The tie-up with Foot Locker was announced as Adidas reported a 3% decline in currency-neutral sales as supply constraints reduced its top-line by EUR400m (US$422.5m).
The new partnership sees Foot Locker become the lead partner for Adidas in the basketball category, accelerate energy and hype launches, as well as including the development and expansion of key franchises across women, kids, and apparel.
Including all Foot Locker banners in North America, EMEA, and Asia-Pacific, the new strategic partnership will target over EUR$2bn in retail sales by 2025, nearly tripling levels from 2021. In 2022, Adidas expects to generate incremental revenues of up to EUR100m as a result of the new partnership.
Earlier this year, Foot Locker said it would look to accelerate its own direct-to-consumer efforts by launching a number of private-label lines and lean into existing relationships with brands such as New Balance, Puma and Crocs, after warning Nike’s direct-to-consumer focus would hurt revenues in 2022.
“We are delighted to be deepening our partnership with Foot Locker as we continue to execute our ‘Own the Game’ strategy,” says Adidas CEO Kasper Rorsted. “Consumers will be at the heart of this exciting collaboration and will be able to experience the Adidas brand and its key product franchises, as well as new product innovations, at Foot Locker, stronger than ever before.”
Richard Johnson, chairman and CEO of Foot Locker, adds: “This close partnership will enable us to bring consumers even more unique, pinnacle products from iconic brands, as well as accelerate our push into apparel, adding new dimension to our assortment and bringing more customers into our ecosystem.”
To execute the new plan, Adidas will provide Foot Locker with a dedicated team to deliver an elevated consumer experience both in stores and online to help create demand and elevate the marketplace. This will involve partnership on product development, exclusive Foot Locker positioning, increased product allocations, shared marketing spend, and an elevated premium presence across Foot Locker’s entire portfolio of banners with a special focus on key cities and communities that the companies jointly serve.
Lastly, to provide consumers with a seamless consumer journey, on and offline, both partners will increase their digital focus and accelerate the rollout of the Adidas partner programme at Foot Locker.
Adidas Q1 numbers reflect impact of supply constraints
- Currency-neutral sales down 3% as supply constraints reduce top-line by EUR400m despite strong momentum in Western markets.
- Market challenges, Covid lockdowns hamper growth in Greater China, APAC.
- Sales in EMEA most impacted by supply shortages with half the total negative impact recorded in this market.
- Gross margin declines 49.9% on hike in sourcing and freight costs as well as a less favourable market mix and tough prior-year comps.
- Net income from continuing operations decreased to EUR310m from EUR502m a year earlier.
Outlook FY 2022 updated
Despite several external factors continuing to weigh on industry-wide demand and supply, Adidas confirms its top- and bottom-line outlook for 2022. While the company continues to expect currency-neutral revenues to increase by a rate of between 11-13%, growth is now anticipated to come in at the lower end of this range due to the severe impact from Covid-19-related lockdowns in China. Consequently, net income from continuing operations is also forecasted to reach the lower end of the previously communicated range of between EUR1.8bn and EUR1.9bn.
Because of the less favourable market mix due to lower-than-expected revenues in Greater China, the company’s gross margin is now expected to be around the prior year’s level of 50.7% in 2022 (previously: between 51.5% and 52%).
Due to the most recent widespread Covid-19-related lockdowns in China, which have led to a large number of store closures as well as strong traffic declines even in parts of the country not directly impacted, revenues in Greater China are now expected to decline significantly in 2022. At the same time, the original growth targets for EMEA (mid-teens growth), North America, Latin America (both mid-to-high-teens growth), and Asia-Pacific (mid-teens growth), which combined represent more than 80% of the company’s business, are confirmed and well underpinned by an extraordinarily strong orderbook. The strong underlying momentum in all Western markets and the return to double-digit growth in the company’s Asia-Pacific region are expected to compensate for the lockdown-related revenue decline in Greater China.
Adidas expects to return to growth in the second quarter despite a continued sales decline in Greater China and around EUR200m negative impact from supply chain constraints. In the second half of the year, net sales are expected to grow more than 20% driven by unconstrained supply combined with the strong momentum in Western markets, accelerating demand in Asia-Pacific, an exciting pipeline of innovative products as well as major sporting events.
“In this environment, characterised by severe external challenges, it is imperative to stay focused on our strategic objectives. While we will remain agile, we will not jeopardize our long-term growth opportunity for short-term profit optimization. We will continue to invest into our brand and partnerships, into our DTC business and digital capabilities to support top-line acceleration and market share gains in our growth markets in 2022,” Rorsted adds.
The Foot Locker-Adidas partnership: Analyst reaction
Darcey Jupp, apparel analyst at GlobalData, says: “Adidas’ FY2022 has certainly not started the way it would have hoped, continuing the downbeat momentum of Q4 FY2021 which was plagued by supply- and demand-side challenges.
“Adidas has regularly cited the difficult trading conditions in Greater China as one of its core issues, with yet another poor quarter in the region as sales fell 34.6% on a currency-neutral basis. While Adidas is not alone in its struggles in the country amidst fresh COVID-19 lockdowns and with Chinese consumers turning away from Western brands in favor of domestic players, its troubles are not confined to China, as its sales in Asia-Pacific fell by 15.7% on a currency-neutral basis. While Adidas recognizes that it faces difficulties in both supply and demand, it stops short of truly acknowledging the global extent of its demand-side challenges, as the brand has consistently underperformed Nike and Puma, who are up 7.6% and 44.9% respectively in their comparative quarters versus FY2019. This must be addressed by Adidas sooner rather than later, as it needs to understand why consumers are favouring its rivals, which could be due to poor marketing or weaker product ranges. This will be particularly important in FY2022 with inflation rising globally, as many consumers will trade down from mass market players unless they feel a brand is worth investing extra money in.
“One success for Adidas is its push to increase direct-to-consumer (DTC) sales, and while its DTC channel saw seen a meagre 1% currency-neutral growth this quarter, it outperformed net revenue, and DTC sales were 33% higher versus Q1 FY2020. However, yesterday Adidas announced a long-term partnership with Foot Locker that aims to generate $2bn in global revenue by 2025. While this deal seems contradictory to its DTC strategy, the move cleverly takes advantage of the recent news that Nike will terminate its wholesale partnerships with the retailer in its own DTC push. But as footwear has often been Adidas’ stumbling block, the success of this strategy will be reliant on an upheaval of its product range and marketing.”