Adidas Says Consumers Are Struggling. In Reality, They Are Getting Selective.

By Helen Gray On Oct 21, 2022

Like a recurring injury,

Adidas’s

ADDYY -3.69%

third profit warning of the year has lopped another 10% off the sportswear giant’s hobbled share price. The company blamed weak consumer spending for its challenges, but a comparison with rivals isn’t flattering.

The German brand unexpectedly prereleased its third-quarter sales late on Thursday, and cut its sales and profit outlook for 2022. Even with a bounce from the FIFA World Cup in the fourth quarter, Adidas now thinks full-year sales will rise at a “mid-single-digit” rate. Operating margins will be just 4%, down from the 7% that seemed manageable a few months ago. Adidas has 63% more inventory on its hands than this time last year, which needs to be discounted heavily to clear.

Adidas said it has noticed weaker spending in “major western markets” since the beginning of September, most likely the U.K., Germany and the U.S. The warning dragged down peers:

Puma’s

shares fell 9%, while

Nike

was down 1% in premarket trading. More broadly, Europe’s big listed shopping malls lost around 4% of their value.

Consumers could be getting choosier where they spend rather than cutting back altogether. Demand for Nike’s goods still looks strong, even if Adidas’s main rival also has too much inventory as orders that were backed up at sea for months all arrived around the same time. The U.S. brand reported a 10% increase in currency-neutral sales for the three months through August and said demand remained resilient in September. This was more than double what Adidas managed in its latest quarter.

A similar divergence is happening among mass-market clothing labels. Sales at fast-fashion brand

Hennes & Mauritz

fell 4% at constant currencies in the company’s latest three-month period, while Zara’s owner,

Inditex,

reported a 13% increase in sales in its most recent quarter.

Adidas was in trouble even before this week’s guidance cut. The brand is losing market share to local competitors in China, and Chief Executive Officer

Kasper Rorsted

is stepping down next year. A new boss may need to scrap plans to reach a 12% to 14% operating margin by 2025, which now looks too ambitious.

The sportswear brand recently put its successful tie-up with controversial rapper Kanye West under review. The Yeezy partnership with Mr. West, which was due to last until 2026, generates around 8% of group sales. Without it, Adidas’s underlying performance looks weak: Strip out the Yeezy collection and analysts at UBS estimate that the company’s annual sales have grown just 1% on average since 2017.

Household budgets will undoubtedly be squeezed early next year as higher winter energy bills eat into disposable incomes, especially in Europe. Adidas’s results suggest consumers are becoming more thoughtful about when and where they splurge, but in truth the brand had already slipped down their shopping lists.

Consumer spending has held up relatively well so far despite inflation, but experts say we’re approaching an inflection point. WSJ’s Sharon Terlep explains the role “elasticity” plays in a company’s decision on whether to raise prices. Photo illustration: Adele Morgan

Write to Carol Ryan at [email protected]