Adidas AG shares trading in Germany crashed after it published its financial guidance for 2023 and warned it’s sitting on a 1.2 billion euros ($1.3 billion) pile of unsold Yeezy product.
The German sportswear company said it’s ‘reviewing’ all options for utilizing its Yeezy inventory. It said, “this guidance already accounts for the significant adverse impact from not selling the existing stock.”
Operating profit will decline by 500 million euros if the company fails to sell the products and expects sales to decline at a high-single-digit rate this year. The company might write off its remaining products if the inventory isn’t repurposed.
In December, we first pointed out Adidas was sitting on a half billion dollars of Yeezy products. Today’s report doubles that number to a staggering $1.3 billion.
“The numbers speak for themselves. We are currently not performing the way we should,” CEO Bjørn Gulden wrote in a statement.
Gulden said this “will be a year of transition to set the base to again be a growing and profitable company.”
In October, Adidas terminated its partnership with Kanye West, who now goes by Ye, after antisemitic comments.
“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.”
Adidas shares crashed 12% on today’s horrible 2023 outlook.
Here’s what Wall Street analysts are saying about Adidas (courtesy of Bloomberg):
Jefferies (cut to hold from buy, PT to €150 from €140)
- The confirmation of an even-deeper earnings trough for 2023, though needed for a quicker rebuild in profit, “will spook many,” analyst James Grzinic says
- The disconnect between the operational delivery at Adidas and the exceptional cash returns will likely see the company end 2022 with a slight net-debt position
- As such, assume no dividend proposal for 2022 or 2023 and cut rating given the rebound for the stock set agains a difficult medium-term profit outlook
Oddo (cuts to underperform from neutral, PT to €120 from €124)
- “Massive” warning on both Yeezy and other problems within the business, with market seemingly too-optimistic on inventory clearing and promotional volumes, analyst Andreas Riemann says
- Not selling more Yeezy is not a surprise, but the magnitude is and given this cannot explain the shortfall entirely, believe there are additional problems which may take years to resolve
Morgan Stanley (underweight, PT to €110 from 115)
- “Material reset” for Adidas in 2023, driven by the combination of losing any profit contribution from the highly-profitable Yeezy line and from weaker underlying performance, analyst Edouard Aubin says
- Bulls will say this is a classic “kitchen-sinking” by the new CEO, who is know to guide conservatively
- Yet this report confirms what the broker has been hearing in the trade, that Adidas has an unattractive profit line, it is losing market share in a number of categories and has a bigger inventory issue than peers
UBS (neutral, PT €150)
- Based on the tone of the press release, see a high likelihood that the Yeezy business will be “scrapped entirely” going forward, analyst Zuzanna Pusz says
- The update may provide a “reality check” for the market given the re-rating in Adidas shares recently
Credit Suisse (underperform, PT €103)
- The warning underlines the weakness of the Adidas brand and damage to the margin structure of the company, analyst Simon Irwin says
- Assume the cut to guidance driven by weaker gross margins and operating de-leverage, which means much of the margin rebound will have to come from the cost lines
RBC (sector perform, PT to €110 from €130)
- Had been anticipating Adidas would book one-offs in FY23 but the lower underlying guidance has resulted in a “materially worse” outlook than expected, analyst Piral Dadhania says
- See much work to do for Adidas across its corporate culture, on products, on lower sell-through rates, inventory and digesting the Yeezy exit, which can all be achieved but which will take time
- Materially cutting FY23 estimates and continue to prefer Puma and Nike
Baader (reduce, PT €133)
- Outlook is “horrible” and and the cut to the sales and earnings guidance is “much deeper than anybody projected,” analyst Volker Bosse says
Senior leaders at the German sportswear company have learned a valuable lesson not to concentrate large segments of the business on one relationship.
Let’s not forget Beyoncé’s clothing line with Adidas is another flop. The Germans sure know how to pick influencers…