Adidas has too much to do and cuts its outlook again – Sourcing Journal

Adidas slashed its full-year earnings and earnings forecast, with the German sportswear giant seeing slowing sales and traffic in China and falling demand in key Western markets, boosting inventory and making inevitable markdowns during the holiday season.

Currency-neutral annual revenue is now expected to grow in mid-single digits rather than mid-to-high single digits, while profitability will be reduced. Net profit for 2022 is now expected to be around 500 million euros ($489.7 million), down from around 1.3 billion euros ($1.27 billion) originally estimated.

Adidas stock fell more than 5% by mid-afternoon Thursday as investors reacted to the news.

Promotional activity will lower net income, which has been a thorn in the side of the wider apparel industry this year, as supply chain volatility and previously high consumer demand encourage many brands to source goods. Today, for many companies, this product is either stuck in transit or in a warehouse, and it has become more difficult to unload as demand declines.

In addition to problems in China and bloated inventory – which was up 63% at the end of its third quarter – Adidas said it had a total of 500 million euros ($489.7 million) in one-time expenses that impacted net income for the full year.

Next year, the company expects the non-recurrence of costs incurred this year to have a positive impact on the evolution of net income “in the same order of magnitude”.

Adidas also expects an operating margin of 4% for this fiscal year, down from a previous forecast of 7%. The gross margin outlook is now expected to be around 47.5% instead of the previous 49%.

The lower forecast marks the third time the Beyoncé collaborator has adjusted the outlook downward for this year. Adidas’ first full-year guidance called for currency-neutral revenue growth of between 11% and 13% and net profit of between €1.8 billion (then $1.9 billion) and €1.9 billion. euros (then 2.01 billion dollars). In May, the company said it expected to land at the lower end of that range and also lowered its gross margin expectations.

Two months later, the company again cut its revenue projections to mid-to-high single-digit growth and lowered its forecasts for net profit, gross margin and operating margin.

The full-year outlook drowned out the other important part of Adidas’ financial report, with the sportswear and footwear retailer also revealing that preliminary currency-neutral revenue rose 4% in the third quarter.

Currency-neutral sales in Greater China declined at a “strong double-digit rate”, reflecting continued widespread Covid-19 related restrictions in the market as well as significant inventory reversals. In the second quarter, Adidas saw sales in the region fall 35.1% on a currency-neutral basis.

Excluding Greater China, currency-neutral revenue in the company’s other combined markets continued to grow at a double-digit rate in the quarter. For reference, Adidas’ second-quarter sales also jumped 4%, but were up 14% excluding China. The company did not break down the results by region.

Adidas’ sales rose 11% to 6.408 billion euros ($6.27 billion) in the third quarter. Gross margin fell 1 percentage point to 49.1% and operating margin reached 8.8% in the third quarter, down from 11.7% a year ago . Net income from continuing operations for the third quarter was €179 million ($175.1 million), down from €479 million in 2021 ($468.6 million).

Adidas incurred approximately 300 million euros ($293.5 million) in one-time expenses during the quarter, with the majority of those costs reflecting the company’s decision to end its business operations in Russia.

Additionally, Adidas said one-time costs also had a negative effect on its gross profit. The expenses were related to the acceleration of cash pooling in high inflation countries, recently settled patent disputes with Nike and increased provisions for customs risks.

Completing the full year, Adidas expects double-digit revenue growth in the fourth quarter.

Looking ahead, the sportswear company has implemented a “business improvement” program designed to preserve profitability in 2023. As part of this program, Adidas has launched several initiatives aimed at mitigating increases costs resulting from inflationary pressure on the company’s value chain. than unfavorable exchange rate movements.

In total, the program, which will incur one-time costs of approximately €50 million ($48.9 million) in Q4 2022, is expected to offset headwinds of up to €500 million ($489.3 million). dollars) in 2023. Adidas says the program is expected to generate a positive profit contribution of around 200 million euros ($195.7 million) next year.

Adidas, which will see CEO Kasper Rørsted step down in 2023 and is currently embroiled in a tumultuous falling out with Yeezy shoe partner Kanye West, will release its official third-quarter results on November 9.

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