Et’s not so long ago that the world of the three stripes was still in order. Adidas boss Kasper Rorsted was the celebrated man at the head of the sporting goods manufacturer in Herzogenaurach. China was considered the promised land, where brand-conscious young consumers snatched products from the company with the famous three stripes.
In addition, the Dax group trumped with a cooperation with the American rapper Kanye West and the joint brand Yeezy in the lifestyle area. Those times have changed – and not for the good of Adidas. The media is discussing how it can be that the former Henkel boss and now also former Adidas CEO Kasper Rorsted can go home with a severance package worth almost 16 million euros, although the company development at Adidas is ultimately to be desired has left.
The new boss has a lot to clean up
The fact that the musician Kanye West has changed his name and is now called “Ye” shows how times have changed. For Adidas, however, his anti-Semitic omissions were much more drastic, which prompted the group to end the cooperation. Now it’s just a matter of whether the “Yeezy” goods that have already been produced are still being sold.
In the worst case, the sports group faces an operating result of 700 million euros in this financial year. According to the company forecast, a failure to sell the goods should have a noticeable impact on sales of around EUR 1.2 billion and a negative effect on the operating result of around EUR 500 million. A potential write-down of the Yeezy inventory will result in an additional negative impact of €500 million, while a strategic review is estimated at around €200 million.
In view of the Yeezy problem and the difficult market environment as a result of the macroeconomic problems and geopolitical tensions, Adidas expects currency-adjusted sales to decline in the high single-digit percentage range in 2023. However, the Yeezy case isn’t even the biggest construction site new Adidas boss and former Puma CEO Bjørn Gulden has to tackle. Political conflicts and the associated dislike of western fashion and clothing brands in politics and the media made the group’s once highly praised China business difficult even before Corona. In 2022, the decline in sales in China was 36 percent.
The fact that the Beijing government moved away from its “Zero-Covid” policy at the end of last year and that consumption should be boosted in this way is an important building block for Adidas to ensure more positive news again in China .
When will you return to your core business?
For his part, the new boss Gulden has now encouraged patience among shareholders and investors. 2023 should be “a year of transition” to lay the foundation for the following years 2024 and 2025. Inventories would have to be reduced and discounts reduced. “In 2024 we can then start building a profitable business again. Adidas has everything it takes to be successful,” says Gulden.
He should probably order Adidas to return to its traditional core business. Similar to the domestic competitor Puma, the focus should be shifted away from the lifestyle business (again) to sports. This had put Puma on the right track. Another pillar of Gulden’s success at Puma was the proximity to wholesalers, while American industry leaders Nike and Adidas have focused on expanding the “direct-to-consumer” business in recent years.
What does an investor do with the Adidas topic? Anyone who has had the share certificates in their depot for a long time could do well with the motto of the former Adidas advertising icon Franz Beckenbauer “Let’s see, then we’ll see.” After all, anyone who invested 10,000 euros in Adidas shares ten years ago is now looking at a position that is still just under 18,000 euros.
In addition, there are dividend payments, for which the company has shown itself to be a reliable payer up until 2019. At 70 cents per share, however, the dividend for 2022 is now significantly lower than in the previous year and also than analysts had expected on average. For comparison: Adidas had paid out 3.30 euros for 2021. But not only the dividend has left a lot to be desired in recent times. Investors who have relied on Adidas over the past five years have so far been empty-handed when it comes to price development. In the past 24 months, 10,000 euros became 5,400 euros due to the weak price development.
Meanwhile, JP Morgan, for example, believes that Adidas can be successful again quickly. An analysis even mentions the “Gulden Days” here, and Gulden’s statements on the subject of profitability were well received. According to JP Morgan, this should be boosted by the fact that investments for 2023 should be lower than estimated by the analysis house. Therefore, the “overweight” assessment and the price target of EUR 162.00 were confirmed for Adidas shares.
With all the optimism, looking at Adidas’ competitors Puma and Nike in terms of their share price history and recent balance sheets might well make an investor consider other options. Just because you personally like shoes or clothes with the three stripes does not mean that the choice in the depot must be identical.
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