Earnings

Adidas sees $1 billion coronavirus hit to China sales, Puma warns on profit

Key Points
  • Adidas says Greater China Q1 sales, profit hit by virus.
  • Adidas, Puma make third of sales in Asia.
  • Companies' shares tumble in early deals.
People in face masks walk in a street during an outbreak of the 2019-nCoV coronavirus.
Artyom Ivanov | TASS via Getty Images

German sportswear makers Adidas and Puma warned on Wednesday of a major decline in sales in China due to the coronavirus and said while there were early signs of improvement there the impact had spread to other markets.

Shares in Adidas and Puma, already pummeled in the last few weeks, were down 6.3% and 3.8% respectively by 0830 GMT. Adidas stock was at one-year lows. 

Adidas said it expected first-quarter sales to drop by up to 1 billion euros ($1.14 billion) in greater China and operating profit to decline by between 400 million and 500 million. 

"The virus hit looks worse than feared," Jefferies analyst James Grzinic wrote in a note.

Puma said it no longer expected its business would return to normal soon, despite encouraging signs coming out of China, adding it was abandoning the 2020 guidance it gave on Feb. 19 that had assumed the crisis would be short lived.

"Given the duration of the situation in China, the negative impact in other Asian countries and now also the spread to Europe and the U.S., we unfortunately have to conclude that a short-term normalization will not occur," Puma said.

Adidas and Puma make almost a third of their sales in Asia, which has been a major growth market for the sporting goods industry in recent years. The region is also the main sourcing hub, with China a major producer for both companies.

Since emerging in China late last year, the new coronavirus has spread around the world, inflecting around 120,000 people, killing nearly 4,300 and sending markets into a tailspin.

As China recovers, disruption spreads

Adidas warned last month its business in the greater China area had dropped by about 85% year on year in the period since China's Lunar New Year on Jan. 25.  On Wednesday, it said it had started to see a "slight improvement" in business activity in greater China, but shopper traffic was now deteriorating in Japan and South Korea, and the impact on other countries was uncertain. 

Puma said Asian markets such as Singapore, Malaysia, Japan and South Korea, where Chinese tourists often travel to shop, were recording a big fall in sales, and it had seen a significant decline in shopper traffic across Europe.

In greater China, Adidas cancelled all shipments to wholesale partners in February and it said it planned to clear excess inventory through its own channels in the rest of 2020.

While its supply chain has faced disruptions, Adidas said most of its factories in China were operating again and its global sourcing activities had not been hit so far.

Speaking to CNBC's "Squawk Box Europe" on Wednesday, Adidas CEO Kasper Rorsted said the company had ended 2019 at an all-time high.

"The company has never been stronger," he said, although he noted that the coronavirus outbreak had led to a substantial slowdown in China.

"That's why we're projecting around a 1 billion euro revenue hit for the first quarter in China alone," he said. "We expect other regions to grow, but of course China being 20% of our business has a substantial impact on all of our business."

VIDEO4:1404:14
Coronavirus has no implication on our strategic outlook, Adidas CEO says

He added that rate cuts from central banks including the Bank of England and the Federal Reserve were unlikely to make a significant difference to the outbreak's economic fallout.

"I think it might calm the markets, I don't think necessarily it will drive demand up in the short term, but I think it does give you the opportunity to plan for the long term for companies that need it," he told CNBC.

"The good part of us increasing our performance so dramatically in the last four years is that we have an extremely strong balance sheet, we have a very strong cash flow, so while this is a significant nuisance to our business it is no implication on the strategic outlook for our company."

Puma said most of its factories in China were running again and its outbound logistics were also mostly in operation, so its global supply chain was only seeing some minor delays.

Adidas forecast currency-neutral sales to increase by between 6% and 8% for the full year and for its operating margin to rise by between 10.5% and 11.8%, but said the outlook did not include any impact from the coronavirus outbreak.

Fourth-quarter sales - covering a period before the coronavirus took hold — rose a currency-adjusted 10% to 5.84 billion euros, while operating profit came in at 245 million euros, missing analysts' mean forecasts of 5.88 billion and 288 million euros, respectively.

Currency-neutral sales grew 18% in greater China, 10% in North America and 14% in Europe, the latter a big rebound from declines in the first half of 2019 after the firm took steps to reduce its reliance on its Originals fashion line.

CNBC's Chloe Taylor contributed to this article.