Dive Brief:
- S&P Global Ratings on Tuesday downgraded Adidas’ debt ratings to A-/A-2 from A+/A-1, saying that “a multitude of business challenges,” that include terminating its partnership with Kanye West and contracting consumer demand will affect the company’s financial performance. S&P Global Ratings expects Adidas’ credit metrics to “significantly deteriorate” due to one-off costs and operational challenges.
- Moody’s earlier this month also downgraded Adidas from A2 to A3 and said its outlook remains negative. Moody’s said the company’s “very weak earnings guidance” raises concerns about Adidas’ risk management and underlying business strength.
- Adidas this month issued low guidance for 2023, saying an inability to sell its Yeezy-branded inventory would lower the company’s revenues by 1.2 billion euros ($1.28 billion at the time) and drop operating profit by 500 million euros.
Dive Insight:
Although the company is not in serious financial distress, S&P Global Ratings’ decision to downgrade Adidas is another signal that the apparel retailer’s financial performance is currently off track as a result of several issues. Due to higher-than-anticipated inventory levels, S&P said Adidas is likely to experience negative free operating cash flow and “a material increase in leverage.”
According to S&P, sales of the West-branded shoes were 5% of Adidas’ total sales in 2021, and the company anticipated the products would represent 7% of sales in 2022. But the company ended its partnership with the celebrity in October after the designer repeatedly made offensive and antisemitic comments.
“Ending the Yeezy partnership with Mr. West will have a stronger-than-expected hit on the group’s operating performance in 2023,” S&P analysts Salvio Cascarino and Rocco Semerano said in the report. Adidas is also facing competitive pressure in China, which generated 15.5% of the company’s total sales in the nine months ending Sept. 30, 2022, and experiencing contracting consumer demand in Western countries, S&P said.
The S&P analysts said the negative outlook reflects volatility and limited visibility on what strategic initiatives Adidas will implement to mitigate the impacts of the terminated partnership, regain market share in China, and manage excess inventory from lower consumer demand.
Together, these factors mean “operating performance could remain under pressure for a prolonged period.” That would hinder Adidas’ capacity to generate an annual free operating cash flow of at least 1 billion euros per year and limit its ability to achieve a better debt-to-EBITDA ratio.
Moody’s this month also downgraded Adidas, citing the company’s lowered guidance. Moody’s analysts said the German-based apparel maker “was already fairly weakly positioned in the A2 rating category, with a negative outlook since November 2022. While Moody’s expected a weak operating performance in the next 12-18 months, the actual guidance is well below Moody’s expectations.”
Adidas may face another downgrade, Moody’s cautioned, “if the company’s operational and financial performance were to further deteriorate or take much longer to improve.”
Despite the challenges, Moody’s said Adidas maintains “conservative financial policies” and that its net leverage should return to a more healthy position toward the end of 2024. S&P’s analysts shared a similar sentiment, saying Adidas has the capacity to turn around its financial position by 2025.
Adidas CEO Bjorn Gulden acknowledged the company’s challenges. He said earlier this month that 2023 will be a transition year.
