Adidas warns of big earnings hit after ending Ye partnership

Adidas on Wednesday cut its full-year guidance on the back of the German sportswear giant’s termination of its partnership with Kanye West’s Yeezy brand.

The company ended its relationship with Ye, formerly known as Kanye West, on Oct. 25 after the musician launched a series of offensive and antisemitic tirades on social media and in interviews.

Adidas now projects a net income from continuing operations of around 250 million euros ($251.56 million), down from a target of around 500 million euros laid out on Oct. 20. The company now expects currency-neutral revenues for low single-digit growth in 2022, with gross margin now expected to come in at around 47% for the year.

Adidas reported a 4% year-on-year increase in currency-neutral sales in the third quarter, with double-digit growth in e-commerce in the EMEA, North America and Latin America. Gross margin fell by one percentage point to 49.1% on the back of “higher supply chain costs, higher discounting, and an unfavorable market mix,” the company said.

Operating profit came in at 564 million euros, while net income from continuing operations of 66 million euros, down from 479 million euros a year ago, was “negatively impacted by several one-off costs totalling almost 300 million as well as extraordinary tax effects in Q3,” Adidas said.

“This amount differs from the preliminary figure published on October 20, 2022, due to negative tax implications in the third quarter related to the company’s decision to terminate the adidas Yeezy partnership. This negative tax effect will be fully compensated by a positive tax effect of similar size in Q4,” Adidas said.

The company also revealed that it had already reduced its full-year guidance on Oct. 20 as a result of “further deterioration of traffic trends in Greater China, higher clearance activity to reduce elevated inventory levels as well as total one-off costs of around 500 million euros.”

“The market environment shifted at the beginning of September as consumer demand in Western markets slowed and traffic trends in Greater China further deteriorated,” Adidas CFO Harm Ohlmeyer said in a statement.

“As a result, we saw a significant inventory buildup across the industry, leading to higher promotional activity during the remainder of the year which will increasingly weigh on our earnings.”

Ohlmeyer said the company was “encouraged” by “noticeable” enthusiasm in the buildup to the FIFA World Cup in Qatar later this month.