German sports apparel maker Adidas AG saw a significant decline in its stock value after announcing that its projected profit for the year would be much lower than expected. The company revealed that its operating profit for 2024 is anticipated to be around €500 million, which is considerably below the average analyst estimate of €1.27 billion. This decline in profit can be attributed to negative currency movements.

To offset some of the damage caused by the lower profit forecast, Adidas plans to continue selling leftover inventory from its discontinued partnership with rapper Ye, known as Yeezy. Despite the conservative projection, Chief Executive Officer Bjorn Gulden stated that the current scenario is the worst-case situation.

Gulden, who is entering his second year as CEO of Adidas, has a history of providing cautious outlooks that he manages to surpass. This was evident during his previous tenure as CEO of rival company Puma SE. Upon the announcement, shares of Adidas fell by as much as 7.4% on Thursday, resulting in the stock losing half of its value since its peak in 2021. This decline also affected competitors Nike Inc. and Under Armour Inc., both of which experienced drops in US trading on Wednesday.

In an effort to minimize the impact, Adidas plans to sell €250 million worth of remaining Yeezy inventory at cost, rather than writing it off completely. Despite facing a €1 billion currency impact from factors like the devaluation of the Argentine peso in 2023, Adidas expects to regain growth this year through ongoing turnaround efforts. The company forecasts a mid-single-digit percentage increase in currency-neutral sales for 2024, aligning with analyst estimates. Sales are projected to start flat at the beginning of the year and gradually improve each quarter.

Analyst James Grzinic from Jefferies notes that caution is evident in Adidas’ forecast, while Gulden suggests that there may be upside potential in the Yeezy sales, possibly resulting in profitability for the collection. In 2023, Adidas recorded flat currency-neutral revenue, a notable improvement from previous targets. Investors have been closely monitoring the sector for signs of weakness, particularly after Nike voiced concerns about consumer demand in China and Puma warned about the impact of hyperinflation in Argentina.

Adidas could potentially enhance its earnings by generating more profit from its remaining Yeezy inventory, rather than simply recovering costs as initially planned. The company has only written off €12 million of damaged or unusable products. Gulden mentioned the potential for better performance in Yeezy sales, with a third bulk sale of the product already in the works. To improve profitability, Bloomberg Intelligence analyst Sydney Goodman emphasizes the importance of strong execution in areas such as new product development and strengthening wholesale relationships. She believes that achieving a double-digit operating margin may require more time.

Gulden acknowledged that tension in the Red Sea region is causing higher supply costs in the short term. Nevertheless, the company has already secured shipping contracts through the summer. He also mentioned the increase in spot rates, resulting in three-week shipping delays, particularly in Europe. Shipping additional products has become more expensive for Adidas. Despite these challenges, Gulden reiterated the company’s goal of achieving a 10% operating margin by 2026.

Sources:
Reuters
The Wall Street Journal