Adidas Warns of Losses Stemming From Yeezy Fallout

Adidas shares slumped as much as 12.6% on Friday after the sportswear maker warned it could plunge to a loss this year for the first time in three decades, in the latest downgrade triggered by its split from Kanye West.

Inventory of the rapper and fashion designer's Yeezy brand, with price tags for sneakers and apparel of up to $700 a pair, could be written off entirely, resulting in a 700 million euro ($749 million) loss this year, the company said on Thursday.

Just by not selling the stock, revenues would take a 1.2 billion euro hit in 2023, while operating profit would fall by about 500 million euros to around break-even, the rival to Nike (NYSE:NKE) added.

"The numbers speak for themselves. We are currently not performing the way we should," said CEO Bjorn Gulden, who joined Adidas on Jan. 1 after switching from rival Puma and has promised a "year of transition" to make the sportswear giant profitable again.

At 1200 GMT, Adidas shares were down 12.3% at 137 euros.

In its fourth profit warning in less than six months, it forecast a high single-digit percentage decline in sales this year. Analysts had on average expected a 4% rise in 2023 revenue on a currency-neutral basis and operating profit of 1.02 billion euros, according to figures on Adidas' website.

Baader Helvea described the new guidance as "horrible" and very disappointing.

The news came as Adidas missed its own forecasts with a rise of just 1% in 2022 revenue in currency-neutral terms.

Jefferies cut its recommendation on Adidas stock to "hold" from "buy", citing "challenges in articulating the mid-term profit delivery".

Adidas had lowered its 2022 forecasts in October to mid-single digit percentage revenue growth and a 4% operating margin in light of weaker demand in China and Western markets and one-off expenses related to exiting Russia.

But Thursday's results showed the company had fared worse than it expected, yielding an operating margin of 3%.

It will report full 2022 results on March 8.

Adidas is conducting a review of its Yeezy products, with one option to salvage warehouse inventory by repurposing it under a different brand.

Adidas cut its ties with Ye, formerly known as Kanye West, in October, halting sales of the shoes and apparel line that had brought in billions and pushed up the company's profit margin for years after he made antisemitic remarks online.

The breakup came just before the crucial pre-Christmas sales period, forcing Adidas to halve its 2022 profit outlook in early November to 250 million euros and highlighting the risks some brands have taken by tying their fortunes to celebrities.

"2023 will be a year of transition to set the base to again be a growing and profitable company," Gulden said, adding the company would focus on creating "brand heat".

"We need to put the pieces back together again, but I am convinced that over time we will make Adidas shine again. But we need some time."

Yeezy is not Gulden's only challenge, as investors fear that persistently high inflation in Europe and the United States could drag down sales in the coming months.

Competitor Puma also lost ground on Friday, with shares down around 5%.

UBS analysts said in a note to investors they expected the Yeezy business to be scrapped entirely given the tone of Gulden's comments - and that it would be a long slog for the new boss.

"While we think CEO Bjørn Gulden is the right person to turn around the brand, we don't expect initial signs until 2H24," the note said.

February 10, 2023