Adidas still has a lot to prove

Sportswear giant Adidas is struggling to offset the impact of a boycott by Chinese consumers and the Kanye West scandal. Matthew Partridge reports

Old adidas tennis shoes
(Image credit: © Getty images)

Adidas’s turnaround is “off to a good start”, says Tim Loh on Bloomberg. While the sportswear giant still expects to lose €700m this year, its sales of €5.3bn in the first quarter were ahead of analysts’ expectations.

Business was stronger in Latin America and parts of Asia, while the company is “ramping up production” of the classic Samba, Gazelle and Campus sneakers, which have recently been in “high demand”: they have been “appearing on the feet of celebrities including Bella Hadid and Kylie Jenner”.

Not so fast, says Aimee Donnellan on Breakingviews. The bounce in Adidas shares “partly reflects the low expectations of Adidas’s investors”, whose shares have slipped by 50% in two years.

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Blame a scandal involving Kanye West, who designed Adidas’s lucrative Yeezy line of trainers. West’s antisemitic statements forced the company to cut ties with the musician, leaving them “with stacks of Yeezy trainers in storage”.

The loss of income from Yeezy will be painful as “the 40% margins on Yeezy sales were ten times Adidas’s overall level”; as a result, Adidas “will have to run hard just to stand still”.

No good options

Indeed, although the company has said that it is getting “closer and closer” to a final decision about how to dispose of the unsold Yeezy trainers, it is clear that it doesn’t have any good options, says the BBC.

While dumping them completely would reduce its operating profit by €500m this year, annoying investors, selling them and pocketing the money might prove even worse. It “risks damaging its brand reputation even further”, which could infuriate customers and lower sales.

No wonder Adidas’s CEO is warning of “a bumpy year with disappointing numbers”. It’s not just the financial fallout that could hit Adidas, says Joseph De Avila in The Wall Street Journal. The Yeezy scandal looks set to move into the courts.

A group of investors in America have already filed a lawsuit claiming Adidas failed to warn investors it was aware of Kanye West’s antisemitic remarks and “extreme behaviour”.

They claim that executives were so concerned that they considered terminating the relationship in 2018, but then opted to continue with it and “failed to take meaningful precautionary measures to limit negative financial exposure if the partnership were to end”.

China, rather than Kanye West, may prove “to be a much longer-lasting problem for the German sportswear company”, says Lex in the Financial Times. Sales in China continue to fall, and are now down a third over the last fiscal year.

While part of this is a result of lockdowns, the rest is due to a backlash by Chinese consumers over Adidas’s principled decision to join in a boycott of cotton from Xinjiang over forced labour allegations.

The controversy is good news for Chinese firms such as Anta Sports and Li-Ning, which pledged to keep using Xinjiang cotton and look set to take market share from more scrupulous Western companies.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri