In view of the declining buying mood in many western markets and weak business in China, the German sporting goods supplier Adidas AG revised its forecasts for the current 2022 financial year downwards on Thursday evening. Naturally, the news was not well received by investors: the company’s shares immediately lost more than eight percent of their value.
Specifically, the group now only expects currency-adjusted sales growth “in the mid single-digit percentage range” for 2022, after previously targeting a plus in the “mid to high single-digit percentage range”. Earnings targets were also lowered: management lowered the forecast for the gross margin from 49.0 to 47.5 percent, and the operating margin is expected to reach only 4.0 instead of 7.0 percent. In view of this development, the company now expects a profit from continued operations of around EUR 500 million for the current financial year. Previously, 1.3 billion euros had been promised here.
The group wants to mitigate the growing cost pressure with a package of measures
The updated forecasts reflected “a further deterioration in customer traffic trends in China, as well as a significant increase in inventory levels in key Western markets, as a result of lower consumer demand since early September,” the company said in a statement. The increased inventories are “expected to result in increased sales promotions throughout the remainder of the year.”
In addition, several negative special effects were taken into account for the new targets, which burdened the result in the third and fourth quarters, explained Adidas. Overall, the group now expects “one-off expenses of around EUR 500 million” for the entire 2022 financial year.
A part of this is accounted for by a program with which the sports goods manufacturer wants to counteract the adverse conditions. In the final quarter, around 50 million euros were booked for measures aimed at “mitigating the significant cost increases resulting from inflationary pressures along the company’s entire value chain and from unfavorable currency developments,” explained Adidas. In the coming year, these initiatives are “expected to make a positive contribution to increasing the company’s profits by around EUR 200 million”.
Profit from continuing operations falls 63 percent in the third quarter
The reason for the decisions that have now been announced was the comparatively weak business development in the third quarter. According to preliminary figures, group sales in the months of July to September amounted to almost 6.41 billion euros. It thus exceeded the level of the same quarter of the previous year by eleven percent, which was mainly due to the weak development of the euro. Adjusted for currency effects, sales increased by only four percent.
The development was slowed down by problems in the China business. The company conceded that sales there in the most recent quarter fell “in a strong double-digit percentage range on a currency-adjusted basis”. This is “attributable to the ongoing extensive Covid-19 restrictions as well as significant inventory reductions”. The company’s other markets “taken together continued to deliver double-digit sales growth on a currency-adjusted basis in the third quarter.”
Due to shrinking margins and negative special effects, which the group put at a total of almost EUR 300 million, earnings in the third quarter fell well short of the corresponding prior-year level. According to the figures available, profit from continued operations slipped by 63 percent from 479 to 179 million euros, Adidas explained.