Dive Brief:
- Adidas slashed its 2022 outlook for the Greater China region and lowered its expectations for the whole company on Tuesday amid continued COVID-19 restrictions and a slow recovery in the country.
- Revenues for the year are now expected to grow in the mid- to high-single-digit range, down from initial projections for double-digit growth. The Greater China region was expected to be flat year over year and could now decline by double digits, according to a company press release.
- The underperformance had knock-on effects across 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 income to 1.3 billion euros ($1.32 billion) from a previous range of 1.8 billion euros to 1.9 billion euros.
Dive Insight:
Adidas highlighted in its release that second quarter results were slightly ahead of expectations thanks to strong growth in its Western markets and a return to growth in Asia-Pacific. However, the change to its projections for China still constitute a “significant departure from original expectations,” Wedbush analysts Tom Nikic and Ezra Weener wrote in emailed comments Wednesday.
Adidas also expects to be clearing excess inventory in Greater China until the end of the year, impacting gross margin. Nikic and Weener predict the company’s gross margin to be down about 150 basis points in the second half of the year as a result.
“So far, the company did not experience a meaningful slowdown in the sell-through of its products or significant cancellations of wholesale orders in any other market,” Adidas said in the release. “Nevertheless, the adjusted guidance also accounts for a potential slowdown of consumer spending in these markets during the second half of the year as a result of the more challenging macroeconomic conditions.”
A challenging environment has already led two other major retailers to cut guidance in recent weeks: Both Walmart and Target have cut profit expectations in the face of ripping inflation and too much inventory. Target in June cut its Q2 operating margin expectations from 5.3% to 2%, while Walmart just this week signaled its operating income would decline by 13% to 14% in the quarter. For Adidas, those macroeconomic factors are a side-note compared to much greater challenges in China. But they might not always be.
“Given how ambitious the prior outlook was (20%+ top-line growth in [the second half of the year]), it's not a huge surprise that management needed to reduce their outlook,” Nikic and Weener said. “We also think it was prudent to embed slowdowns outside of China, even though the company has not yet seen any ‘cracks’ in their Western markets.”
