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New Adidas CEO Discusses Turnaround Strategy

New Adidas CEO Discusses Turnaround Strategy

On his first quarterly analyst call, Bjørn Gulden, Adidas’ new CEO, said the company plans to focus on culture, wholesale service levels, local go-to-market approaches, speed to market, and brand heat to orchestrate a turnaround at Adidas.

On the call, Gulden, who formerly led Puma, said Adidas already has the “ingredients for success” and spent the majority of the call discussing the Adidas brand’s strengths in the marketplace, including its long-established roots in sports history and archives, as well as its credibility in fashion and street culture built up over the last twenty years.

He said the brand’s current weakness is not coming from the Performance category, where sales jumped 19 percent in 2022 on the strength of gains in global football, running, outdoor and golf. He described it as “kind of ironic” that Adidas’ challenges are coming amid strength on the Performance side considering “performance is more difficult to create than fashion and there has always been criticism on this brand and also my previous brand that it’s only fashion or non-performance.”

He said the “problems” are emanating from the Lifestyle side, where sales fell 5 percent in 2022. The Lifestyle business includes Originals, Adidas Sportswear and Yeezy.

Gulden believes awareness and consideration remain “very, very high all over the world” for the Adidas brand and believes Adidas has been unfairly criticized for not creating enough brand heat.

He pointed to recent collaborations with Montclair, Prada, Gucci, and Balenciaga as a sign of the brand’s desirability. He said, “It’s impossible to have higher partners than this.”

He attributed the lackluster performance of many of these collaborations to supply chain disruptions that caused too many “to go to market almost at the same time.”

Gulden further blamed Adidas’ overall weakness in Lifestyle categories on having products being overly distributed, leading to “too many franchises with too high inventory and too much discounting.”

The major near-term challenge, however, is what to do with unsold stock of Yeezy merchandise after Adidas in October cut ties with Kanye West, now known as Ye, following antisemitic comments by the rapper and workplace complaints against him.

Adidas’ currency-neutral revenues in the fourth quarter declined 1 percent to €5.2 billion ($5.5 bn), reflecting a €600 million impact related to the company’s decision to terminate the Yeezy partnership. The decline also reflects a currency-neutral tumble of 50 percent in Greater China due to the challenging market environment, company-specific challenges as well as significant inventory take-backs. At the same time, double-digit currency-neutral revenues gains were seen in Latin America, up 47 percent; Asia-Pacific, 16 percent; and EMEA, 12 percent. Currency-neutral sales increased 6 percent in North America, slowed by the discontinuation of the Yeezy partnership which had a particularly strong impact on this market.

Adidas recorded an operating loss of €724 million in the quarter against an operating profit of €66 million a year ago due to significantly higher supply chain costs as well as the strong increase in promotional activity to reduce elevated inventories. The net loss from continuing operations amounted to €482 million in the quarter including one-off costs of around €50 million mainly related to restructuring costs as part of the company’s business improvement program. In the 2021 quarter, net income was €123 million.

The results were in line with a pre-announcement given in February although a new development was Adidas’ decision to slash its annual dividend by nearly 80 percent to €70 cents per share from €3.30 previously.

Adidas also reiterated that its 2023 forecast first given in February that the termination of its Yeezy contract could push the company into the red for the first time in 31 years, depending on what it’s able to do with unsold Yeezy stock.

Adidas had said the decision to not repurpose Yeezy products would lower revenues by around €1.2 billion (around $1.29 billion) this year. Accounting for the corresponding negative operating profit impact of around €500 million, the company’s underlying operating profit is projected to be around the break-even level in 2023.

Adidas said that should the company decide not to repurpose any of the existing Yeezy product going forward, this would result in the potential write-off of the existing Yeezy inventory and would lower the company’s operating profit by an additional €500 million this year. In addition, €200 million in restructuring costs are expected, which would lead to an operating loss of €700 million in 2023.

On Wednesday’s call, Gulden praised Ye as “maybe the most creative person that has ever been in our industry,” and said Adidas’ go-to-market approach for Yeezy, including a strong digital component, was “better than anything.”

He lamented, “Of course, losing that is a very, very tough thing. But anyway, now we have lost it and we have to deal with that.”

However, he said disposing of the product remains a “very complicated” issue with the normal sale of the product carrying a reputational risk while destroying the product carries with it sustainability issues and ESG backlash.

He noted that donating shoes to support a tragic situation or to a place where people need shoes presents challenges. He said, “I think you agree that these are not normal shoes. So, if you did that, they will come back again because the value of the product is not the physical value of the ingredients. It is premium because it’s branded merchandise that is sold at a higher price. “

He noted part of the delay in making a decision on what to do with unsold Yeezy products is because Adidas committed to factory orders and the product only arrived in recent weeks. However, he said internal discussions on figuring out the “right thing to do” are ongoing.

“We could sell it with a small margin and give the margin away for different donations,” said Gulden. “We can sell them with more margin and give more donations. I think the goal that we have is to do what the probability is that it damages us the least that we use to do something good.”

Beyond the disposal of Yeezy inventory, Adidas continues to grapple with ongoing macroeconomic challenges and geopolitical tensions, including elevated recession risks in Europe and North America as well as uncertainty around the recovery in Greater China. Adidas’ growth will also be impacted by efforts to significantly reduce high inventory levels.

