Adidas reported a sharp decrease in net income from continuing operations impacted by the decision to terminate the Yeezy partnership

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Sports maker Adidas reported a strong decrease in net income from continuing operations up to 83% (€ 254 million in 2022  vs 2021: € 1,492 million) partly related to one-off costs in the amount of € 350 million reflecting the company’s decision to wind down its business in Russia and settled legal dispute with singer Kanye West.

Both basic and diluted EPS from continuing operations also decreased 83% to € 1.25.

Chief executive Bjørn Gulden said “2023 will be a transition year to build the base for 2024 and 2025.“

We need to reduce inventories and lower discounts. We can then start to build a profitable business again in 2024. adidas has all the ingredients to be successful. But we need to put our focus back on our core: product, consumers, retail partners, and athletes. We will work on strengthening our people and the adidas culture. Motivated people and a strong adidas culture are the most important factors to build a unique adidas business model again. We will bring it back to be the best sports brand in the world once again.

In 2022, revenues grew 6%, reflecting increases in all market segments except Greater China. From a channel perspective, adidas’ top-line development was supported by growth in both wholesale (+1%) and the company’s own direct-to-consumer (DTC) business (+2%).

E-commerce revenues increased 4% during the year driven by double-digit growth in North America and Latin America. From a category perspective, currency-neutral revenues in Performance grew at a strong double-digit rate, while Lifestyle revenues declined.

From a market perspective, currency-neutral sales grew at a double-digit rate in Latin America (+44%) and North America (+12%). Revenues in EMEA were up 9% amid the significant adverse impact from the wind-down of the company’s business in Russia.

Sales in Asia-Pacific grew 4% in 2022. In Greater China, revenues declined 36% compared to the prior year level due to the challenging market environment, company-specific challenges as well as significant inventory takebacks.

Gross margin at 47.3%
The company’s gross margin decreased 3.4 percentage points to 47.3% in 2022 (2021: 50.7%). Broad-based price increases were more than offset by the strong increase in supply chain costs, reflecting increased product costs and freight expenses.

In addition, higher discounts, particularly in the second half of the year, a less favorable market, category, and channel mix as well as negative currency developments weighed on the gross margin development in 2022.

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Net income from continuing operations decreased 83% to € 254 million in 2022, partly related to one-off costs in the amount of € 350 million.

At the end of December 2022, inventories increased 49% to € 5,973 million mainly driven by higher product and freight costs, a different order pattern as a result of longer transportation lead times, the termination of the Yeezy partnership, as well as lower prior year comparables due to last year’s impact from the factory lockdowns in Vietnam.

In 2023, adidas expects revenues to decline at a high-single-digit rate as macroeconomic challenges and geopolitical tensions persist.

The company’s revenue development will also be impacted by the initiatives to significantly reduce high inventory levels. In addition, while the company continues to review future options for the utilization of its Yeezy inventory, the guidance already reflects the revenue loss of around € 1.2 billion from potentially not selling the existing stock.

Accounting for the corresponding negative operating profit impact of around € 500 million, the company’s underlying operating profit is projected to be around the break-even level in 2023.

Reported operating loss of € 700 million projected
Should the company irrevocably decide not to repurpose any of the existing Yeezy product going forward, this would result in the potential write-off of the existing Yeezy inventory and would lower the company’s operating profit by an additional € 500 million this year.

In addition, adidas expects one-off costs of up to € 200 million in 2023. These costs are part of a strategic review the company is currently conducting aimed at reigniting profitable growth as of 2024. If all these effects were to materialize, the company expects to report an operating loss of € 700 million in 2023.

The adidas Executive and Supervisory Boards will recommend paying a dividend of € 0.70 per share, reflecting a payout ratio of 49.2% (2022: 40.9%) of net income from continuing operations and is at the upper end of the target range of between 30% and 50% of net income from continuing operations as defined in adidas’ dividend policy.