German sportswear giant Adidas is expecting its sales to take a €1 billion ($1.2 billion) hit over the next two quarters because of factory closures in Vietnam and supply chain bottlenecks that are expected to continue into the early part of 2022.
Even as factories continue to ramp up production again, Adidas does not expect to reach full capacity until the new year, leading to a €400 million ($462 million) sales impact in the final three months of this year and a €600 million ($693 million) impact in the first three months of next year.
The “challenging market environment” in China, COVID-related lockdowns in Asia-Pacific and other industry-wide supply chain disruptions also reduced revenue growth by €600 million in the third quarter, Adidas reported on Wednesday (Nov. 10), though sales were still up 3% year over year.
Chief Financial Officer Harm Ohlmeyer said that at the end of September, 30% of global inventory was in transit, meaning that it was sitting on a dock, ship or truck, “but not being delivered to a customer or to a consumer.” Currently, around one-third of all shipments are leaving Asia with “significant delays,” he said — in many cases by more than two weeks. Freight costs are also expected to be €200 million ($231 million) higher than initially forecast.
Overall, Adidas has lost nearly 20 weeks of production, Ohlmeyer said, amounting to a total of 100 million units in the second half of the year — though some additional production capacity, mainly in China and Indonesia, will help alleviate this.
“All of the challenges are transitory in nature,” Ohlmeyer told investors and analysts on a conference call. “None of them change the optimism about our long-term growth opportunities.”
In September, rival Nike said it had lost 10 weeks of production because of factory closures in Vietnam and Indonesia, and transit times in North America are now almost double pre-pandemic levels. Chief Financial Officer Matt Friend told analysts on a conference call that these issues will likely curtail the availability of holiday and spring merchandise and hurt sales in the coming quarters.
Read more: Factory Closures Cause 10-Plus Weeks of Lost Production for Nike
“In this very dynamic environment, there are clearly things that are out of our control,” Ohlmeyer said. “So … we’re making sure that we are laser-focused on the things we can influence.”
Strategic Progress
Adidas executives said they are making good progress on shifting the company more toward eCommerce and direct-to-consumer (D2C) sales, part of a strategic plan outlined earlier this year. D2C sales grew 5% year over year and 20% compared to 2019; eCommerce revenues were up 8% versus last year and 64% on a two-year stack, boosted by a “significant increase” in full-price sales.
Related news: Adidas Looks to ‘Own the Game’ With Focus on eCommerce, D2C, Women
“We have the right strategy in place to succeed even in a challenging market environment like the one we’re currently faced with,” said Adidas CEO Kasper Rørsted. He noted that in markets that have largely begun to recover from COVID-19, such as North America and Europe, Adidas is growing by high single digits and gaining market share, “which is very encouraging.”
And despite a slower-than-expected recovery in China and flooding in certain parts of the country that caused deflated retail sales in the third quarter, Ohlmeyer said Adidas continues to invest in the market through localized advertising campaigns and a new local creation center in Shanghai, set to open in 2022. About one-third of the products sold in China are expected to be tailored specifically for the country.
“Greater China is one of our strategic growth markets, and we remain confident about the long-term opportunity,” Ohlmeyer said.
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