Adidas cuts guidance as China’s Covid lockdowns bite

Adidas has warned that its operating profit this year would be lower than previously expected as the company struggles with disrupted supply chains, closed shops in China and rising costs.

Operating profit tumbled 38 per cent to €437 million in the first quarter as the world’s second-largest sportswear maker was hit by the economic fallout from China’s strict anti-Covid policies.

The company said lockdowns in China “have led to a large number of store closures as well as strong traffic declines, even in parts of the country not directly impacted”.

The main rival to US group Nike now expects full-year sales in China to fall by a double-digit percentage in 2022. Shares in Adidas fell almost 5 per cent in morning trading before recovering slightly to end off 3.6 per cent at €181.36.

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Adidas's plummeting sales in Greater China come as several other multinational companies, including Starbucks and Coca-Cola, warned that revenues in the world's largest consumer market could continue to suffer as hundreds of millions of consumers remained confined to their homes following the country's worst coronavirus outbreak in two years.

Adidas cut its operating profit guidance, warning that the operating profit margin would be at last year’s level of 9.4 per cent, rather than the 10.5-11 per cent previously expected.

Supply chain

Disrupted supply chains dented first-quarter sales by €400 million and the company expects a €200 million hit during the second quarter. Lockdowns and supply chain disruption wiped out €1.5 billion in annual sales last year.

Chief executive Kasper Rørsted said the group would "return to growth in Asia-Pacific in the second quarter" but was preparing for a continuation of the "challenging market environment in Greater China", pointing out that 45 cities in China were currently under lockdown.

Retailers in badly affected cities including Shanghai have been closed for several weeks as authorities seek to eliminate transmission chains. Experts warn that fashion retailers such as Adidas will not see the same boom in online spending witnessed in many western countries that went into lockdown two years ago because of broader weaknesses in the economy.

The Omicron outbreak has compounded problems for China, which was already reeling from a debt crisis in the property sector and a bruising regulatory crackdown on its tech titans.

Adidas's woes in China – long its most important growth market – predate this Omicron outbreak. The group was one of the western brands subject to a consumer backlash after it shunned Xinjiang cotton over human rights concerns.

As a consequence, group sales adjusted for currency swings will grow 11 per cent this year, compared with a previous expectation of 11-13 per cent, the company said. It now expects net income from continuing operations to be about €1.8 billion, against previous guidance of €1.8 billion-€1.9 billion.

Adidas said 80 per cent of its business was achieving double-digit growth, with sales in western markets rising by 13 per cent year on year in the first quarter. – Copyright The Financial Times Limited 2022