8th Mar 2023 13:06
(Alliance News) - Analysts warn that "a rather long list of tasks lies ahead" for Adidas AG's new chief executive, as its annual results suffered from the aftermath of the Kanye West antisemitism scandal.
Adidas on Wednesday said 2023 will be a "transition year".
Last year was an eventful one for the Herzogenaurach, Germany-based sports apparel maker. It closed its Yeezy sneaker collaboration with Kanye West, after the US rapper and fashion designer's antisemitic outbursts.
It was quite the blow for Adidas, with Yeezy products making up 8% of its annual sales, according to UBS.
Its final quarter suffered a EUR600 million hit to revenue from ending the Yeezy partnership, while challenging market conditions in China brought revenue in the country down 50% year-on-year, and significant inventory takebacks weighed also on revenue growth.
In the fourth quarter, net sales edged 1.3% higher to EUR5.21 billion from EUR5.14 billion.
However, the firm swung to a net loss of EUR513 million from EUR202 million profit, or a loss per diluted share of EUR2.69 from earnings of EUR0.58 per share.
Gross margin during the quarter plunged to 39.1% from 49.0% a year before, driven by higher supply chain costs and a higher spend on promotions.
The firm proposed a payout of EUR0.70 for 2022, down 79% from EUR3.30 the year before. Jefferies described the dividend as "modest."
For the year as a whole, net sales rose 6.0% to EUR22.51 billion from EUR21.23 billion. Net profit plunged 70% to EUR638 million from EUR2.16 billion, as diluted earnings per share fell to EUR3.34 from EUR10.90.
In 2023, Adidas expects currency-neutral revenue to fall at a high single-digit percentage rate.
Adidas also reiterated previous guidance from February, expecting EUR1.2 billion in lost sales, and a EUR500 million hit to operating profit from not selling Yeezy stock. This would bring underlying operating profit to around break-even, and operating loss to around EUR700 million in 2023.
This assumes it does not sell Yeezy stock, though the company said it "continues to review future options" for the Yeezy inventory.
Furthermore, Adidas expects one-off costs of up to EUR200 million in 2023, as part of a strategic review.
"Adidas has all the ingredients to be successful. But we need to put our focus back on our core: product, consumers, retail partners, and athletes," the company said.
"2023 will be a transition year to build the base for 2024 and 2025," said Chief Executive Officer Bjorn Gulden.
"We need to reduce inventories and lower discounts. We can then start to build a profitable business again in 2024."
Gulden has been CEO of the company for just 67 days. "Investors' focus today will be on Bjorn's initial thoughts," Jefferies said.
In November, Adidas appointed the current boss of long-time rival and neighbour Puma SE to take charge of the sportswear firm, as it looked to revive its fortunes.
Adidas and Puma both are based in the town of Herzogenaurach in Bavaria, Germany, where the duo were founded by brothers Adolf Dassler and Rudolf Dassler, respectively.
Adolf, or Adi, founded Adidas before being joined by brother Rudolf. Relations between the duo soon soured, with Rudolf then going on to form what is now known as Puma. The two firms have been rivals ever since.
The new boss seemed optimistic in the release.
However, Jefferies warned: "A rather long list of tasks lies ahead."
Shore Capital Equity Research Analyst Eleonora Dani said: "Adidas' underperformance in 2022 contrasts with Puma's growth, as the company faces a year of reset in 2023."
Last Wednesday, Puma SE touted the efficacy of its business strategy, as it posted its strongest full-year results yet.
This was despite a fall in fourth quarter earnings on volatile consumer demand.
For 2022, the Herzogenaurach, Germany-based company reported sales of EUR8.47 billion, up 24% from EUR6.81 billion a year prior.
Earnings before interest and tax rose 15% to EUR641 million, up from EUR557 million the previous year, while earnings per share were EUR2.36, up from EUR2.07.
The firm declared a dividend of EUR0.82 per share.
Despite its strong annual performance, Puma also warned of the continued threat posed by "geopolitical, macroeconomic and commercial uncertainty". This was reflected in the fourth quarter, which saw a 38% decline in earnings to EUR40.5 million from EUR65.0 million in 2021.
Looking ahead, it expects currency-adjusted sales growth in the "high single-digit percentage range" for 2023, and Ebit between EUR590 million and EUR670 million.
The strength of Puma is significant due to its long term rivalry with Adidas.
"Consumer confidence will have a significant impact on sports players in 2023, and companies are adopting different strategies to tackle the volatile consumer environment," said Shore Capital's Dani.
"Puma plans to prioritise market share gains, even if it comes at the expense of profitability, while Hibbett is focusing on cost savings following a disappointing performance in 2022. Adidas, on the other
hand, will have a year of reset as it focuses on its core products, consumers, retail partners, and
athletes to build a profitable business again by 2024."
Dani also warned that Adidas has an "uncertain" future, though this could create opportunities for other brands like New Balance Athletics Inc to gain more shelf space and sales in stores.
"The Yeezy write-off may open up space for these brands to showcase their products and compete for
consumer attention," Dani added.
Shares in Adidas fell 2.9% to EUR140.30 in Frankfurt on Wednesday afternoon.
Jefferies reiterated its "hold" recommendation for Adidas, with a target price of EUR150.00.
By Sophie Rose, Alliance News reporter
Comments and questions to [email protected]
Copyright 2023 Alliance News Ltd. All Rights Reserved.
Related Shares:
JD Sports