German shoemaker Adidas AG warned it’s sitting on a €1.2 billion ($1.3 billion) pile of unsold merchandise after terminating its lucrative branding deal with rapper Ye.

The German sneaker brand said in a worst-case scenario, if it has to write off all existing Yeezy inventory, it faces an operating loss of as much as €700 million in 2023.

“The numbers speak for themselves,” New CEO Bjorn Gulden said on the company’s website. “We are currently not performing the way we should.”

Gulden is looking to refresh a brand beset by crises on several fronts. He’s conducting a strategic review aimed at reigniting profitable growth by next year that could cost as much as €200 million in 2023. A loss would be the first in at least three decades.

“It seems like the new CEO wants to set the bar low and take early action in 2023 to make the changes needed” to turn around the company, Cristina Fernandez, an analyst at Telsey Advisory Group, wrote by email.

The new CEO started at Adidas in January after nearly a decade running cross-town rival Puma. With Puma, he led a turnaround that he also began by resetting profit and sales growth expectations. His main focus at Adidas will be reinvigorating the brand’s pipeline of sneakers and apparel and winning back customers in the U.S., Europe and China.

Adidas ranks No. 20 in Digital Commerce 360’s Europe Database. It gathers the top European online retailers in order by web sales.

Sitting on Adidas Yeezy gear

Gulden will also have to figure out whether Adidas can sell or repurpose Yeezy designs to customers without the brand name. It previously flagged that profit and revenue have been hurt by the damage from ending the line, whose shoes previously fetched hundreds of dollars.

The Yeezy inventory might have brought in €1.2 billion of revenue and €500 million of operating profit had things turned out differently, the company said. If Adidas decides not to repurpose any of those products, then it will write off the entire Yeezy inventory.

“We need to put the pieces back together again,” Gulden said. “I am convinced that over time, we will make Adidas shine again. But we need some time.”

The sportswear group terminated its lucrative design partnership with Ye, formerly known as Kanye West, in late October after he made a series of antisemitic and racist remarks. Adidas had become heavily dependent on the Yeezy line, which it dubbed one of the most successful in the industry’s history, and it took weeks of deliberations inside the company before it finally ended the deal. Other retailers such as Gap Inc. moved much more quickly to sever ties.

Unsold inventory

Deciding what to do with unsold stock can be a headache for apparel and shoe companies. In 2018, Burberry Group Plc was criticized for burning nearly £30 million ($36 million) of unsold clothes, accessories and perfume to prevent them from being stolen or sold cheaply, which could have caused damage to the brand. It no longer burns unsold stock.

Adidas sales will sink at a high-single-digit rate in 2023, the German company forecast late Feb. 9. That compares with the roughly 4% growth that analysts estimated.

Adidas will put its full focus on consumers along with its athletes, retail partners and employees, Gulden said. The goal is to create “brand heat,” improve products, better serve distributors and become “a great and fun place to work,” he said.

Adidas is also still facing challenges in China, where demand for its shoes and clothing has fallen amid a consumer boycott and as a result of COVID restrictions.

The weak full-year results and muted sales guidance for 2023 means the new leadership must improve execution and brand health, said Poonam Goyal, a Bloomberg Intelligence senior industry analyst.

“The sales guidance is more than just the €1.2 billion in lost Yeezy sales, we believe,” she said. “It reflects a struggle to draw sales and staunch market-share loss, despite a rise in demand for athleisure worldwide.”

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