Tuesday, June 18, 2024

$1.3 Billion Yeezy Sneakers unsold inventory stuck at Adidas

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After Rapper Ye, new chief executive of Adidas has $1.3 billion in Yeezy sneakers he doesn’t know what to do with.

Stored in warehouses around the world, the sneakers are a reminder of the once-fruitful tie between Adidas and Kanye West, the rapper now known as Ye. Since the first Yeezy Boost 750 shoe dropped in February 2015, his Yeezy brand became a defining force in the sportswear industry and an incredibly lucrative cornerstone for Adidas.

That ended when a fierce backlash against a string of antisemitic remarks by the musician forced Adidas to terminate the deal in October.

According to the New York Times, Bjorn Gulden, who took over Adidas in January, is trying to steady the German company, and the sudden loss of a profitable line is only one of his problems. Last year, sales in China, its biggest market, fell more than 35 percent as the country extended its lockdown to curb Covid, and the decision to pull out of Russia after the invasion of Ukraine cost it 59 million euros (about $62 million). It is also losing market share to Nike and other rivals.

On Wednesday, Mr. Gulden declared 2023 a “transition year,” as he laid out plans to shift priorities toward traditional product lines and cut costs, starting with slashing the dividend to €0.70 a share from the current €3.30.

At the same time, he said, the company was still trying to decide what to do with its remaining stock of Yeezy sneakers and other sportswear.

Mr. Gulden said he and his team were still weighing their options, including the idea of potentially selling the inventory and donating the profits “to do something good.” He said the shoes most likely wouldn’t be destroyed.

“We need to reduce inventories and lower discounts,” Mr. Gulden said. “Adidas has all the ingredients to be successful. But we need to put our focus back on our core: product, consumers, retail partners and athletes.”

Even as the company looks to expand its soccer, running, outdoor and golf lines, Mr. Gulden said, he remains hopeful that collaborations with social media influencers and pop culture stars, including Beyoncé and Pharrell Williams, will pick up this year. They are part of the company’s lifestyle sector, which in recent years has been key to boosting Adidas’s popularity with wider audiences, especially in the United States.

But the collapse of the most prominent of those collaborations hung over Wednesday’s earnings presentation. Last fall Ye began making antisemitic remarks on Twitter that prompted immediate blowback as companies disassociated with him.

Adidas, which was criticized for not acting quickly enough, described his comments and behavior as “unacceptable, hateful and dangerous, and they violate the company’s values of diversity and inclusion, mutual respect and fairness.”

Severing the agreement with Ye left the company with a mound of sneakers and clothing, resulting in potential losses of €1.2 billion in sales and about €500 million in profit this year.

When the contract was severed, Mr. Gulden said, Adidas decided to continue with the production of Yeezy goods in the pipeline to prevent thousands of people involved from losing their jobs. The future of that inventory is now in question.

“If we sell it, I promise that the people who have been hurt by this will also get something good out of this,” Mr. Gulden said. He did not elaborate, but added that donating the proceeds would make more sense than just giving away the shoes, which have an outsize value on the resale market among collectors and other fans. Before last year’s uproar, Yeezy sneakers often sold for hundreds of dollars a pair.

Jewish groups were among the strongest voices urging Adidas and other companies to sever ties with Ye, warning that refusing to do so could further fuel hatred against Jews at a time when antisemitism is on the rise, in Germany and the United States alike.

Their response to the idea of selling the Yeezy stock for a good purpose was split. Holly Huffnagle, director of combating antisemitism for the American Jewish Committee, said a financial investment from Adidas toward fighting hatred against Jews could be “a good start,” but called on the company to make a more comprehensive effort.

But Charlotte Knobloch, president of the Jewish Community of Munich and Upper Bavaria, warned that regardless of what happened with the proceeds, returning Yeezy shoes to the market would send the wrong signal.

“By deciding to sell West’s merchandise now, Adidas would choose to turn back the clock and severely compromise its own values no matter where the proceeds go: Yeezy products would end up on the streets as if nothing had happened,” Ms. Knobloch said.

Analysts underlined the various and competing factors involved in the decision over the Yeezy stock.

“When there are more than financial questions at play, the dance between figuring out donating versus liquidating, versus simply moving on, gets complicated,” said Simeon Siegel, a retail analyst at BMO Capital Markets.

The company previously said it was “the sole owner of all design rights to existing products” under the partnership, but Mr. Gulden said on Wednesday that it would not consider rebranding the Yeezy inventory. If it were sold instead of being destroyed, Ye would still be entitled to a portion of the proceeds as stipulated under his royalty agreement, although Adidas would not make a profit, Mr. Gulden said.

“Losing the Yeezy business is so hard,” he told reporters on Wednesday, praising the creativity of the collaboration on multiple levels, including the design, marketing and its use of social media and apps.

“There is no other Yeezy business in the market,” he said. “The people who think you can just replace this with something else — you can’t.”

The earnings presentation on Wednesday was Mr. Gulden’s first at Adidas, after he spent more than a dozen years as chairman at its crosstown rival Puma. Both companies are based in the same town in Bavaria, Herzogenaurach, where the Dassler brothers, Rudolf and Adi, founded them after World War II.

Adidas reported a 6 percent gain in net sales in 2022, to €22.5 billion, but operating profit fell 66 percent, to €669 million, weighed down by its pullout from Russia and the “zero Covid” lockdowns in China, which contributed to more unsold inventory.

The losses forced the company to issue four profit warnings over six months, leading both Moody’s and S&P to downgrade its debt last month.

For 2023, Adidas forecast underlying operating profit at roughly break-even level when taking into account the sales loss, should it fail to find a way to sell the Yeezy inventory.

Adidas faces numerous other challenges beyond its breakup with Ye. The company has been losing market share to Nike and other rivals including Puma, Mr. Gulden’s previous employer.

Adidas said it planned to cut its dividend as part of the cost-saving measures, pending approval from shareholders at their annual meeting in May.

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