China Lockdowns Impact Adidas Q1 Results
● The German sportswear giant has significant exposure to the Chinese market, which weighed down this quarter’s results. Executives expect improvements later this year.
While a slowdown in China weighed heavily on Adidas in the first quarter, the company’s executives remained optimistic, predicting a return to growth.
Adidas blamed ongoing challenges in the Chinese market — once seen as the sportswear giant’s best opportunity for growth — for the fact that first quarter revenues fell 3 percent, currency neutral.
Adidas net sales rose only 0.6 percent to 5.3 billion euros in the first quarter and EBIT fell 38.5 percent to 437 million euros.
The results have much to do with the fact that, in late March, the whole equation around the Chinese market changed, Adidas chief executive officer Kasper Rorsted said during an online press conference revealing the company’s quarterly results. “And it’s not just us. You’ve heard this from almost every company, whether they are large German chemicals companies or Starbucks,” he explained.
Until recently, each of Adidas’ three main markets — Europe, America and China — brought in roughly a third of the brand’s revenues.
In the first quarter, revenues from Greater China fell 34.6 percent to generate 1 billion euros, and revenues in the rest of Asia Pacific dropped 15.7 percent to make 506 million euros.
Currently, 45 cities in China are under lockdown due to the country’s “zero COVID-19” policy, Rorsted noted. Compared to other brands, like Puma, the speedily growing but smaller German sportswear brand, Adidas is much more exposed to the Chinese market.
Around a quarter of Adidas stores in China are currently closed. Even in cities that had come out the other side of a lockdown, like Shenzhen and Wuhan, traffic at retail was still down by around a quarter, Adidas calculated, whereas in large cities like Shanghai and Beijing, where restrictions were still in place, there was no retail footfall at all. Business in Shanghai makes for almost a tenth of Adidas’ China revenue.
“Unlike the initial [COVID-19] outbreak in 2020, we are not observing a spike in our e-comm channel either,” Rorsted cautioned. Much-hyped special product releases were still faring well but mainstream products were suffering and consumer sentiment was heavily affected.
Recently, market analysis from the likes of Credit Suisse and Baader Bank expressed concern that Adidas’ China business might never return to previous form. But Rorsted disagreed.
“In the future, you will see a growth economy in China [again] but right now, the predominant inhibitor of growth is the lockdown,” he argued. “But that will also be the primary opener for growth [when lockdowns end].”
Adidas expects revenues in China to continue to decline right up until the third quarter of this year, the company’s chief financial officer Harm Ohlmeyer added. Throughout the second half of the year, the brand expects sequential improvement as China learns to better manage the pandemic and its lockdowns, but Chinese revenues are still likely to end the year down in the low-double digits, Ohlmeyer said.
Adidas’ slowdown in the first quarter had been expected. The last quarter of 2021 brought a similar dip and the company had forecast a mid-single-digit decline in revenues for first quarter in 2022.
Also weighing on Adidas’ first-quarter numbers were lingering impacts of pandemic-related lockdowns in its main manufacturing hub in Vietnam late last year as well as freight problems. The brand estimated these challenges would likely cost it 600 million euros altogether over the first half of the year. By the third quarter though, supply issues would no longer be a problem.
The numbers in all other territories were far healthier than those in China, with the categories soccer, running and outdoor doing particularly well over the first quarter, Adidas reported.
In the Europe, Middle East and Africa territory, Adidas brought in 1.93 billion euros, reflecting growth of 9.1 percent. The closure of Adidas’ Russian operations, due to that country’s invasion of Ukraine, only had an estimated impact of around 1 percent in this territory.
Over the coming year, Adidas planned to put more emphasis on culture and lifestyle in “key cities” like Paris, London, Berlin and Dubai, Rorsted said, listing collaborations with Gucci, Prada and Y3 as well as the ever-popular Yeezy range.
Asked whether Adidas had felt any change in consumer sentiment due to the war in Ukraine or rising inflation, Rorsted said it had not. “We saw very good trading in April in Europe and our order backlog is very strong,” the executive noted. “We also take into account that we are operating in a pricing space that is affordable — we’re not selling cars or electronics — so we are not seeing that [a downturn] at this stage.”
In North America, Adidas revenues grew 12.8 percent to hit 1.4 billion euros. “We want to double down on this,” Rorsted stressed.
A newly minted deal with Footlocker stores globally should triple retail sales for both companies up to 2 billion euros by 2025, he noted, adding that Adidas expected to make 100 million euros in incremental net sales from the deal this year alone. Footlocker would also play the lead in Adidas’ new take on its basketball offerings, Rorsted said.
Increases in these markets averaged out at 13 percent over the first quarter of 2022 and were more in line with what Adidas experienced between 2015 and 2020, when it saw around 13 percent growth annually.
Sales in those territories in the black make up about 70 percent of Adidas’ business and the company is also expecting a return to growth in the rest of Asia, which would then add up to 80 percent of the total business, Rorsted concluded optimistically: “We are growing double digits in parts of the business that are within our control. And we have to adapt to the challenges we have in China, which are mostly out of our control.”
Despite the decreases, Adidas sales figures actually slightly outpaced market expectations. Analysts had predicted, on average, operating profit of 395.5 million euros and sales of 5.22 billion euros this quarter.
Adidas also confirmed most of its guidance for the year, although the company cautioned that this would now be at the lower end of what it had predicted. It slightly lowered its outlook on gross margin and operating margin, by about one percentage point, to 50.7 percent and 9.4 percent, respectively.
The company planned to increase product prices in the second half of this year “in the mid- to high-single-digit range,” finance boss Ohlmeyer pointed out. Marketing and other costs were rising and the price increases would balance this out, he said.
Adidas forecast that its revenues would still grow by between 11 and 13 percent over the full year and it expected net income of between 1.8 billion and 1.9 billion euros in 2022.