Adidas cut its full-year guidance for the second time in three months and announced a new “business improvement program” after preliminary results for the third quarter showed sales were hit by a “strong” double-digit decline in Greater China and profits shrank in the wake of nearly €300 million in one-off charges tied largely to its decision to wind-down business operations in Russia.
The company’s new outlook takes into account a further deterioration of traffic trends in China, where widespread Covid-19-related restrictions and significant inventory takebacks have dented its performance. It also incorporates expectations that promotional activity will pick up for the remainder of the year as inventory piles up due to low consumer demand in major Western markets since the start of September, alongside one-off costs that are expected to continue to impact profit figures in both the third and fourth quarters.
Adidas now expects full-year currency-neutral sales to increase by a mid-single-digit rate, below previous guidance of a mid-to-high-single-digit rate and indications before that of growth at the lower end of an 11 to 13 percent range. The company also sees a gross margin of about 47.5 percent in 2022, down from previous guidance of 49.0 percent, and an operating margin of about 4.0 percent against 7.0 percent previously. Net income from continuing operations is projected at €500 million versus the €1.3 billion seen in previous guidance.
Adidas is set to present final results for the third quarter on Nov. 9. The preliminary data showed reported sales increased by 11 percent to €6,408 million as sales at constant currency rates inched up by 4 percent. Excluding China, currency-neutral sales in other markets continued to grow at a double-digit clip. As high inflation and the macroeconomic backdrop led to lower consumer demand, inventory on a currency-neutral basis was up by 69 percent at the end of the third quarter compared to the year earlier.
The gross margin narrowed by 1.0 percentage points to 49.1 percent, and the operating margin fell by 2.9 percentage points to 8.8 percent. Net profit from continuing operations fell to €179 million from €479 million in the third quarter of 2021 and came after almost €300 million in one-off charges, mainly tied to the company’s Russia exit but reflecting costs associated with accelerated cash pooling in high inflation countries, a recently settled legal dispute and higher provisions for customs-related risks. For the full year, one-off costs are expected to total €500 million, although Adidas pointed out that the non-recurrence of these costs should have a positive impact on net income development of the same magnitude in 2023.
Given the challenging market environment, Adidas said it was launching a “business improvement program” designed to safeguard profitability in 2023. The company said the program includes unspecified initiatives aimed at mitigating significant cost increases across its value chain and unfavorable currency movements. While the program will result in one-off costs totaling about €50 million in the fourth quarter of this year, the company anticipates that in 2023 it will compensate for cost headwinds of up to €500 million as well as deliver a positive profit contribution of about €200 million.
