Adidas Q1 Revenues Slump as Yeezy Woes Continue
Former Puma chief executive officer Bjorn Gulden has only been in the top job at Adidas since January but at a quarterly results press conference, he discussed the many changes he’d already been making.
Even as Adidas reported a 1 percent decrease in revenues for the first quarter of the year, the German sportswear giant’s new boss expressed optimism about the brand’s progress so far this year. Adidas had already prepared the market for a disappointing year and the company’s first-quarter results for 2023 were in line with that clouded outlook, even as the company managed to beat market expectations.
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Revenues at the group fell 1 percent to 5.27 billion euros in the first quarter. Market analysts had expected the company’s revenues to fall by 4 percent, and on Friday, Adidas shares rose 8.9 percent to 170.34 euros because a turnaround in the company’s fortunes appeared to be on the horizon.
“[The first quarter] ended a little better than we had expected,” Gulden said in a statement; he previously headed rival Puma but started at Adidas last January. “We still have a long way to go, but I am very happy with the progress we have made and what we have achieved so far,” Gulden stated, while cautioning that 2023 would still be a “bumpy” transitional year.
“Under the circumstances, I think we have done a good job,” he added during an online press conference on Friday morning.
Besides an uncertain economic climate and ongoing geopolitical tensions, Adidas is dealing with the 500 million euro inventory problem caused by the end of its long-running collaboration with the musician known as Ye — formerly Kanye West — and the resulting leftover Yeezy stock. The collaboration ended last October after Ye’s increasingly erratic behavior and offensive comments. But the question of what to do with unsold Yeezy stock remains.
Adidas has said it could lose around 1.2 billion euros if it decides not to sell the product. Gulden pointed out that Adidas’ first-quarter sales growth would have been 9 percent if not for the Yeezy problem.
Adidas is also facing restive investors who say they will vote against the company’s supervisory board at the annual shareholder meeting on May 11, as well as a class action lawsuit launched early this month in the U.S. that accuses its executives of mismanaging the Yeezy situation.
Nonetheless, during the press conference on the first-quarter results on Friday morning, Gulden said he believed there was reason for optimism. In addressing various rumors and explaining how the company had dealt with all of the above over the past few months, the Adidas CEO also offered insights as to how he would be running the second-biggest sportswear company in the world from now on.
Diversification and delegation appear to be key.
For example, “when it comes to Yeezy, it is impossible to replace that with one thing,” Gulden said.
Previously market experts have suggested the Yeezy collaboration could have been making Adidas between 1.5 billion euros and 2 billion euros a year, generating around 40 percent of the company’s annual profits due to the line’s favorable pricing.
Adidas was potentially plugging that financial hole with several different collaborations and product lines, Gulden explained.
Adidas’ Fear of God collaboration, which has been two years in the making, finally launched at Los Angeles’ Hollywood Bowl in mid-April, alongside the Fear of God mainline collection. Gulden described it as a potential “game changer” and sneaker and streetwear aficionados have already suggested the streamlined, luxury looks could well be the “new Yeezy.”
Other partnerships, with the artists Bad Bunny and Pharrell Williams, had also been very successful, Gulden added.
“So you are starting to see a group of partnerships that are having a huge influence in the U.S.,” he continued. “That makes us optimistic that we can again connect to that street culture. It’s a difficult market, in a difficult state, given the inventory and high discounts, but I think we have done all the right things to be successful.”
Adidas will not give the exact numbers of Yeezy shoes that it now has in warehouses around the world but Gulden confirmed that all production on previous orders had been completed by March, and that the company was now sitting on around 500 million euros’ worth of Yeezy product.
Despite speculation, the question of what to do with the product has not been answered, Gulden also said. Selling them, donating them or destroying the shoes: Nothing is off the table right now, Gulden said — although, he added, the company is trying to avoid simply destroying the product.
Adidas’ chief financial officer Harm Ohlmeyer commented on the class action lawsuit based on the Yeezy situation.
The U.S. lawsuit, which covers anybody who bought Adidas shares between May 2018 and 2023, claims executives knew about Ye’s controversial comments and behavior for years yet did little to mitigate the risks of the relationship ending suddenly or controversially, and also “ignored the risks of oversupply of Yeezy branded shoes.”
The lawsuit is based on the fact that Ye was making controversial comments as far back as May 2018 when he said he thought slavery was “a choice” during an interview with the tabloid news organization TMZ. It alleges that Adidas executives ignored this, as well as other erratic and disturbing behavior.
“Unfortunately I was named in the class action lawsuit myself so that’s not a good situation to be in,” Ohlmeyer conceded during the press conference. “But we clearly outright reject all of these unfounded claims and will take all the necessary measures to vigorously defend ourselves.”
