ADDDF - Adidas downgraded at RBC on issues related to inflation inventory and Kanye West

Adidas ( OTCQX:ADDYY ) could have more downside ahead as there are “too many fires” to put out for management at the moment, according to RBC Capital Markets.

Equity analyst Piral Dadhania explained that sales deterioration in China, an exit from Russia, elevated inventory levels, and inflationary pressures on North American and European consumers. Of course, the loss of a profitable partnership with Kanye West is also due to impact earnings power.

“We downgrade adidas to Sector Perform given the mounting number of challenges facing the business,” he commented. “Despite the ~60% YTD share price decline, we see the prospect of further negative share price events in the coming quarters, with confidence depressed and questions around management credibility.”

The latest “share price event” gaining attention is the loss of the Yeezy brand . RBC’s analysis suggests that the German apparel giant will lose €500m in revenues for the remainder of the year and take a hit of €250M in net income. For 2023, gross lost revenues are expected to be €1.7-1.8B and net income of €700-750M.

“If our estimates are correct, this implies adidas was reliant on Yeezy for ~45% of FY21 net income which we think is significantly higher than many investors had previously estimated,” Dadhania noted.

He added expectations for the company that it can still utilize the product designs to mitigate the adverse impact are “too optimistic.”

Dadhania downgraded the stock to “Sector Perform” from a prior “Outperform” and lowered his price target to €100 from a prior €155. Frankfurt-listed shares of Adidas ( OTCQX:ADDYY ) fell 1.82% on Wednesday.

Read more on The Gap’s termination of its own deal with Kanye West .

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