Adidas Slumps After Fresh Profit Warning

By Geoffrey Smith 

Investing.com -- Shares in Adidas (OTC:ADDYY) slumped to their lowest in over six years on Friday after the German sportswear giant slashed its profit forecasts again in response to ongoing problems in China and a sharp slowdown in developed markets in the last six weeks.

Adidas said it now expects net profit from continuing operations of only 500 million euros this year, down from a previous estimate of 1.3 billion euros, after a shocking 63% rise in inventory over the last quarter that will force it to discount heavily in the coming months to shift surplus stock.

The warning adds to a miserable year for a company whose business is reverting to the mean after initially profiting from the pandemic, enjoying a windfall from spending on leisure and exercise clothing. Its problems have been exacerbated by supply chain problems in Asia due to COVID-19, a politicized trading environment in China, and, among other things, public falling out with Kanye West over the popular Yeezy range of footwear.

As a result, the company now sees sales growth of around 5%, down from a "mid- to high-single-digit" increase previously, while the fire sale of inventory is expected to push the gross operating margin down to 47.5% from a previous forecast of 49%, and the operating margin down to a paltry 4% from a previous estimate of 7%.

Analysts at Morgan Stanley noted that the new forecasts imply fourth quarter margins well below the existing consensus. That leaves the group badly in need of a lift from the upcoming soccer World Cup in Qatar, which begins in late November.

Adidas, whose CEO Kasper Rorsted has already announced his departure, said it had seen "further deterioration of traffic trends in Greater China," a trend that goes back to its troubled relationship with suppliers in Xinjiang, the western province of China where a UN report has identified widespread human rights abuses of the ethnic Uyghur community. In moving to distance itself from those suppliers, Adidas triggered a nationalist backlash in what is now its second-largest market, losing customers to local rivals.

Adidas said it had launched "several initiatives aimed at mitigating the significant cost increases resulting from the inflationary pressure across the company's value chain as well as unfavorable currency movements." It didn't provide any further details.

While these initiatives will cost it 50 million euros in the fourth quarter of this year, they are expected to bolster profitability next year by 200 million.

The new outlook also reflects several one-off costs impacting the company's bottom-line results in both the third and fourth quarters of the year.

Investors will be unnerved by the speed with which Adidas' earlier forecast has "crumbled under the scrutiny of a more stressed consumer," Jefferies analysts said in a note to clients. He added the company needs a quick resolution to its leadership issues to "allow investors to engage on the fundamental merits of the business."

The news triggered a fresh round of downgrades from watching analysts. Stifel cut its price target to 114.80 euros a share from 130 euros previously, while Evercore ISI cut it to "in line" from "outperform" with a price target of 110 euros.