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High Retail Inventory Levels, Loss of Yeezy Biz Hurt Adidas

Adidas is left with “mountains” of unsold Yeezy product after ending its partnership with Kanye West, who it had partnered with since 2013.

The Three Stripes suffered a 20 percent, constant-currency decline in North American Q1 sales to $1.3 billion and an operating loss equivalent to $50.7 million. The geography’s revenues were adversely impacted by the discontinuation of the Yeezy business last October (when Adidas cut ties with Kanye West) and lower sell-in to the wholesale channel due to high inventory levels across the market. The company is reportedly closing in on a decision of what to do with unsold Yeezys, which hurt Q1 sales by approximately $440 million and may impact the company’s total FY23 revenues by as much as $1.32 billion if the company opts to not sell the inventory.

Adidas reported flat overall Q1 revenues, the equivalent of $5.81 billion, but suffered an 86 percent decline in operating income to the equivalent of $66.1 million as gross margin slipped substantially despite price increases. Footwear sales increased 1 percent to approximately $3.3 billion with the brand experiencing some momentum in soccer, running, and outdoor with sales in each segment increasing by double-digits.

Lifestyle footwear sales declined in the period despite higher market demand for the brands iconic Samba, Gazelle, and Campus styles. Adidas intends to start scaling access to the styles for the remainder of the year after restricting access to them in Q1.

CEO Bjorn Gulden, in a prepared statement, confirmed that FY23 will be a “bumpy year” for Adidas with disappointing numbers, but it is also a transition period for the company to build a strong base for a better FY24 and beyond.

The company, citing persistent macroeconomic challenges and the risk of recession in both North America and Europe coupled with uncertainty about its China market turnaround, is forecasting annual, constant-currency revenues to fall at a high-single-digit rate. These issues and impacts from the discontinued Yeezy business could lead Adidas to report an annual operating loss approaching $771 million for FY23.