Adidas reins in FY expectations as Q1 sales dip, China struggles

Adidas cut its expectations for gross and operating margins for the full year and projected that sales and net profit would come in at the lower end of guidance after sales dipped in the first quarter and as it continues to struggle in China, where new Covid-19 lockdowns have worsened an already challenging market backdrop.

In the three months ended March 31, sales inched up a reported 1 percent to €5,302 million and were 3 percent lower at constant currency rates, declining for the second consecutive quarter. Supply chain constraints attributed to last year’s lockdown in Vietnam reduced top-line growth by about €400 million.

Adidas foresees that it will return to sales growth in the second quarter, despite an estimated €200 million negative impact from supply chain constraints and a continued sales decline in Greater China, where sales slumped by 34.6 percent in the first quarter.

In the second half of the year, sales are anticipated to grow by over 20 percent, underpinned by “unconstrained” supply, accelerating growth in Asia Pacific and continued momentum in western markets, backed up by a strong order book in all markets except for China.

The company no longer expects growth in gross and operating margins for the 2022 financial year, which are now seen around the prior-year level of 50.7 percent and 9.4 percent, respectively, as supply chain costs are expected to pressure margins for the remainder of the year and sales in China are seen posting a “significant” decline. As a result of gloomier prospects in China, currency-neutral sales are now projected at the lower end of an 11 to 13 percent growth range. Net profit from continuing operations is seen at the lower end of a €1.8 to €1.9 billion guidance range.

At constant currency rates, sales in the first quarter rose by 9.3 percent in the EMEA region, despite being most impacted by supply shortages, driven by more than 50 percent growth in own retail. Sales grew by 21.2 percent in North America, with growth above 20 percent in DTC, and were 38.0 percent higher in Latin America. Alongside the steep decline in China, Adidas also underperformed in Asia Pacific, where sales slipped by 7.6 percent. Adidas anticipates that Asia Pacific will recover in the second quarter while China is expected to remain a challenging market.

In China, new Covid-19 lockdowns swept away the company’s previous guidance of sales growth in a mid-single-digit range. Like many other western brands, Adidas had already been suffering in China from a boycott called last year by state media and social media users over Western allegations of human rights abuses in Xianjing. Consumer sentiment has been heavily impacted by the surge in Covid-19 cases, with a significant traffic decline even in cities not subject to restrictions. Nonetheless, Adidas expects to see sequential improvement in China in the second half of the year.

Given persistent supply shortages, Adidas said it has continued to prioritize its own DTC business. DTC revenues went up by 1 percent versus the first quarter of 2021 and were 33 percent above the 2020 level. While Adidas e-commerce revenues saw a double-digit increase in the share of full-price sales, revenues in the company’s own digital channel increased by 2 percent from the year-earlier, when growth was exceptionally strong. E-commerce revenues were up by 50 percent on the 2020 level. As a percentage of sales, DTC rose to 36 percent, up 2 percentage points on the year-earlier and 3 percentage points above 2020.

Among product categories, Adidas singled out the solid sales performance in Football and Outdoor, which expanded at a “strong” double-digit rate, and Running, which increased at a high-single-digit rate.

The gross margin fell by 1.9 percentage points to 49.9 percent, as an increase in sourcing and freight costs, the negative impact from a less favorable market mix, and the comparable effect from its strong prior-year e-commerce performance more than outweighed the positive impact from higher full-price sales and the company’s first selective price increases.

The operating margin declined by 5.2 percentage points to 8.2 percent, as operating expenses rose by 10 percent to €2,258 million. Marketing and point-of-sales expenses increased by 19 percent due to additional investments to support brand campaigns and new product launches. Operating overhead expenses climbed by 7 percent as the company stepped up investments in its DTC business and digital capabilities.

Adidas stressed that lead times remain high for key markets. As of March 31, 43 percent of all goods for the EMEA region were in transit compared to 57 percent for goods on hand. In North America, the percentage was about evenly split, with 49 percent of goods in transit and 51 percent on hand. This compares with 38 percent of goods in transit and 62 percent on hand for the total company on the same date.

Adidas intends to continue its first-quarter policy of selective price increases on its DTC exclusives in the second quarter before implementing broad-based price increases at mid-to-high-single-digit rates in the second half of the year. This, along with foreign currency tailwinds expected from the second quarter onwards, is seen counterbalancing the negative effect of supply chain costs and China on margins in the remainder of 2022.