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adidas Reports Better-Than-Expected Q3’23 Results

A statement from adidas CEO Bjørn Gulden:
“Q3 was another quarter where we saw progress and where the results were better than expected. The heat around our Terrace range (Samba, Gazelle, Spezial) and other models like Campus is creating new growth in our Lifestyle business again. We have scaled up supply but are far from covering the total current demand. The halo effect of these successful models, together with the new Originals campaign that we launched in September, has increased our brand heat in all parts of the world. We see the interest in our brand and products increasing in all markets and are now experiencing a visibly higher interest from retailers for the sell-in for our Fall/Winter 2024 range.

Our own inventory levels are down 23%, which is even a little more than we planned. Inventory levels in the markets with our retail partners are also improving, although at a slower pace. Especially the inventory levels in the US market will continue to impact our business for a while.

We see good improvement also in our Performance products, especially in football and running, but now also in basketball and US sports. The success of our Adizero Adios Pro Evo 1 shoe with Tigist Assefa’s marathon world record in Berlin is an example of our new focus on bringing innovation to the market fast. The launch of the first signature shoe of Anthony Edwards (AE1) and the Fear of God product that is arriving in the US market in Q4 gives us also a more optimistic outlook for our basketball business.

We do of course know that our current performance is not good enough, but we have said from the beginning that we need time to build this fantastic brand and company back to where it belongs: At the top as the best sports brand in the world.

I feel we are improving every day. The teams are showing the right attitude, we are constantly
speeding up our decision processes and we are making the progress I expected. We need time to get enough of the right products into the markets and make the good products more visible for our consumers. We feel strong interest and support from our retailers to build this together. Our focus in our DTC business is clearly to give less discounts, increase the fullprice share and balance brand building with commercial success. We have also started to see good progress in this area.

In Q4, we will continue to focus on our priorities and lay the foundation for an improving 2024 and a successful 2025 and 2026. This year, we improved our outlook every quarter and are now looking at currency-neutral revenues to be down only low single digits (started the year with down high single digits) and a small operating loss of €100 million, including a possible €300 million write-off of the remaining Yeezy inventory and one-off costs of €200 million related to the strategic review. We started the year with a negative outlook of an operating loss of €700 million.”

Q3 Results

Currency-neutral revenues up 1%
Currency-neutral revenues increased 1% during the third quarter of 2023. The top-line development reflects adidas’ conservative sell-in approach aimed at reducing high inventory levels, improved sell-through as well as the company’s focus on full-price sales across its own channels. adidas third quarter revenues were also impacted by the sale of parts of its remaining Yeezy inventory. The second product drop generated revenues of around €350 million in Q3, which is somewhat below the Yeezy sales generated in the prior year’s quarter. As a result, excluding the Yeezy revenues in both years, currency-neutral revenues increased 2% during the quarter.

Footwear revenues grew 6% during the quarter on a currency-neutral basis, reflecting double-digit growth in adidas Originals as well as in the football and basketball categories.

Apparel sales declined 6% in the third quarter. Revenues in the company’s outdoor and basketball categories grew at strong double-digit rates. Apparel sales in the football category were down due to last year’s strong sell-in prior to the FIFA World Cup. In addition, the company continued its conservative sell-in strategy as the apparel market faced particularly high inventory levels.

Accessories revenues were down 3% during the quarter.

Currency-neutral sales in adidas Lifestyle categories increased during the quarter as extraordinary demand for the company’s Samba, Gazelle, Spezial and Campus franchises led to a return to growth in adidas Originals.

The company’s Performance categories continued to experience strong momentum for many of its new product introductions such as the latest iterations of its Predator, X and Copa football boots as well as the next generation of the Terrex Free Hiker outdoor shoes. In running, the introduction of the Adizero Adios Pro EVO 1 led to record-breaking performances at marathon races. In addition, it continued to generate a lot of attention and strong demand for the entire Adizero product family. This excitement translated into strong double-digit growth for the franchise during the quarter. In euro terms, the company’s revenues declined 6% to €5.999 billion in the third quarter (2022: €6.408 billion).

Growth in all markets except North America
Currency-neutral sales in North America declined 9% during the quarter (-10% excluding Yeezy revenues in both years). The region is particularly affected by elevated inventory levels in the market and – in response to this – the company’s significantly reduced sell-in. As a result, wholesale revenues were down double digits in the region, whereas DTC sales increased versus the prior-year level. Revenues in Greater China grew 6% in Q3 (+10% excluding Yeezy), driven by double-digit growth in wholesale. Sales in EMEA increased 2% (+2% excluding Yeezy), reflecting high-single-digit growth across the company’s own distribution channels. Revenues in Asia-Pacific increased 7% during the quarter (+5% excluding Yeezy). Strong double-digit DTC growth reflects the strong sell-out trend adidas is enjoying in the region. Latin America continued to increase at a double-digit rate (+13%, +12% excluding Yeezy), reflecting strong growth in both wholesale and DTC.

Gross margin improves to 49.3%
The company’s third quarter gross margin increased 0.2 percentage points to 49.3% (2022: 49.1%). This improvement was mainly driven by reduced freight costs, a more favorable business mix, as well as lower inventory allowances. Unfavorable currency movements strongly weighed on the gross margin development during the quarter. Discounting levels improved significantly compared to the first half and second quarter of the year.

Operating profit of € 409 million, resulting in an operating margin of 6.8%
Other operating expenses were down 4% to €2.570 billion (2022: €2.676 billion). As a percentage of sales, other operating expenses increased 1.1 percentage points to 42.8% (2022: 41.8%). Marketing and point-of-sale expenses decreased 7% to €644 million (2022: €691 million). As a percentage of sales, marketing and point-of-sale expenses slightly decreased to 10.7% (2022: 10.8%). Operating overhead expenses declined 3% to €1.926 billion (2022: €1.985 billion). During the quarter, the company recorded one-off costs of around €80 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 €30 million.

As a percentage of sales, operating overhead expenses increased 1.1 percentage points to 32.1% (2022: 31.0%). The company’s operating profit amounted to €409 million (2022: €564 million) in the quarter. This amount includes the extraordinary expenses of in total around €110 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 Q3. The operating margin reached 6.8% in the quarter (2022: 8.8%).

Net income from continuing operations of €270 million
After taxes, the company’s net income from continuing operations increased significantly to €270 million (2022: €66 million), while basic EPS from continuing operations improved to €1.40 (2022: €0.34).

Outlook

adidas expects revenues to decline at a low-single-digit rate
On October 17, adidas had adjusted its full year financial guidance to reflect both the positive impact of the second drop of some of its Yeezy inventory and the better-than-expected development of the underlying business. 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 in North America and the company’s focus on full-price sales across its own channels. As a result, adidas now expects currency-neutral revenues to decline at a low single-digit rate in 2023 (previously: decline at a mid-single-digit rate).

Underlying operating profit anticipated to reach a level of around €100 million
The company’s underlying operating profit – excluding any one-offs related to Yeezy and the ongoing strategic review – is now anticipated to reach a level of around €100 million in 2023 (previously: around break-even level). Including the positive impact from the two Yeezy drops in Q2 and Q3 (no drop off in Q1’23) of around €300 million (previously: €150 million), the potential write-off of the remaining Yeezy inventory of now around €300 million (previously: €400 million) and one-off costs related to the strategic review of up to €200 million (unchanged), adidas now expects a reported operating loss of around €100 million in 2023 (previously: loss of €450 million).