adidas AG (OTCQX:ADDYY) has "too many fires" to put out, said RBC Capital Markets, which downgraded its rating on the sportswear group a day it terminated its partnership with Kanye West.
The rating was cut to 'sector perform' from 'outperform' before and its target price was slashed to €100 from €150.
Analysts at the bank believe the German sportswear company has a “mounting number of challenges facing the business.”
Included in those is the termination this week of its Yeezy partnership with West following accusations of antisemitism by the rapper.
Termination of that deal is expected to cost Adidas somewhere between €1.7bn and €1.8bn in revenue, and a €700-750mln net income gap.
"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."
Adidas said it is looking to sell the Yeezy product designs, for which it still owns the rights, under its own branding rather than the Yeezy branding, in the first quarter of next year.
RBC said that Adidas “believes it can limit the loss of revenues through this strategy, and Adidas will also save on expenses related to royalty and marketing fees.”
However, RBC is less optimistic on the impact this will have, arguing the price point will have been lowered and the core Yeezy customer may not be as willing to purchase without the Kanye connection.
Aside from this issue, the German company must also deal with the slowing demand that has led to a build-up of inventory in western markets, which RBC believes will impact sales and margins into 2023.
Additionally, Adidas has a one-off payment related to exiting Russia and to settle a legal dispute, as well as a weakening of trends in China.
RBC said it prefers sportswear rival Nike, which it believes has its own challenges better contained alongside a “more compelling” growth outlook.