Adidas Faces More Adversity in 2023 but New CEO and Brand Strength Provide Hope

In an extraordinarily tumultuous period for Adidas ADDYY, new CEO Bjorn Gulden and holdover CFO Harm Ohlmeyer (both of whom are under contract until 2028) presented the final 2022 financial results, discussed the challenges in 2023, and highlighted future opportunities. The 2022 results and outlook for 2023 were consistent with its preannouncement (see our Feb. 9 note) and our recently lowered estimates. Thus, we do not expect material changes in our EUR 162/$86 fair value estimates and believe Adidas’ shares are attractive for investors willing to ride out more strife in 2023. Our confidence stems from the recovery in international athletics and the power of Adidas’ brand, the source of our narrow-moat rating on the firm.

Adidas, as expected, reported weak sales and a massive loss in 2022′s fourth quarter due to the termination of the Yeezy deal (negative impact of about EUR 600 million) and a woeful 50% sales decline in greater China due to its ongoing competitive challenges and prior virus-related restrictions in the country. The firm’s 1.3% sales increase and negative 13.9% operating income exactly matched our estimates. For 2023, Adidas guided to a constant-currency high-single-digit percentage sales decline and breakeven underlying operating profit as it suffers negative impacts of EUR 1.2 billion and EUR 500 million in sales and operating profit, respectively, with zero Yeezy revenue. In addition, it expects to write off EUR 500 million in Yeezy inventory and record EUR 200 million in one-off costs related to its optimization efforts. Our estimates have already reflected these negative effects. There is, however, some uncertainty as Gulden indicated on the earnings call that some or all the existing Yeezy product may eventually be sold to recover production costs. For now, however, we assume a total Yeezy product destruction scenario, contributing to a 2023 EPS loss of about EUR 3.50-EUR 4.00.