
| Financial income | 19 | 16 | 18.8% | |
| Financial expenses | 71 | 107 | -33.6% | |
| Pre-tax | 123 | 300 | -59.0% | |
| Tax | 27 | -60 | – | |
| Net income from continuing operations | 96 | 360 | -73.3% | |
| Gain from discontinued operations, net of tax | -1 | -52 | 98.1% | |
| Net income | 95 | 309 | -69.3% | |
| % of net sales | 1.8% | 5.5% | -3.7 pp | |
| Diluted EPS from continuing operations | 0.48 | 1.88 | -74.5% | |
| H1 (€ millions) | ||||
| Net sales | 10,617 | 10,897 | -2.6% | |
| Cost of sales | 5,535 | 5,435 | 1.8% | |
| Gross profit | 5,082 | 5,463 | -7.0% | |
| % of net sales | 47.9% | 50.1% | -2.2 pp | |
| Royalty and commission income | 46 | 50 | -8.0% | |
| Other operating income | 57 | 74 | -23.0% | |
| Other operating expenses | 4,949 | 4,759 | 4.0% | |
| Marketing and PoS expenses | 1,218 | 1,304 | -6.6% | |
| Operating overhead expenses | 3,731 | 3,455 | 8.0% | |
| Operating profit | 236 | 828 | -71.5% | |
| % of net sales | 2.2% | 7.6% | -5.4 pp | |
| Financial income | 30 | 24 | 25.0% | |
| Financial expenses | 111 | 140 | -20.7% | |
| Pre-tax | 155 | 711 | -78.2% | |
| Tax | 82 | 41 | 100.0% | |
| Net income from continuing operations | 73 | 671 | -89.1% | |
| Gain from discontinued operations, net of tax | -7 | 128 | – | |
| Net income | 65 | 799 | -91.9% | |
| % of net sales | 0.6% | 7.3% | -6.7 pp | |
| Diluted EPS from continuing operations | 0.29 | 3.47 | -91.6% | |
| Source: Adidas Group | ||||
Operating profit was down by 55 percent to €176 million from €392 million. The operating margin was 3.3 percent versus 7.0 percent in Q2/22. Gross margin improved by 60 basis points to 50.9 percent from 50.3 percent due to price increases and an improved channel mix but continue to be negatively impacted by supply chain costs and currency headwinds. Net income was 69 percent lower year-over-year at €95 million versus €309 million in the year-ago period. Q2 end inventory level was up 1 percent year-over-year at €5.54 billion and up 6 percent on a currency-neutral basis. The number of units fell by 11 percent in H1, helped by lowered buying volumes and the tactical repurposing of existing merchandise.
Segment development
Footwear sales rose by 1 percent in Q2, helped by strong growth in soccer, basketball, tennis, and U.S. sports. Apparel sales, meanwhile, declined by 3 percent and were hurt by an overstocked market. Football contributed to an 8 percent gain in quarterly accessories sales.
Despite “extraordinary demand” for the brand’s Samba, Gazelle and Campus franchises, lifestyle sales fell during the period. The company said sales of performance products, including the latest iterations of the Predator, X and Copa soccer boots and Barricade tennis products, had positive momentum.
Regional results
EMEA Q2 sales fell by 1 percent, but the group significantly improved full-price selling trends during the period and experienced double-digit growth in the DTC channel. In Greater China, fueled by double-digit wholesale and own retail gains, period sales increased by 16 percent. North America was the group’s worst-performing region, with sales down by 16 percent in Q2 and 18 percent lower for H1 due to higher market inventory levels that negatively impacted the company’s ability to sell-in products. Sales in Latin America, bolstered by strong wholesale and DTC growth, increased 30 percent in Q2.
| Adidas - Regional sales | ||||
|---|---|---|---|---|
| 2023 | 2022 | Change | Change (currency neutral) | |
| Q1 (€ millions) | ||||
| EMEA | 1,980 | 2,079 | -4.8% | -0.8% |
| North America | 1,399 | 1,707 | -18.0% | -16.4% |
| Greater China | 766 | 719 | 6.5% | 16.4% |
| Asia-Pacific | 550 | 550 | 0.0% | 7.0% |
| Latin America | 596 | 512 | 16.4% | 29.8% |
| Other businesses | 36 | 29 | 24.1% | 27.9% |
| H1 (€ millions) | ||||
| EMEA | 3,975 | 4,014 | -1.0% | 1.6% |
| North America | 2,575 | 3,111 | -17.2% | -17.9% |
| Greater China | 1,650 | 1,723 | -4.2% | 1.0% |
| Asia-Pacific | 1,117 | 1,056 | 5.8% | 11.2% |
| Latin America | 1,191 | 929 | 28.2% | 38.6% |
| Other businesses | 81 | 65 | 24.6% | 26.3% |
| Source: Adidas Group | ||||
Adjusted FY23 Outlook
Thanks to the positive impact from the June Yeezy drop that netted approximately €400 million and slightly better H1 results than forecast, Adidas is currently forecasting annual revenues to decline by mid-single digits instead of high-single digits anticipated previously in March.
Meanwhile, the FY23 operating loss is now estimated at -€450 million, down 36 percent from a prior forecast of -€700 million. The improvement is related to a lower Yeezy write-off of €400 million versus a previous forecast of €500 million and a €150 million gain from the first Yeezy product sale. It should be noted that Adidas has pledged to donate approximately €110 million from the Yeezy sales to charitable organizations, including the Foundation to Combat Antisemitism, the Anti-Defamation League, Stand Up Against All Hate, and the NAACP.
Discontinuation of Yeezy when inventory is sold
The revised FY23 outlook does not include any impact from the second release of Yeezy products. Analysts at Citi have estimated that additional Yeezy drops by Adidas will generate €1.5 billion in revenues and €700 million in additional profit after planned charitable donations. Asked if the company would consider producing more Yeezy products again in the future, Gulden said in a call with analysts, “Our job is to limit the damage, get rid of the inventory and then build the business later without Yeezy.”
