Adidas slips to operating loss in fourth quarter amid impact from Yeezy dispute

By Scott Kanowsky 

Investing.com -- Adidas AG (ETR:ADSGN) slumped to a worse-than-expected operating loss in the fourth quarter after sales were hit by its dispute with rapper Ye and a rise in input expenses.

The German sportswear company slumped to an operating loss of €724 million (€1 = $1.0546) for the three months to the end of December, down from a profit of €66M in the same period in the prior year. Bloomberg consensus estimates had seen the loss at €717M.

Quarterly revenues declined by 1%, which Adidas said stemmed from a negative impact of €600M related to its decision to terminate its business partnership with Ye - the performer formerly known as Kanye West - in October after he made a series of controversial remarks. The discontinuation of the so-called "Yeezy" line of products, previously a solid source of top-line growth, had a "particularly strong impact" on North American demand, Adidas noted.

Sales slipped by 50% in China as well due to a tough market environment as the country continues to recover from strict COVID-19 regulations.

"[C]ompany-specific challenges as well as significant inventory takebacks weighed on the company’s top-line development in the quarter," Adidas added.

Elevated supply chain costs and a jump in promotional spending also weighed on gross margin, which decreased by 9.9 percentage points to 39.1%. The fall came despite price hikes designed to help offset these pressures.

Adidas reiterated a warning issued in February that if it decides not to repurpose any of its Yeezy branded products going forward, the remaining unsold inventory will be written off, lowering operating profit by €500M and revenue by around €1.2 billion in its current financial year.

Meanwhile, the firm said it expects to be hit by one-off costs of up to €200M as part of a wider review of its operations.

As a result, Adidas predicted it could now report an annual operating loss of €700M, while currency-neutral sales are seen declining at a high-single-digit rate this year. On an underlying basis, operating profit is forecast to be "around the break-even level."

“2023 will be a transition year to build the base for 2024 and 2025,” said chief executive officer Bjørn Gulden in a statement. “We need to reduce inventories and lower discounts. We can then start to build a profitable business again in 2024."

Shares in Adidas were in the red in early trading on Wednesday.