The German sportswear giant needs new products that can bring the same brand heat and profits the canceled Yeezy collaboration did, and especially in North America.
Adidas recently released a new version of its iconic Superstar sneaker. COURTESY: ADIDAS
BERLIN — Adidas’ canceled collaboration with the rapper formerly known as Kanye West continues to hang over the German sportswear giant.
Explaining the company’s second-quarter results at an online press conference in Germany on Thursday morning, Adidas executives returned repeatedly to the topic and presented numbers on the company’s earnings, both with and without Yeezy, the line West had helped design.
In currency neutral terms, Adidas’ sales in the second quarter were relatively flat, bringing in 5.34 billion euros in the three months to June 30. Last year’s sales over the same period totaled 5.6 billion euros.
That brought the German brand’s revenues to 10.62 billion euros for the first half of 2023.
This was as expected, the company’s chief executive officer Bjørn Gulden said in a statement. “We are happy with the way the second quarter developed. 2023 is not about trying to show short-term results,” he explained, adding that he didn’t expect to see “a good and profitable Adidas” until 2025.
Without the Yeezy sales, revenues would have been lower. But not by much, Gulden was eager to point out. The success of the Yeezy drop only added around 1 percent extra to Adidas’ growth in the second quarter, he noted.
Adidas severed ties with longtime collaborator West last October after his erratic behavior, hate speech and antisemitic comments caused international controversy. This left a significant hole in Adidas’ earnings — sector experts have suggested the collaboration could have been making Adidas as much as 1.5 billion euros and around 40 percent of the company’s annual profits due to the line’s favorable pricing.
“We have inherited a situation that was very unfortunate,” Gulden told journalists. “I think the Yeezy business and the [Nike] Jordan business were the only two collabs in the world that were creating these kind of premiums over a longer period. Our task now is to limit the damage, get rid of the inventory, use the proceeds for good and lead the business without Yeezy.”
Adidas eventually decided to sell leftover Yeezy products and donate part of the proceeds to organizations fighting antisemitism and other forms of prejudice. The first batch of Yeezy products went on sale in May and was comprised of between 15 and 20 different models (depending on the market), all produced in 2022. These were mostly premium products, with some models costing more than $200 and the majority sold out at full price, Adidas said. This brought in around 400 million euros during the second quarter.
Adidas adjusted its guidance for 2023 in late July, thanks to the extra income it gained from Yeezy sales. Previously the company expected revenues to decline at a high-single-digit rate. Now it forecasts declines in the mid-single digits. And instead of an operating loss of around 700 million euros for the whole year, Adidas now expects this to be closer to around 450 million euros.
But there could be more changes to guidance later in the year depending on how the second drop of Yeezy products, which started Aug. 2, sells.
Some might say that Adidas is being too conservative with its forecasts, Gulden said. But, he argued, “there are so many uncertainties floating around [the Yeezy sales].”
These include such things as which channels to sell through, which retailers to partner with and how successful sales will be, as well as the product mix in each batch. The current Yeezy drop involves 10 different models and has a wider mix of products, including things like the less costly, foam Yeezy Slides.
“We’ve said from the beginning that we will report upsides when the upside is there,” Gulden explained. “When it gets to Yeezy, we will report that when it’s in the pocket. I would caution against extrapolating that Yeezy will make things better and better.”
Proceeds from recent sales of Yeezy will go toward production costs and some will also go to Kanye West, with whom Adidas is in arbitration. Adidas also has around 100 million euros ready for donation to various causes and has already given away 10 million euros. It takes a while to organize the donations and there are also costs involved in that, Gulden said. “You can’t just write out a check,” he joked.
While the company’s second-quarter results came in ahead of market expectations, experts in the sector have also suggested that the loss of the Yeezy collection has led to a serious lack of brand heat for Adidas in North America.
In North America, Adidas sales fell 16 percent to 1.4 billion euros in the second quarter. If it were not for the Yeezy sales, the drop in North America would have been 20 percent, Adidas executives conceded.
“The departure of Yeezy has had a profound impact on Adidas’ brand perception, particularly in North America,” said Alex Smith, global sector lead for consumer business at the U.K.-based asset manager Third Bridge.
Asked what was going wrong for Adidas in the U.S., Gulden told WWD it was a complex environment and that both internal and external factors were wearing on the group’s performance there.
Supply chain and logistics issues following on from the COVID-19 pandemic meant that retailers first had too little stock, then too much, which then led to discounting. The same external factors were also impacting Adidas’ competitors, Gulden said.
“Then, on our side, we were very dependent on what Yeezy was bringing,” he confirmed. “It’s been a difficult issue for us in America — Yeezy was a big part of the business — so that made things more difficult for us. Then I think we didn’t launch Fear of God as we should have done, from a timing point of view, which gave us some problems in the basketball business.”
It has also taken longer than expected to set up Adidas’ Los Angeles office, from where U.S.-specific and basketball-related products would be created.
“But I think we have all the ingredients to turn this around,” he argued. “We need to get through the slow moving inventory, we need to get closer to our American retailers, we need to think more about the way we go to market and we have to invest more in American sports. The recipe is there but going from saying to doing takes time.”
Gulden believes things will start to look more positive for Adidas in North America toward the second half of 2024.
Meanwhile, sales in Adidas’ home market of Europe remained comparatively static, with a decrease of just under 1 percent in currency neutral terms to 1.98 billion euros. Again, Gulden admitted, this wasn’t satisfactory, especially not for Adidas’ home market.
The company has various initiatives ongoing to tackle that, he said, including this week’s renegotiation of the company’s existing gear sponsorship deal with British soccer club Manchester United. Valued at 1 billion euros over 10 years, it is apparently the biggest such deal in the history of the British Premier League.
Elsewhere, sales in Latin America and Asia Pacific were positive, with increases of 30 percent and 7 percent, respectively.
Adidas also saw a 16 percent increase in sales in Greater China and Gulden said the brand was happy to be able to work together with Chinese celebrities again over the past month. Major Western brands were unable to do so for about three years because of a politically motivated boycott of Western-made products.
Adidas also planned to invest more in sports in China, Gulden said. “We see performance [sports] as a major vehicle in a huge market,” he explained of the brand’s plans for China.
In terms of product categories, sales of footwear rose 1 percent in currency-neutral terms in the second quarter to 3.11 billion euros. Apparel sales fell 3 percent to 1.82 billion euros, with the lifestyle category very slightly up and sportswear slightly down.
When it comes to fashion and street style, this is another area where the company is trying to make up for the attention that Yeezy had previously brought it. The collaboration with British designer Grace Wales Bonner is selling well, as are the so-called “terrace” shoes — the Gazelle, the Spezial and the Samba — and the retro Adicolor looks, Gulden said. He plans to harvest more looks from Adidas’ archives, including — next up — ’70s-style running shoes. Gulden also categorically ruled out making any kind of Yeezy lookalikes.
“We have the world’s best archive and we need to use it properly,” he noted.
Sales of Adidas accessories and gear grew 8 percent over the second quarter to 405 million euros. This growth was driven by increased interest in football, Adidas explained.
https://wwd.com/business-news/financial/adidas-q2-flat-guidance-raised-400-million-yeezy-1235759983/
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