- Following Nike’s negative guidance of a month ago, Adidas offered a cautious outlook for 2H22 results which reflected a further deterioration in traffic trends in Greater China and a "significant inventory build-up as a result of lower consumer demand in major Western markets since the beginning of September, which is expected to lead to higher promotional activity during the remainder of the year. Nike’s negative guidance reflected a significant build-up of inventory in apparel for the U.S., not Europe. As such, this is new information that likely reflects negatively on Nike as well.
- Since Nike’s guidance we have concluded that there were two primary causes of the build-up of inventory in the U.S. One, we suspect that Nike faced canceled orders from wholesale customers that had double-or triple-ordered due to transportation and supply chain delays. We do not know why Nike missed this sell-in versus sell-out disconnect. Second, we suspect that as nearly all brands are chasing the athletic apparel segment, there became too large of a supply-demand imbalance, especially as consumers moved to out-on-the-town, occasion-based, and new in-the-office outfits. This second reason should have impacted Adidas as well.
- The callout by Adidas on China is worse than what Nike shared on September 29. At that time, Nike CFO Matt Friend stated, "We are taking a cautious near-term approach in Greater China, given the ongoing risks of COVID-related disruption." L’Oréal, P&G, and other global brands have called out a weak 3Q22 for the region. All of this confirms to us that our theme of Western brands pivoting to the U.S. consumer to drive growth has durability. Additionally, it suggests growth and profit headwinds for brands that have amplified their China exposure such as Lululemon; that will something to watch for when they report 3Q22 results.
- Not totally unrelated to this new news, Adidas had announced on August 22 that CEO Kasper Rosted would be leaving the company "during the course of 2023." The update may be part of a play to "kitchen sink" the business so that a new CEO can begin without any legacy problems or inventory overhang.
