Adidas: brand set to lose more ground as Yeezy losses widen

New chief executive Bjørn Gulden did more than throw out the kitchen sink at Adidas: he booted it clear out of the field. The former head of Puma delivered a hefty profit warning ahead of unveiling plans next month to fix the trainer maker’s brand. The German company continues to reel from its failed collaboration with Kanye West. It severed the link after the rapper made antisemitic remarks and behaved inappropriately in meetings.

An operating loss of at least €200mn is expected this year. A full writedown of West’s Yeezy branded inventory would widen losses to €700mn, unless Yeezy gear is repurposed. That is unlikely.

Former boss Kasper Rørsted bet big on Yeezy to revive the flagging brand’s fortunes. The loss of Yeezy sales is likely to lop 5 per cent off Adidas’s revenues this year. But the company expects a high single-digit decline in revenues across its businesses.

The additional fall reflects the impact of inflation and debt costs eating into consumers’ disposable incomes. The reverberations of this forecast spread to Puma shares which fell 5 per cent.

Adidas shares, which fell 12 per cent on Friday, have underperformed Puma by a tenth since West’s racist comments last year. Over three years, that gap widens to almost 40 per cent. Relative falls against Nike are larger still.

The Yeezy partnership was highly profitable. It generated a 40 per cent operating margin after royalties. That went some way to masking the underperformance of the rest of the business. Its operating profitability is about 4 per cent, thinks Jefferies. That is about one-third of the operating margin that Nike is thought to have achieved last year.

Adidas will be doing well if it can restore sales to 2022 levels by the end of 2024. Assuming a 2 per cent net margin, that implies a valuation of almost 60 times 2024 earnings per share. Puma and Nike, trading on 20 and 30 times 2024 earnings respectively, will remain a more comfortable fit for investors’ portfolios.