Adidas shares soar despite company "hurting" from Yeezy split

(Alliance News) - Adidas AG on Friday said its performance over the first quarter of 2023 was "a little better" than expected, despite swinging to a loss after ending its Yeezy collaboration with Kanye West.

For the three months ended March 31, the Herzogenaurach, Germany-based sports apparel maker swung to a net loss of EUR30 million, down from net income of EUR490 million a year prior.

Pretax income took a similar fall, declining 92% to EUR32 million from EUR411 million.

Russ Mould, investment director at AJ Bell, said: "Like someone trying to wipe dog mess off a pair of pristine white trainers, Adidas' efforts to leave the controversy over its association with rapper Ye behind it are only proving partially successful so far."

In 2022, Adidas closed its Yeezy sneaker collaboration with Kanye West, following the US rapper and fashion designer's antisemitic outbursts. It was a major financial and reputational blow for Adidas, with Yeezy products having made up 8% of its annual sales, according to UBS.

Its final quarter suffered a EUR600 million hit to revenue from ending the partnership.

Net sales in the first-quarter amounted to EUR5.27 billion, a 0.5% year-on-year fall from EUR5.30 billion. However, it had been expected to report a 4.3% sales shrink, according to company-compiled consensus.

"On the plus side," AJ Bell's Mould continued, "the company's quarterly earnings did beat expectations."

Analysts at Jefferies, however, said parsing Adidas's results was an "inherently challenging operation" given industry inventory challenges, Yeezy deconsolidation, and the unwind of supply chain disruption last year.

"Today's first quarter results show a business tracking ahead of full-year organic growth guidance, even if it is still in the weeds of transformation efforts and concerns remain around the health of US/European consumers," the analysts commented.

Chief Executive Officer Bjorn Gulden admitted on Friday that the decline in the company's Lifestyle segment and the loss of Yeezy were "hurting" the company.

More positively, however, Gulden pointed to positive trading for its Terrace segment and better-than-expected sell-out growth in Greater China. This, he said, was making the firm "optimistic" for the rest of the year.

Victoria Scholar, head of investment at interactive investor, noted that investors were also optimistic about the new CEO himself, thanks to his "impressive" CV which includes his recent nine-year term at long-term rival Puma SE, at which he helped "spearhead the brand's revival."

Looking ahead, Adidas continues to expect currency-neutral revenue to decline at a high-single-digit rate as macroeconomic challenges and geopolitical tensions persist.

It added that, although it continues to review options for the utilisation of its Yeezy inventory, guidance reflects a revenue loss of around EUR1.2 billion from potentially not selling the existing stock.

Underlying operating profit is projected to be around break-even in 2023.

UBS said that though the market may comment that Adidas's outlook is "conservative" the company's future largely depend on its actions to reduce sell-in to the channel.

The broker also noted several "encouraging" signs for the firm: a better than expected Greater China performance, its inventory reduction being on track and signs of underlying brand momentum, with the company now scaling-up the Gazelle, Samba and Campus franchises.

Adidas closed 8.9% higher at EUR170.34 in Frankfurt on Friday. The stock is 6.1% lower over the past 12 months.

By Heather Rydings, Alliance News senior economics reporter

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