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Adidas dropping Ye comes at ‘a tough time for the company’: Analyst

Bernstein Senior Analyst Aneesha Sherman joins Yahoo Finance Live to discuss Adidas severing ties with Ye, formerly known as Kanye West, what that means for the athletic apparel brand's bottom line, corporate governance, and the competitive landscape.

Video transcript

BRAD SMITH: And switching gears here, everyone. Cutting ties, Adidas has become the latest company to end its partnership with Ye, formerly known as Kanye West, following his anti-Semitic remarks. The athletic brand says it will stop production of Yeezy-branded products immediately, along with all payments to Ye and his companies.

Bernstein senior analyst Aneesha Sherman joins us now to discuss, alongside Yahoo Finance's Alexandra Canal. Aneesha, great to have you here with us today. Help us really put this kind of into perspective on the business front, $250 million net income, short-term negative impact Adidas is saying that this is going to mean, at a time when the brand was already seeing some of that waning popularity within their core consumer groups.

ANEESHA SHERMAN: Yes, this is coming at a tough time for the company. They just had their second of two early earnings releases and guidedowns for the year. They're now expecting Q4 to come in negative profitability anyway, ex this Yeezy impact. And this $250 million will further reduce the bottom line for Q4. The Q3 results have already been pre-released. The Yeezy Day, which was in August, counted towards Q3 performance and was quite successful.

However, the launches that were slated for Q4, which were meant to come out in the kind of October, November time frame, have now been completely pulled, and thus, the impact to the sales and the bottom line. And what's more important is Adidas is going to stop using the Yeezy label altogether. Although the company does own the rights to the product, they're going to rebrand it as Adidas product and stop using the Yeezy brand label completely, which should take a haircut off the 2023 and beyond sales as well because that was quite a successful brand franchise for the company.

ALEXANDRA CANAL: Hey, Aneesha. There is no denying how successful the Yeezy brand has been for Adidas, largely because it catered to Gen Z. It had that social currency with Ye, who, at the time of the partnership in 2013, he was at the top of his game. So what other types of partnerships or alternative revenue streams should Adidas consider exploring in order to cater to that Gen Z consumer base?

ANEESHA SHERMAN: Yeah, that's a good question. So Yeezy has been one of their more successful franchises. But in recent years, they have tried to diversify that by adding a few additional franchises. We've seen them come out this year with launches with Gucci and with Prada. The Gucci collection in particular was very successful. And they view it as a multiyear partnership.

They're continuing their partnership with Stella McCartney, which is also a multiyear long-term partnership. It's also a premium product, higher margin product. And they're continuing to work with Beyonce with the Ivy Park collection, which also released a new line this year and will continue to be a multi-year partnership.

So they do have several other partnerships. This isn't their only one. But that being said, Yeezy has been, as you said, one of the more successful ones. So it will require a haircut to sales estimates, as well as margins for the coming year or so.

BRIAN SOZZI: Aneesha, why do you think it took so long for Adidas to make this decision? Because I do think it says a lot about the corporate governance of a company like that.

ANEESHA SHERMAN: Yeah, I mean, this debate has been going on since August. So it started when, actually, Kanye West came out against Adidas, alleging that they had stolen his intellectual property. Adidas insisted that they own all the IP of the Yeezy franchise that's been released today. That's for kind of normal terms of these kinds of partnerships.

But this debate has continued for the last two months. They were trying to make amends and trying to make things work. They had a few years left on the contract. But it's been under review for the last couple of weeks. They probably could have come to an agreement sooner. I don't know the details behind their legal disagreements. But essentially, I mean, it's a big part of their revenue and profit. This franchise is one of their more successful.

So I think they were trying to figure out a way to break things off, whether they would continue using the Yeezy name, whether they had the right to continue, how that would impact both this year's and ongoing sales, and how they would kind of position the brand going forward, which is why it took a few days longer. And there's been increasing pressure on the company to drop him, as we've seen other companies drop him over the last couple of weeks, thanks to all of his statements in the past few weeks.

ALEXANDRA CANAL: Relative to what's going on with Adidas at the moment, and as Brad was saying, there's a lot of other issues at this company besides just Ye. How do you view the competitive landscape?

ANEESHA SHERMAN: Yeah, it's a tough year for sportswear in general because China has continued to be a very slow market, both partly due to macro concerns as people have been held back by COVID restrictions, but also due to a continued prominence of local brands, of Chinese-owned brands, that have taken share from the big Western brands. So that's been a market that's continued to be tough, particularly for Adidas, as they've kind of underinvested in the region in the past and are now trying to make up for lost ground.

At the same time, North America, as I'm sure you know, is going into a pretty heavy inventory quarter, as your guest speaker was talking about a few minutes ago. And that's going to impact them as well. So we have the bearish China outlook, the kind of short-term bearish North American outlook, and then EMEA. EMEA is also under pressure. The consumer continues to pull back on discretionary spend.

So it's been a tough year overall for the competitive landscape in general. It's been a tougher year for Adidas because they've had specific challenges in China to get their brand back on track. And so even preceding this Yeezy announcement, they were expecting net income to drop below 500 million for the year. And that number is now even lower.

BRAD SMITH: Do you believe that there's a trickle through here to the resale market as well, considering what led to the termination of this deal? Do people now go on to Stadium Goods, who's owned by FARFETCH, a publicly traded company, and say, I don't want to buy Yeezy shoes? Do they go on a StockX and say, you know, I'm not any longer interested in buying this product?

ANEESHA SHERMAN: Yeah, I think that's a good question. I think if the product were continuing to be sold by Adidas, I would expect a general boycott of it. Now that the product is not going to be sold by Adidas, I think there might be a reversal effect where this becomes-- the Yeezy product becomes somewhat of a collector's item, maybe not right now where nobody wants to touch it. But over the next couple of years, it becomes a limited edition collector's item that's sold in resale.

But I think the decision to stop branding the Yeezy brand was a good decision for Adidas because at the moment, that brand is associated very strongly with the creator, with the artist. And they want to cut the-- disassociate themselves completely. So I think what happens in the resale market is because of this restricted supply, it could continue to trade. But in the primary market, that was probably the right decision for them to do.

BRIAN SOZZI: And Aneesha, the Yeezy line has been popular almost since it hit the market. And because of that popularity, I think an argument could be made, it has taken market share from a company like Nike. But now, if that brand is no longer going to be at Adidas, is a Nike a winner here?

ANEESHA SHERMAN: Yeah, I think they lose that portion of the market share, which was the Yeezy premium product. They are going to relaunch. They're going to continue to launch the designs. I mean, it's unclear where they're going to launch it as a sub-brand or as just a kind of-- under the Adidas umbrella overall. They obviously aren't going to use the Yeezy name anymore. But the sneakerheads and the loyal customers will know it's the same product. It's just being launched under the Adidas brand umbrella.

So I think they will retain some of those sales. They're not going to lose that entire 1.5 to 2 billion worth of sales. But it will take a haircut because it's not being branded under that Yeezy brand anymore. It will probably cede some share to some of the other sneakerhead brands, including Nike.

BRAD SMITH: The real sneakerheads will always know. Aneesha Sherman, thanks so much for joining us here on the morning. Bernstein senior analyst, Aneesha Sherman, and Yahoo Finance's own Allie Canal, appreciate it.