Global sportswear brand Adidas has warned that it may record an annual operating loss this year for the first time in over 30 years. This is due to a loss amounting to 700 billion KRW caused by discontinuing its collaboration with American hip-hop star Ye (formerly Kanye West), who sparked controversy with anti-Semitic and Nazi-sympathizing remarks, dealing a severe blow to the company.
Adidas plans to resolve the crisis by seeking ways to handle the inventory of collaboration products and cutting costs significantly, including drastically reducing dividends.
According to CNBC and other media on the 8th (local time), Adidas announced in its 2022 performance and 2023 outlook that it expects to record an annual operating loss of 700 million euros (approximately 970 billion KRW) this year. This would be the first annual operating loss in 31 years. Adidas explained that 500 million euros of the loss is related to handling inventory of the 'Yeezy' brand, a collaboration with Ye, and the remaining 200 million euros are one-time costs.
Adidas had collaborated with Ye since 2013, releasing Yeezy brand products. However, last year Ye caused controversy with anti-Semitic and Nazi-sympathizing remarks, leading Adidas to terminate the collaboration in October of the same year and cease production of products associated with the Yeezy brand. It is estimated that Adidas’s annual revenue from the collaboration with Ye reached about 2 billion USD.
Adidas’s main headache is the inventory of Yeezy brand products. Adidas estimates the sales loss from this inventory to be around 1.2 billion euros, which it expects will keep this year’s annual operating profit at the break-even point. The announced results show that in the fourth quarter of last year alone, Adidas recorded an operating loss of 724 million euros. The end of the collaboration with the Yeezy brand and one-time costs are seen as the causes of this impact.
Adidas CEO Bjorn Gulden stated that the company is reviewing several options to handle the Yeezy brand inventory, including selling the stock and donating the proceeds somewhere. Typically, many fashion brands destroy such inventory to protect brand value. However, CEO Gulden said the possibility of destruction is low.
In addition to ending the collaboration with Ye, Adidas is also troubled by declining sales in China and shrinking market share due to intensified competition. Adidas’s global sales last year increased by 1% compared to the previous year, but sales in China, its largest single market, decreased by 36% annually.
The worsening performance has also affected Adidas’s credit rating. Global credit rating agency Moody’s downgraded Adidas’s credit rating last month from 'A2' to 'A3', and S&P lowered it from 'A+/A-1' to 'A-/A-2'.
Bjorn Gulden, who took office as Adidas’s new CEO in January, declared this year as Adidas’s 'year of transformation' and said the company will prioritize traditional product lines while cutting costs. Additionally, Adidas plans to reduce dividends from 3.30 euros per share in 2021 to 0.70 euros this year at the annual general meeting scheduled for May 11.
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