On Tuesday, S&P Global Ratings downgraded its long- and short-term ratings on Adidas AG (ADS, ADS1, ADDYY) to A+/A-1 from A-/A-2. This downgrade was due to deteriorating credit metrics caused by the termination of Adidas’ partnership with Kanye West’s Yeezy. The outlook is negative, meaning the credit agency may downgrade again in the medium term.
The Yeezy deal was expected to account for 7% of Adidas’ total sales in 2022. In 2021, it accounted for 5%. Additionally, Adidas is facing competitive pressures in the key Chinese market, which accounted for 15.5% of total sales in the nine months through Sept. 30. Additionally, the company is contending with shrinking consumer demand in Western countries.
S&P Global Ratings stated in a statement that, “Under our base-case scenario, credit metrics will significantly deteriorate with 2022 S&P Global Ratings-adjusted debt to EBITDA of close to 3.0x (up from 0.7x in 2021) while peaking at 4x-5x 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. We then expect adjusted leverage to gradually improve toward 2.0x-2.5x over 2024-2025 on average.”
The Yeezy partnership was a significant factor in Adidas’ success over the past few years. The partnership allowed Adidas to tap into the streetwear market, which was previously dominated by Nike. The partnership also allowed Adidas to gain exposure to the younger demographic and increase their sales.
The termination of the Yeezy deal has put Adidas in a difficult position. Not only has the company lost a major source of revenue, but it also has to contend with increased competition in the Chinese market and a decrease in consumer demand in Western countries. This has caused their credit metrics to deteriorate and their outlook to become negative.
Adidas’ ADRs were down 5% following the news of the downgrade. This is a sign of how much the termination of the Yeezy partnership has affected the company. The company must now find ways to make up for the lost revenue and regain their competitive edge.
Adidas has made efforts to diversify its portfolio and tap into new markets. The company has launched a number of new products, including the 4D Run 1.0 and the Ultraboost DNA. Additionally, the company has invested in digital marketing and e-commerce, which has allowed them to reach a wider audience.
Adidas must continue to find ways to innovate and stay competitive in order to succeed in the long-term. The company must also find ways to make up for the lost revenue from the Yeezy partnership and regain their competitive edge. The downgrade from S&P Global Ratings is a sign of the challenges that Adidas is facing, and the company must take action to ensure that they remain competitive in the future.
