Adidas AG, the renowned German sportswear company, has announced that its profits for this year will be negatively impacted by unfavorable currency movements. However, the company has a plan to mitigate some of the damage by continuing to sell the remaining inventory from its defunct partnership with rapper Ye, known for his Yeezy brand.
In a statement released on Wednesday, Adidas stated that it expects to generate an operating profit of approximately €500 million ($542 million) in 2024. This projection falls below the average estimate of €1.27 billion provided by analysts. Despite acknowledging their current financial performance, Chief Executive Officer Bjorn Gulden expressed optimism, stating that the company's teams are displaying the old Adidas DNA and that their agility and attitude are back on track.
Unfortunately, the announcement had a negative impact on the company's shares, with Adidas's American depositary receipts falling 7.8% in New York trading after the close of European exchanges. Nike Inc. and Under Armour Inc. also experienced extended declines in response to the news.
In an effort to recoup losses, Adidas revealed that it will be selling the remaining Yeezy inventory at cost, generating sales of €250 million. This decision aims to avoid writing off the inventory completely. However, it remains to be seen whether Adidas can enhance its earnings by extracting additional profit from the remaining Yeezy inventory, as opposed to just recovering costs. Currently, only Yeezy inventory that is damaged or unsellable in specific sizes has been written off.
Despite the impact of a €1 billion currency loss, which includes factors such as the devaluation of the Argentine peso in 2023, Adidas remains hopeful of returning to growth this year. The company has been implementing turnaround efforts in response to concerns about global demand for sneakers and sportswear. Adidas projects that currency-neutral sales will increase by a percentage in the mid single digits in 2024, aligning with analyst estimates. The company anticipates that sales will start off "flattish" this year but will improve steadily throughout the year.
Bjorn Gulden, who is entering his second year as CEO of Adidas, inherited numerous challenges from his predecessor. However, Gulden is well-known for offering conservative outlooks early in the year and consistently surpassing them, a pattern that characterized his successful tenure as CEO of Puma SE. In 2023, Adidas managed to maintain flat currency-neutral revenue, surpassing its earlier forecasts.
With concerns arising from Nike's doubts about consumer demand in China and globally, as well as Puma's warnings about the impact of hyperinflation in Argentina, investors have been searching for signs of weaknesses in the sportswear sector. If Adidas can successfully maximize profits from the remaining Yeezy inventory, rather than merely recovering costs, it could potentially boost its earnings. To achieve improved profitability, execution in areas such as developing new products and strengthening wholesale relationships will be crucial, according to Bloomberg Intelligence analyst Sydney Goodman. However, achieving a double-digit operating margin may require more time.