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adidas Q2’23 Financial Results Flat Compared To Q2’22
- Currency-neutral revenues flat versus the prior-year level
- Top-line development reflects improved sell-out trends and conservative sell-in strategy
- Gross margin up 0.6pp to 50.9%; strong improvement compared to Q1 reflecting better sell-through and less discounting
- Operating profit of €176 million includes extraordinary expenses of around €160 million related to one-off costs, donations and accruals for future donations
- Inventory position improves substantially versus Q1 level to €5.5 billion; now up only 1% year-over-year
CEO Commentary
adidas CEO Bjørn Gulden:
“We are happy with the way the second quarter developed. The core adidas business was
slightly better than we expected. Although we still have too much slow-moving inventory in
the market, sell-through has been improving. We also saw gross margin in our core business
improving strongly compared to the first quarter. The operating profit of €176 million was
substantially higher than our initial plans. The sale of the first part of the Yeezy inventory did
of course help both our top and bottom line in the quarter.
The market is still very volatile, and we continue to see a lot of uncertainty for the rest of the year. As there is still a lot of inventory in the market, retailers are very cautious in their preorders.
We believe that when we start to see larger volumes of our hot sellers in the Terrace area like Samba and Gazelle hitting the markets, we will continue to see adidas brand heat improving. This will support the sell-through of all adidas products in the market.
Our story is the same as we said at the beginning of the year: We are using 2023 to clean inventories, work on future products, improve the way we work, build better partnerships, and
lay the foundation for a better 2024 and a good and profitable adidas in 2025 and 2026. 2023
is not about trying to show short-term results.
We will continue to carefully sell off more of the existing Yeezy inventory. This is much better
than destroying and writing off the inventory and allows us to make substantial donations to
organizations like the Anti-Defamation League, the Philonise & Keeta Floyd Institute for Social
Change and Robert Kraft’s Foundation to Combat Antisemitism. And it is of course also
helping both our cash flow and general financial strength.”
Second quarter 2023
Currency-neutral revenues on prior-year level
In the second quarter of 2023, currency-neutral revenues were flat versus the prior-year
level. The top-line development continued to be impacted by the company’s conservative sellin approach in order to reduce high inventory levels, particularly in North America and Greater
China. At the same time, adidas second quarter revenues benefited from the first sale of some
of its Yeezy inventory. The initial product drop in June generated revenues of around €400
million in Q2, which is largely in line with the Yeezy sales generated in the prior year’s quarter.
Footwear revenues grew 1% during the quarter, reflecting strong growth in football,
basketball, tennis and US sports. Apparel sales declined 3% in the second quarter. As the
apparel market continues to be particularly overstocked, the company continued its
conservative sell-in strategy to improve sell-through and margins in the medium term.
Accessories, such as sunglasses, grew 8% during the quarter driven by growth in football.
Lifestyle revenues were down during the quarter despite extraordinary demand for the company’s Samba, Gazelle and Campus franchises. While adidas slowly started to scale its
offering for these product families during the second quarter, the total volume still only
represents a small portion of the company’s overall business. Sales in the adidas Performance categories continued to show positive momentum. This reflects strong demand for new product introductions such as the latest iterations of its Predator, X and Copa football boots, as well as jerseys for both the FIFA Women’s World Cup 2023 and the company’s unique portfolio of football teams ahead of the start of the European club season.
In addition, the Adizero product family in running continued to gain a lot of attention around marathon races across the world, translating into higher demand. At the same time, the brand’s Barricade tennis franchise grew strongly, leveraging the excitement around major tournaments.
In euro terms, the company’s revenues declined 5% to €5.343 billion in the second quarter
(2022: €5.596 billion).
Double-digit growth in Greater China and Latin America
Currency-neutral sales in North America declined 16% during the quarter. The region is
particularly affected by elevated inventory levels in the market and – in response to this – the
company’s significantly reduced sell-in. Revenues in Greater China grew 16% in Q2, reflecting
double-digit sell-out growth in both wholesale and own retail. Sales in EMEA were down slightly (-1%) despite double-digit DTC growth. While the company’s initiatives to reduce
inventory levels and discounting weighed on the overall top-line development in the region,
adidas recorded significantly improving full-price trends during the quarter. Revenues in
Asia-Pacific increased 7% during the quarter, driven by strong double-digit growth in DTC.
Latin America continued to increase at a double-digit rate (+30%), reflecting strong growth in
both wholesale and DTC.
