Dive Brief:
- Adidas cut its guidance for the fiscal year on Thursday citing “a significant inventory build-up as a result of lower consumer demand in major Western markets since the beginning of September,” as well as a traffic drop-off in the China market.
- The shoe and sportswear giant said the inventory excess would likely lead to more discounting through the rest of the year.
- Adidas now expects a gross margin of 47.5% for the year, down from its previous forecast of 49%, a figure that itself was a downward revision from earlier guidance. Adidas now estimates operating margin of around 4% (down from its prior forecast of 7%)
Dive Insight:
Adidas is the latest player to signal that the painful adjustment companies have been working on — as they try to match inventory with falling demand — is not over.
The company follows Nike, whose Q3 report shook the market. Nike said it was working “aggressively” to clear inventory consumers didn’t want to buy, at least not without discounts. The sneaker giant said then that for the period ending Aug. 31, inventory was up 65% while its gross margin fell by 220 basis points.
The latest statements from companies and executives have tempered hopes that brands and retailers might have worked through inventory pileups by the holiday season. The discounting — which is now prevalent, with everyone from Nike to Target to department stores moving increasing promotions to rid themselves of slow-moving inventory — hurts margins, but is aimed at refreshing stock for the holiday season and beyond.
It can also keep those companies’ operations and supply chains working smoothly and skirts the costs of holding on to that inventory and storing it for a longer period.
In August, for example, Target said it took an 87% hit to operating profits for Q2, most of it stemming from the retailer’s inventory rightsizing efforts. Target CEO Brian Cornell said at the time that the alternative scenario would have entailed costs to store the inventory, as well as cluttered sales floors, and store and supply chain teams burdened with the task of managing the excess inventory.
Adidas in Q3 is feeling similar pain. Early results show a drop of 1 percentage point in its margin from last year and a drop of nearly 3 percentage points in its operating margin, while net income fell by more than half, though much of the hit was from one-time costs including the wind-down of its business in Russia.
To manage the margin difficulties, Adidas has launched a cost-cutting program aimed at inflation in the company’s value chain and unfavorable currency rates. Adidas said the initiative is meant to "safeguard the company’s profitability in 2023.”
In an uncertain period, even the bad news from Adidas and Nike has the effect of providing clarity. As Wedbush analysts said in a note on Adidas’ guidance cut, “The clearest ‘silver lining’ we can see is that the near-term issues in the athletic industry are now out in the open (particularly following last month's disappointing [Nike] print) and numbers have been effectively re-based.”
