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Fancy Sneakers Won't Top Shopping Lists Anytime Soon

Andrea Felsted
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Fancy Sneakers Won't Top Shopping Lists Anytime Soon

(Bloomberg Opinion) -- Adidas AG has become the first big consumer group to put a figure on the impact of the novel coronavirus. It won’t be the last. And the ultimate cost to the maker of Stan Smith sneakers may be much bigger than the about $1 billion hit to revenue outlined on Wednesday.

Adidas, which also makes Kanye West’s Yeezy line and Beyonce’s Ivy Park collection, said first-quarter revenue in Greater China would be between 800 million euros ($906 million) and 1 billion euros lower than in 2019 because of the effect of the outbreak. It expects operating profit in the region to decline by as much as 500 million euros in the quarter. This reflects Chinese store closures and a drop in visits to locations that were open. China accounted for 23% of Adidas’s sales in 2019.

While Adidas said things have started picking back up in China since the end of February, with stores and factories reopening, the danger is that there is more pain to come as the virus spreads. Just how bad it could get, nobody can say for sure. Underlining the threat, rival Puma SE said it wasn’t possible to quantify the coronavirus’s effect on its full-year results. Consequently, it retracted its Feb. 19 outlook that was based on expectations for a quick recovery from the virus.

 

From Adidas’s perspective, footfall is already declining in its stores in Japan and South Korea, which will hurt first-quarter sales by 100 million euros. Kasper Rorsted, Adidas’s chief executive officer, acknowledged that sneakers and sportswear won’t be high on people’s shopping lists as they emerge from quarantine. But he argued that the company is on solid footing to weather the crisis. The company is forecasting an increase in group sales excluding currency movements of between 6% and 8% for 2020, with the operating margin set to increase from 11.3% in 2019 to between 11.5% and 11.8%. But that does not reflect any impact from the coronavirus outbreak.

With the virus spreading to the U.S. and Europe, there is a serious risk that consumers there also take fright.

Footfall across the market is already suffering on both sides of the Atlantic. If the illness continues to spread, shoppers’ reluctance to hit the mall will only increase. Governments moving to stem large gatherings, employees increasingly working from home and plunging stock markets could all dent demand. What’s more, avoiding the gym for fear of infection means less need for new workout gear.

Meanwhile, the risk of sporting events such as the UEFA Euro 2020 soccer tournament and the Olympic Games, is particularly severe for Adidas. If these events were to be canceled, it would hurt sales by about 50 million to 70 million euros, it said, with the bigger impact from Euro 2020.

Shares in Adidas fell as much as 8.8% on Wednesday. Even without the warning on the coronavirus, there may have been some worry about the fourth-quarter performance from 2019. While sales excluding currency movements rose 10% in the final three months of the year, the gross margin declined by 3.2 percentage points, hurt by adverse currency movements and a less favorable mix of products sold. But right now, the illness is the focus of investors’ attention.

Rorsted likens the situation to a football match. The company had a great first half. The break has been longer than expected, but the second half will also come.

Yet right now, investors don’t know when normal play will resume, and what else might transpire before the kick-off.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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