Faced with a myriad of issues that need addressing in the coming financial year under the leadership of newly named CEO Bjørn Gulden, Adidas today cut its FY22 guidance for the third time since July 26. Three weeks after its last outlook adjustment on Oct. 20, the group today reduced expectations further. In doing so, it cited a deterioration in Greater China traffic trends, about €500 million in excess inventory, and its Oct. 25 decision to terminate its Yeezy partnership with Kanye West as the primary reasons.
Adidas now expects full-year net income from continuing operations to hit €250 million, half as much as the €500 million it projected last month and only 19 percent of the €1.3 billion it forecasted on Aug. 4. Annual currency-neutral revenues are now projected to increase at a low-single-digit rate, down from the expectations of 11 to 13 percent growth it disclosed earlier this year. The FY22 operating margin is now anticipated at about 2.5 percent, well below the 9.4 percent, it achieved in FY21. FY22 revenues are expected to rise at a low-single-digit rate. Regionally from a sales perspective, EMEA is forecast to contribute high-single-digit growth this year, with North America growing at a mid-teens rate and Asia-Pacific up mid-single digits. While Greater China is expected to have a strong double-digit drop in annual sales in FY22, growth in Latin America is seen as rising between 30-40 percent year-over-year.
| Adidas - Income Statement | |||
|---|---|---|---|
| 2022 | 2021 | % Change | |
| Nine months 2022 (€ million) | |||
| Net sales | 17,306 | 16,096 | 7.5% |
| Cost of sales | 8,697 | 7,851 | 10.8% |
| Gross profit | 8,609 | 8,245 | 4.4% |
| Royalty & commission income | 86 | 53 | 62.3% |
| Other operating income | 133 | 13 | 923.1% |
| Other operating expenses | 7,435 | 6,391 | 16.3% |
| Marketing and POS expenses | 1,995 | 1,831 | 9.0% |
| Operating overhead expenses | 5,440 | 4,560 | 19.3% |
| Operating profit | 1,393 | 1,920 | -27.4% |
| Financial income | 32 | 11 | 190.9% |
| Financial expenses | 302 | 123 | 145.5% |
| Pre-tax | 1,122 | 1,808 | -37.9% |
| Tax | 386 | 439 | -12.1% |
| Net income from continuing operations | 736 | 1,369 | -46.2% |
| Gain from discontinued operations | 415 | 576 | -28.0% |
| Net | 1,151 | 1,945 | -40.8% |
| Euros/share (diluted) from continuing operations | 3.83 | 6.87 | -44.3% |
| Q3 2022 (€ million) | |||
| Net sales | 6,408 | 5,752 | 11.4% |
| Cost of sales | 3,262 | 2,868 | 13.7% |
| Gross profit | 3,146 | 2,884 | 9.1% |
| Royalty & commission income | 36 | 22 | 63.6% |
| Other operating income | 58 | 3 | 1833.3% |
| Other operating expenses | 2,676 | 2,237 | 19.6% |
| Marketing and POS expenses | 691 | 674 | 2.5% |
| Operating overhead expenses | 1,985 | 1,562 | 27.1% |
| Operating profit | 564 | 672 | -16.1% |
| Financial income | 8 | 6 | 33.3% |
| Financial expenses | 162 | 49 | 230.6% |
| Pre-tax | 411 | 629 | -34.7% |
| Tax | 345 | 150 | 130.0% |
| Net income from continuing operations | 66 | 479 | -86.2% |
| Gain from discontinued operations | 286 | 504 | -43.3% |
| Net | 352 | 984 | -64.2% |
| Euros/share (diluted) from continuing operations | 0.34 | 2.34 | -85.5% |
| Source: Adidas | |||
The group anticipates that one-time costs of about €500 million taken in FY22 will impact net income growth by the same degree in FY23. In Q4, Adidas will take one-time charges of approximately €50 million to assist it in safeguarding next year’s profitability against impacts from higher expenses and currency fluctuation. The newly developed business improvement program is forecast to generate about €200 million in FY23.
