Transition year’ for company is off to a solid start
By guest author Jinjoo Lee from the Wall Street Journal.
May 5, 2023
Adidas’s ADDYY -0.46%decrease; red down pointing triangle new chief executive officer, Bjørn Gulden, can’t quite hit the ground running yet, but his first move—setting a low bar—is turning out to be a pretty solid strategy for the company’s stock.
These are still early days for the new CEO, who joined in January after the company suffered some major injuries: The fallout with Chinese consumers in 2021 from a dust-up over Xinjiang forced-labor allegations, and then a breakup with Kanye West last year. Mr. Gulden called 2023 a year of transition before the company can hit its stride again. One key goal is to reduce inventories—especially the piles of Yeezy products that Adidas has left over from its terminated partnership with Mr. West—and to lower discounts.
Here, the progress is mixed. On its earnings call on Friday, Adidas said inventories declined by roughly €300 million compared with a quarter earlier, about €420 million short of the decline analysts expected to see. Adidas said Yeezy inventory rose to about €500 million, some €100 million more than a quarter ago, because there were products in production that Adidas didn’t cancel.
Still, Adidas’s results overall were better than the low bar that Mr. Gulden set in his first earnings call earlier this year. The company said revenue was flat in the first quarter compared with a year earlier on a currency-neutral basis, better than the 4% decline that Wall Street analysts were penciling in. Operating profit was a better-than-expected €60 million. That was enough to send Adidas stock up 7 % on Friday.
Adidas shined in its home turf, growing 4% from a year earlier in Europe on a currency-neutral basis. Sales in China dropped 9.4% on the same basis. While that marks the eighth consecutive quarter of on-year sales declines in the region, it was better than Wall Street expectations of a 12% decline. There are glimmers of hope there: Adidas has started partnering up with local celebrities again, and the company said the country’s reopening brought more people back to sports. While revenue in North America shrank 19.6%, much of that was expected given how important the Yeezy brand was in that market. Adidas has also been deliberately putting fewer products on the shelves to reduce inventory levels while minimizing discounts.
The brand has yet to prove out the success of its new strategy, which will be more focused on sportswear. This is a pivot that Mr. Gulden carried out successfully at former employer Puma. A good early sign, though, is his clear-eyed view of the company, which was evident in its very conservative guidance for 2023.
During the earnings call, Mr. Gulden acknowledged Adidas’s shortcomings compared with Nike, saying its rival has done a much better job of sticking to fewer, but more enduring, sneaker lines compared with Adidas, which has “gone in and out” of some of its footwear lines. He also said Adidas can’t have the same centralized model, noting that while Nike generates and then exports American street culture, Adidas’s home turf of Germany doesn’t have a similar culture to export. That means Adidas will have multiple “creation centers” out of cities such as Los Angeles, Tokyo and Shanghai. That will be less cost-efficient, but it will be a better way to reach consumers, he said.
Notably, investors see Mr. Gulden as being closer to the product than the more finance-minded former CEO, as The Wall Street Journal has reported. The hiring of Mr. Gulden has revived Adidas stock substantially, though it still trades at just 1.4 times forward-12-month sales, a 61% discount to Nike.
Investors looking for an underdog story to bet on could find it in Adidas for a reasonable price.
Appeared in the May 6, 2023, print edition as ‘Adidas’s New CEO Shows Good Form’.