Yeezy isn’t the only issue Adidas is dealing with

On Thursday, Adidas released their 2023 financial guidance sooner than expected.

The company’s guidance got off to a gloomy start with the prediction that its Yeezy relationship will result in a decline in revenue for the year. If it fails not sell its remaining Yeezy inventory, the company projects that revenues will fall by €1.2 billion, or $1.28 billion, and operating profit will fall by €500 million, or $537 million. Adidas will spend an additional €200 million on a strategic evaluation of the company’s operations.

Adidas stated that it expects 2023 sales to drop by the upper single digits in light of this.

However, according to observers, its problems go beyond Yeezy. Without considering the effect of the Yeezy brand, its projections for the coming year suggest that it still expects to suffer a significant decline in sales and profits.

What did Adidas do wrong?

In a letter to clients sent early on Friday, Bernstein analyst Aneesha Sherman stated, “The sales fall is about more than just Yeezy.”

According to Bernstein’s analysis, discounting the $1.2 billion in lost income from the Yeezy brand, Adidas is also anticipating a $2 billion reduction in sales in 2023 based on the company’s estimate of a high-single-digit decline in sales.

Even after taking the Yeezy impact into account, Sherman added, “We are concerned about the fundamental health of the firm that would necessitate such a severe guide-down.”

She still questions, though, whether the business has reached its “kitchen sink” moment, when it airs all its dirty linen at once and hits investors with bad news all at once.

“There may be more shoes to drop,” she said.

In recent years, Adidas has primarily relied on partners, such as musicians Bad Bunny, Pharrell Williams, and Beyoncé. But according to The Wall Street Journal, sales of the Ivy Park brand from Adidas dropped by more than 50% to around $40 million last year, falling far short of Adidas’ prediction of $250 million.

Ye, also known as Kanye West, was extremely successful for Adidas. Before Adidas ended the agreement in October, Cowen estimates that the brand made $1.2 billion in sales the previous year. Adidas enlisted Ye in 2013. He not only wore popular Yeezy models but also general release Adidas shoes like the Ultraboost, which helped bring them into the spotlight.

Regarding the popularity of the Yeezy brand, senior analyst at Wedbush Securities Tom Nikic wrote in a note to investors on Thursday, “One of the fundamental issues is that Adidas has had trouble discovering the ‘next great thing’.”

Adidas’s brand reset affects the entire industry

The reset by Adidas, the No. 2 sportswear brand in the world, will have a significant effect on the entire industry.

The German sportswear manufacturer could lose market share to rivals like Nike, which has held the top spot for decades. According to Nikic, Adidas’ troubles may also provide emerging companies like Hoka One One and On the chance to succeed. Foot Locker, which is now undergoing its own corporate reset, might potentially be affected. After Nike cut inventories on a number of wholesale partners during the pandemic, Foot Locker aims to increase the amount of Adidas products in its product mix to increase sales over the next years.

If North American pressure contributes to the sales declines Adidas anticipates this year, Nikic warned that FL’s efforts to diversify their product offering may be jeopardized.

According to a report from Telsey Advisory Group, Adidas’ problems are not solely caused by their glut of Yeezy sneakers. The corporation and archrival Nike have both been hurt by high inventories and promotional activities as well as declining sales in China.

Adidas appears to be lowering the threshold for 2023 in order to avoid having to make numerous downward modifications, as was necessary for 2022, according to TAG.