The Hidden Cost of Moving Unsold Sneakers
Adidas has spent the better part of two years trying to convince investors that its financial recovery is on track. Gross margins are climbing, revenue is stabilizing, and the brand has largely moved past the public fallout from its split with Kanye West. But buried inside that recovery narrative is a structural problem that keeps distorting the picture: the company is still sitting on, and quietly liquidating, a significant pile of Yeezy inventory – and the way it accounts for those sales makes its margin recovery look cleaner than it actually is.
The Yeezy situation never had a clean ending. After Adidas severed ties with West in late 2022 following his antisemitic remarks, the company was left holding hundreds of millions of euros worth of finished product it couldn’t sell under the Yeezy brand without significant reputational risk. It eventually chose to sell portions of the stockpile, donating a share of proceeds to charity, but the decision to move that inventory at all introduced a variable into its earnings reports that doesn’t reflect organic business performance. Every Yeezy batch that ships distorts the baseline.
How Yeezy Sales Inflate the Margin Numbers
The mechanics are straightforward. Adidas already absorbed the production costs for all Yeezy inventory as a write-down or impairment when it became clear the product couldn’t be sold through normal channels. That means when the company does sell a pair – even at a discount – the gross margin on that unit is artificially elevated because most of the cost burden was already expensed in a prior period. The sale registers revenue and margin contribution without the corresponding cost of goods sitting in the current period’s books.
This creates a flattering illusion. Adidas’s reported gross margin in recent quarters has shown genuine improvement, and some of that improvement is real – the company has been cutting promotional discounts, reducing clearance sales on core lines, and tightening its product mix. But the Yeezy effect runs alongside those genuine gains, inflating the headline number in ways that make it difficult for investors to isolate how well the underlying business is actually performing. Strip out the Yeezy contribution and the margin trajectory looks less steep.
Adidas has, to its credit, broken out Yeezy revenues in some of its disclosures. But separating the margin impact cleanly is harder. The company reports gross margin at a consolidated level, and parsing the exact profitability of Yeezy units versus core Adidas product requires assumptions about how legacy costs were allocated – assumptions that even sophisticated analysts have to estimate rather than read directly from the filings.
The Inventory Overhang That Won’t Fully Clear
What makes this more than a one-quarter accounting quirk is the pace at which the Yeezy stock is being moved. Adidas has released Yeezy inventory in batches rather than all at once, partly to avoid flooding the market and partly to manage reputational optics around each sale. The staggered approach has kept the inventory overhang alive well into 2024, meaning the margin-distortion effect has been persistent rather than isolated to a single earnings period.
That persistence matters because it has coincided with the period Adidas is using to demonstrate its operational turnaround to investors. CEO Bjorn Gulden has made margin recovery central to his messaging since taking the role, and the numbers he’s presenting do show improvement. The problem is that investors trying to evaluate whether Adidas has genuinely rebuilt its pricing power and cost discipline are doing so against a backdrop where a non-recurring inventory liquidation is running alongside regular business. The turnaround story is partially real and partially a function of how legacy costs were timed.
There’s also a demand question buried inside the inventory picture. Each Yeezy batch that sells out quickly – and several have – generates enthusiasm that doesn’t necessarily translate to enthusiasm for Adidas’s core product lines. Yeezy buyers are often motivated by resale value, nostalgia, or the specific design language West developed, none of which benefits Adidas’s ability to sell its own originals or performance footwear at full price. The brand equity uplift from a successful Yeezy drop is narrow and doesn’t spread evenly across the catalog.
Adidas’s own guidance has acknowledged that Yeezy sales will eventually stop – either because the inventory runs out or because the company decides the reputational calculus no longer works in its favor. When that happens, the gross margin will face a quiet headwind: the inflating effect disappears, and what’s left is whatever the core business has actually built. If Adidas has used this window to genuinely improve its underlying margin structure – through better sourcing, stronger full-price sell-through, and reduced reliance on markdowns – the transition will be manageable. If the core business improvement has been slower than the headline numbers suggest, investors will see the gap clearly the first quarter Yeezy is absent from the mix. That reckoning hasn’t arrived yet, but the inventory stockpile is finite.
