(BFM Bourse) – The sports equipment manufacturer has given up on significant income by ending its collaboration with the rapper. But the fall in the share price of the German group is explained by several other factors, in particular lowerings of forecasts and uncertainties about the direction of the group.
The information made headlines around the world. Adidas cut ties with Kanye West, or “Ye” as he calls himself, this week. The famous rapper was no longer in the odor of sanctity since his recent statements of an anti-Semitic nature.
Under pressure, Adidas had no choice but to end its collaboration with immediate effect on Tuesday, which also implies the end of the production of Yeezy brand items, object of a partnership with the rapper since 2014. .
A far from minor decision for the German group, which indicated that this judgment would cause a charge of 250 million euros on the net profit for its entire 2022 financial year. And which theoretically deprives Adidas of an important source revenue: Royal Bank of Canada estimates the annual turnover generated by Yeezy at between 1.7 billion and 1.8 billion euros, UBS arrives at a similar estimate of 1.75 billion euros. As a result, Adidas stock fell more than 3% on Tuesday.
The Swiss bank also estimates that Yeezy accounted for around 35% of the company’s operating profit, or around 700 million euros. In addition, this announcement has indirectly reduced the evaluation of the personal fortune of Kanye West by Forbeswho thus leaves the club of billionaires in dollars.
“Too Many Fires” to Contain
Still, this odd remains only the most visible part of the iceberg, because the course of Adidas suffered long before this announcement. “It’s the icing on the cake for Adidas, but having a commercial relationship with Kanye West would have been inconceivable anyway,” summarizes Cédric Lecasble, analyst at Stifel Europe.
Since the start of the year, the three-stripe brand has fallen by 61%
on the Frankfurt Stock Exchange, against a 45% drop for its great rival Nike on Wall Street.
Among analysts yet optimistic on the matter, Royal Bank of Canada on Wednesday downgraded its recommendation from “outperformance” to “online performance”, believing that the company had “too many fires” to contain.
The direction of the group is about to change. At the end of August, Adidas thus announced the end of the mandate of the chairman of the management board, Kasper Rorsted, during the next year, obviously creating uncertainty about his successor and therefore about the title. “The danger is that (…) investors remain on the sidelines until the new chairman of the management board is appointed and the changes in strategy or direction are revealed”, explained Deutsche Bank. Adidas has also passed no less than three profit warnings this year, the last of which was last week before its third quarter release.
Marketing and innovation at half mast
Adidas also suffered from difficulties in China. The group “was the most present player in China, a country which represented around 25% of its turnover (and probably between 35% and 40% of its operating profit) against around 20% for Nike and less 15% for Puma”, recalls Cédric Lecasble.
“But the arrival of the Covid and a badly managed inventory situation by the group in the country have upset the situation. Especially since following the desire of Western brands to stop the supply of cotton in the region of Xianjing, due to accusations of forced labor, a burst of Chinese nationalism has been observed. This has caused a strong growth of local competitors of Adidas”, he develops.
The three-stripe brand has also lost ground when it comes to innovation. “Adidas has been less aggressive than its competitors in product innovation following the phenomenal success of its ‘Boost’ technology between 2015 and 2018, a technology which notably enabled it to break into footwear (running) in the United States. Product innovation has run out of steam a little, and a certain weariness of consumers has been felt, “said the Stifel analyst.
Also, the German company was a little less effective in marketing. “Nike has taken a bit of a lead in digital, particularly through its apps, while Puma has managed to be more agile in the use of social networks. Puma, with less resources from Adidas, has been able to gain visibility with women, a public poorly served by sports equipment manufacturers and yet loyal and spendthrift, via collections with, for example, Rihanna or Ariana Grande”, continues Cédric Lecasble.
Expected initiatives
These problems are combined with the current difficulties for the entire sector with inflation which is squeezing gross margins, a strong dollar which is penalizing sports equipment manufacturers – because they outsource most of the products they sell, very mainly in Asia, and invoice their suppliers in dollars – and fears about household consumption in a context of recession.
“If demand holds for the time being, stocks are increasing very sharply, particularly in the United States with problems of overcapacity in supply. This phenomenon is due to a sudden improvement in the supply chain”, adds Cédric Lecasble. UBS explained in a recent note that in an industry known to be cyclical, “the weak brand momentum of Adidas casts doubt on its growth in 2023”.
In the end, “the real question is how long it will take for a new management team to settle in, clean up excess inventory and develop and execute new products and new marketing initiatives”, decided Credit Suisse in a recent note. Which, for that last point “usually takes 12 to 18 months, so unless the new team just approves the existing plans, we may not see real signs of change until 2025,” continued the Swiss bank. A crossing of the desert therefore awaits the Adidas action.
*Classes stopped Friday at the beginning of the afternoon
Julien Marion – ©2022 BFM Bourse
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