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Adidas’ Asia Sales Declines Wipe Out Double-Digit Gains in the West

Though a “strategic partnership” with Foot Locker will offer Adidas a new avenue for long-term growth, Covid-related lockdowns in Asia are dampening its prospects today.

Despite double-digit gains in the West, Adidas’ revenue declined in the first quarter as shutdowns dragged down sales, particularly in China. Released Friday, Adidas’ Q1 results showed revenue up 1 percent year over year in reported terms, but down 3 percent on a currency-neutral basis.

Adidas’ latest earnings arrived just one day after it and Foot Locker announced a “new and enhanced,” “long-term” partnership. The alliance will target more than $2 billion in retail sales by 2025, “nearly tripling” 2021 levels, they said. This year, Adidas expects to generate incremental revenues of “up to” 100 million euros ($106 million) as a result of the partnership.

In a Nutshell: More than 13 months after Chinese consumers first began boycotting Western brands for their statements on Xinjiang, Adidas is still reporting year-over-year sales declines. Covid-related lockdowns in the country are amplifying that “challenging market environment,” it said Friday, prompting the German firm to adjust its 2022 ambitions to the lower end of its previously communicated guidance.

Greater China revenues decreased 35 percent in the first quarter—Adidas’ largest drop in the country since sales fell 58 percent in Q1 2020. In the second quarter of last year, sales declined 16 percent year over year. In the third and fourth quarters of 2021, Greater China revenues fell 15 percent and 24 percent, respectively. Despite registering a 156 percent leap in the first quarter of last year, Adidas sales in the world’s most populous country only inched up 3 percent in full-year 2021.

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Though Asia-Pacific revenue also fell—by 16 percent—during the first three months of the year, the region is expected to return to growth this quarter. In Greater China, however, CEO Kasper Rorsted said the company anticipates the “challenging market environment” will continue.

China’s most recent Covid-related lockdowns have produced “a large number” of store closures, as well as “strong” traffic declines in parts of the country not directly impacted, Adidas said. Given these factors, it expects revenues there will decline “significantly” this year.

Supply chain constraints related to last year’s lockdowns in Vietnam reduced top-line growth once again, this time to the tune of around 400 million euros ($432 million), the sneaker company said Friday. “More than half” of the negative impact was recorded in Europe, the Middle East and Africa (EMEA), it added.

Three months ago, Adidas said the Vietnamese lockdowns, the market environment in China and Covid lockdowns in Asia-Pacific together reduced revenue growth by more than 400 million euros ($422 million) in the fourth quarter of last year. Six months ago, it estimated that challenges in China, lockdowns in Asia- Pacific and supply chain disruptions reduced third-quarter revenue by 600 million euros ($635 million).

Inventories at the end of the first quarter totaled 4.54 billion euros ($4.81 billion), a 15 percent jump versus the prior year on reported terms. On a currency-neutral basis, inventories grew 12 percent.

On Thursday, Adidas and Foot Locker unveiled what they are calling a “long-term strategic partnership.” The “enhanced” relationship will position Foot Locker as Adidas’ lead partner in basketball, accelerate “hype launches” and include the development and expansion of “key franchises” in women’s, kids’ and apparel.

Foot Locker’s leading role in Adidas’ basketball offering—headed up since December 2020 by Fear of God founder Jerry Lorenzo—will span the lifestyle and performance categories, with the retailer developing “exclusive positions” in both areas. The collaboration will also focus on Adidas Originals franchises, including its NMD, Superstar and Stan Smith sneakers, and the “Adidas influencer partnership portfolio,” they said. Foot Locker will also play a “prominent role” in the launch of Adidas’ lifestyle-aimed sportswear product division.

“This close partnership will enable us to bring consumers even more unique, pinnacle products from iconic brands, as well as accelerate our push into apparel, adding new dimension to our assortment and bringing more customers into our ecosystem,” Foot Locker chairman and CEO Richard Johnson said in a statement.

To execute on their new plan, Adidas will provide Foot Locker with a team dedicated to delivering an “elevated” experience in stores and online. This will involve partnering on product development, increased product allocations, “exclusive” Foot Locker positioning, shared marketing spend and an “elevated premium presence” across Foot Locker’s portfolio of brands. The collaborators said they will also increase their digital focus and accelerate the rollout of an Adidas partner program at Foot Locker.

