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Adidas Facing Historic $750M Disaster Amid Yeezy Fallout

Adidas’ high-profile collaborations are setting the stage for a rocky 2023 for the athleticwear and footwear brand months after the firm broke ties with disgraced hip-hop mogul Ye.

The sportswear giant said it’s still reviewing future options for its Yeezy inventory, which could include releasing the shoes under its own branding. But failing to sell all of the Yeezy footwear it has on its hands would tank Adidas revenue by 1.2 billion euros ($1.29 billion) and send operating profit plummeting by 500 million euros ($537 million).

Adidas also incurred 200 million euros ($215 million) in additional one-off costs related to the company’s attempts to reignite profitable growth in 2024, bringing potential 2023 operating losses to 700 million euros ($752 million).

In total, the projected operating losses would potentially mark the Three Stripes’ first breakeven or worse year since 1992.

The Yeezy problems aren’t the only concerns around Adidas’ A-list celebrities. The Wall Street Journal reported that Adidas’ partnership with 32-time Grammy Award winner Beyoncé delivered a colossal underperformance in 2022.

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The WSJ said sales of the Ivy Park brand tumbled by more than 50 percent to about $40 million last year—coming in well below internal Adidas projections for $250 million in sales that year.

According to documents reviewed by the publication, Ivy Park has been losing money for Adidas while Beyoncé gets approximate $20 million in annual compensation for the deal. The contract between the Grammy-winning pop icon and German company is set to end after 2023, and Adidas executives have discussed either ending or revamping the arrangement, the report said. 

Adidas in 2019 announced its collaboration with Beyoncé, who at the time called it the “partnership of a lifetime.” The company sought to diversify its portfolio with women and hoped to replicate the celebrity success that it already had with Ye, formerly known as Kanye West.

Sneaker industry analyst Matt Powell, formerly of NPD Group and now running his own consulting firm, Spurwink River, wasn’t surprised with Ivy Park’s results.

“The partnership never seemed to be grounded in sales performance,” Powell told Sourcing Journal. “Releases felt incomplete. Timing of releases seemed random. The artist never seemed fully committed to the idea.”

Powell added that there never seemed to be a plan to make this a “truly commercial venture.”

An Adidas spokesperson told Sourcing Journal that the Ivy Park partnership is “strong and successful.”

“As part of our valued strategic partnership with Ivy Park, we continue to be inspired by our collective vision and are proud of the work we have created together,” the spokesperson said. “As a matter of principle, we do not disclose key financial figures for individual product categories.”

Beyoncé at the 65th Grammys. Photo by Emma McIntyre/Getty Images for The Recording Academy

Adidas CEO Bjørn Gulden, who has served in the role since Jan. 1 after leaving the same position at rival Puma, didn’t mince words about the company’s recent overall performance.

“The numbers speak for themselves. We are currently not performing the way we should,” Gulden said in a statement. “2023 will be a year of transition to set the base to again be a growing and profitable company. We will put full focus on the consumer, our athletes, our retail partners and our Adidas employees. Together we will work on creating brand heat, improve our product engine, better serve our distribution and assure that Adidas is a great and fun place to work. Adidas has all the ingredients to be successful: A great brand, great people, fantastic partners and a global infrastructure second to none. We need to put the pieces back together again, but I am convinced that over time we will make Adidas shine again.”

In October, Adidas cut its 2022 forecast to mid-single-digit percentage revenue growth and a 4 percent operating margin. The company will report detailed results for last year on March 8, but it looks like the numbers won’t even reach the downward revisions.

Based on preliminary unaudited numbers, Adidas expects 2022 revenues to increase 1 percent on a currency-neutral basis. In reported terms, sales were up 6 percent to 22.5 billion euros ($24.1 billion), up from 21.2 billion euros ($22.7 billion). Net income from continuing operations was 254 million euros ($271.6 million) in 2022, down significantly from 2021 totals of 1.5 million euros ($1.6 billion).

The company’s gross margin reached was 47.3, falling from 50.7 percent in 2022. Operating margin was 3 percent, down from 9.4 percent in 2021.

The financial distress comes as Adidas continues to change where it is sourcing its apparel products. Cambodia, where Adidas has faced labor complaints, become its top country of origin producing 21 percent of the company’s apparel in 2021, followed by China with 20 percent and Vietnam with 15 percent.

This is a major turnaround from a mere decade ago. In 2013, China was Adidas’ biggest producer of apparel at 33 percent of total volume, followed by Indonesia with 11 percent and 10 percent for Vietnam, with only minimal operations in Cambodia at the time. This has steadily increased over the last 10 years as the company has sought to diversify away from Mainland China, a shift that has been accelerated by the Covid-19 pandemic.

Footwear sourcing is a different story for Adidas, with Indonesia representing the company’s largest sourcing country with 36 percent of the total volume, followed by Vietnam with 30 percent and China with 15 percent. Production volumes in Vietnam dropped precipitously from 2020’s 42 percent of footwear due to government-mandated Covid-19 lockdowns that forced factories in much of the country to shutter.