What’s the sneaker equivalent of a kitchen sinking? Clearing the old Yeezys from the back of the closet.
The strategy of getting all of the bad news out at once is one that new Adidas AG Chief Executive Officer Bjorn Gulden has adopted quickly. Adidas said late Thursday that its operating loss this year may reach as much as €700 million ($749.9 million) if it has to write off all existing Yeezy inventory.
Also read: Coming soon: Adidas Yeezy shoes without the Ye
The German sportswear giant has been stuck with the sneakers after ending its lucrative, almost-decade-long partnership with Kanye West in October, following anti-Semitic comments by the rapper, now known as Ye.
We always knew the split was going to be expensive. But Gulden, who took up his role in January, left investors in no doubt. The shares fell as much as 12%.
Adidas said on Thursday that ditching Yeezy would mean the loss of €1.2 billion of sales and €500 million of operating profit. Consequently, it is forecasting to only break even at an operating profit level this year. Before Thursday, the consensus of analysts expectations had been for close to €1 billion of operating profit.
Adidas is looking at ways to mitigate the damage by repurposing Yeezy shoes into styles sold under Adidas’s own name.
In the event that this is not possible and it has to write off every sneaker, it would lose another €500 million in operating profit. At the same time, it will incur an extra €200 million of one-time charges as Gulden seeks to reignite growth. That could mean a worst-case scenario of a €700 million operating loss.
The upside of a kitchen sinking is that it clears the decks, creating a clean platform from which a new CEO can build. But it’s hard to see things improving at Adidas any time soon.
For a start, it must decide whether it can reuse the Yeezy sneakers in any way. Yet bringing back Yeezy without Ye is fraught with risks, chief among them being Adidas is seen as not doing enough to distance itself from its former collaborator.
Even without the Yeezy debacle, Adidas has been losing ground to Nike Inc. It not only needs to make up for the Yeezy shortfall, but it requires a broader style revamp too. It has fallen behind on fashion-focused lines, and Gulden needs to breathe new life into its offerings off the football field and running track.
Adding to these worries, the Wall Street Journal reported this week that Beyonce’s Ivy Park collaboration — a potential replacement to some of the lost Yeezy revenues — was not living up to expectations. Gulden needs to decide whether to continue with the partnership.
Add in a slump in China’s sales from Covid restrictions and uncertainties around its reopening, as well as mounting evidence that younger American buyers of affordable luxury — i.e., those who are likely to splurge on sneakers — are cutting back, and Gulden has his hands full.
After a 43% fall in Adidas shares over the past year, the company trades on a forward enterprise value to earnings before interest, tax, depreciation and amortization multiple of 13 times, compared with Nike’s 24 times.
To close the gap, Gulden needs to show there are no more shoes to drop.
Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.
Also read: How will Adidas perform in the post-Kanye West era?
