German sports sneaker and apparel maker Adidas AG on Wednesday reported sharply lower profit in its third quarter, despite higher net sales. The company also trimmed its fiscal 2022 forecast, mainly reflecting the impact from the recent termination of adidas Yeezy partnership.
As announced on October 25, 2022, adidas terminated its partnership with American rapper Kanye West, who goes by the name Ye. The company then had said that the decision would result in a short-term negative impact of up to 250 million euros on its fiscal 2022 net income due to the high seasonality of the adidas Yeezy business in the fourth quarter.
adidas CFO Harm Ohlmeyer said, “The market environment shifted at the beginning of September as consumer demand in Western markets slowed and traffic trends in Greater China further deteriorated. As a result, we saw a significant inventory buildup across the industry, leading to higher promotional activity during the remainder of the year which will increasingly weigh on our earnings.”
For fiscal 2022, adidas now expects net income from continuing operations of around 250 million euros, operating margin around 2.5 percent, gross margin around 47.0 percent, and currency-neutral revenues to grow at a low-single-digit rate.
In mid-October, the company said it expects full-year net income from continuing operations of around 500 million euros, operating margin around 4 percent, gross margin around 47.5 percent, and currency-neutral revenues to grow at a mid-single-digit rate in 2022.
Further, for fiscal 2023, the company continues to expect the non-recurrence of the one-off costs of around 500 million euros occurred in 2022 to have a positive impact on the net income development in the same magnitude. In addition, it is expected to deliver a positive profit contribution of around 200 million euros next year.
In its third quarter, net income attributable to shareholders dropped 63.8 percent to 347 million euros or 1.91 euros per share from 960 million euros or 4.94 euros per share in the prior year.
Net income from continuing operations declined 86.3 percent to 66 million euros. Basic earnings per share from continuing operations were 0.34 euro, down 85.7 percent.
Operating profit of 564 million euros dropped 16 percent, and operating margin of 8.8 percent declined 2.9 percentage points.
Gross margin was down 1.0 percentage point to 49.1 percent as price increases were more than offset by increased supply chain costs, higher discounting, and an unfavorable market mix.
The company’s net sales, however, grew 11.4 percent to 6.41 billion euros from 5.75 billion euros last year.
adidas’ currency-neutral revenues increased 4 percent in the third quarter reflecting continued double-digit growth outside Greater China.
During the first two months of the period, the company experienced high-single-digit top-line growth, but the month of September was hit by deteriorating traffic trends in Greater China as well as slowing consumer demand in major Western markets..
The company also recorded double-digit growth in e-commerce in EMEA, North America, and Latin America.
The decision to suspend its own operations in Russia reduced revenues by more than 100 million euros.
Revenue growth was the highest in adidas’ strategic growth categories Football and Running, both growing at strong double-digit rates.
Inventories increased 72 percent from last year to 6.315 billion euros as of September 30. On a currency-neutral basis, inventories were up 63 percent.
In Germany, adidas shares were gaining around 120.86 euros, up 0.72 percent.
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