Adidas lowers expectations amid slow recovery in Greater China

Diving Brief:

• Adidas on Tuesday slashed its 2022 outlook for the Greater China region and its expectations for the entire company amid continued COVID-19 restrictions and a slow recovery in the country.
• Revenue for the year is now expected to grow in the mid to high single digit range, down from initial double digit growth projections. The Greater China region was expected to be flat year-over-year and may now decline in double digits, according to a company press release.
• The underperformance impacted the company’s metrics for the year, with Adidas lowering gross margin expectations to 49% (from 50.7%), operating margin to 7% (from 9.4% ) and net profit at 1.3 billion euros ($1.32 billion). ) from a previous range of €1.8 billion to €1.9 billion.

Overview of the dive:

Adidas said in its statement that second quarter results were slightly better than expected thanks to strong growth in its Western markets and a return to growth in Asia-Pacific. However, the change in its projections for China is still a “significant departure from original expectations,” Wedbush analysts Tom Nikic and Ezra Weener wrote in email comments on Wednesday.

Adidas also plans to liquidate excess inventory in Greater China until the end of the year, which will impact gross margin. Nikic and Weener predict that the company’s gross margin will be down about 150 basis points in the second half of the year.

“So far, the company has not experienced a significant slowdown in product sales or significant wholesale order cancellations in any other market,” Adidas said in the statement. “Nevertheless, the adjusted forecast also takes into account a potential slowdown in consumer spending in these markets in the second half of the year due to more difficult macroeconomic conditions.”

A difficult environment has already led two other major retailers to cut their forecasts in recent weeks: Walmart and Target both cut their earnings expectations in the face of soaring inflation and excess inventory. Target in June lowers its operating margin expectations in the second quarter from 5.3% to 2%, while Walmart reported this week that its operating profit would be drop from 13% to 14% in the neighborhood. For Adidas, these macroeconomic factors are a side note to much greater challenges in China. But they may not always be.

“Given the ambition of the previous outlook (growth in turnover of more than 20% in [the second half of the year]), it’s no big surprise that management had to cut its outlook,” Nikic and Weener said. “We also believe it was prudent to factor in slowdowns outside of China, even though the company has yet to see any ‘cracks’ in its Western markets.”