by (Bloomberg) — Adidas AG shares plunged after the German shoemaker warned it was on a 1.2 billion-euro ($1.3 billion) pile of unsold stock after ending its lucrative branding deal with rapper Ye.
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The German sneaker brand said that in the worst-case scenario, it would face an operating loss of as much as €700 million in 2023 if it were to clear all existing Yeezy inventory. The stock fell 11% and lost half of its value since mid-2021.
“The numbers speak for themselves,” new chief executive Bjorn Gulden said on the company’s website. “At the moment we are not behaving as we should.”
Gulden is looking to refresh a brand plagued by crises on multiple fronts. It is conducting a strategic review aimed at rekindling profitable growth within the next year that could cost up to €200 million in 2023. A loss would be the first in at least three decades.
“It looks like the new CEO wants to lower the bar and act early in 2023 to make the necessary changes” to turn the company around, Cristina Fernandez, an analyst at Telsey Advisory Group, wrote in an email.
The new CEO joined Adidas in January after nearly a decade at the helm of rival Puma, where he spearheaded a turnaround that also initiated by resetting profit and sales growth expectations. His main focus at Adidas will be to reinvigorate the brand’s meager pipeline of sneakers and apparel and win back customers in the US, Europe and China.
Gulden will also need to figure out whether Adidas can sell or repurpose Yeezy designs to customers without the brand name. She previously signaled that profits and revenues were hurt by the damage caused by the demise of the lucrative line, whose shoes previously brought in hundreds of dollars.
Yeezy’s inventory could have brought in 1.2 billion euros in revenue and 500 million euros in operating profit had things gone differently, the company said. If Adidas decides not to reuse any of these products, they will delete their entire Yeezy inventory.
“We have to put the pieces back together,” Gulden said. “I am convinced that over time we will make Adidas shine again. But we need some time.”
The sportswear group ended its lucrative design partnership with Ye, formerly known as Kanye West, in late October after he made a string of anti-Semitic and racist remarks. Adidas had become heavily reliant on the Yeezy line, which he dubbed one of the most successful in the industry’s history, and it took weeks of deliberation within the company before the deal finally closed. Other retailers like Gap Inc. have moved much quicker to sever ties.
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Deciding what to do with unsold inventory can be a headache for apparel and footwear companies. In 2018, Burberry Group Plc came under fire for burning nearly £30m ($36m) of unsold clothes, accessories and perfume to prevent them from being stolen or sold cheaply, which could have caused brand damage. No longer burns unsold stock.
Adidas’ sales will fall at a high-single-digit rate in 2023, according to the German company’s forecast on Thursday. This compares with the roughly 4% growth estimated by analysts.
Adidas will fully focus on consumers along with its athletes, business partners and employees, Gulden said. The goal is to build “brand warmth”, improve products, better serve distributors, and become “a great and fun place to work,” she said.
Adidas is still facing challenges in China, where demand for shoes and apparel has declined due to consumer boycotts and Covid-related restrictions.
Weak full-year results and subdued sales guidance for 2023 mean the new leadership needs to improve execution and brand health, said Poonam Goyal, senior industry analyst at Bloomberg Intelligence.
“We believe the sales guidance goes beyond just €1.2 billion in lost Yeezy sales. It reflects a struggle to attract sales and a steep loss in market share, despite an increase in demand for athleisure worldwide,” she added.
–With assistance from John Lauerman and Eric Pfanner.
(Updates with Burberry unsold merchandise in 11th paragraph)
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