adidas’ sales decline in Greater China reflected the continued widespread Covid-19-related restrictions as well as significant inventory takebacks, however its currency-neutral revenues in other markets combined continued to grow at a double-digit rate during the third quarter.
The company’s sales increased 11% to EUR6.408bn (US$6.27bn) in Q3 and the gross margin declined 1 percentage point to a level of 49.1% and operating margin reached 8.8% during the third quarter, compared to 11.7% in 2021.
Net income from continuing operations was EUR179m in Q3 compared to EUR479m in 2021. The bottom-line development during the quarter reflects several one-off costs totaling almost EUR300m on the net income level. The majority of these expenses reflect the company’s decision to initiate the wind-down of its business operations in Russia.
Adidas explains non-recurring costs related to accelerated cash pooling in high inflationary countries, a recently settled legal dispute as well as higher provisions for customs-related risks also had an adverse effect on its gross profit, operating overheads as well as financial and tax expenses in the quarter.
Adidas’ lower full year guidance
Adidas’ new full year guidance takes into account a further deterioration of traffic trends in Greater China as well as a significant inventory build-up as a result of lower consumer demand in major Western markets since the beginning of September, which is expected to lead to higher promotional activity during the remainder of the year. The new outlook also reflects several one-off costs impacting the company’s bottom-line results in both the third and fourth quarter of the year.
Plus, it takes account of the higher clearance activity to reduce elevated inventory levels (up 63% on a currency-neutral basis at the end of Q3) as well as total one-off costs of around EUR500m on the net income level in 2022.
It now expects currency-neutral revenues for the total company to grow at a mid-single-digit rate in 2022, whereas previously Adidas’ guidance was at a mid-to high-single-digit rate, reflecting double-digit revenue growth during the fourth quarter.
This growth will be driven by the company’s strong product pipeline, support from the FIFA World Cup 2022 as well as easier prior year comparables.
The company’s gross margin is now expected to be around 47.5% in 2022, it was previously around 49%. Consequently, the company’s operating margin is now forecasted to be around 4% in 2022 and previously it was around 7%). Net income from continuing operations is expected to reach a level of around EUR500m, compared to EUR1.3bn last year.
In 2023, the company expects the non-recurrence of the one-off costs of around EUR500m occurred in 2022 to have a positive impact on the net income development in the same order of magnitude. In addition, in light of the challenging market environment adidas established a business improvement program to safeguard the company’s profitability in 2023. As part of this programme the company has launched several initiatives aimed at mitigating the significant cost increases resulting from the inflationary pressure across the company’s value chain as well as unfavourable currency movements. In total, the programme, which will result in one-off costs of around EUR50m in the fourth quarter of 2022, is expected to compensate cost headwinds of up to EUR500m in 2023. In addition, it is expected to deliver a positive profit contribution of around EUR200m next year.
What the analyst says about Adidas’ lower full year 2022 guidance
GlobalData apparel analyst Darcey Jupp tells Just Style exclusively: “The news of Adidas reducing its full year guidance is unsurprising, as the sportswear giant has struggled to remain competitive despite the continuing demand for sportswear, and now the persisting macroeconomic pressures are only adding to its woes.”
She continues: “The upcoming FIFA World Cup should be a good time for Adidas to see an uplift in sales, as football has been one of its top growing categories this year. It provides the kit for some of the top teams including Argentina, Spain and Germany, and with the tournament coinciding with the Christmas season this year, kit sales will likely be boosted by festive demand.”
Adidas’ wind-down of Russia operations
In terms of Adidas’ operations in Russia, the company says: “We can confirm that Adidas has initiated the wind-down of its business operations in Russia as the company believes that a resumption of operations is not possible for the foreseeable future. The company has already taken initial steps in recent weeks to close its stores in the region and will wind-down its business in the coming months.”
The priority for Adidas is a responsible implementation of the measures and the support of the employees and partners affected by the decision. In the interest of its employees and consumers, Adidas says it deeply regrets this development.
Initially, at the beginning of March, Adidas suspended the operations of its own stores and its online business in Russia.