Kanye West blunder puts Adidas in play
LONDON, March 15 (Reuters Breakingviews) - Adidas (ADSGn.DE) is a vulnerable underdog among sportswear champions. After a disastrous breakup with the musician formerly known as Kanye West, the $28 billion sneaker maker is slashing dividends and heading for the first loss in decades. Boosting marketing spending could deliver success, but it would be a slog. With no easy win, larger rivals may soon come sniffing.
Adidas’s new boss Bjorn Gulden took the helm in January. That was just two months after the company cut ties with West, now known as Ye, after the singer posted social media comments that readers deemed antisemitic. Gulden has promised a turnaround, but warned on March 8 that Adidas could face a 700 million euro operating loss if it fails to rebrand and sell thousands of Yeezy-branded trainers still in storage.
Gulden may have to splurge. The German group now spends less on marketing as a percentage of sales than it did in 2015. This made sense when Adidas could count on the 200-to-500-euro-apiece Yeezy trainers delivering an estimated 40% net income margin, 35 times higher than the group’s net income margin last year. But with no alternative bestseller, $180 billion Nike (NKE.N) is bound to take market share.
Higher costs, however, risk riling investors. Last year, Adidas spent 12.3% of its 22.5 billion euros of revenue on marketing and similar expenses. If it were to return to the 13.9% it allocated in 2015, it would add 2 billion euros of extra costs over the next five years, Breakingviews calculations show. That would hit Adidas’s operating profit and shave 1.5 percentage points off its operating margin – currently at 3% – each year from now until 2027.
Faced with such bitter medicine, a takeover offer may look enticing. Adidas’s shares have lost 50% since the pandemic and the group’s enterprise value has collapsed to just 1.5 times sales for the next year. That is a far cry from Nike’s 3.4 times multiple.
The discount may catch the attention of bigger rivals like $37 billion yoga pants brand Lululemon Athletica (LULU.O). Swooping on Adidas would allow the U.S. athleisure giant to dominate sportswear by servicing women and men across a wide spectrum of categories. Luxury giant LVMH (LVMH.PA), which last month named musician Pharrell Williams to head menswear designs at its top label, may also be enticed to swallow Adidas and elevate its offering.
A deal may offer Gulden a way out of a slow brand resuscitation.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
CONTEXT NEWS
Adidas will slash its 2022 dividend, the sportswear maker said on March 8, after warning that a split with the artist formerly known as Kanye West could push it to its first annual loss in three decades in 2023.
Chief Executive Bjorn Gulden, speaking to investors for the first time since taking the reins on Jan. 1, pledged to rebuild the bruised brand after dealing with the consequences of Adidas’s decision to end an alliance with controversial musician West, who now goes by Ye. The partnership yielded the lucrative Yeezy sneaker line.
Adidas has not said how much the Yeezy brand has made since its first deal with the artist at the end of 2013, but analysts estimate it accounted for as much as 7% of total sales per year.
The group sits on unsold Yeezy products. Should the company decide not to repurpose any of these products this would result in an operating loss of 700 million euros in 2023, including one-off costs, Adidas said in its earnings statement.
The German company needs to refocus on its core business and faces a “transition” year before returning to profit in 2024, and will return to its sports-based roots, Gulden said.
Shares in Adidas were down 2.4% at 144.50 euros by 0859 GMT on March 15.
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