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Adidas Has Too Much Stuff on its Hands

Adidas has cut its full-year revenue and income forecasts as the German athleticwear giant is seeing a slowdown in sales and traffic in China and sagging demand in major Western markets, pushing up inventory and making markdowns inevitable during the holiday season.

Full-year, currency-neutral revenues are now expected to grow at a mid-single-digit rate rather than mid-to-high-single-digit rate, while profitability will be squeezed. Net income for 2022 is now projected to be approximately 500 million euros ($489.7 million), down from the approximately 1.3 billion euros ($1.27 billion) initially estimated.

Adidas stock dropped more than 5 percent around mid-afternoon Thursday as investors reacted to the news.

Dragging down net income will be promotional activity, 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 stock up on goods. Now, for many companies, that product is either stuck in transit or in a warehouse, and has become more difficult to offload as demand tapers off.

On top of the troubles in China and bloated inventory—which was up 63 percent at the end of its third quarter—Adidas said it had a total of 500 million euros ($489.7 million) in one-off expenses that impacted the net income for the full year.

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

Adidas also anticipates an operating margin of 4 percent this fiscal year, down from a prior forecast of 7 percent. Gross margin outlook is now expected to be around 47.5 percent instead of the previous 49 percent.

The guidance cut marks the third time the Beyoncé collaborator adjusted this year’s outlook downward. Adidas’ first full-year forecast called for currency-neutral revenue growth ranging between 11 percent and 13 percent and net income of between 1.8 billion euros (then $1.9 billion) and 1.9 billion euros (then $2.01 billion). In May, the company said it anticipated it would land on the lower end of this range, and also lowered gross margin expectations.

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

The full-year outlook drowned out the other major portion of Adidas’ financial report, with the footwear and sportswear seller also revealing that preliminary currency-neutral revenues grew 4 percent during the third quarter.

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

Excluding Greater China, currency-neutral revenues in the company’s other markets combined continued to grow at a double-digit rate during the quarter. For reference, second-quarter sales at Adidas also jumped 4 percent, but increased 14 percent when not taking China into account. The company did not break out results by region.

Adidas sales increased 11 percent to 6.408 billion euros ($6.27 billion) in the third quarter. Gross margin declined 1 percentage point to 49.1 percent and operating margin reached 8.8 percent during the third quarter, down from the 11.7 percent margin from one year ago. Third-quarter net income from continuing operations was 179 million euros ($175.1 million), down from 2021’s 479 million euros ($468.6 million).

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

In addition, Adidas said that non-recurring costs also had an adverse effect on its gross profit. The expenses were related to accelerated cash pooling in high inflationary countries, recently settled legal patent disputes with Nike and higher provisions for customs-related risks.

Rounding out the full year, Adidas expects double-digit revenue growth during the fourth quarter.

Looking ahead, the athleticwear company established a “business improvement” program designed to safeguard its profitability in 2023. As part of this program, Adidas has launched several initiatives aimed at mitigating the cost increases resulting from the inflationary pressure across the company’s value chain as well as unfavorable currency movements.

In total, the program, which will result in one-off costs of around 50 million euros ($48.9 million) in the fourth quarter of 2022, is expected to compensate cost headwinds of up to 500 million euros ($489.3 million) in 2023. Adidas says the program should deliver a positive profit contribution of around 200 million euros ($195.7 million) next year. 

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