Adidas CEO sees turnaround after Kanye West split

HERZOGENAURACH, Germany/London, March 8 (Reuters) – Adidas ( ADSGn.DE ) will cut its dividend for 2022, the sportswear maker said on Wednesday, after warning that a split with the artist formerly known as Kanye West could push it to its first annual loss in three decades this year.

CEO Bjørn Gulden, who will speak to investors later in the day for the first time since taking the reins on January 1, vowed to rebuild the battered brand after dealing with the fallout from ending Adidas’ partnership with West, which now goes by Ye, which spawned the lucrative Yeezy sneaker line.

Adidas has not said how much the Yeezy brand has earned since the initial deal with Ye in late 2013, but analysts estimate it accounted for as much as 7% of total sales in its best years.

The company needs to refocus on its core business and faces a “transition” year before it returns to profit in 2024 and will return to its sports-based roots, Gulden said.

“You will see us invest in more sports … because that is the DNA of this company,” he told reporters.

The company will recommend a dividend of 0.70 euros ($0.7374) per share, down from 3.30 euros per share in 2021, at an annual general meeting on May 11, it said.

Adidas shares were down 2.1% by 1230 GMT. However, they have outperformed rivals Puma and Nike since the start of this year, in a sign that investors are backing Gulden.

“We believe the shares are failing to reduce the time it will take to rebuild the brand and margins,” Credit Suisse analyst Simon Irwin said in a note.

The company cut ties with Ye in October after a series of anti-Semitic comments he made on social media and in interviews that also prompted Twitter and Instagram to restrict his accounts on their platforms.

Gulden said Adidas is still deciding what to do with its inventory of unsold Yeezy footwear. Burning the shoes poses a sustainability issue, he said, while giving them away to charity is complicated by their resale value, which has increased since the split.

A pair of Yeezy 350 “Zebra” shoes now sells for between $340 and $360, compared to about $260 four months ago, according to John Mocadlo, CEO of US sneaker retailer Impossible Kicks.

An alternative could be for Adidas to donate the proceeds from the sale of reused Yeezy stock to charity, Gulden said.

The split cost Adidas 600 million euros ($632 million) in sales in the fourth quarter of 2022, and Yeezy shoes would have brought in an estimated $1.2 billion in revenue this year.

Gulden said that ending Yeezy – a decision before he took the helm – was the right thing to do, but added that it was “very sad” and that it would take time for Adidas to build a new brand as influential.

Closing the gap after Yeezy won’t be easy, Gulden said.

One area of ​​growth he pointed to is a trend for “terrace” style sneakers such as the Samba, Gazelle and Spezial. He cited Adidas stores selling Samba shoes that drew queues of shoppers in China.

“For the first time in a long, long time, people are lining up to buy an Adi product that isn’t Yeezy.”

LESS DISCOUNT

In general, Gulden said Adidas needs to reduce inventory levels and do less discounting. Inventories came in at just under 6 billion euros at the end of December, up 49% from a year earlier, including 400 million euros of Yeezy products.

The company estimates 2023 underlying operating profit to be roughly break-even when factoring in the $500 million loss from not selling existing Yeezy stock.

If Adidas decides not to reuse the products, it will write off the inventory in its entirety, reducing profits by another $500 million. That, along with $200 million in one-time costs, would put Adidas at a $700 million loss this year.

RBC analysts said they see the full write-down as the most likely scenario.

Analysts at Wedbush who track new sneaker product launches said Nike is likely to take market share from Adidas in the absence of new Yeezy designs.

($1 = 0.9493 euros)

Reporting by Alexander Huebner and Helen Reid; additional reporting by Friederike Heine and Uday Sampath Kumar; Editing by Paul Carrel, Matt Scuffham and Emelia Sithole-Matarise

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