Adidas cutting ties with the one-time juggernaut Yeezy brand is going to sting, one Wall Street analyst explained.
"They will continue to launch designs," Bernstein analyst Aneesha Sherman said on Yahoo Finance Live (video above), adding: "They won't obviously use the Yeezy name anymore. ... I think Adidas will retain some of the sales. They will not lose that $1.5 billion to $2 billion worth of Yeezy sales, but it will take a haircut because it's not being branded under that brand as well."
In ending their relationship, Adidas will have a huge hole to fill financially: The popular Yeezy line represents about $1 billion to $2 billion in annual sales for the company, according to Evercore ISI analyst Omar Saad.
Adidas severed ties with Ye on Tuesday morning after a spate of antisemitic comments by the musician-turned-designer in recent weeks.
"Adidas does not tolerate antisemitism and any other sort of hate speech," the German company said in a statement. "Ye’s recent comments and actions have been unacceptable, hateful and dangerous, and they violate the company’s values of diversity and inclusion, mutual respect and fairness. After a thorough review, the company has taken the decision to terminate the partnership with Ye immediately, end production of Yeezy branded products and stop all payments to Ye and his companies. Adidas will stop the adidas Yeezy business with immediate effect."
Adidas stock fell 3% on the news and is down about 65% so far in 2022.
Adidas noted that it would miss out on $250 million in profits this year as a result of the decision.
"This is coming at a tough time for the company," Sherman said. "They had their second of two early earnings releases and guidedowns for the year. They are expecting Q4 to come in negative profitability anyway... and this $250 million will further reduce the bottom line for Q4."
Aside from the West drama, Adidas is entering into the holiday season wounded as the latest retailer to get caught flat-footed operationally as global economies have slowed. That poor execution has primarily led to a glut of Adidas inventory that will have to be aggressively marked down at the expense of profits, the company warned a week ago.
"The company’s new outlook takes into account a further deterioration of traffic trends in Greater China as well as 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," Adidas stated on October 20.
Evercore ISI's Omar Saad believes Adidas shares will be dead money as it works through excess inventory and also searches for a new CEO to replace long-time leader Kaspar Rorsted in 2023.
"Adidas has been significantly underperforming in China before and through the pandemic (China sales 55% vs. pre-pandemic levels vs Nike 87%), and that divergence appears to be widening," Saad explained. "Adidas has more exposure to apparel, which is really where the demand weakness and inventory issues have been highly concentrated."