Adidas braces for ‘bumpy’ year after Yeezy and discounting damage brand

Adidas is preparing for a “bumpy” 2023 after the termination of its Yeezy brand partnership with rapper Kanye West and the hit to margins caused by the anticipated high level of discounting.

In a statement following the announcement of its first quarter results, CEO Bjørn Gulden admitted the loss of the Yeezy brand has “hurt” the sportswear brand as have high levels of discounting as the company seeks to shift excess stock.

Gulden stressed the the importance of trying to protect the long-term health of its flagship adidas brand, adding 2023 will be a “transitional” year for the business, he said.

“Adidas has all the ingredients to be the best sports brand in the world, to grow strongly and to be a good profitable company,” he said. “We just need some time. 2023 will be a bumpy year with disappointing numbers, where maximising our short-term financial results is not our goal.”

The brand has been damaged by the Yeezy scandal, he acknowledged. The sports giant parted ways with the rapper following his anti-Semitic remarks last year and now has to deal with a mountain of unsold Yeezy trainers, worth around €1.2bn (£1bn). Gulden said Adidas is still “working on different options”.

A group of investors are currently suing the company, claiming it knew about Kanye West’s problematic behaviour, and failed to mitigate the financial risk it faced by being exposed to it.

The Yeezy episode has damaged Adidas’s reputation, says GlobalData senior apparel analyst Pippa Stephens, and while selling the brand’s remaining stock may help it recoup costs, it could be a risky strategy.

“Should it decide to sell it, it risks damaging its brand reputation even further, so must ensure it does so sensitively to avoid upsetting customers,” she notes.

With one celebrity partnership ended, there are also rumours the brand’s partnership on Ivy Park with Beyoncé is to an end. Stephens states the company should look to rebuild its “star power” through new partnerships to regain brand power.

Gulden noted in the call today that the brand’s collaboration with luxury brand Gucci was delivering a “great performance”.

He said the company is looking to re-build momentum behind its product, some of which has been taken away through discounting after surplus supply. Going forward, marketing and the supply chain will work together to retain “brand heat”, he noted.

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“[On trending products] we will keep supply lower than demand so that there is still heat and that we continue to do both collabs and other marketing activities to keep these franchises hot,” he said. “That is a test for us, can we do that with discipline. It’s  very, very important that the commercial and brand and the sourcing side works together.”

Overall, Adidas’s operating profit was down 82.6% to €60m (£52m) in the three months ending 31 March 2023 compared to the same quarter last year.

Net sales dropped by a more modest 0.5% to €5.3bn (£4.6bn), but sales growth excluding Yeezy increased by 9%.

Overall, the business says its gross margin feel 5.1 percentage points to 44.8%.

E-commerce sales were particularly damaged by the Yeezy fallout, with sales dropping 23% versus the same period last year.

Gulden noted that the company was pulling back on discounting activity in the channel, with the goal of boosting the brand.

“We tried to take the promotions down in e-comm to protect our franchises,” he said. “Top line maximization is not the goal of e-comm, but it’s to make it profitable, protect the brand and then of course clear product but only as needed.”

While currency-neutral revenues remained flat on the year prior, the company has retained its forecast that its revenues will decline at a high-single-digit rate in its full 2023 year.