Gulden also addressed speculation that the brand’s relationship with musical superstar Beyoncé, who collaborates on the Ivy Park sportswear collection, had ended. There’s no final decision on this, he said, and in fact, there are two more Ivy Park releases to come this year, one in May, to coincide with the singer’s next concert tour, and another drop in September.
Beyond that, “there’s nothing else to communicate…until there’s a decision,” Gulden stated.
During the rest of the press conference, Gulden and Ohlmeyer preferred to focus on Adidas’ new attitude.
The previous corporate strategy developed by former CEO Karsten Rorsted, who departed the company three years before his contract expired, has not officially been replaced. But it seems a more diverse and retailer-and-consumer pleasing policy has been enacted under Gulden.
“We do not talk about ‘own the game’ anymore,” Gulden said, referring to the name of his predecessor’s strategy. “We talk about ‘earn the game.’ It’s very important for us that we win trust back again.”
To do this, Adidas has held large-scale meetings with its retailers, athletes and suppliers over the past three months, both at its home base in Germany and in Jakarta, Indonesia.
Just as he did at Puma, Gulden believes that the key to success is gaining credibility with performance sports products and then using that credibility to sell other products, including archival looks, the latter being something he doesn’t think Adidas has fully exploited yet.
In the first quarter of this year, sales of Adidas footwear grew 1 percent to 3 billion euros, driven by success in performance footwear, particularly in running, football, tennis and outdoor pursuits like hiking. Sales of accessories rose 8 percent to 340 million euros and this too was driven by the football category, the company noted.
Apparel sales fell by 3 percent to 1.9 billion euros. “This product division is particularly impacted by the high inventory levels in the marketplace,” Adidas said. The company executives said they expect inventory problems to have been mostly resolved in the last half of this year.
“We know we have issues on the lifestyle side,” Gulden agreed, “but we really feel there is a change in the energy of the brand.”
This change was mostly led by so-called “Terrace” shoes, he continued. Terrace collections — so called because these casual sneaker styles were what soccer fans first wore on the terraces of stadiums when they came to watch games — include the Samba, Gazelle and Spezial styles. Adidas’ Campus and Superstar styles were also proving increasingly popular.
Adidas also plans more emphasis on “smaller” sports, Gulden said. He wants to bring soccer culture closer to street culture — the return of retro soccer shirts is planned — as well as more emphasis on sports like golf, rugby, women’s boxing and soccer and outdoor sports like hiking. Adidas will also support the upcoming Special Olympics in Berlin this June.
“It’s very important for us to be everywhere where sport is being played or executed,” Gulden said.
In terms of sales territories, revenues in the North American market decreased 19.6 percent. But Gulden pointed out that the sales decline in North America would only have been 5 percent if the Yeezy line was excluded and that the decrease “was in line with our conservative sell-in strategy due to the high levels of inventory and discounts in the market.”
Adidas is changing its approach in the U.S. and opened a new office in Los Angeles about two months ago, the Adidas boss revealed.
“You have to remember the U.S. is a market that is more different from Europe than many people like to admit,” Gulden explained. “[It is] very driven by American street culture. That’s why we decided to move a lot of the product development relevant for the American market to L.A. We are driving our basketball business out of that office…then we will be doing more and more of our street culture product, also out of there.”
The impact of that on product lines likely won’t be visible to consumers until next year though, Gulden added. Similar moves are being made in China. Revenues in mainland China — once one of Adidas’ greatest hopes for growing its business — fell 9.4 percent in the first quarter. But Gulden saw that as potentially positive. Over the whole of last year, Chinese revenues fell 36 percent due to pandemic-related lockdowns and a boycott of Western-made consumer goods.
“China looks to be on the right path,” Gulden suggested. “Of course, it will take time for it to get back to old highs again but I would say right now it looks pretty positive….I am very optimistic about the mid- term outlook for China.”
Adidas is also giving its team in Shanghai, with 45 designers, more autonomy to decide what best serves the Chinese market. The team there can tweak Adidas’ global offerings to suit, or design their own products if they felt something is lacking, Gulden said. Production sourcing for China will also increasingly come from inside the country, reducing duties and costs, and allowing for faster lead times, he explained. This is something that Gulden also put into practice at Puma.
“We in Germany will not be telling them what to sell,” Gulden stated.
In the rest of Asia Pacific, revenues rose 15.6 percent. And in Adidas’ home market of Europe, the Middle East and Africa revenues rose 4 percent. Had Russian numbers been excluded, growth would have been 9 percent, the company noted.
Despite the cautious optimism expressed by company executives and the market’s welcome of Adidas’ first-quarter numbers, the German brand also confirmed its less-than-optimal guidance for the year again: Adidas expects that it will break even as revenues continue to fall at a high-single-digit rate throughout 2023.
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