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Adidas is facing a problem even bigger than Yeezy

Feb 13, 2023, 17:10 IST
Business Insider
Adidas flagship store entrance in New York City.Sarah Belle Lin/Insider
  • Adidas announced early financial guidance for 2023 on Thursday.
  • Adidas expects sales to drop by $1.28 billion in 2023 if it doesn't sell leftover Yeezy inventory.
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Adidas announced its financial guidance for 2023 earlier than anticipated on Thursday.

The company's guidance began on a bleak note with revenue for the year expected to drop after ending its Yeezy partnership. The company said it expects to see sales drop by €1.2 billion, or about $1.28 billion, and operating profit by €500 million, or about $537 million, if it does not sell its leftover Yeezy inventory. A strategic review of the business by Adidas will cost the company another €200 million.

Against this background, Adidas said it is forecasting a decline in the high-single digits in sales in 2023.

But analysts say its issues run deeper than Yeezy. Stripping out the impact of the Yeezy brand, its forecasts for the year ahead imply that it still expects to take a substantial sales hit and see profits dwindle.

What went wrong at Adidas?

"The sales decline is about more than just Yeezy," Bernstein analyst Aneesha Sherman wrote in a note to clients early Friday.

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According to Bernstein's research, excluding the $1.2 billion of lost revenue from the Yeezy brand, the company's guidance of a high-single-digits decline in sales in 2023 suggests that Adidas is also expecting to see sales drop by $2 billion.

"We are concerned about the underlying health of the business that would drive such a drastic guide-down, even after stripping out the Yeezy impact," Sherman said.

But she's still doubtful as to whether the company has reached its "kitchen sink" moment – the idea that its airing all its dirty laundry at once and giving investors one combined hit of negative news.

"There may be more shoes to drop," she said.

Bjørn Gulden took over as CEO of Adidas in January.Daniel Karmann/Getty Images

Adidas has relied heavily on collaborators in recent years, including music artists Bad Bunny, Pharrell Williams, and Beyoncé. However, The Wall Street Journal reported that sales of the Ivy Park line with Adidas declined more than 50% to roughly $40 million last year, well short of Adidas' $250 million forecast.

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Ye, formerly known as Kanye West, was a big hit for Adidas. Cowen estimates the brand earned $1.2 billion in sales last year before Adidas terminated the partnership in October. Ye signed with Adidas in 2013. In addition to popular Yeezy silhouettes, he also helped propel general release footwear by Adidas, such as the Ultraboost, into the mainstream by wearing them in public.

"One of the major issues is that Adidas has had trouble finding the 'next big thing,'" Tom Nikic, senior analyst at Wedbush Securities said in a note to clients on Thursday, said, referring to the success of the Yeezy brand.

It does feel like Adidas' new CEO Bjorn Gulden is starting over. His first order of business is to "clear the deck," he said.

Adidas reset has broader industry impact

As the No. 2 sportswear brand in the world, Adidas' reset will have a serious impact on the industry at-large.

Competitors like Nike, which has been firmly in the number one spot for decades, stand to pick up market share from the German sportswear company. Adidas' struggles could also open the door for up-and-coming brands like Hoka One One and On to do the same, Nikic said. Foot Locker, in the middle of its own company reset, could also be impacted. Foot Locker plans to add more Adidas product mix to generate sales over the next few years after Nike cut inventory on several wholesale partners during the pandemic.

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"If the revenue declines Adidas expects this year include pressure in North America, then this could throw a monkey wrench into FL's plans to diversify their product assortment," Nikic said.

Adidas' troubles can also be attributed to other factors aside from its stockpile of Yeezys, according to a note by Telsey Advisory Group. High inventory and promotional activity along with slowing sales in China have impacted the company as well as archrival Nike.

"We also get the sense that Adidas is setting the bar low for 2023 as to not have to make multiple downward revisions, as was the case in 2022," TAG wrote.

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