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Supply chain constraints impact Q1 sales and earnings at Adidas

By Prachi Singh

May 6, 2022

Management

Image: Avatar Ozworld by Adidas

Currency-neutral revenues in the first quarter declined 3 percent as Adidas faced challenges on both supply and demand. In euro terms, revenues increased 1 percent to 5.302 billion euros.

The company said in a statement that while Adidas continued to experience strong demand in all western markets, supply chain constraints as a result of last year’s lockdowns in Vietnam reduced top-line growth by around 400 million euros in Q1 2022.

In addition, the challenging market environment as well as covid-19-related lockdowns in Greater China and Asia-Pacific continued to weigh on the top-line development in these regions.

“In the first quarter, consumer demand for our brand and products was strong in all western markets. Our combined sales in North America, EMEA and Latin America grew at a double-digit rate. Backed by an exceptionally strong wholesale order book and relentless focus on driving growth in our own DTC channels, we expect this positive development to continue for the rest of the year,” said Adidas CEO Kasper Rorsted.

Highlights of first quarter results at Adidas

The company’s DTC revenues increased 1 percent versus the prior year, reflecting a 33 percent increase compared to the 2020 level.

While Adidas e-commerce revenues experienced a double-digit increase in the share of full-price sales, revenues in the company’s own digital channel increased 2 percent during the quarter reflecting high growth in the prior year period. Compared to the 2020 level, e-commerce revenues grew 50 percent.

From a category perspective, the company added, revenue development was strongest in the company’s strategic growth categories football and outdoor, which both grew at strong double-digit rates. In addition, sales in running increased at a high-single-digit rate driven by strong sell-through of Adidas’ latest product innovations such as UltraBoost 22 and AdiStar as well as the broadening of the Solar franchise with the introduction of SolarGlide.

Despite supply chain constraints limiting growth by around 400 million euros, currency-neutral revenues in all western markets combined increased 13 percent during the quarter with an increase of 13 percent in North America and 38 percent in Latin America.

Sales in EMEA were most impacted by the supply shortages with more than half of the total negative impact recorded in this particular market. Revenues grew by 9 percent in the region. In the eastern part of the world, the company continued to face a challenging market environment in Greater China, amplified by covid-19-related lockdowns across both regions. As a result, revenues in Greater China decreased 35 percent and 16 percent in Asia-Pacific.

The company’s gross margin in the first quarter was down 1.9 percentage points to 49.9 percent. Operating profit of 437 million euros resulted in an operating margin of 8.2 percent.

The company’s net income from continuing operations decreased to 310 million euros, while basic EPS from continuing operations reached 1.60 euros compared to 2.60 euros in 2021.

Adidas expects sales growth at lower end of the forecast

Despite several external factors continuing to weigh on industry-wide demand and supply, Adidas confirms its top and bottom-line outlook for 2022. While the company continues to expect currency-neutral revenues to increase by a rate of between 11 percent and 13 percent, growth is now anticipated to come in at the lower end of this range due to the severe impact from Covid-19-related lockdowns in China.

Net income from continuing operations is also forecasted to reach the lower end of the previously communicated range of between 1.8 billion euros and 1.9 billion euros.

Because of the less favourable market mix due to lower-than-expected revenues in Greater China, the company’s gross margin is now expected to be around the prior year’s level of 50.7 percent and operating margin to come in at around the prior year’s level of 9.4 percent.

Due to the most recent widespread covid-19-related lockdowns in China, which have led to a large number of store closures as well as strong traffic declines even in parts of the country not directly impacted, revenues in Greater China are now expected to decline significantly in 2022.

The original growth targets for EMEA (mid-teens growth), North America, Latin America (both mid-to-high-teens growth), and Asia-Pacific (mid-teens growth), which combined represent more than 80 percent of the company’s business, are confirmed underpinned by a strong orderbook.

Adidas expects to already return to growth in the second quarter despite a continued sales decline in Greater China and around 200 million euros negative impact from supply chain constraints. In the second half of the year, net sales are expected to grow more than 20 percent driven by unconstrained supply combined with the strong momentum in western markets, accelerating demand in Asia-Pacific, a pipeline of innovative products as well as major sporting events.

ADIDAS