Adidas cut its full-year income guidance nearly 30 percent Tuesday in response to continued Covid lockdowns in China and in anticipation of a broader “potential slowdown in consumer spending.”
The German sportswear company’s revised 2022 outlook arrived less than a day after Walmart released a similar update warning that increasing food and fuel prices were affecting how customers were spending. The updated forecast—the mega-retailer now expects adjusted earnings per share to decline 11 percent to 13 percent instead of just 1 percent—prompted an 8 percent decline in Walmart’s stock price when markets opened Tuesday morning and erased billions in market cap.
Though Adidas’ lowered guidance accounts for “the more challenging macroeconomic conditions” that have some economists fearing a recession, the sneaker company attributed its new outlook first to the “slower-than-expected recovery” it has seen in Greater China this month.
Adidas’ forecast originally assumed that, absent any “major lockdowns” in the third and fourth quarters, currency-neutral revenues in the region would be flat in the second half. “Given the continued widespread Covid-19-related restrictions,” however, Adidas now expects revenue to decline at a “double-digit rate” the rest of the year, it said.
The company said it has not experienced “a meaningful slowdown” in sell-through or “significant” wholesale cancellations in any other market so far. “Nevertheless, the adjusted guidance also accounts for a potential slowdown of consumer spending in these markets during the second half of the year as a result of the more challenging macroeconomic conditions,” it added.
Adidas now expects currency-neutral revenues to grow at a mid- to high single-digit rate this year versus prior guidance of 11 percent to 13 percent growth. It lowered its gross margin forecast from 50.7 percent to 49 percent, citing lower-than-expected revenues in China and initiatives to clear excess inventories in the same country. It reduced its operating margin prediction from 9.4 percent to 7 percent. It now expects net income from continuing operations to be around 1.3 billion euros ($1.32 billion), compared to a prior range of 1.8 billion to 1.9 billion euros ($1.82 billion to $1.92 billion).
During the second half alone, Adidas anticipates revenue will grow in the double digits, driven by easier prior-year comparables, a “strong product pipeline,” the restocking opportunity with wholesale customers given “unconstrained supply” and support from major sporting events.
Adidas published its updated outlook little more than a week before it is scheduled to release its second quarter earnings on Aug. 4. Though it did not go into full detail about those results, the company said they were “somewhat ahead of expectations.”
Based on preliminary numbers, currency-neutral revenues grew 4 percent driven by “strong” double-digit growth in North America and Latin America and high single-digit growth in Europe, the Middle East and Africa—double-digit excluding the negative impact from Russia and the Commonwealth of Independent States (CIS). Sales in the Asia-Pacific region, meanwhile, returned to growth. In euro terms, sales increased 10 percent to 5.6 billion euros ($5.66 billion).
Its gross margin declined 1.5 percentage points to 50.3 percent and operating margin reached 7 percent, down from 10.7 percent a year earlier. Net income from continuing operations totaled 360 million euros ($364 million), supported by a one-time tax benefit of more than 100 million euros ($101 million).
When Adidas shared its first-quarter results nearly three months ago, Greater China revenues were down by 35 percent—the company’s largest year-over-year drop since sales fell 58 percent in the first quarter of 2020. Overall, Adidas China sales inched up just 3 percent in 2021, even as it lapped the first year of the pandemic. In May, CEO Kasper Rorsted said the company anticipated the “challenging market environment” would continue.