By
Bloomberg
Published
Jul 26, 2023
Adidas AG has begun to clear the old Yeezys from the back of its closet.
The process has gone better than expected. But this doesn’t change the fact that once the last Yeezy inventory is offloaded, the sportswear maker still faces a future without its former star collaborator.
To recap: Adidas ended its almost decade-long partnership with Kanye West, now known as Ye, last October, after he made a series of anti-Semitic comments. The tie-up had been extremely lucrative for the company. It could have brought in about €1.2 billion ($1.3 billion) of sales and about €500 million of operating profit this year.
The split was always going to be painful. But compounding the financial costs was the mountain of unsold Yeezy sneakers that Adidas didn’t know what to do with.
The company said in February that if it was unable to sell or repurpose the shoes, it would lose another €500 million in operating profit. With €200 million of one-time charges as new Chief Executive Officer Bjorn Gulden seeks to reignite growth, this could mean up to a €700 million operating loss this year.
Yet late Monday, Adidas said the worst-case scenario had been avoided.
After selling an estimated €400 million to €500 million of Yeezy products from late May, the company said the potential writeoff of the remaining stocks would now be up to €400 million and the potential operating loss for the year €450 million. This forecast could prove conservative, too, given that the company has successfully liquidated the first tranche of Yeezy products at high margins, and there may be further drops to come over the remainder of the year.
Consequently, the shares rose as much as 5.5% Tuesday morning. But this looks overdone.
For a start, Adidas may be seen as profiting from the clearout, which would be unfortunate. The company said in May that it would donate a “significant amount” to organizations working to combat discrimination including the Anti-Defamation League and the Philonise & Keeta Floyd Institute for Social Change.
So far, there has been no brand backlash from releasing the unsold shoes, and the successful Yeezy sale could mean a higher donation. But even so, there is a danger that Adidas is seen as not doing enough to distance itself from its former partner.
And once the surfeit of stock has been dealt with, Adidas must learn to live without the lucrative Yeezy sales. It doesn’t help that it has also lost Beyonce’s Ivy Park line, as the two parted ways earlier this year.
There are some positive signs. As demand cools for Nike Inc.’s Jordans, which have dominated Gen Z sneaker culture for the last couple of years, Adidas’s historic styles, including the Samba, are coming back into favor. Gulden must make the most of the retro revival as a bridge to the post-Kanye world. Indeed, Adidas also said on Monday that it expected full-year revenue to decline by a mid-single digit rate, rather than drop by a high single-digit percentage as outlined previously.
The company has a number of other initiatives getting underway, including a collaboration with Jerry Lorenzo’s Fear of God. The American fashion designer’s mix of formal and streetwear is just the right aesthetic for post-pandemic dressing, but Fear of God Athletics, the tie-up with Adidas, which was debuted recently, will take time to build.
Gulden has also talked about Adidas’s strength in the type of sportswear that helps athletes run faster and train harder. But to compensate for Yeezy, the company needs to find a new fashion franchise.
It faces other challenges including China’s slower-than-expected consumer recovery, as well as young, aspirational US luxury buyers losing steam. They are just the type of shopper to splurge on high-end sneakers.
With the fall in Nike’s shares in the wake of its disappointing outlook, the two companies now trade on a similar multiple on a forward enterprise value to earnings before interest, tax, depreciation and amortization basis.
To prevent another lurch downwards in Adidas’s valuation, Gulden must prove that he can seamlessly offload the rest of the Yeezy stock — but even more importantly he will have to fill its Yeezy-shaped hole thereafter.
