Adidas, the iconic sportswear giant, has been through a tumultuous year. The severance with Kanye West and the subsequent Yeezy inventory debacle have cast a long shadow on the company's financial performance. While the media has focused on the headline-grabbing losses, there's a more subtle, almost invisible, trend hiding in the latest financial data that could signal a deeper, more pervasive challenge for Adidas.

Analysts are quick to point to the 1.29 billion Euros in lost Yeezy revenue as the primary culprit for Adidas's 75 million Euro net loss in 2023. Indeed, the company's income statement paints a stark picture of the Yeezy impact. A 0.67 EUR loss per share in 2023, compared to 1.24 EUR earnings per share in 2022, screams the story of lost revenue.

But peek behind the curtain, delve into the nuances of the quarterly data, and a different story begins to emerge. Even before the Yeezy situation reached its breaking point, Adidas was already experiencing a concerning trend: a steady decline in net working capital.

Net working capital, the lifeblood of any business, represents the difference between a company's current assets and its current liabilities. It's a measure of a company's short-term financial health, its ability to meet its immediate obligations and invest in growth. A healthy net working capital position indicates a company's capacity to efficiently manage its inventory, collect receivables, and pay its suppliers.

Looking at Adidas's quarterly balance sheets, we see a consistent erosion of net working capital throughout 2022 and into the first quarter of 2023. In Q1 2022, Adidas boasted a robust net working capital of 4 billion Euros. By Q2, that figure had dipped to 3.22 billion Euros. The decline continued in Q3, falling to 2.61 billion Euros, and further contracted to 2.47 billion Euros in Q4.

The trend didn't reverse in Q1 2023, even before the Yeezy storm fully hit. Net working capital continued its downward trajectory, shrinking to 2.39 billion Euros. This consistent decline, predating the full Yeezy impact, suggests a fundamental operational challenge within Adidas, independent of the highly publicized Kanye West saga.

One possible explanation for this trend is an increasingly inefficient inventory management system. Adidas might be struggling to move its products as quickly as it once did, leading to a buildup of unsold inventory. This ties back to the Yeezy problem, highlighting a possible pre-existing weakness that the Yeezy fiasco simply amplified.

Another possibility is a less aggressive approach to receivables collection. Perhaps Adidas is offering more lenient payment terms to its wholesale partners, leading to a slower inflow of cash.

The implications of this shrinking net working capital are significant. It could signal a broader issue with demand for Adidas products. A slowdown in sales would naturally lead to a buildup of inventory and a corresponding decrease in net working capital.

While the Yeezy situation undoubtedly dealt a blow to Adidas, the shrinking net working capital trend hints at a deeper, systemic challenge. Adidas needs to address these underlying operational issues, independent of the Yeezy inventory overhang, if it wants to reclaim its position as a global sportswear leader.

Hypotheses:

Inventory Management Inefficiency: Adidas's inventory turnover ratio has been declining, indicating a growing difficulty in moving its products. This could be due to overproduction, a shift in consumer preferences, or increased competition.

Relaxed Receivables Collection: Adidas might be extending more generous credit terms to wholesale partners to maintain sales volume, leading to slower cash collection. An analysis of Days Sales Outstanding (DSO) could validate this hypothesis.

Overall Demand Slowdown: A decline in demand for Adidas products would lead to a natural buildup of inventory and a shrinking net working capital. Examining Adidas's sales growth in comparison to competitors, particularly in key markets, would offer insights.

Numbers:

Net Working Capital Decline: 4 billion EUR (Q1 2022) to 2.39 billion EUR (Q1 2023)

Net Loss 2023: 75 million EUR

Lost Yeezy Revenue: 1.29 billion EUR

The Yeezy saga might be grabbing the headlines, but the shrinking net working capital trend whispers a more complex story, a story that demands a deeper investigation and strategic adjustments from Adidas. The company's future hinges not only on resolving the Yeezy inventory problem but also on confronting and overcoming these deeper operational challenges.

"Fun Fact: The three stripes in the Adidas logo represent the three sons of founder Adi Dassler, symbolizing the company's family heritage and its commitment to carrying on his legacy."