Gross margin improves to 50.9%
The company’s second quarter gross margin increased 0.6 percentage points to 50.9% (2022:
50.3%). This improvement was mainly driven by price increases the company has
implemented as well as by an improved channel mix. At the same time, higher supply chain
costs and unfavorable currency movements continued to strongly weigh on the gross margin
development. While still adversely impacting the company’s gross margin in the quarter,
discounting levels significantly improved compared to the first quarter of the year.
Operating profit of €176 million, resulting in an operating margin of 3.3%
Other operating expenses were up 3% to €2.582 billion (2022: €2.501 billion). As a
percentage of sales, other operating expenses increased 3.6 percentage points to 48.3%
(2022: 44.7%).
Marketing and point-of-sale expenses decreased 7% to €617 million (2022: €663 million). As a percentage of sales, marketing and point-of-sale expenses slightly decreased by 0.3 percentage points to 11.5% (2022: 11.8%).
Operating overhead expenses were up 7% to €1.965 billion (2022: €1.838 billion), reflecting higher logistics expenses. In addition, the company recorded one-off costs of around €50 million related to the strategic review the company is currently conducting as well as donations and accruals for further donations in an amount of around €110 million. As a percentage of sales, operating overhead expenses increased 3.9 percentage points to 36.8% (2022: 32.8%). The company’s operating profit amounted to €176 million (2022: €392 million) in the quarter. This amount includes the extraordinary expenses of in total around € 160 million reflecting the one-off costs related to the strategic review as well as the donations and accruals for further donations. The sale of the Yeezy product positively impacted adidas’ operating profit by an incremental amount of around €150 million in Q2. The operating margin reached 3.3% in the quarter (2022: 7.0%).
First half year
Currency-neutral revenues on prior-year level in the first half of 2023
In the first half of 2023, currency-neutral revenues were flat versus the prior-year period. In
euro terms, revenues decreased 3% to €10.617 billion in the first six months of 2023 (2022:
€10.897 billion). While sell-out trends improved throughout the period, the company
continued with its conservative sell-in strategy. The discontinuation of the regular Yeezy
business represented a drag of around €400 million on the year-over-year comparison during
the first half of the year. The first sale of some of the company’s remaining Yeezy inventory
positively impacted net sales in the amount of around €400 million in the second quarter of
2023, which was largely in line with the prior year’s quarter. At the same time, however, there
were no Yeezy revenues in the first quarter of 2023, while the company had generated around
€400 million of Yeezy sales in Q1 2022. As a result, the company’s Yeezy revenues reached
around €400 million in H1 2023 compared to a total of around €800 million in the prior year
period.
The company’s gross margin declined 2.3 percentage points to 47.9% (2022: 50.1%) during
the first half of the year. The development improved significantly between the first and the
second quarter, partly driven by better sell-through and improving discounting levels. Higher
supply chain costs, negative currency developments, higher inventory allowances, as well as
the promotional activity weighed on the gross margin development during the six-month
period. At the same time, price increases benefited the gross margin in H1.
Inventories nearly at prior-year level, operating working capital increases
Inventories continued to improve substantially during the second quarter. Year-over-year,
inventories were up only 1% to €5.540 billion (2022: €5.483 billion). On a currency-neutral
basis, inventories grew 6% compared to the prior year. Inventory units were down 11%
compared to the prior year, reflecting the strong progress the company has made in improving its inventory position. During the first six months of the year, the company’s inventory level declined by more than €400 million as a result of adidas’ initiatives around inventory management, including significantly reducing buying volumes and tactically repurposing existing inventory. Operating working capital was up 14% to €5.896 billion (2022:
€5.191 billion).
Adjusted net borrowings of €6.039 billion
Adjusted net borrowings at June 30, 2023, amounted to €6.039 billion (June 30, 2022:
€4.673 billion), representing a year-over-year increase of 29%. The decline in lease liabilities
was more than offset by a significant increase in short- and long-term borrowings as well as
a decrease in cash and cash equivalents.
Outlook
adidas expects revenues to decline at a mid-single-digit rate. On July 24, adidas had adjusted its full year financial guidance to reflect the positive impact of the first sale of some of its Yeezy inventory and a slightly better-than-expected development of the adidas business in the first half of the year. At the same time, macroeconomic challenges and geopolitical tensions persist. Elevated recession risks in North America and Europe as well as uncertainty around the recovery in Greater China continue to exist. In addition, the company’s revenue development will continue to be impacted by the initiatives to significantly reduce high inventory levels. As a result, adidas now expects currency-neutral revenues to decline at a mid-single-digit rate in 2023 (previously: decline at a high-singledigit rate).
