Adidas’ decision to end its partnership with Kanye West and immediately stop selling his Yeezy brand, due to West’s recent antisemitic and other hateful comments, will likely cost the company billions of dollars in annual sales and could set up a legal battle over the intellectual property behind the fashion brand.
“While this move had recently become inevitable, its impact will be more severe than we had anticipated as Adidas has ended production of all Yeezy products and ceased royalty payments,” Morningstar equity analyst David Swartz wrote in a midday Tuesday research note. “We had previously expected that Adidas would continue to sell the items that were already in the pipeline, but this is not to be the case.”
The immediate impact is expected to be a €250 million ($250 million) hit to Adidas’ net income this coming quarter, according to a company press release. Adidas indicated that number could be the high-water mark for losses by noting the seasonality of fourth quarter sales. The cost of Yeezy inventory that Adidas won’t be selling also likely figures into that number. The business said it would discuss the effect more on Nov. 9 in its next earnings announcement.
According to Swartz, West has said he intends to sell Yeezy brand directly to consumers, but the Adidas press release pointed out that the company “is the sole owner of all design rights to existing products, as well as previous and new colorways under the partnership.”
Other than releasing the expected impact of net income this quarter, the German sportswear maker hasn’t publicly disclosed how much Yeezy contributes to its business. Reports from Reuters and Bloomberg in recent years indicate top-line sales were around $1.3 billion in 2019 and have been growing. Given Adidas’ overall net profit margin is about 6% in recent years, the numbers suggest the Yeezy brand is much more profitable than other Adidas lines. Royalty payments to West probably have been more than $100 million annually, according to Swartz.
Using stock market value as a proxy for the deal’s value to Adidas implies Yeezy brand is worth $600 million to Adidas, given shares in Germany were down 3.2% at closing on Tuesday after falling as much as 9% after the announcement. However, in New York trading, where Adidas is traded over the counter, shares had recovered all their losses and were up slightly midday. That suggests Adidas splitting with the controversial West may not hurt the business terribly.
“Adidas ships more than 300 million shoes a year and has a revenue base of around €20 billion,” Morningstar’s Swartz wrote. “Adidas’ status as a global sportswear brand… has never been dependent on Yeezy.”