Adidas surprised the market with an early announcement of its fourth-quarter results. While the quarter itself was satisfactory, the company's guidance for fiscal 2024 has reignited concerns about the demand for athleticwear in key markets, causing a ripple effect throughout the sector.
According to Adidas, sales are expected to grow at a mid-single-digit annual rate in 2024 as the company grapples with various obstacles. These obstacles include lagging sales in North America, unfavorable foreign exchange rates, and challenges in selling off the remaining Yeezy inventory.
CEO Bjorn Gulden stated, "For 2024, we expect sales to start flattish, but to then improve every quarter." The official announcement of results will take place on March 13.
The company's guidance had a negative impact on the retail sector as a whole. The SPDR S&P Retail ETF (XRT) closed 2.4% lower, with athleticwear stocks bearing the brunt of the decline. Adidas shares were down 9.4%, Nike decreased by 2.5%, Under Armour by 3.7%, Lululemon Athletica by 5.7%, Deckers Outdoors by 2.6%, and On Holding by 3.4%.
Adding to the blowback is the timing of Adidas' announcement, which follows Nike's guide-down in December and Puma's disappointing preliminary results last week.
Wedbush analyst Tom Nikic wrote in a note on Tuesday, "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 does not express significant concern regarding certain "buzzy" brands in the sector, such as Hoka, On Holding, and Lululemon. According to him, these companies have well-maintained inventories and enough brand momentum to withstand a challenging period for consumer demand.
Adidas Faces Challenges in North America
Adidas recently highlighted the challenges it is facing in North America, a market that accounts for over 60% of Under Armour's sales. With Under Armour set to report its earnings next week, the company may be at risk due to these challenges.
While Adidas did not provide exact numbers for its North American business, CEO Gulden acknowledged the ongoing difficulties in the segment. The company's overall revenue for 2023 fell by 5% to €21.4 billion ($23.1 billion), slightly lower than analysts' expectations of €21.6 billion ($23.4 billion).
Adidas attributed a significant portion of the revenue decline to its decision to discontinue its Yeezy line, which was previously developed in partnership with rapper Kanye West. This move resulted in a €500 million drag on revenue.
However, the company managed to exceed previous guidance by generating an operating profit of €268 million in 2023, compared to a predicted loss of €100 million. This outperformance was primarily due to Adidas' decision not to write off most of its existing Yeezy inventory.
Looking ahead to 2024, Adidas plans to sell the remaining Yeezy products at cost, which could bring in around €250 million in revenue. However, since this is a cost sale, it is unlikely to impact operating profit for the year.
Adidas projects an operating profit of €500 million in 2024, which is significantly below the Street's consensus of close to €1.3 billion. Analysts anticipate that 2024 will be a transitional year for the company as it focuses on achieving double-digit growth and a 10% operating margin.
In summary, Adidas faces challenges in the North American market, which may have negative implications for Under Armour. Despite discontinuing its Yeezy line, Adidas managed to generate an operating profit in 2023 by not writing off most of its existing inventory. Looking ahead, the company plans to sell the remaining Yeezy products at cost, but this is not expected to impact operating profit for the year. Adidas aims to achieve significant growth and an improved operating margin in 2024.