Company CFO Harm Ohlmeyer, with an extended contract in hand, said on the call that Adidas’ inventories ended the year up 49 percent on a currency-neutral basis year-over-year. Inventories of €6 billion at year-end included about €400 million in Yeezy products.

Ohlmeyer said the high inventories are partly due to inflation, lean year-ago inventories due to 2021 shutdowns in Vietnam factories, and some foreign-exchange impacts. He nonetheless added that “still too high very clearly,” particularly in North America and to some degree, China.

“We are focusing on apparel first and foremost because footwear is easier to carry forward into other quarters,” said Ohlmeyer. “We significantly decreased our buying volume going into spring/summer ‘23 but also more importantly fall/winter ‘23 and we are technically repurposing some in existing inventory, again primarily on footwear, but also moving it to markets where the demand is higher. So, we believe overall depending on the market, it will be a much better situation in the summertime, but we still need to work with this one over the next couple of months.”

Among Adidas’ positives cited by Gulden was the brand’s line-up of endorsers supporting street culture, including Pharrell Williams, Beyonce, Bad Bunny, and Jenny Ortega. Said Gulden, “The lineup to connect to that culture is unique. And again, I think we have the resources and the scalability to really create brand heat there again and that is of course what we will do.”

Gulden also said Adidas has “maybe the hottest shoe in the market” with a segment called Terrace or T-Toe that includes the Samba, Gazelle and Spezial models. A pop-up in Shanghai for the Samba model is drawing long lines outside that was previously only seen for Yeezy launches. Celebrities are also being seen wearing the models. Gulden said, “It’s the first test if we can manage our new franchise in the right way by keeping it alive, heating it up every quarter without over distributing it so we start to discount.”

On the Performance side, Gulden sees an opportunity for Adidas to widen its offering to cover smaller sports. He said, “I think the DNA of Adidas has always been to develop products for all kinds of sports. I think it was even at the Olympics where we had shoes for all sports that you could participate in. I’m not sure we go that wide. But I do think from a creativity point of view and from a development point of view, we cannot only do the big sports but have to go wider again and we have the resources here. I mean we both have our own factories and our own sample shops. And you will see us be more reachable again like it used to be, in the smallest sports.”

However, he said the major Performance categories are performing well, supported by its roster of teams, federations and athletes as well as compelling innovation. Gulden said, “I would say that the criticism that we don’t have innovation in performance is not true. There is quite some innovation that has gone into the market. There is more innovation down the road.”

On global football, Gulden said Adidas has been taking market share lately with the success of its Predator cleat with triple-black and triple-white shoes “working very well,” as well as its new alliances with Italy and Jamaica squads. In running, the Adizero is helping the brand’s Boost technology finally find success on the performance side, supported by a wide number of race podium wins.

The outdoor category has been helped by a rebranding around the Terex name and greater interest in the outdoors over the pandemic. Golf, consisting of footwear and apparel for Adidas, also found “quite some momentum” during the pandemic and is positioned well for continued growth.,

Gulden said Adidas’ top-line recovery will be hampered in the near term by cautious ordering by retailers amid broader elevated inventories and recessionary conditions.

In North America, for example, high inventories and the return to a promotional marketplace are leading to a “challenging order book for the second half” from retailers.

He said, “Retail is being very careful committing to orders in the volumes that we would hope for. That’s why of course we are now doing everything we can to convince the retailers that we are the brand of choice going into ’24.”

For the current year, Gulden said Adidas plans to put a foremost focus on people and culture. He believes Adidas has a misperception about having a “negative culture and people not liking to work here,” citing surveys that show the company earns credit as among the best places to work.

Nonetheless, Gulden, who previously worked for Adidas as SVP of apparel and accessories from 1992 to 1999, said elevating culture remains a priority. He said, “Our business is 50 percent rational and 50 percent emotional. I still believe that there are no machines that can take emotions away from human beings. That’s why this is our most important resource. Adidas used to have, in my opinion, a very unique culture, which I was part of many years ago. And we need to find that culture again and strengthen it because I think it’s something unique and unbeatable if we give all the people a reason to have fun and be part of a successful Adidas.”

Adidas will also focus on the optimization of the business model that includes a focus on being more service-oriented toward wholesale. Wholesale is expected to become a bigger part of Adidas’ mix as Yeezy is eliminated from the mix, but Gulden doesn’t expect to shift to necessary impact margins. Said Gulden, “It is not true in the current environment with so much clearance that wholesale is the least profitable channel. I think that is a big misunderstanding depending on how you actually look at the business.”

From a go-to-market approach, Gulden expects Adidas will become “much more local” to best cater to local tastes. He said, “The world is not becoming more central or global. It’s very, very hard to find products that are doing well in all the regions and all the markets.”

Adidas will also focus on improving speed and agility. Gulden noted that such investments paid off for his previous company, Puma. He said, “There is a big, big need in a market that is changing to be much faster than Adi currently is.”

Finally, Adidas will remain committed to elevating brand heat. Gulden said, “There are many ways to get brand heat, but unfortunately there’s not a phone number that you can call and say, ‘I want more brand heat!’ It’s the sum of everything we do. It’s athletes. It’s teams. It’s federations. It is of course celebrities. It’s street culture, but also here, it is very, very local. And we need to have people in the different markets as close as we can to the consumer to make sure that we invest where it really makes sense. And of course, try to get as much brand heat as we can. And as you know, Adi has always been able to come back again when the brand has been down and I’m convinced we will do it again.”