- Adidas saw its profits fall by more than 70 percent last year and estimates a net operating loss of 700 million for the current year.
- Much of the difficulties stem from the cancellation of the deal with Yeezy, the sneakers of rapper Kanye West, who was fired for his racist and xenophobic comments.
- Adidas estimates that it has Yeezy products valued at more than 1 billion dollars unsold and without much choice.
The German giant continues to analyze the least loss-making alternative to dispose of the accumulated inventory of Yeezy, the sneaker brand owned by the U.S. rapper and which was manufactured and distributed by Adidas since 2007.
The alliance was broken by the company’s decision after Ye, the stage name by which Kanye West wants to be recognized, made racist and anti-Semitic statements on his social networks.
The new CEO of Adidas, Bøjrn Gulden, who has been in the position for two months (he was the head of Puma), spoke this week about the paths the company may take regarding the inventory.
It is not a minor issue, since the unusability of this volume of products will result in sales losses of more than one billion euros by 2023.
One option that Adidas has is to burn the stock, something that according to Gulden leads to problems in the sustainability of the firm.
Another alternative they are analyzing is to donate it to countries that are going through crises, such as Syria or Turkey (which suffered from a series of earthquakes), but he also sees this as difficult due to the very high price for which these items can be resold.
Adidas and the dispute with Kanye West over the Yeezy
Adidas also analyzed the opportunity to recycle the materials that make up the shoes of this brand and use them for various things, for example, to build synthetic turf soccer fields, in addition to the possibility of removing the Yeezy logos and being able to sell them under another name.
Although the latter, according to Adidas’ CEO, was ruled out because they will not try to hide what they are. “That’s not an alternative because you wouldn’t act honestly,” Gulden said.
In that case, the multinational’s CEO slipped as a valid option that of re-selling Ye’s branded products and resorting to donating the proceeds.
He added that there is a large number of people interested in this worldwide. He added that he has only been in office for two months, which is why he does not feel competent to take a measure based on the facts known to him.
In the report they publish every year, presented a few days ago with their 2022 results, Adidas recognizes the relevant effect that the termination of the contract with the singer has had, and sees that the probability of being able to sell these items is between 15 and 30 percent.
Adidas’ numbers (without Kanye West’s branding)
The breakup of the partnership with Kanye West already had the first negative impacts on Adidas’ numbers last year, and will continue to do so in this new fiscal year. The Herzogenaurach-based company closed 2022 with an attributable net profit of more than $610 million, down 70 percent from 2021.
The company explains this decline by the difficult circumstances of the year, with very high cost growth, which could not fully compensate for price increases (and there were increases, in some products by more than 15 percent).
In addition, it is necessary to clarify that the withdrawal from Russia and the problems it continues to have in China, where its sales plummeted by 35 percent annually and by 50 percent during the last three months, add to the above.
Adidas acknowledges in the financial results that the separation of the business with Ye generated a deficit. The company estimates the impact on revenue in the last three months to be approximately 600 million. In addition, its stocks soared by 50 percent due to the accumulation of Yeezy sneakers in its inventory.
Adidas’ outlook for 2023
Far from having solved them, the problems will continue this year.
Adidas estimates that the operating loss will be 700 million during this 2023, 500 million of which is due to the breakup with West.
In its forecast for this year, the company added that the downside risk on the European continent and in the United States, Canada and Mexico, as well as uncertainty regarding the economic recovery in China, will continue to exist.
It will depend on how Adidas’ revenue evolves and how it will be affected to reduce the high level of stock it currently holds.
The German company’s total revenue has been €22.51 billion at the end of 2022, an increase of 7 percent year-on-year.
The results are due to cost growth, the reduction of its net profit by 70 percent, the contraction of its gross profit by 3.5 percentage points and the 65 percent plunge in its operating profit.
Adidas cuts dividend payout (West is partly to blame)
For this reason, Adidas decided to cut its earnings payout by 80 percent to €0.70 per share.
As Bøjrn Gulden explained, this year will be a transitional year with the ultimate goal set for the next two years.
He pointed out that they need to reduce stock and discounts. From there they will be able to build a profitable business again by 2024. The company has everything to succeed again.
On the other hand, it was learned that Adidas will pay more than 15 million euros to Kasper Rørsted, its former CEO
The multinational will pay a total of 16 million euros to the former CEO of the group, who remained in office until the last day of 2022, after four years. The figure includes a severance payment of €12 million and a payment of €3.6 million for the non-compete clause, which prevents him from working for another company in the same sector until 2025.
In addition, €300,000 is added as cover for his contract between November 12 and the last day of 2022. Rørsted had resigned as CEO on November 11.
He was then replaced by Bjørn Gulden, who was in the same position at one of its biggest rivals, Puma.
How the alliance between West and Adidas was born
Adidas and Yeezy formed an alliance that truly transformed the sportswear industry. The collaboration between the German giant and the American rapper began in 2013, and since then, while the Yeezy brand grew exponentially, Adidas raised fortunes.
As it transpired, the collaboration was born out of West’s dissatisfaction with Nike, his former partner. Kanye approached Adidas with a proposal to collaborate on a new line of sneakers that would reflect his unique style and vision.
Adidas accepted because they saw this as an opportunity to capitalize on Kanye’s huge fan base.
The results of the partnership were phenomenal. The Yeezy brand became one of the most sought after in the sportswear industry and his sneakers sold out every time a new model came out.
West’s brand also expanded into other areas after the partnership with Adidas, including apparel, accessories and even a fragrance line.
The alliance began to have conflicts in 2018, when West criticized Adidas for not giving him enough creative freedom and threatened to leave the company.
The two parties eventually resolved their differences and Yeezy continued under the German company’s umbrella.
Statistics show that the partnership has been incredibly lucrative for both Adidas and Kanye West. It is estimated that Yeezy reached a value of over $1 billion, catapulting West to be the highest paid celebrity for several years.
Successful partnerships in sports
The alliance between Adidas and Kanye West is not the only successful partnership in the world of sports business and sportswear.
Nike’s collaboration with Michael Jordan in the 1980s and 1990s revolutionized the basketball footwear industry and remains one of the most successful partnerships in sports history.
Similarly, Puma’ s partnership with Usain Bolt helped the brand increase its visibility and market share.
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