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Adidas Net Income Plunges 97% in Q1

More than 70 percent of Adidas’ stores remain closed as of its most recent earnings report released on Monday, and the German athletic giant expects extreme challenges in the second quarter.

In a Nutshell: Adidas reported a “pronounced” drop in foot traffic in the first quarter, even throughout that remained open stores, and said its revenue patterns directly reflect the trajectory of the coronavirus outbreak.

For example, since Greater China, South Korea and Japan have been dealing with the virus since January, combined sales for Adidas and Reebok in the region are down 45 percent.

“Our results for the first quarter speak to the serious challenges that the global outbreak of the coronavirus poses even for healthy companies,” Adidas CEO Kasper Rorsted said. “I am proud of how our Adidas family has been working together to support both our company and our communities.

“At the moment, we are focused on managing the current challenges and doubling down on the recovery in China and the opportunities we see in [e-commerce],” he added.

The company’s inventory increased by 32 percent in the quarter over the comparable period and was partially offset by an 8 percent decline in accounts receivable and a 23 percent increase in accounts payable.

Sales: In the first quarter, Adidas reported 4.753 billion euros ($5.15 billion) in revenue, a decline of 19 percent compared to the first quarter last year but slightly above the $5.13 billion Wall Street estimate.

E-commerce sales were up 35 percent in the quarter, growing by 55 percent through March once pandemic countermeasures began. Beyond the Asia-Pacific region, sales were up 8 percent during the first two months of the year.

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Income from continuing operations, however, fell by 97 percent in the first quarter to 20 million ($21.66 million) as the company’s stores closed their doors across the world.

Locations in Greater China and South Korea opened up on March 2, Adidas said, but Greater China revenue was still down by 58 percent to 800 million euros ($866.39 million). Product takebacks reached a ‘triple-digit-million euro amount’ in Greater China as Adidas worked to manage inventory.

“At this point in time, more than 70 percent of the company’s store fleet is still closed,” Adidas said. “The company is making use of the flexibility in its operating cost base but largely refraining from measures that would jeopardize future prospects.”

The company expects the top and bottom line to decline in the second quarter in a way that was “more pronounced” than in the first quarter. Adidas expects currency-neutral sales to decline by 40 percent versus the prior year, on top of negative operating income.

Earnings: Due to the 97 percent drop in net income, basic earnings per share fell to 0.13 euros or $0.14, a 96 percent decline from the comparable period in 2019 and far from Wall Street’s $1.29 estimate.

CEOs Take: “Despite the current situation, I am confident about the attractive long-term prospects this industry provides for Adidas,” Rorsted said. “Consumers are developing an increased appreciation of well-being. They want to stay fit and healthy through sports. Our focus on accelerating our own-retail and digital business will serve us even better in the future.”