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Friday, August 7, 2020

Adidas Dropped 34% In Q2 Revenue, But The Real Issue Is Not Financial - Forbes

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Adidas reported revenue sales down 34% for Q2. The North American market dropped 37% while China remained flat. The pressing issue that was not addressed in the Q2 written press release was how Adidas will make deep and meaningful progress in creating a culture of diversity, equity and inclusion. In the earnings presentation, however, the company discussed the goals of increasing employee diversity and having zero-tolerance for racism. Adidas has been criticized by employees and the media for making non-substantive claims on this topic. Even if the company follows through on its current social justice initiatives, the results may come a little too late and not be aggressive enough to make a meaningful impact in the second half of this year.

The business highlights

The e-commerce business was up 93% year-over-year with a focus on direct-to-consumer (DTC) businesses and digital success through targeted consumer marketing, exclusive product launches and prioritized supply chain management. Dan Neiweem, co-founder and principal at Avionos, stated: “Be it a fear of exposing themselves to COVID-19, a desire to get outside, boredom shopping or the simple fact people want to be comfortable at home in their athleisure wear, we’re seeing an increase in demand for fitness shoes and apparel with the bulk of these purchases being made online.” Neiweem expects that adidas, as a leader in the athletic apparel space, will continue to see an increase in digital sales heading into the second half of the year. 

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Traffic was significantly lower than last year with 70% of stores closed at the beginning of the quarter, however, the company registered an increase in conversion rates, as consumers that visit stores tend to have a clearer buying intent. By the end of the quarter, only 17% of stores remained closed. Adidas has 5% more stores in Q2 than last year and it plans to open more stores than it will close. 

Profitability took a hit in Q2

The company’s gross margin decreased by 2.4 percentage points to 51.0% (2019: 53.5%) in the second quarter. While the mix of business and lower sourcing costs had a positive effect on gross margin, heavy promotions impacting pricing and currency fluctuations had a negative impact. Net debt was down $792 million compared to last year and showed a positive position of $362 million.

Creating Lasting Change Now

Kasper Rorsted, CEO of adidas, said, “Diversity and inclusion are very important to me personally and I have listened to many of our employee stories which is a quite humbling experience.” Rorsted discussed some of the initiatives outlined in the Q2 plan, Create Lasting Change Now. They include long-range goals that may seem late to the party such as increasing Black and Latinx representation on the leadership board to 12% by 2025 (many of its competitors have already reached this modest goal). While adidas speaks to how it is creating change with diversity and inclusion, it has lagged behind other competitors in this area. In June the company announced the departure of the head of global human resources who had been with the company for 23 years. The sudden move was a result of pressure from criticisms by Black employees about the lack of diversity.  

Moving Forward To The Second Half Of The Year

Adidas’ plan moving into Q3 and Q4 is focused on shifting product into 2021, adjusting its launch calendar and executing fully digital commerce. Adidas plans to focus on digital opportunities including social media and the running/training app to drive brand-building platforms and also to create commercial platforms like the adidas app and Creators Club. Rorsted stated, “From everything we know today, our recovery will continue in Q3. Where we are open for business, be it in physical stores or in the digital space, consumer demand for our products is high. This is a solid foundation to build on as the long-term growth prospects for the industry have become even more promising.” 

According to  Neiweem, adidas has been focusing on its digital strategy, creating premium experiences and transforming its marketplace to controlled spaces. “Without these key commerce initiatives in place, adidas would have been more significantly impacted in Q2.”  Neiweem expects to see adidas accelerate its plans to improve the digital experience across all customer touchpoints heading into Q3 and beyond.

The challenge faced by adidas that will foretell its road to a sustainable future goes beyond digital strategies and includes addressing the cultural issues. Financial performance needs to be strong and this is a challenge considering the current pandemic driven limitations on physical retail, but it can be offset through strong digital strategies and a move to more DTC business. However, cultural issues need to be addressed as aggressively as financial ones.

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August 07, 2020 at 11:48PM
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Adidas Dropped 34% In Q2 Revenue, But The Real Issue Is Not Financial - Forbes

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