Kanye’s Split Results In A New Profit Warning For Adidas, Stocks Suffer

In the latest downgrade brought on by its split from Kanye West, sportswear manufacturer Adidas warned it could plunge to a loss this year for the first time in three decades, sending its shares plunging as much as 12.6%.

The company warned on Thursday that inventory of the rapper and fashion designer’s Yeezy line, which sells footwear and clothing for up to $700 a pair, may be completely written off, resulting in a loss of 700 million euros ($749 million) this year.

The competitor to Nike added that simply by holding onto the stock, revenues would drop by 1.2 billion euros in 2023 and operating profit would drop by roughly 500 million euros to roughly break-even.

“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 (PUMG.DE) and has promised a “year of transition” to make the sportswear giant profitable again.

The company predicted a high single-digit percentage decline in sales this year in its fourth profit warning in less than six months. According to data on Adidas’ website, analysts had anticipated a 4% increase in revenue on a currency-neutral basis in 2023 as well as an operating profit of 1.02 billion euros.

The new guidance was dubbed “horrible” and “very disappointing” by Baader Helvea.

The news was released as Adidas reported revenue growth in 2022 of just 1% in currency-neutral terms, missing its own projections.

Due to “challenges in articulating the mid-term profit delivery,” Jefferies changed its recommendation on Adidas stock from “buy” to “hold.”

In October, Adidas revised its projections for 2022 downward, to mid-single digit percentage revenue growth and a 4% operating margin, due to weaker demand in China and Western markets, as well as one-time costs associated with leaving Russia.

The company, however, performed worse than anticipated, as evidenced by Thursday’s results, which produced an operating margin of 3%.

On March 8, it will release the complete 2022 results.

Adidas is reviewing its Yeezy offerings with the goal of salvaging warehouse stock by reusing it under a different label.

After Ye, formerly known as Kanye West, made antisemitic comments online, Adidas severed its relationship with him in October, stopping sales of the shoes and clothing line that had generated billions and increased the company’s profit margin for years.

The split occurred right before the crucial pre-Christmas shopping season, forcing Adidas to halve its 2022 profit outlook to 250 million euros in early November and highlighting the risks some companies have taken by associating their success with 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.”

Investors worry that persistently high inflation in Europe and the US could hurt sales in the upcoming months, so Yeezy is not Gulden’s only problem.

Competitor Puma saw its shares fall by about 5% on Friday.

Given the tone of Gulden’s remarks, UBS analysts wrote in a note to investors that they anticipated the Yeezy business to be completely abandoned and predicted a difficult road ahead for the new CEO.

“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.

(Adapted from LiveMint.com)


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