Meta Description: Adidas AG reports a worse-than-expected operating loss in Q4 2021, as sales decline due to a dispute with rapper Ye and a rise in input expenses. The discontinuation of the Yeezy line of products and elevated supply chain costs weigh on gross margin, leading to a warning of unsold inventory write-offs.
Sales Slump Due to Ye Dispute and Input Costs
Adidas AG, the German sportswear giant, has reported a Q4 2021 operating loss of €724 million, compared to a profit of €66 million in the same period in the previous year, missing Bloomberg consensus estimates by €7 million. The company blamed the decline on a negative impact of €600 million related to its decision to end its partnership with rapper Ye (formerly known as Kanye West) in October 2021, after he made a series of controversial remarks. The discontinuation of the “Yeezy” line of products, which had been a significant source of top-line growth for Adidas, had a “particularly strong impact” on North American demand, according to the company. Additionally, sales declined by 1% in Q4 2021, with Adidas citing elevated input costs and a rise in promotional spending as the main factors.
Chinese Sales Suffer Due to COVID-19
Adidas also reported a 50% sales slump in China, where the country continues to recover from strict COVID-19 regulations. The challenging market environment in China contributed to the dip in sales, which was not offset by positive developments in other regions.
Gross Margin Falls Despite Price Hikes
Despite price hikes aimed at offsetting elevated supply chain costs and promotional spending, gross margin declined by 9.9 percentage points to 39.1%. Adidas noted that “company-specific challenges, as well as significant inventory takebacks” weighed on top-line development in Q4 2021.
Warning of Unsold Inventory Write-Offs
Adidas reiterated its warning, issued in February 2022, that if it decides not to repurpose any of its remaining Yeezy branded products going forward, unsold inventory will be written off, lowering operating profit by €500 million and revenue by around €1.2 billion in the current financial year. The company also said that it expects to be hit by one-off costs of up to €200 million as part of a wider review of its operations.
Outlook for 2022 and Beyond
Adidas warned that it could report an annual operating loss of €700 million, with currency-neutral sales expected to decline at a high-single-digit rate in 2022. On an underlying basis, operating profit is forecast to be “around the break-even level.” The company’s CEO, Bjørn Gulden, said that “2023 will be a transition year to build the base for 2024 and 2025,” adding that the company needs to reduce inventories and lower discounts to rebuild a profitable business by 2024.
Shares in Adidas Decline
Shares in Adidas fell in early trading on Wednesday, reflecting investors’ concerns about the company’s financial performance and outlook.
In conclusion, Adidas AG’s Q4 2021 operating loss of €724 million has been attributed to a variety of factors, including the company’s decision to end its partnership with rapper Ye, rising input costs, and elevated promotional spending. The company has warned of unsold inventory write-offs if it decides not to repurpose its remaining Yeezy branded products, and it expects to incur one-off costs of up to €200 million as part of a wider review of its operations.