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Adidas Will Release Some Yeezy Inventory to Ease Pressure


May 12, 2023

Adidas plans to sell some Yeezy inventory, and revenues will be donated to international organizations.

German sports giant Adidas CEO Bjoern Gulden said earlier that the company will sell some Yeezy brand merchandise and donate part of the proceeds to international organizations.

In October last year, adidas announced that it had terminated its partnership with the famous American rapper Kanye West. The direct cause was that Kanye's offensive behavior and anti-semitic remarks touched the company's bottom line. Since then, Yeezy's backlog of inventory and its negative impact on the group's performance have kept Adidas' share price under pressure.

Adidas said in February this year that the group still holds millions of pairs of Yeezy product inventories with a total value of 1.2 billion euros. If they can be sold normally, this part of the inventory is expected to generate sales of 1.2 billion euros and 500 million euros in operating profit. But in a worst-case scenario, all inventory would have to be scrapped, which would result in an operating loss of 500 million euros for the group in 2023.

As of the fiscal year ended December 31, 2022, the weakness of the China market and the "failure" of the Yeezy business caused Adidas' operating profit to decline by 66.3% year-on-year to 669 million euros, and net profit fell by 70.4% year-on-year to 638 million euros. According to Morgan Stanley, in 2021, Yeezy products will generate nearly $2 billion in sales for Adidas, accounting for 8% of the company's total sales.

As of the first quarter ended March 31, 2023, Adidas' after-tax continuing business net loss was 24 million euros, and it is expected that there will be an operating loss of 700 million euros in the whole year of fiscal 2023.

Bjoern Gulden said at a recent investor conference that it has not yet been determined when and how to advance the sales plan. "What we have to do now is to sell some shoes over time. Burning these shoes is not a solution". He further added that the revenues from the sale of this part of the product will be donated to international organizations to make up for groups harmed by Kanye's inappropriate remarks.

"We will do everything we can to bring Adidas back to where it belongs," said Bjoern Gulden.

Plus, the reason the company doesn't donate the sneakers directly is to avoid them "re-entering the market in a roundabout way." Since Adidas stopped production and sales of Yeezy, the price of Yeezy products in the resale market has been rising, and the price of some styles has more than doubled.

Ed Stoner, a sporting goods industry consultant who once worked for Adidas, said, "This is a smart and responsible move that not only maintains the integrity of the brand but also avoids a sustainable crisis." By selling part of its Yeezy inventory, Adidas may minimize an operating loss of 700 million euros for the current financial year, but it is unclear how much inventory will be sold and how much of the proceeds will be donated.

As of May 11, the stock price of Adidas rose by 2.09% to 167.14 euros per share, with a market value of 29.841 billion euros.

If the inventory is sold, Kanye will be entitled to a previously agreed commission of 15 percent of the sales, according to media reports. Adidas declined to comment.

Regarding the cooperation between Adidas and Kanye over the years, Bjoern Gulden commented "Although he faces a series of difficulties, he may be the most creative person in our industry."

In addition, Adidas also said in March that due to the poor sales of the fashion sports series Ivy Park in cooperation with Beyoncé, the company would terminate its cooperative relationship with her. The company reportedly paid Beyoncé $20 million a year as part of the deal.

On the same day, Harm Ohlmeyer, chief financial officer of Adidas, pointed out that after an external law firm conducted a dialogue with more than 20 current and former employees, the internal investigation results showed that there was no clear evidence to prove that Kanye was suspected of displaying pornographic materials, publishing anti-semitic remarks, or engaging in harassment. Of course, the findings also pointed to Kanye's erratic and sometimes inappropriate behavior, which made the Adidas work environment challenging. "The company is implementing measures to prevent similar problems in the future."

Harm Ohlmeyer also revealed that the lawsuit regarding Adidas' claim against Kanye is still in its early stages and the financial amount has not yet been determined. Kanye declined to comment.

As of March 31, the first quarter of fiscal year 2023, Adidas key performance data are as follows:

Despite the adverse impact of Yeezy, sales fell only 1% year-on-year to 5.274 billion euros. Among them, shoe sales increased by 1% year-on-year, clothing sales decreased by 3% year-on-year, and accessory sales increased by 8% year-on-year.

By channel: Wholesale sales increased 3% yoy, while DTC sales fell 7% yoy, a development that reflects Yeezy's negative impact on the company's e-commerce business (-23%), as most of the brand's products are sold through Adidas Sold Online. Meanwhile, sales at self-operated retail stores rose 11% year over year.

Gross margin decreased 5.1% points to 44.8%, primarily due to higher supply chain costs, higher discounts, inventory allowances, an unfavorable Yeezy impact, and negative foreign exchange movements.

Operating profit reached EUR 60 million, representing an operating margin of 1.1%.

Bjoern Gulden said "The first quarter results were better than expected, with flat sales and a small operating profit of 60 million euros. Sales growth excluding Yeezy was 9%. Latin America and Asia Pacific have er results were better than expected, with flat sales and a small operating profit of 60 million euros." Sales growth excluding Yeezy was 9%.

Latin America and Asia Pacific have two despite the negative impact of the Russian market, the EMEA region also achieved a slight increase, in line with expectations. Although sales in China fell by 9%, the actual sales value (sell-out, retail sales to end-consumers) achieved double-digit growth. These were better than expected and thus make us optimistic about the year as a whole. Sales in North America were down 20%, but were down 5% excluding Yeezy, in line with our conservative sales strategy given the high level of inventory and discounts in the market."

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