Announcing a slowdown in revenues in the third quarter amid global supply-chain challenges and pandemic lockdowns, Adidas executives emphasized the various logistical and business challenges they were facing.
The German activewear giant said those challenges would likely knock around 2 billion euros off sales for this year and over the first quarter of next year. The company also predicted that it would be forced to raise prices next year, in mid-single-digit percentages on average.
“Unfortunately, we are still confronted by severe challenges, on both the demand and supply sides in many parts of the world,” Adidas chief executive Kasper Rorsted told journalists at an online press conference announcing the third-quarter results. “That is posing a significant drag on our top-line development.”
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In the third quarter of this year, revenues at Adidas increased 3.4 percent to bring in 5.75 billion euros — this is a slowdown compared to the same period in previous years and also came in slightly under market analysts’ expectations.
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On Wednesday morning, Adidas shares fell slightly on the announcement and analysts from the likes of JP Morgan, Warburg Research and Baader Bank all agreed the results were mixed and the challenges significant.
In 2020, currency-neutral revenues were down 3 percent. However, in 2019, the last “normal” year before the pandemic, Adidas revenues grew 6 percent. Over the three years previous to that — 2018, 2017 and 2016 — Adidas’ growth in the third quarter averaged more than 10 percent every year.
Adidas explained that in the third quarter alone, various issues — including supply chain and logistics problems, COVID-19-related lockdowns and a problematic market environment in mainland China — had likely knocked about 600 million euros off its revenue. The company expected a sales drag of 400 million euros in the fourth quarter and another 600 million euros worth in the first quarter of 2022.
The COVID-19 lockdown in Vietnam in the third quarter was part of the reason for this. Although factories were back up and running, and expected to be operating at 85 percent capacity by the end of November, the company’s chief financial officer, Harm Ohlmeyer, said Adidas had lost capacity for around 100 million units for the second half of the year.
Additionally, around a third of Adidas shipments leaving Asia were delayed due to a shortage of ships and containers, Ohlmeyer explained. Add in holdups in Europe and North America and the company was seeing delays of more than a month on some goods.
Freight costs were also 200 million euros more than expected over the year, Ohlmeyer noted, while marketing and point of sale costs jumped 25.4 percent in the third quarter. The brand’s operating profit dropped 8.5 percent in the third quarter to 672 million euros.
Other activewear companies, including Nike and Puma, have listed similar challenges recently.
In terms of sales, the year so far has been “a tale of two cities,” Rorsted continued. “Wherever we see a somewhat normalized environment [without pandemic-related lockdowns], we trade at double-digit growth. Where we experience heavy impact by COVID-19, we experience a double-digit decline. That is, very strong growth in the west and a high impact on our business in the east,” he explained.
After looking promising at the start of summer, sales in Greater China became more volatile due to pandemic-related lockdowns, flooding and a politically motivated boycott of Western-made goods, Rorsted said. As a result, sales in the third quarter there slumped 14.6 percent, currency neutral. In Asia Pacific, more than half of Adidas’ stores were closed during the third quarter and sales there also fell, dropping 8.2 percent to 504 million euros.
Meanwhile in Europe, the Middle East and Africa, Adidas sales climbed 8.8 percent. And in North America, they rose 8.6 percent to hit 1.4 billion euros. The much smaller market of Latin America provided a bright spot this quarter as sales there rocketed up 55.4 percent to 405 million euros.
Adidas e-commerce revenues rose 8 percent compared to 2020 and 64 percent compared to 2019.
Adidas was putting various mitigation plans into action to deal with the various problems. In particular, the company had set up a new creative team in Shanghai to produce market-specific output and planned to tailor around one-third of products sold there to Chinese customers’ needs in the future.
Although there had been a lot of talk in the industry about moving production lines from Vietnam after this crisis, Rorsted pointed out that this was nigh on impossible.
“We have approximately 800,000 people deployed in our factories,” he argued. “It is an illusion to believe you can move an industry that has grown over 30 years in Asia, to other regions. And even if you theoretically could do that, you’d still have to move the raw materials. It will not happen,” he stated.
Despite the slightly sluggish results and the long list of problems it had presented, Adidas emphasized that it was on track to meet its guidance for the year.
For the nine months of the year so far, the brand recorded 16.09 billion euros worth of sales, which indicated growth of 21.1 percent compared to the first nine months of a pandemic-impacted 2020.
However, that’s not back to pre-pandemic levels yet. In 2019, Adidas had already made 17.8 billion euros over the first three quarters.
Adidas now expected a “flattish fourth quarter,” the executives noted. The group would still be able to achieve its guidance for the year, albeit within a narrower range at the lower end of predictions. Previously, the company had forecast its net income to land somewhere between 1.4 billion euros and 1.5 billion euros. “Growth is now anticipated to come in at the lower end of this range,” a company statement conceded.
Where Adidas had previously said it expected revenues to increase to as much as 20 percent, it was now looking at an increase of between 17 and 18 percent for the full year, Rorsted confirmed.