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S&P Global Ratings lowered its long- and short-term debt ratings on Adidas AG on Tuesday, citing deteriorating credit metrics in the wave of the termination of its partnership with Kanye West on the Yeezy product line.
The agency lowered the ratings to A-/A-2 from A+/A-1 and said the outlook is negative, meaning it may downgrade Adidas’s credit again in the medium term.
The Yeezy deal accounted for about 5% of total 2021 sales for the German maker of athletic shoes, clothing and sporting goods and had been expected to account for 7% in 2022, the agency said in a statement.
Adidas is also facing competitive pressures in the key Chinese market, which accounted for 15.5% of total sales in the nine months through Sept. 30, as well as shrinking consumer demand in Western countries, said S&P.
Adidas
ADS,
ADDYY,
ended its relationship with West last year after the rapper and fashion designer made a string of antisemitic remarks. At the time, the sports-shoe pioneer said that it would stop making Yeezy products and halt payments to West and his businesses, leading to costs of some €250 million in 2022.
On Feb. 9, Adidas issued a profit warning for 2023 and said terminating the partnership would reduce sales for the year by €1.2 billion ($1.3 billion) compared with 2022. The company now expects 2023 sales to fall 7% to 9% on an organic basis — “materially worse” than S&P ‘s forecast.
Adidas said that if it decides not to repurpose any of its existing inventory of Yeezy products, that would result in a write-off of an additional €500 million that would hurt its operating profit.
As that decision has not been finalized, it’s not included in S&P’s base-case calculations.
“Under our base-case scenario, credit metrics will significantly deteriorate with [a] 2022 S&P Global Ratings-adjusted debt to EBITDA [ratio] of close to [a multiple of 3, up from 0.7 in 2022, peaking at 4 to 5 in 2023] due to the expected operating challenges in the company’s key markets, announced one-off costs, and the impact from the Yeezy partnership’s termination,” said S&P in a statement.
The Margin (October 2022): Balenciaga ends Kanye West partnership over rapper’s controversial comments
“We then expect adjusted leverage to gradually improve toward [a 2 to 2.5 multiple] over 2024-2025 on average.”
S&P estimates that higher-than-expected inventory levels for Adidas at the end of 2022 will result in negative free operating cash flow, or FOCF, this year, as it will be forced to manage through promotional activities.
“We estimate FOCF turned negative in 2022,” estimating the red ink on that metric to be in the range of €1 billion to €1.2 billion “before principal lease payments mainly driven by working capital requirements,” said S&P.
U.S.-listed Adidas shares were down 5% Tuesday and are down 44% in the last 12 months, while the S&P 500
SPX,
has fallen 8%.
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