Adidas expects sale of Yeezy inventory to further drive results

In the second quarter of 2023, currency-neutral revenues were flat at Adidas versus the prior-year level and in euro terms, the company’s revenues declined 5 percent to 5.343 billion euros.

Even in the first half of 2023, currency-neutral revenues were flat, while in euro terms, revenues decreased 3 percent to 10.617 billion euros.

On August 2, the company launched a second drop of Yeezy inventory. If successful, the company expects this second drop to further improve the results.

Commenting on the trading update, Adidas CEO Bjørn Gulden said in a statement: “Although we still have too much slow-moving inventory in the market, sell-through has been improving. The operating profit of 176 million euros was substantially higher than our initial plans. The sale of the first part of the Yeezy inventory did of course help both our top and bottom line in the quarter.”

“We will continue to carefully sell off more of the existing Yeezy inventory. This is much better than destroying and writing off the inventory and allows us to make substantial donations to organisations like the Anti-Defamation League, the Philonise & Keeta Floyd Institute for Social Change and Robert Kraft’s Foundation to Combat Antisemitism. And it is of course also helping both our cash flow and general financial strength,” added Gulden.

Highlights of Adidas’ Q2 results

The company said that the top-line development continued to be impacted by the company’s conservative sell-in approach in order to reduce high inventory levels, particularly in North America and Greater China.

Adidas second quarter revenues benefited from the first sale of some of its Yeezy inventory. The initial product drop in June generated revenues of around 400 million euros in Q2, which is largely in line with the Yeezy sales generated in the prior year’s quarter.

The company’s footwear revenues grew 1 percent during the quarter, reflecting strong growth in football, basketball, tennis and US sports. Apparel sales declined 3 percent in the second quarter, while accessories grew 8 percent driven by growth in football.

Lifestyle revenues were down despite demand for the company’s Samba, Gazelle and Campus franchises. Sales in the adidas Performance categories continued to show positive momentum.

As a result of the company’s initiatives to reduce high inventory levels, currency-neutral sales in wholesale declined 10 percent despite double-digit growth in Greater China and Latin America. At the same time, direct-to-consumer (DTC) revenues grew 16 percent versus the prior year driven by 14 percent growth in both the company’s e-commerce business as well as 19 percent growth in the company-owned retail stores, reflecting continued strong sell-out trends across most regions.

Currency-neutral sales in North America declined 16 percent during the quarter. Revenues in Greater China grew 16 percent in Q2, reflecting double-digit sell-out growth in both wholesale and company-owned retail. Sales in EMEA were down 1 percent despite double-digit DTC growth. Revenues in Asia-Pacific increased 7 percent during the quarter, driven by strong double-digit growth in DTC. Latin America increased 30 percent, reflecting strong growth in both wholesale and DTC.

The company’s second quarter gross margin increased 0.6 percentage points to 50.9 percent, while operating profit reached 176 million euros, resulting in an operating margin of 3.3 percent and net income declined to 96 million euros with basic EPS decreased to 0.48 euros.

Review of first half performance at Adidas

In the first half, the company added that the discontinuation of the regular Yeezy business represented a drag of around 400 million euros on the year-over-year comparison during the first half of the year.

The company’s gross margin declined 2.3 percentage points to 47.9 percent, while Adidas generated an operating profit of 236 million euros compared to 828 million euros during the first six months of 2022 and net income declined to 73 million euros with basic and diluted earnings per share declining to 0.29 euros.

Adidas expects revenues to decline at a mid-single-digit rate

Impacted by the initiatives to significantly reduce high inventory levels, Adidas now expects currency-neutral revenues to decline at a mid-single-digit rate in 2023.

The company’s underlying operating profit – excluding any one-offs related to Yeezy and the ongoing strategic review – is still anticipated to be around the break-even level. Including the positive impact from the first Yeezy drop of around 150 million euros, the potential write-off of the remaining Yeezy inventory of now 400 million euros and one-off costs related to the strategic review of up to 200 million euros, the company now expects to report an operating loss of 450 million euros in 2023.