Head of Equity Strategy
Summary: Since the early days of the pandemic Adidas has been living a nightmare significantly underperforming its main competitor Nike. Adidas has gone from one problem to the next. It started with lockdowns, then supply chain issues around its factories, then the fallout in China over comments about Xinjiang cotton, and in October it terminated its successful partnership with Ye following antisemitic comments. It turns out that Adidas had increased its business risk substantially by allowing the Yeezy collection to become the dominant part of operating income. We take a look at Adidas and why the problems are deeper than just Yeezy.
Catastrophic 2023 outlook send Adidas shares down 12%
Adidas announced yesterday after the European market close that it now expects €700mn in operating loss for 2023 as the German sports clothing maker has decided not to sell its existing inventory of Yeezy items until a review is carried out. Adidas terminated its partnership with Ye, formerly known as Kanye West, back in October 2022 over antisemitic comments from Ye. The impact on Adidas’ business is profound with €1.2bn in lost revenue in 2023 which will lower revenue by high-single-digit this year.
Should Adidas decide not to repurpose the existing Yeezy items in inventory and sell those under Adidas own brand then the inventory will written off and the operating income will be lowered by an additional €500mn. The company is also announcing €200mn in one-off items which is mostly part of a strategic review which is been carried out to reignite growth in 2024.
The problem seems to be Yeezy, but that it is only part of the problem. If you remove the hit to operating income from the Yeezy business line then the company would barely be above break-even this year. That is in sharp contrast to previous years. One thing is that management has allowed one partnership to become such a large part of the operating income increasing the business risks, but another thing is to almost not be profitable when adjusting for Yeezy on €22bn of revenue. Something very deep is broken at Adidas.
Also if we take a look at the revenue growth trajectories of Nike and Adidas, we can see that Adidas has massively underperformed Nike and that is even before the Yeezy fallout. Part of that is declining revenue in China as Adidas’ comments about Xinjiang cotton in relation to Western countries imposing sanctions on China. These comments combined with rising domestic sport clothing companies in China and Chinese consumers choosing domestic brand have materially impacted Adidas business. But even if we strip out the weakness in the Chinese business and the fallout from Yeezy that does not make up for the lower revenue growth compared to Nike.
At only 45% of the size of Nike in terms of revenue and these growing problems and a lost year on a strategic review, Adidas is in a hurry. They need to catch up fast or risking being left at the station and never catching up with Nike.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
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