adidas(ADDYY) - 2023 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Sales for Q1 2023 were €5.3 billion, essentially flat on a currency-neutral basis, but up 7% when excluding the Yeezy business [7] - Gross profit margin decreased by 510 basis points, primarily due to discounts and inventory write-offs, with expectations to return towards 50% in the future [7] - Operating expenses increased by approximately €110 million, leading to a small profit of €60 million, which was better than expected given prior forecasts of a small loss [8] Business Line Data and Key Metrics Changes - Footwear sales reached €3 billion, up 1%, while apparel sales decreased by 3% to nearly €2 billion, indicating a higher inventory of apparel compared to footwear [25] - The accessory business grew by 8%, contributing to a split of 57% footwear, 37% apparel, and 6% accessories [26] - Performance categories showed double-digit growth, except for training, which remained flat [27] Market Data and Key Metrics Changes - North America experienced a dramatic 20% decline in sales, but when excluding Yeezy, the decline was only 5% [9] - EMEA showed a slight increase of 9% when excluding Russia, indicating positive growth in the region [16] - China reported a 9% decline, but sell-through rates were up double digits, suggesting potential for recovery [17][20] Company Strategy and Development Direction - The company is heavily investing in women's soccer, with jerseys developed for teams participating in the upcoming Women's World Cup [6] - Strategic initiatives include extending the MLS contract and enhancing soccer culture in the U.S. [10] - The focus remains on improving the core business areas of design, development, sourcing, and marketing to build a stronger foundation for future growth [58] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing geopolitical tensions and macroeconomic challenges but noted some positive trends, such as decreasing inflation and normalizing freight costs [62] - The company confirmed guidance for 2023 as a transition year, expecting a high single-digit decline in net sales and a breakeven operating model [63] - There is optimism about regaining market share in China as local brands begin to saturate [74] Other Important Information - The company is working on various exit options for the Yeezy inventory, with decisions expected in the mid-term [75] - Inventory levels are currently at €5.7 billion, with €500 million attributed to Yeezy, indicating a need for better inventory management [51][52] Q&A Session Summary Question: Comments on market share between Western and local Chinese brands - Management noted that while local brands have gained market share, there are signs of saturation, and Western brands, including Adidas, are expected to regain some market share [73][74] Question: Distribution points in China and future store openings - The number of sales points in China is around 8,000, with expectations to open more stores in lower-tier cities as the business stabilizes [78][79] Question: Route to margin improvement and gross margin targets - Management indicated that gross margins should improve from the current low levels, with a target of reaching 10% EBIT in the mid-term [80][83]