Jonathan Leibson/Getty Images for ADIDAS
- Adidas’ share price could be under threat after the sportswear giant ended its Yeezy partnership.
- The company warned last month that it faces a $1.3 billion earnings wipeout after cutting ties with Ye.
- It’s also been battered by declining sales in China and Nike’s recent surge.
Adidas shareholders are fretting after the German sportswear giant warned that the end of its relationship with “Yeezy” designer Ye would likely wipe out billions of dollars in earnings.
The company terminated its deal with the rapper formerly known as Kanye West in October after he repeatedly made antisemitic comments on Twitter and in an unaired interview with Fox News presenter Tucker Carlson.
Shares have rallied 40% since that date – but Adidas now faces a wave of headwinds including an earnings wipeout, declining sales in China, and a recent surge by its main rival Nike.
Here’s what you need to know.
1. Earnings wipeout
In a profit warning issued on February 9, Adidas warned that the end of its Yeezy deal would reduce its earnings by €1.2 billion ($1.3 billion) this year.
Ye-designed sneakers had been one of the company’s top earners and accounted for roughly 7% of all sales in 2022, according to data from S&P Global Ratings.
2. Excess inventory
Part of that $1.3 billion figure comes from stockpiles of Yeezy sneakers that the company may struggle to find buyers for.
Adidas warned Wednesday that it could have to write off around 500 million euros worth of shoes – although its best bet may be to sell them and then give most of the proceeds to charity, according to Deutsche Bank analyst Adam Cochrane.
“Selling remaining stock can make the best out of the situation by recovering some of the lost profit and costs,” he said in a research note. “I think to sell it themselves and to split the proceeds with the charity will be the most likely outcome.”
3. Debt rating downgrade
The earnings wipeout raises the risk that Adidas will fail to pay back bondholders, according to S&P credit analysts.
The ratings agency, which judges companies’ ability to repay their debts, cut its long- and short-term credit ratings for the sportswear brand after last month’s profit warning.
“Adidas faces a multitude of business challenges, including the termination of its Yeezy partnership,” S&P said.
4. Dividend decline
Adidas shareholders will also receive lower dividends as the Yeezy fiasco hammers profitability.
The company slashed its 2022 dividend by 79% to 70 euro cents ($0.74) a share Wednesday as it issued a recap of its performance for the year.
5. China fallout
Adidas’s split with Ye isn’t the only factor that could drag on its share price – with sales also hit by a boycott in China after Adidas and several other western brands sought to distance themselves from the Xinjiang’s labor camps.
The western province, which is home to China’s Muslim Uyghur minority, is the source of around four-fifths of the country’s cotton.
The boycott in China was slamming Adidas’s profit levels “even before the Yeezy fallout”, according to Saxo Bank’s top equity strategist Peter Garnry.
“Part of that is declining revenue in China as Adidas comments about Xinjiang cotton in relation to Western countries imposing sanctions on China,” he said in a research note last month. “These comments, combined with rising domestic sport clothing companies in China and Chinese consumers choosing domestic brands, have materially impacted Adidas’s business.”
6. Nike’s surge
Lastly, there’s evidence that Adidas’s market share is being squeezed by its old rival Nike.
The Yeezy split and Chinese boycott have fueled an earnings wipeout that means the German company now only has 45% of the revenues of its Oregon-based rival, according to data from Saxo.
That’s helped Nike’s shares to trounce Adidas’ ADRs over the past year, with Nike down just 3% compared to Adidas’s 26% plunge.
“Adidas is in a hurry,” Garnry said. “They need to catch up fast or risk being left at the station and never catching up with Nike.”