Adidas made waves in the market on Wednesday with its pre-announcement of fourth-quarter results. While the quarter itself showed promising performance, the company’s guidance for fiscal 2024 raised concerns about a slowdown in demand for athleticwear in important markets, causing shockwaves throughout the sector.
According to Adidas, sales are expected to grow at a mid-single-digit annual rate in 2024. However, the company will need to navigate various obstacles, including sluggish sales in North America, unfavorable foreign exchange rates, and challenges related to selling off its remaining Yeezy inventory.
CEO Bjorn Gulden provided insights into the company’s plans, stating, “For 2024, we expect sales to start flattish, but to then improve every quarter.” The official announcement of the results will be made on March 13.
Adidas’ guidance had a significant impact on the retail sector as a whole on Wednesday, with the SPDR S&P Retail ETF (XRT) closing 2.4% lower. Athleticwear stocks were hit particularly hard, with Adidas shares falling by 9.4%, Nike by 2.5%, Under Armour by 3.7%, Lululemon Athletica by 5.7%, Deckers Outdoor by 2.6%, and On Holding by 3.4%.
One reason for this negative response is that Adidas’ announcement follows Nike’s guide-down in December and Puma’s disappointing preliminary results last week. Consequently, many investors are worried about the challenges facing global athletic brands.
In a note on Tuesday, Wedbush analyst Tom Nikic commented, “It seems clear that the large, global athletic brands continue to face headwinds, and this is driving most of the athleticwear stocks in our coverage down.” However, Nikic also expressed less concern about certain brands like Hoka, On Holding, and Lululemon, which he believes have adequate inventories and enough brand momentum to withstand a temporary decline in consumer demand.
Adidas Faces Challenges in North America
A company like Under Armour may be more at risk, especially because Adidas called out challenges in North America, which accounted for over 60% of Under Armour’s sales in the company’s latest quarter. Under Armour reports earnings next Thursday.
Adidas didn’t pre-report exact numbers for its North American business, but there were ongoing challenges in the segment.
Based on unaudited preliminary figures, overall revenue fell 5% to €21.4 billion ($23.1 billion) in 2023. Analysts had expected €21.6 billion ($23.4 billion) for the year, according to FactSet. On a constant currency basis, revenue was flat from 2022, slightly better than the company’s guidance for sales to fall by a low-single digit percentage.
Adidas’ decision to discontinue its Yeezy line, previously made in partnership with Ye, the rapper formerly known as Kanye West, was a €500 million drag on revenue, the company said.
In 2023, Adidas generated an operating profit of €268 million, better than previous guidance for a loss of €100 million but still below 2022’s €669 million profit. The outperformance came from the company’s decision not to write off most of its existing Yeezy inventory.
In 2024, Adidas plans to sell the remaining Yeezy product at cost, which could result in revenue of about €250 million. But since the sale is at cost, it likely won’t have any effect on operating profit over the year, the company said.
Operating profit will be around €500 million in 2024, Adidas said—close to 60% below the Street’s consensus for close to €1.3 billion.