Despite reporting meager 2022 revenue growth of 1 percent, and a 1 percent decline in fourth-quarter tallies, Adidas’ new chief executive officer Bjørn Gulden was surprisingly upbeat as he laid out his plans on Wednesday.
Results for the fourth quarter were slightly above what market analysts had expected. Still, Adidas said it planned to slash its dividend to 70 cents versus 3.30 euros per share in 2021. Adidas is also looking at a potential operating loss of 700 million euros in 2023, something the brand has not seen since the early ’90s.
“Elevated recession risks in Europe and North America as well as uncertainty around the recovery in Greater China continue to exist,” the company said in a statement. High inventory levels remain a problem, as does the company’s October 2022 split with longtime collaborator, musician Kanye West, otherwise known as Ye, after his increasingly erratic behavior.
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Industry experts have suggested the Yeezy collaboration was making Adidas between 1.5 billion euros and 2 billion euros a year, and generating around 40 percent of the company’s annual profits, due to favorable pricing.
“If you lose three profit pools in one year, that leaves some marks,” Adidas’ chief financial officer Harm Ohlmeyer conceded during a press conference at Adidas’ headquarters in southern Germany, referring to Yeezy, China and negative shifts in consumer sentiment.
But, as Gulden added optimistically, “we do have all the things we need to be successful. We just need a little bit of time.”
The two executives described 2023 as a year of transition for the activewear giant.
Consumer sentiment and the hangover from the COVID-19 pandemic, with resulting supply-chain problems, meant that excess inventory was going to be an issue for Adidas for the rest of the year, Ohlmeyer explained. High inventory meant more discounting at retail and fewer advance orders.
“But we’ve been there in the past and we know how to work through this,” he noted. The company was ridding itself of excess inventory slowly, channeling products to discount warehouses and trying to improve buyer relationships.
A further issue is what to do with existing Yeezy products, a subject of much recent media speculation. Adidas’ guidance for 2023 reflects a potential loss of 1.2 billion euros, should the Yeezy stock not be able to be sold.
“I was not here when this thing exploded,” Gulden said, “but when it happened, a lot of product was still in the production pipeline. I think Adidas made the right decision to continue to produce [because] if not, 10,000 people in factories would have lost their jobs. So all the orders that were placed in Asia were fulfilled.” These are just now being delivered to warehouses around the world, he noted.
Addressing recent online speculation, Gulden stated that no decisions had been made about what would happen to the remaining Yeezy product and that Adidas had not been in negotiations with anybody on the topic.
There have been “gazillions” of suggestions as to what to do with the leftover Yeezy products, Gulden said. That includes everything from destroying them, donating them to earthquake victims in Syria and Turkey, recycling them, turning them into artificial soccer pitches and, of course, selling them.
If the shoes were sold, then they would be sold as is. Re-labeling them wouldn’t be honest, Gulden said. And even though Adidas has cut ties with Ye, if the shoes were sold, then Ye would eventually receive royalty payments from them, as per his original contact.
But there are problems with almost all the options, Gulden explained, not least because the Yeezy shoes are scattered around the world right now. Adidas is trying to work out what would be the least harmful thing to do, he said.
“We will probably not make profit on this product, if I’m really honest with you,” he told journalists. “But there’s a lot of cost involved with this, depending on what we choose.”
If there was excess cash involved in getting rid of the Yeezy products, then those who had been harmed by the scandal would also receive some of it, Gulden added.
The other major problem for Adidas is an ongoing sales declines in Greater China — around 50 percent in the fourth quarter — because of COVID-19 lockdowns, geopolitical tensions and what Adidas called “company-specific challenges.” Adidas made 520 million euros in sales there in the last three months of 2022, compared to 1 billion euros over the same period the previous year.
This resulted in a total of 3.18 billion euros in revenue from Greater China over the whole of 2022, a decrease of 36 percent altogether, currency adjusted.
Gulden signaled that to tackle this, he planned similar tactics for the Chinese market as he had implemented at Puma. That includes giving Chinese management teams more autonomy in their own territory, making more products for Chinese consumers inside China, and instituting shorter lead times for production.
Elsewhere in Asia Pacific, Adidas’ revenues grew 4 percent, currency adjusted, to 2.24 billion euros last year.
The fourth quarter saw revenues grow in Adidas’ home market of Europe by 12 percent and in the North American market by 6 percent, in currency adjusted terms. This resulted in increases of 9 percent in Europe and 12 percent in North America for the whole year, and revenues of 8.55 billion euros and 6.4 billion euros in those markets respectively.
Sales in Latin America powered ahead 44 percent, currency adjusted over the year, to 2.11 billion euros over the whole year and Gulden also saw potential in India as an emerging market.
Footwear continued to be Adidas’ biggest seller, with sales rising 3 percent, currency adjusted, over 2022, to hit 12.29 billion euros. Although a much smaller category, accessories sales grew 19 percent, currency adjusted, to 1.5 billion euros.
Apparel sales were flat in 2022, with revenues of 8.73 billion euros.
For Gulden, one of the most important factors in the company’s recovery was how well Adidas’ performance products — that is, more technical shoes and clothing made for sportspeople — had done. Revenues in the performance category grew 19 percent in 2022, while lifestyle products fell 5 percent, the company reported.
“If we had negative numbers here [in the performance category] and positive numbers in the fashion sector, it would have been much more difficult to be optimistic,” Gulden admitted.
Speaking about the U.S. basketball market, the new CEO gave a clue as to why. A sportswear brand gains credibility with more expensive to develop technical products on the court, he explained, but makes its money selling more ordinary shoes and classics. “That’s the recipe,” he said.
As for Adidas’ lifestyle and fashion products, the Adidas boss clearly saw some room for improvement. Replacing the Yeezy collaboration was going to be very difficult, he conceded, but thought there was potential in Adidas classics like the Samba, Gazelle and Spezial shoes.
Gulden also confessed that while at Puma, he’d been “very jealous” of the kinds of relationships Adidas had with high-fashion partners like Balenciaga, Moncler, Gucci and Prada.
“I don’t think I would have said no to any of those brands,” he added, but then noted there had been problems in executing the collaborations. “Because of COVID-19, a lot of these things were delayed and then they came, probably too quick, in sequence. I don’t think that was the plan. We would work with those brands in the future — but not four in 18 months.”
Gulden is widely credited as having taken Puma, a smaller competitor, to record-breaking heights. He headed that sportswear company for nine years and left last December, just as Puma proclaimed 2022 its best year for revenues. While not overtly critical, Gulden did let a few criticisms slip during the press conference.
“On the question of mistakes, it’s hard for me to judge,” Gulden told attendees. “That strategy [at Puma] was to be flexible because the world was very unstable. I think Adidas chose a strategy in the middle of COVID-19 and tried to execute it, and that was difficult. You cannot have a two-year strategy if the world is changing. The changes in the world hit Adidas much harder than Puma.”
On the other hand, Gulden believes that a lot of the groundwork for Adidas’ future success have now been laid. “So when we get out of this uncertainty and instability, then a lot of the things that were in the strategy will be an advantage,” he suggested.
For now, the sportswear brand must continue to deal with its current, less happy circumstances. Adidas had already set out its grim forecast for 2023 in February and reiterated those expectations on Wednesday morning, predicting revenues would decline in the high-single digits during the year and that the company would only just break even during 2023. If the Yeezy stock is not sold, it would likely be dealing with a loss.