“Consumers will be at the heart of this exciting collaboration and will be able to experience the adidas brand and its key product franchises, as well as new product innovations, at Foot Locker, stronger than ever before,” Rorsted said in a statement.

The partnership arrives months after Foot Locker revealed Nike would pull back on deliveries to the retailer. In 2020 and 2021, the Swoosh brand accounted for 75 percent and 70 percent of its products. Starting in the fourth quarter, Foot Locker expects Nike will comprise no more than 55 percent of its product spend moving forward.

In Nike’s own earnings call in March, CEO John Donahoe attempted to clear up what he described as “some confusion” around the company’s relationship with Foot Locker. He dubbed the retailer one of the company’s “important partners going forward” and insisted it will have “a very distinct role in our marketplace strategy as a wholesaler, with a particular focus on the culture of basketball, on the sneaker culture and on kids.”

Net Sales: Facing challenges on both supply and demand, Adidas’ first-quarter revenues grew just 1 percent from 5.27 billion euros ($5.57 billion) a year ago to 5.3 billion euros ($5.61 billion). In currency-neutral terms, sales fell 3 percent.

Facing supply shortages, Adidas said it chose to prioritize its direct-to-consumer channel. DTC revenue grew 1 percent versus the prior year and 33 percent against the first quarter of 2020. Even though the share of full-price e-commerce sales experienced a double-digit increase, revenues from Adidas’ own digital channels rose just 2 percent in the first quarter. Compared to 2020, e-commerce sales grew 50 percent.

By category, football and outdoor saw the strongest growth with sales up double digits. Running grew at a high-single-digit rate, driven by strong sell-through of Adidas’ new Ultraboost 22 and AdiStar, as well as the broadening of its Solar franchise with the introduction of SolarGlide, the company said.

Regionally, Latin America experienced the strongest revenue gains with sales up 38 percent. North America and EMEA saw 13 percent and 9 percent growth, respectively.

Net Income: Despite a “significantly higher” share of full-price sales and “selective” price increases, “mainly on DTC-exclusive product,” Adidas’ gross margin fell 1.9 percentage points to 49.9 percent. The main driver, it said, was a “significant increase” in sourcing and freight costs. Other negative factors included a less favorable market mix and a tough prior-year comparable in e-commerce. Its operating margin fell from 13.4 percent to 8.2 percent, reflecting additional investments into the brand, DTC and digital, it said.

The company’s net income from continuing operations decreased to 310 million euros ($328 million) from 502 million euros ($531 million) a year ago. Basic earnings per share fell to 1.60 euros ($1.69).

Adidas’ previous full-year forecast called for currency-neutral revenue growth of between 11 percent and 13 percent and net income of between 1.8 billion euros ($1.9 billion) and 1.9 billion euros ($2.01 billion). The company confirmed this guidance, but said it now anticipates it will land on the lower end of this range.

Given the “less favorable market mix due to lower-than-expected revenues in Greater China,” it predicted its gross margin will end up around last year’s 50.7 percent, a downgrade from 51.5 percent to 52 percent.

Adidas confirmed its full-year growth targets for all regions but China. It expects EMEA and Asia-Pacific to grow in the mid-teens and North America and Latin America to grow in the mid-to-high teens. Together, these regions account for more than 80 percent of the company’s business.

Adidas said it expects a return to growth in the second quarter despite a continued sales decline in Greater China and a 200 million-euro ($212 million) impact from supply chain constraints. It predicted “unconstrained supply,” momentum in Western markets, accelerating demand in Asia-Pacific, an “exciting” product pipeline and “major sporting events” will drive net sales growth of more than 20 percent in the second half of the year.

CEO’s Take: “In this environment, characterized by severe external challenges, it is imperative to stay focused on our strategic objectives,” Rorsted said. “While we will remain agile, we will not jeopardize our long-term growth opportunity for short-term profit optimization. We will continue to invest into our brand and partnerships, into our DTC business and digital capabilities to support top-line acceleration and market share gains in our growth markets in 2022.”