Ye is only the tip of the iceberg of Adidas’s problems

The company warned Thursday that unsold goods are piling up as consumer demand weakens across China and western markets. That sent the German sport apparel maker’s stock slumping as much as 9.1%. 

Problems are accumulating under outgoing Chief Executive Officer Kasper Rorsted, including a mounting publicity crisis over an alliance with rapper and designer Kanye West. Whoever replaces Rorsted as CEO next year will need to come up with buzzy products as the future of the bestselling Yeezy line is in doubt. Adidas shares have now lost all the gains they made during Rorsted’s six-year tenure, leaving the German company with a market value about a sixth of that of U.S. rival Nike Inc. 

Adidas said the gloomier outlook — its second profit warning in three months — reflects a deterioration in store traffic trends in Greater China and a slowdown in demand in western markets since September. That’s likely to lead to an overhang of inventory that will have to be discounted. 

Adidas had already flagged weakness in China in its July warning. The country was once the brand’s biggest growth engine, but consumer boycotts and Covid restrictions have dented sales. Surging inflation across western markets has crimped consumer spending power.

Full-year revenue will grow at a mid-single-digit rather than mid- to high-single-digit rate, Adidas said. The German company lowered its forecast for this year’s operating margin to 4% from 7% in the surprise update.

Adidas is probably only part-way through the process of lowering earnings expectations, Piral Dadhania of RBC said in a note. Discount sales to clear inventory could force Rorsted’s successor to abandon Adidas’s financial targets through 2025, he wrote.

Inventory backlogs have been weighing across the industry. Last month, Nike shares tumbled after a glut of unwanted merchandise eroded the US sportswear giant’s profitability.

West has caused more controversy in recent weeks, getting locked out of his Twitter and Instagram accounts after making repeated anti-Semitic remarks. Thursday, the Anti-Defamation League sent Adidas an open letter saying the fact that Adidas continues to sell Yeezy products is surprising and concerning.  

Adidas didn’t respond Friday morning to a request for comment on the letter, which urged the company to issue a statement it has no tolerance for anti-Semitism.

The German company also said Thursday this year’s profit will be eroded by about €500 million ($488 million) of one-off costs related to issues such as the winding down of its operations in Russia. 

Adidas announced an efficiency program that should compensate for higher costs next year and add about €200 million to profit. Still, that will entail a charge of €50 million in the fourth quarter of this year.