Adidas Split With Kanye West Cause First Annual Loss In 31 Years

Adidas has issued a cautionary statement regarding its separation from Kanye West, citing the potential risk of incurring its first annual loss in 31 years. The sportswear company faces challenges due to the need to write off unsold Yeezy stock and cover one-off costs associated with a strategic review. The warning, which could see shares fall, comes as the company reports fourth-quarter results and warns of a “transition” year before it returns to profit in 2024.
During the Yeezy breakup, currency-neutral revenues in the fourth quarter saw a 1 percent decline, mainly attributed to the discontinuation of the Yeezy partnership at the end of October, resulting in an approximate negative impact of EUR 600 million.Greater China revenue remained weak in the quarter as well, driven by company-specific challenges and inventory takebacks.
Total revenues in 2022 grew 1%, with a strong increase in Performance and a moderate decrease in Lifestyle. However, sales in North America, which was negatively impacted by the Yeezy discontinuation, were lower than expected. Despite the weakness, the company’s operating margin in 2022 was slightly above the mid-point of its guidance.
Anticipated for 2023, the company is projecting an operating loss of 700 million euros due to potential write-offs of its Yeezy stock and an additional $200 million in one-off costs, impacting its overall earnings. It also expects to face a “transition” year before it will return to profitability in 2024, CEO Bjorn Gulden told investors on Wednesday.
Gulden said the sportswear brand will have to find new ways to plug the gap left by Yeezy, which was responsible for about 7% of Adidas’ overall sales during its best periods. The new chief executive, who took over on January 1, pledged to rebuild the bruised brand and its profits.
In a conference call, Gulden said the company is considering several options for its Yeezy product. It could burn or donate the unsold footwear and then repurpose it under a different brand, he said. Or it could sell the Yeezy stock for its current resale value and then give the money to charity.
The company plans to review its Yeezy products and will decide “irrevocably” whether or not to repurpose them. If the company does not repurpose them, it will write off all of its existing Yeezy inventory. That would cost Adidas about $500 million in 2023, along with the one-off costs of its strategic review.
If the company does repurpose the shoes, it could be able to salvage warehouse inventory. That would help lower costs, but the resale price of the shoes has skyrocketed since the split, and it could take some time for Adidas to recoup losses.
The Yeezy brand, which brought in billions of dollars and helped boost Adidas’ profit margins for years, has been discontinued, but the company still has about PS1.1 billion worth of Yeezy inventory parked in its warehouses. If the company does not repurpose the product, it could write off the inventory entirely, costing Adidas another $500 million in 2023.