Adidas’s big bet blows up
The German sportswear giant says the cost of its break-up with rapper Ye will be greater than investors expected. Matthew Partridge reports
Bjørn Gulden has been chief executive of Adidas for just six weeks, but he’s already warning that year one will be a mess, says Bernhard Warner in The New York Times. The giant German sportswear firm saw its share price fall more than 12% at the end of last week, after it issued its fourth profit warning in six months and said it expected big losses in 2023. The main reason for this is Adidas’ “messy split” last year with musician Ye (formerly known as Kanye West), which came about after his increasingly controversial behaviour culminated in an antisemitic rant. Adidas has now been left with a “mountain of unsold inventory” from the Yeezy line of trainers that it developed with Ye.
Shareholders were expecting bad news since Adidas had already said that the end of its partnership would cut its net income by €250m in 2022, says Aimee Donnellan on Breakingviews. However, the size of the drop in its share price suggests that investors are surprised that Adidas expects to write off the entire inventory, rather than being able to “repurpose” the items under a different brand. Scrapping shoes that have already been produced means Adidas is likely to lose another €500m.
Masking the underperformance
The whole debacle is particularly embarrassing for Adidas, given that former boss Kasper Rørsted “bet big on Yeezy to revive the flagging brand’s fortunes”, says Lex in the Financial Times. What’s more, before it imploded, it looked like the gamble might pay off. The partnership was highly profitable, generating a 40% operating margin after royalties. This went some way towards “masking the underperformance” of the rest of Adidas, whose core operating profitability has been estimated at about 4% – roughly “one-third of the operating margin that Nike is thought to have achieved last year”.
Quite, says Andrea Felsted on Bloomberg. Adidas has been losing ground to its rival, Nike, for some time, as shown by the fact that it trades on a forward enterprise value to earnings before interest, tax, depreciation and amortisation multiple of 13 times, compared with Nike’s 24 times. To catch up, it will need to make up for the shortfall caused by the break-up with Ye and have a style revamp that will “breathe new life into its offerings off the football field and running track”. Early results do not look encouraging. There are reports that the Ivy Park collaboration with musician Beyoncé, which was seen as “a potential replacement to some of the lost Yeezy revenues”, is “not living up to expectations”.
Searching for a show-stopper
Coming up with a “show-stopping replacement for Yeezy, both as a driver of profits and as a standard bearer for the Adidas brand”, will be crucial, says Trefor Moss in The Wall Street Journal. However, the firm will also have to “find a successful formula for China”, where sales were hit by a recent consumer boycott as well as competition from Chinese sportswear makers. But Gulden has already turned around Puma, Adidas’s smaller German rival. “Opening the taps on marketing spend will be the quickest way… to help Adidas regain some brand momentum.”