- Company cuts sales guidance for the second time
- Slowdown in Europe adds to China weakness
- Shares in JD Sports and Frasers pulled lower
German sporting goods maker Adidas (ADS:FRA) disappointed investors with its earnings guidance, blaming weaker demand in Western Europe and China and costs involved in exiting the Russian market for a sharp drop in full year profits.
Shares slid 8.5% to €105 on the Frankfurt exchange, less than half their value at the start of the year when they were trading above €250 and their lowest level since 2016.
The sell-off in Adidas spilled over into UK sports retailers with Frasers Group (FRAS), the operator of Sports Direct, and 'King of Trainers' JD Sports (JD.) trading down 5% and 7% respectively.
WHY HAS ADIDAS CUT FORECASTS?
Adidas is one of the world’s biggest consumer brands, racking up net sales of more than €21 billion or £18.4 billion in 2021, an increase of 16% on the previous year.
At the start of this year, its aim was to grow revenues by between 12% and 14% and to deliver net income of between €1.8 billion and €1.9 billion.
However, by July it was obvious that continued Covid lockdowns in China - one of its biggest markets - were impacting sales, and the company lowered its sales growth target to around 11% for the year.
When it reported its second-quarter results, the firm cut its sales growth target again to mid to high-single digits due to ongoing weakness in China but said there was no significant slowdown in retail or wholesale demand for its products in other markets.
That view has obviously changed, as with today’s third quarter results the firm has cut its full year revenue growth guidance to just mid-single digits.
The firm blamed ‘the deteriorating traffic trend’ in China as well as ‘a significant inventory build-up as a result of lower consumer demand in major Western markets since the beginning of September’.
Higher inventories mean lower prices as the company has to discount the leftover stock in order to get rid of it.
On top of this sales headwind, the firm has finally decided to quit the Russian market, so altogether it is taking a write-off of €500 million against this year’s earnings.
Therefore, net profit from operations is now going to be just €500 million against an already-lowered target of €1.3 billion and an original estimate of nearly four times that amount.
THEY THINK IT’S ALL OVER
It’s worth noting the company’s new, lower forecast for full year sales growth assumes there will be a double-digit rebound in the final quarter due to the FIFA World Cup driving demand.
Historically, the firm has done well off the back of big sporting events such as the Euros, the Olympics and the World Cup, but whether this year’s tournament will be enough to rescue it is another matter.
Consumer confidence is slipping in most western markets, and the decision by the Chinese leadership to maintain its Covid-zero policy means sales there are unlikely to revive any time soon so investors’ caution would seem to be justified for the time being.
