Adidas has bigger problems than Yeezy

Since the beginning of the pandemic, Adidas has been experiencing a nightmare, losing heavily compared to its biggest competitor - Nike. As soon as one problem was solved, another appeared immediately. It started with lockdowns, then there were problems with the supply chain, then there was a scandal in China related to comments about cotton production in Xinjiang province, and in October the company ended its effective cooperation with Ye after the rapper made anti-Semitic comments. It turns out that Adidas has significantly increased its business risk by allowing the Yeezy collection to become the dominant part of operating revenue. Let's take a look at both the health of the company and the reasons why its problems are bigger than just the Yeezy collection.

With catastrophic forecasts for 2023, Adidas shares fall 12%

Last week, after the close of the session on European stock exchanges, the German sportswear company Adidas she announced, that it expects an operating loss of €2023 million in 700 as it has decided not to sell its current stock of Yeezy items pending a review. In October 2022, the company closed cooperation with Ye, formerly known as Kanye West, in connection with the rapper's anti-Semitic comments. This has had a major impact on Adidas' business: lost revenue in 2023 amounted to €1,2 billion, which will significantly reduce revenue this year.

If Adidas decides not to use the remaining Yeezy items in stock for other purposes and sell them under its own brand, these stocks will be written off and operating income will be reduced by an additional €500 million. The company also announces that the value of one-off items, which are an essential part of the strategic review carried out to boost growth in 2024, will amount to EUR 200 million.

Yeezy seems to be the problem, but that's only part of a larger puzzle. Excluding the negative impact of Yeezy's business line on operating income, it can be seen that the company would barely break even this year. This is a significant contrast to previous years. It's one thing that management has allowed a single partner to account for so much of its operating income, thereby increasing business risk; a situation where the company is almost profitless after adjusting revenues of EUR 22 billion for Yeezy, the latter. Things are bad at Adidas.

If we also look at the revenue growth trajectories of Nike and Adidas, we see that Adidas's performance was significantly worse than Nike's, even before the Yeezy problems. This partly explains the decline in revenues in China due to the company's comments about cotton production in Xinjiang province in the context of sanctions imposed on China by Western countries. Combined with the dynamic growth of domestic sportswear manufacturers in the Middle Kingdom and the fact that Chinese consumers choose domestic brands, this significantly affected the operations of the German company. However, even if we ignore the decline in China and problems with the Yeezy collection, this does not explain the lower revenue growth compared to Nike.

With just 45% of Nike's revenue, the aforementioned growing problems, and a year lost to a strategic review, Adidas needs to step up. The company must catch up quickly or risk falling behind and never catching up with Nike.

About the Author

Peter potter - director of equity markets strategy in Saxo Bank. Develops investment strategies and analyzes of the stock market as well as individual companies, using statistical methods and models. Garnry creates Alpha Picks for Saxo Bank, a monthly magazine in which the most attractive companies in the US, Europe and Asia are selected. It also contributes to Saxo Bank's quarterly and annual forecasts "Shocking forecasts". He regularly gives comments on television, including CNBC and Bloomberg TV.