For the remainder of 2022, under the leadership of CFO Harm Ohlmeyer, Adidas anticipates positive sales impacts on its football business from the upcoming World Cup and a new basketball launch. Those gains will be welcome news to the brand that has had to address a Russia exit, the break with Kanye West, supply chain issues, currency headwinds, declining traffic trends in China due to pandemic-related shutdowns, and a buildup of excess inventory in recent months. In September, Adidas experienced 30 percent sales growth in football, a 16 percent improvement in its running business, and a 28 percent increase in U.S. sports such as American football. Regionally, European sales gained 9 percent in September, trailing the monthly sales increases in North America (+14%), Emerging Markets (+31%), and Latin America (+42%).
In Q2 ended Sept. 30, group operating profit declined by 16.0 percent to €564 million from €672 million as net income from continuing operations sunk by 86 percent to €66 million from €479 million. Broad price hikes and favorable currency impacts were offset by “significantly higher” product costs and freight expenses, pushing gross margin down to 49.1 percent from 50.1 percent in the year-ago period. Operating costs rose 20 percent to €2,676 million, a smaller increase than the 23 percent reported during the second quarter, driven by one-time charges and currency movements. Total sales rose 11.4 percent (+4% currency neutral) to €6,408 million from €5,752 million. There was aggregate sales growth of 13 percent in all markets, except for Greater China, through September. During the period’s final month, Adidas said the was a noticeable sales slowdown in the U.K., Germany, and the U.S.
Regionally, Western markets and APAC drove revenues, rising by 12 percent on an aggregate basis. But year-over-year operating margins were down in all markets except Latin America and Asia-Pacific.
| Adidas - Sales | ||||
|---|---|---|---|---|
| 2022 | 2021 | Change | Change (currency neutral) | |
| Nine months 2022 (€ million) | ||||
| EMEA | 2,463 | 2,248 | 9.6% | 7.4% |
| North America | 1,750 | 1,396 | 25.4% | 8.2% |
| Greater China | 937 | 1,155 | -18.9% | -26.6% |
| Asia-Pacific | 579 | 504 | 14.9% | 14.6% |
| Latin America | 633 | 405 | 56.3% | 50.6% |
| Other businesses | 46 | 45 | 2.2% | 2.7% |
| Q3 2022 (€ million) | ||||
| EMEA | 6,477 | 5,928 | 9.3% | 7.7% |
| North America | 4,858 | 3,802 | 27.8% | 13.9% |
| Greater China | 2,659 | 3,560 | -25.3% | -32.1% |
| Asia-Pacific | 1,635 | 1,639 | -0.2% | -0.4% |
| Latin America | 1,566 | 1,050 | 49.1% | 42.5% |
| Other businesses | 111 | 118 | -5.9% | -6.1% |
| Source: Adidas | ||||
EMEA revenues increased by 7.4 percent currency neutral to €2,463 million from €2,248 million despite a loss of more than €100 million in sales from the Russia/CIS exit. Sales in the market were driven by double-digit growth in direct-to-consumer sales in Europe and emerging markets, as the regional operating margin hit 19.7 percent. North American sales improved 13.9 percent currency neutral to €4,858 million from €3,802 million as d-t-c sales increased 10 percent, and the operating margin came in at 18.8 percent.
In Greater China, market revenues slid by 27 percent currency neutral to €937 million from €1,155 million as a 7 percent improvement in own retail sales was offset by “significant” product takebacks. Greater China’s third-quarter operating margin was 22.7 percent. Planned market initiatives include a “right-sizing” of operations there, a closing of unprofitable stores but continued investments in key cities and locations, and increasing grassroots spending.
Adidas is forecasting mid-single digit sales growth in Q4, down from its mid-to-high teens’ outlook on Oct. 20. The World Cup, key product launches and easier year-over-year comparisons will contribute to the upside as the group takes an estimated €500 million hit from the Yeezy exit.
