Adidas says it intends to reduce inventories and lower discounts while focusing on its core business as part of a turnaround plan designed to get it back on more solid footing after sales and earnings in the fourth quarter and full year 2022 suffered from the termination of its Yeezy partnership and continued struggles on the Chinese market.
The year “2023 will be a transition year to build the base for 2024 and 2025,” said Bjorn Gulden, CEO. “We need to put our focus back on our core: product, consumers, retail partners, and athletes.”
Adidas, which continues to anticipate a high-single-digit decrease in sales and a reported operating loss this year, warned that 2023 is likely to be marked by continuing macroeconomic challenges and geopolitical tensions while it sees an “elevated” risk of recession in Europe and North America and uncertainty about an economic recovery in China.
Management reshuffle
As it prepares to weather the storm, Adidas announced that the contract of its CFO, Harm Ohlmeyer, has been extended by three years until the beginning of 2028, while changes have also been made to its executive board. Brian Grevy, the executive board member responsible for Global Brands, is set to step down as of March 31, and Gulden will take on that role alongside that of CEO, leading product and marketing activities in a move Adidas said would “enable the required fast decision-making across all business units and departments.” Arthur Hoeld, who has been managing director of the EMEA region for the company since 2018, will take on responsibility for Global Sales on April 1, replacing Roland Auschel, who is stepping down after a 33-year career at the company.
Q4 constant-currency sales slip 1%
In the three months ended Dec. 31, Adidas revenues increased by a reported 1.3 percent to €5,205 million but were about 1 percent lower on a constant currency basis. This reflected a negative impact of about €600 million tied to the company’s decision to end its partnership with the Yeezy brand of rapper and fashion designer Kanye West in October after West publicly made antisemitic remarks. Adidas said it was continuing to evaluate options for its Yeezy inventory. Sales were also affected by the nearly 50 percent decline in revenues in its Greater China region, where the market environment continues to be challenging, and the company highlighted “significant” inventory takebacks in the quarter.
| Adidas | |||
|---|---|---|---|
| 2022 | 2021 | Change | |
| Q4 ended Dec. 31 (€ million) | |||
| Net sales | 5,205 | 5,137 | 1.3% |
| Cost of sales | 3,170 | 2,618 | 21.1% |
| Gross profit | 2,035 | 2,519 | -19.2% |
| Royalty and commission income | 26 | 33 | -21.2% |
| Other operating income | 41 | 15 | 173.3% |
| Other operating expenses | 2,825 | 2,501 | 13.0% |
| Operating profit | -724 | 66 | – |
| Financial income | 30 | 17 | 76.5% |
| Financial expenses | 41 | 39 | 5.1% |
| Pre-tax | -734 | 44 | – |
| Tax | 252 | 79 | 219.0% |
| Net from continuing operations | -482 | 123 | – |
| Net income | -513 | 213 | – |
| Diluted EPS | -2.69 | 0.58 | – |
| FY ended Dec. 31 (€ million) | |||
| Net sales | 22,511 | 21,234 | 6.0% |
| Cost of sales | 11,867 | 10,469 | 13.4% |
| Gross profit | 10,644 | 10,765 | -1.1% |
| Royalty and commission income | 112 | 86 | 30.2% |
| Other operating income | 173 | 28 | 517.9% |
| Other operating expenses | 10,260 | 8,892 | 15.4% |
| Operating profit | 669 | 1,986 | -66.3% |
| Financial income | 39 | 19 | 105.3% |
| Financial expenses | 320 | 153 | 109.2% |
| Pre-tax | 388 | 1,852 | -79.0% |
| Tax | 134 | 360 | -62.8% |
| Net from continuing operations | 254 | 1,492 | -83.0% |
| Net income | 638 | 2,158 | -70.4% |
| Diluted EPS | 1.25 | 7.47 | -83.3% |
| Source: Adidas | |||
The gross margin in the quarter declined by 9.9 percentage points to 39.1 percent, driven by a sharp rise in supply chain costs as well as an increase in promotional activity. These factors outweighed positive developments, namely price increases, currency tailwinds and a favorable channel and product mix. The operating loss for the quarter amounted to €724 million compared to an operating profit of €66 million in the fourth quarter of 2021. The net loss from continuing operations totaled €482 million against a net profit of €123 million the year earlier.
While fourth-quarter sales were down sharply in China, Adidas saw growth in all other regions. At constant currency rates, revenues in the EMEA region were 12.2 percent higher while they grew by 6.0 percent in North America, where the discontinuation of the Yeezy partnership had a particularly strong impact. Sales in the Asia-Pacific region rose by 16.2 percent, while sales in Latin America were 47.2 percent higher.
| Adidas | |||
|---|---|---|---|
| 2022 | 2021 | Change | |
| Q4 ended Dec. 31 (€ million) | |||
| EMEA | 2,073 | 1,832 | 13.2% |
| North America | 1,540 | 1,303 | 18.2% |
| Greater China | 520 | 1,037 | -49.9% |
| Asia-Pacific | 606 | 541 | 12.0% |
| Latin America | 544 | 397 | 37.0% |
| Other business | 39 | 28 | 39.3% |
| FY ended Dec. 31 (€ million) | |||
| EMEA | 8,550 | 7,760 | 10.2% |
| North America | 6,398 | 5,105 | 25.3% |
| Greater China | 3,179 | 4,597 | -30.8% |
| Asia-Pacific | 2,241 | 2,180 | 2.8% |
| Latin America | 2,110 | 1,446 | 45.9% |
| Other business | 150 | 145 | 3.4% |
| Source: Adidas | |||
By sales channel, revenues in the company’s direct-to-consumer (DTC) channel declined by 1 percent in the quarter, with e-commerce revenues falling by 4 percent and Adidas’ own retail stores sales increasing by 1 percent.
Inventories rise, dividend falls
The termination of the Yeezy partnership, higher product and freight costs, a different order pattern as a result of longer transportation lead time and lower year earlier comparables due to the impact last year from factory lockdowns in Vietnam all contributed to a steep rise in inventories, which increased to €5,973 million at the end of December 2022, up by 49 percent on the year earlier.
Adidas also announced it was slashing its proposed dividend payment on 2022 earnings to €0.70 per share, from €3.30 the year earlier, after reporting a net profit from continuing operations of €254 million against €1,492 million the year earlier. However, it noted that the proposed dividend represents a payout ratio of 49.2 percent, up from 40.9 percent the year earlier and at the high end of a 30-50 percent target range.
Sales for the full year rose by a reported 6.0 percent, or about 1 percent at constant rates, to €22,511 million, and like the net profit and other key data was in line with preliminary indications already released in February. Wholesale sales represented 61 percent of the total sales pie and DTC the remaining 39 percent.
Adidas continues to expect an underlying operating profit at about breakeven in 2023. While Adidas decides what to do with its Yeezy inventory, this guidance already reflects a revenue loss of about €1.2 billion and a corresponding €500 million hit to operating profit from not selling the existing Yeezy stock. The company also still foresees a reported operating loss of up to €700 million, should it decide not to repurpose any of the existing Yeezy products and book expected one-off costs of up to €200 million as part of a strategic review designed to “reignite profitable growth” in 2024.
High severance payment for the former CEO
Despite the result and all the challenges during the past fiscal year, Kasper Rorsted, who was CEO at Adidas for a total of six years from October 2016 to November 2022 and left the company prematurely, can enjoy a high settlement. According to the annual report presented on March 8, Rorsted will receive €12.3 million in severance pay plus €200,000 per month for the next 18 months as compensation for not being allowed to join any Adidas competitor during that time.
