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Cost of COVID-19? Adidas Could Swallow $1B in Lost China Revenue

Adidas Group is staring down a billion-dollar black hole as the coronavirus pandemic could pulverize Greater-China revenue this year.

In a Nutshell: Adidas revealed how closing a significant number of stores and reduced traffic are weighing on business in Greater China, noting it has experienced “material negative impact” since the outbreak of COVID-19, which has infected more than 115,000 people and killed more than 4,000. Between the Chinese New Year holiday starting Jan. 25 and the end of February, revenue has plunged by 80 percent in the region, Adidas said.

Although it declined to provide an updated outlook for fiscal 2020, Adidas said revenues are currently expected to decrease by between 800 million euros ($902.1 million) and 1 billion euros ($1.13 billion) in Greater China during the next year.

“As the situation keeps evolving, the further recovery in Greater China, the extent of spillover into other countries as well as the availability of raw materials remain largely uncertain,” Adidas said in a statement.

Operating profit is also expected to decline between 400 million euros ($451.05 million) and 500 million euros ($563.81 million).

Most of the the company’s factories are operational again, according to the report, and Adidas said global sourcing has not yet been affected.

“Since the coronavirus outbreak, Adidas has been working closely together with its wholesale partners to ensure inventory levels remain healthy in the market,” the company said. “This resulted in the cancelation of all shipments in February and could lead to the acceptance of a significant amount of product takebacks, which the company plans to clear through its own channels throughout the remainder of the year.”

Adidas has assembled a dedicated task force to develop mitigation policies and safeguard the health and safety of its workforce.

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Sales: Revenue was up 10 percent in Q4, driven by 11 percent growth at the Adidas brand and double-digit gains in its Sport Inspired and Sport Performance categories. In performance, training, running and basketball products also saw double-digit growth.

Reebok grew by 7 percent due to double-digit growth in Sport and high-single-digit growth in Reebok Classics.

Overall company revenue totaled 5.8 billion euros ($6.57 billion), up 12 percent. By region, revenue rose the most in Greater China (18 percent) and North America (10 percent).

Full-year revenue increased by 8 percent in fiscal 2019 to 23.6 billion euros ($26.61 billion) and 6 percent in terms of currency-neutral growth. This was largely driven by high-single-digit growth in Sport Inspired product and mid-single-digit gains in Sport Performance.

Reebok returned to growth in the fiscal year, expanding by 2 percent powered by double-digit North American growth.

E-commerce was the standout channel for Adidas, expanding by 34 percent to nearly 3 billion euros ($3.38 billion) while overall DTC revenue rose by 18 percent, the company said. E-commerce sales now make up one-third of Adidas’ business, up from 30 percent in 2018.

Greater China drove 15 percent growth in fiscal 2109, while the Asia Pacific region grew by 10 percent and emerging market revenue increased by 10 percent.

In the United States, where supply chain shortages strangled revenue in the first half of the year, Adidas still achieved 8 percent sales growth.

The company expects sales to increase between 6 percent and 8 percent in 2020 on a currency-neutral basis.

Earnings: Net income in the fourth quarter reached 167 million euros ($188.31 million) and basic earnings per share was 0.85 euros ($0.96).

For the full fiscal year, Adidas reported 15 percent growth in net income, rising to 1.972 billion euros ($2.22 billion) for basic EPS of 9.97 euros ($11.24).

The company expects net income to increase between 10 percent and 13 percent for fiscal 2020.

CEOs Take: Adidas CEO Kasper Rorsted suggested DTC growth and new initiatives will help the company survive a challenging year.

“In 2019, we proved our resilience and delivered a strong year yet again,” Rorsted said in a statement. “We recorded revenue increases across all regions and our direct-to-consumer business grew double-digits driven by e-commerce, one of our strategic growth areas.

“In 2020, we will stay focused on the execution of our strategy to bring ‘Creating the New’ home and aim for a sixth consecutive year of double-digit bottom-line growth,” he added.