Adidas boss eyes turnaround after Kanye West split

[March 08, 2023]  By Alexander Hübner and Helen Reid

HERZOGENAURACH, Germany/London (Reuters) - Adidas will slash its 2022 dividend, the sporstwear maker said on Wednesday, after warning a split with the artist formerly known as Kanye West could push it to its first annual loss in three decades this year.

Chief Executive Bjorn Gulden, who will speak to investors later in the day for the first time since taking the reins on Jan. 1, pledged to rebuild the bruised brand after dealing with the fallout from ending Adidas' partnership with West, who now goes by Ye, which yielded the lucrative Yeezy sneaker line.

Adidas has not said how much the Yeezy brand has made since its first deal with Ye at the end of 2013, but analysts estimate it accounted for as much as 7% of total sales in its best years.

The company needs to refocus on its core business and faces a "transition" year before returning to profit in 2024, and will return to its sports-based roots, Gulden said.

"You will see us investing in more sports... because that is the DNA of this company," he told reporters.

The company will recommend a dividend of 0.70 euros ($0.7374) per share, down from 3.30 euros a share in 2021, at a May 11 annual general meeting, it said.

Adidas shares were down 2.1% by 1230 GMT. They have, however outperformed rivals Puma and Nike since the start of this year, in a sign that investors back Gulden.

"We believe the shares fail to discount the time it will take to rebuild the brand and margins," Credit Suisse analyst Simon Irwin said in a note.

The company cut ties with Ye in October following a series of antisemitic comments he made on social media and in interviews which also prompted Twitter and Instagram to restrict his accounts on their platforms.

Gulden said Adidas is still deciding what to do with its stock of unsold Yeezy footwear. Burning the shoes poses a sustainability issue, he said, while giving them away to charity is complicated due to their resale value, which has surged since the split.

A pair of Yeezy 350 "Zebra" shoes is now selling for between $340 and $360, compared to around $260 four months ago, according to John Mocadlo, CEO of U.S. sneaker reseller Impossible Kicks.

One option could be for Adidas to donate proceeds from the sale of repurposed Yeezy stock to charity, Gulden said.

Adidas merchandise is seen in an Adidas store on the day the German company terminated its partnership with the American rapper and designer Kanye West, now known as Ye, in Garden City, New York, U.S., October 25, 2022. REUTERS/Shannon Stapleton

The split cost Adidas 600 million euros ($632 million) in sales in the fourth quarter of 2022, and Yeezy shoes would have brought in an estimated $1.2 billion in revenue this year.

Gulden said ending Yeezy - a decision that predated his taking the helm - was the right thing to do but added that it was "very sad" and that it would take time for Adidas to build a new brand that is as influential.

Plugging the gap left by Yeezy will not be easy, Gulden said.

One area of growth he pointed to is a trend for "terrace" style sneakers like the Samba, Gazelle, and Spezial. He cited Adidas stores selling Samba shoes drawing queues of shoppers in China.

"For the first time in a long, long, time people are lining up to buy an Adi product that is not Yeezy."

LESS DISCOUNTING

Overall, Gulden said Adidas needs to reduce inventory levels and do less discounting. Inventories came in at just under 6 billion euros at the end of December, up 49% from the previous year, including 400 million euros of Yeezy products.

The company forecast 2023 underlying operating profit at roughly break-even when taking into account the $500 million loss from not selling existing Yeezy stock.

If Adidas decides not to repurpose the products, it will write the inventory off altogether, denting profit by another $500 million. That, along with $200 million of one-off costs, would bring Adidas to a $700 million loss this year.

RBC analysts said they see the full write-down as the most likely scenario.

Analysts at Wedbush who track new sneaker product launches said Nike is likely to take market share from Adidas in the absence of new Yeezy designs.

($1 = 0.9493 euros)

(Reporting by Alexander Huebner and Helen Reid; additional reporting by Friederike Heine and Uday Sampath Kumar; Editing by Paul Carrel, Matt Scuffham and Emelia Sithole-Matarise)

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