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Adidas CFO: Supply Chain Delays Could Cost $592M in H2 Sales

Count Adidas as the latest major brand experiencing some turbulence abroad as Vietnam factories remain closed due to Covid-19 outbreaks and Chinese consumers slow their demand.

Nevertheless, the German athleticwear and footwear giant is still reeling in the cash, seeing second-quarter sales jump 55 percent on a currency-neutral basis to $6 billion, with net income totaling $482 million. With the performance, Adidas now expects sales growth of up to 20 percent this year. 

In a Nutshell: Harm Ohlmeyer, chief financial officer of Adidas, said in an earnings call that the combined impact of supply chain delays, new Covid-19 lockdowns in Asia and tensions with China could amount to more than 500 million euros ($592 million) in lost sales in the second half.

Adidas hopes to be able to restart production in Vietnam after the scheduled end of a coronavirus lockdown in the Southeast Asian nation’s southern region on Aug. 15. For the time being, Adidas is establishing key mitigation actions, such as reallocating production to other centers, securing additional production capacity, selectively use air freight and redeploying existing market inventory.

Vietnam accounts for 28 percent of Adidas’s sourcing base and its factories mostly manufacture footwear, while 75 of its more than 500 suppliers reside in Vietnam.

“We expect the situation in Vietnam to start improving later this month, leading to a largely operational sourcing network at the end of the third quarter,” Adidas CEO Kasper Rorsted said in an earnings call. “The current interruptions will have a negative impact on our business in the second half, as we will not be able to fully cater to the strong demand for our products.”

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Meanwhile, Greater China was the only market that saw a sales decline, with the 16 percent loss. Like rival Puma, whose China sales dipped 5 percent sales, Adidas is seeing weakening demand likely the product of a state-sanctioned consumer boycott of its products.

“Because of geopolitical tensions, we did see an impact particularly in our online business in the second quarter in China, and we think that will over time normalize,” Rorsted said.

Inventories decreased 22 percent to 4.05 billion euros ($4.8 billion) from 5.21 billion euros ($6.2 billion). While this development was supported by the reclassification of Reebok, inventories were still down by double-digits year-over-year.

The athleticwear and footwear giant saw a double-digit year-over-year decrease in payables amid a normalization of the company’s payment terms with its vendors.

The company’s gross margin increased 0.5 percentage points to 51.8 percent. The positive effects from significantly higher full-price sales and the non-recurrence of last year’s inventory allowances more than offset the negative impact from a less favorable market and channel mix as well as higher sourcing costs. With an improvement of 18.5 percentage points to 10.7 percent, the operating margin almost fully recovered to the pre-pandemic level.

Adidas upgraded its full-year outlook for the second time this year, expecting currency-neutral sales to increase at a rate of up to 20 percent year-over-year in 2021 and strong double-digit improvements seen in all markets. The estimate is an improvement over the initial mid- to high-teens projection.

This new outlook reflects sales growth of up to 7 percent in the second half of the year compared to the 2020 level, which would be well off the first-half growth of 40 percent. The growth is expected to come from new product releases and the start of the club football season in Europe and the kickoff to the NFL season in the U.S., the company said.

Net income from continuing operations is now expected to reach 1.4 billion euros to 1.5 billion euros ($1.66 billion to $1.78 billion), up from the prior range of 1.25 billion euros ($1.48 billion) to 1.45 billion euros ($1.72 billion).

The company’s full-year gross margin forecast remains at 52 percent, while the low end of the expected operating margin range has now increased from 9 percent to 9.5 percent.

Adidas’ profitability outlook continues to include temporary stranded costs related to the intended divestiture of Reebok, which Ohlmeyer expects to conclude by the end of the summer. In 2021, these costs are expected to amount to around 250 million euros ($296 million) on the operating profit level and to impact net income from continuing operations by approximately 200 million euros ($237 million).

The medium-term growth outlook is not impacted by these costs as Adidas anticipates that only around 30 percent of the $296 million will reoccur in 2022 and that by 2023 the stranded costs will be fully eliminated.

Net Sales: Adidas revenues grew 51 percent in the second quarter to 5.1 billion euros ($6 billion) from 3.4 billion euros ($4 billion), or 55 percent on a currency-neutral basis.

From a channel perspective, wholesale revenues as well as sales in Adidas’ own-retail stores grew at a high-double-digit rate during the second quarter of 2021. E-commerce revenues declined 14 percent in the quarter, reflecting the high growth in the prior-year period when digital revenues had almost doubled. 

The top-line expansion in the second quarter was driven by increases in all market segments except Greater China. Currency-neutral sales in EMEA doubled at 99 percent growth to 1.9 billion euros ($2.3 billion), while they jumped 87 percent in North America to 1.25 billion euros ($1.5 billion), reflecting strong double-digit growth versus 2019 levels.

Currency-neutral sales in Latin America increased 230 percent to 348 million euros ($412 million), while the Asia-Pacific region grew 66 percent to 533 million euros (631 million) despite the negative impact from the extended lockdowns in the region.

In Greater China, revenues declined 16 percent to 1 billion euros ($1.2 billion), impacted by a Chinese boycott of Western brands that publicly shared concerns about forced labor in the country’s Xinjiang Uyghur Autonomous Region.

Net Earnings: Second-quarter net income at Adidas was 407 million euros ($482 million), an improvement from its loss of 317 million euros ($375 million).

Net income from continuing operations, which excludes Reebok sales that are now reported as discontinued operations as, was 387 million euros ($458 million), ahead of the 243-million-euro ($288 million) loss last year

Basic earnings per share (EPS) from continuing operations reached 1.93 euros, ($2.29) ahead of the 1.13 euro-per-share loss ($1.34) during the 2020 second quarter.

CEO’s Take: “Our supply chain works in a way where it takes about three to four months before it has an impact, so you should not expect an impact in the third quarter, and of course we’re trying to mitigate the fourth quarter,” Rorsted said on the call, referring to challenges in Vietnam.