Adidas: China Boycott Shows No Impact

Friends,

Despite a boycott by some mainland Chinese consumers due to the treatment of one of China’s ethnic minorities in the Xinjiang region, Adidas reported strong earnings last week.

Here are the highlights (Source):

• Currency-neutral revenue is up 27% year-over-year.

• Almost 90% of Adidas stores globally have now reopened.

• Sales in China grew by 156% over the first three months of the year.

Even better?

Similar to competitors like Nike, Under Armour, and Lululemon, the COVID-19 pandemic continues to act as an accelerant for Adidas’ eCommerce business. After seeing a 35% uptick in online sales last year, the German sportswear company reported another 43% increase this past quarter.

As a result, Adidas saw their stock jump more than 10% following the earnings announcement — reversing a YTD decline of ~15%.

In addition to continued online sales penetration, investors were impressed with Adidas’ assertion that currency-neutral sales will rise at a “high-teens” rate this year — along with a “significant” acceleration already taking place due to product innovation.

That’s great, but this quarter was all about China.

After the United States, the United Kingdom, and others expressed concern over China’s forced labor and mass detention of the Uyghurs earlier this year, an ethnic group living mostly in China’s Western region, international retailers like Adidas, Nike, and H&M joined in.

Adidas released a statement saying they have a “zero-tolerance approach to slavery and human trafficking” and reminded consumers that they have “never manufactured goods in Xinjiang” and have “no contractual relationship with any Xinjiang supplier.”

China denied allegations of forced labor and other abuses in Xinjiang, claiming Adidas and its retail counterparts were spreading “malicious lies” designed to “smear China” and “politicize business” within the country (Source).

To make matters worse, various Chinese consumers banned together through social media to boycott international sportswear brands like Adidas & Nike. Instead, they insisted they would buy products from domestic companies.

Given China is the single largest market for most global retail brands like Adidas, investors were immediately concerned. But with sales increasing 156% last quarter — partly aided by store reopenings — and Adidas CEO Kasper Rorsted reaffirming his expectation for “very strong growth” this year in China, those concerns appear to have subsided — for now at least.

The threat of social & political differences impacting business within foreign countries has always existed but is rarely tested. Companies like Adidas and Nike remain ultra-aware of the impact their actions and words carry internationally.

Remember, the NBA saw its games banned from Chinese television for ~12 months following Daryl Morey’s support for anti-government protestors in Hong Kong. Estimates suggest that it potentially cost the NBA billions of dollars.

Only time will tell what financial impact — if any — Adidas will see from its vocal disagreements with the Chinese government, but if history tells us anything, investors will remain cautious.

My take?

Continuous quarters of double-digit sales growth will help ease those concerns :)

Have a great day, and we’ll talk tomorrow.

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