Kanye West’s Yeezy Makes Investors Queasy

Investors are getting another reminder of the risk of teaming up with volatile influencers.

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Following Adidas‘ (ADDYY) decision to cut ties with singer Kanye West, shares of the shoemaker are down 3.2% this week, based on trading on the Deutsche Borse Xetra quoted by S&P Global Market Intelligence. And shares of the American Depositary Receipts that trade by the symbol ADDYY are down by the same amount.

Pressure turned up on Adidas to part ways with West after the singer made a series of charged racial comments. Given the shoemaker’s reliance on the “Yeezy” shoe brand backed by West, losing it is a big blow to the Germany-based company’s business. And that stock sell-off may be just the start of the pain for Adidas investors as the brand essentially goes away, says David Swartz, Morningstar equity analyst. The company’s ties with West on pitching shoe brands was material.

“While this move had recently become inevitable, its impact will be more severe than we had anticipated as Adidas has ended production of all Yeezy products and ceased royalty payments,” Swartz said.

Kanye Drops Bomb On Adidas Investors

Losing this important line of business is a big stumbling block for struggling Adidas. The company’s overreliance on the volatile star is a liability now.

Swartz estimates the immediate shelving of the brand will translate into a 250 million euro hit to Adidas’ fourth-quarter net income. That amounts to roughly $249 million in lost profit. That’s a significant setback, amounting to more than 40% of the $598 million Adidas is expected to make all year, says S&P Global Market Intelligence.

Adidas’ business was already in trouble before the West problem. The company told investors last week it would miss expectations for profit due to weak sales in China, a glut of inventory and charges associated with ending its business in Russia. Swartz thinks Adidas will now make just 250 million euros this year on a continuing operations basis, down more than 80% from what was expected before.

Measuring the Yeezy impact is a guess. Swartz estimates it amounts to up to 9% of Adidas’ revenue and up to 15% of profit. Adidas is likely paying West roughly $100 million a year in licensing fees. Swartz, though, points out Adidas sells more than 300 million non-Yeezy shoes.

The future of the Yeezy brand is unknown. “Adidas noted that it retains the rights to existing Yeezy designs and new colorways. (West) has made public statements that suggest that he owns this intellectual property, but we do not believe this to be the case,” Swartz said. “Ye has stated his intention to sell Yeezy products directly to consumers but doing so risks the possibility of legal action.”

And it’s not just a problem for Adidas investors. Shares of the shoemaker are in a variety of indexes, including the S&P Global 1200 and iShares Global Consumer Discretionary ETF (RXI).

Caution With Influencers

Many brands have tried to reinvigorate brands with influencers. But it’s not an automatic win.

Crocs (CROX) found success breathing new life into its brand by teaming up with stars like Zooey Deschanel. And The Gap (GPS) teamed up with West, too. Shares of Gap are actually up 3.7% after the casual clothing retailer this week formally pulled any remaining Yeezy Gap goods from shelves. It ended its partnership with the singer in September.

Other deals with celebrities and public companies also have had mixed results. Glu Mobile teamed up with West’s ex-wife Kim Kardashian for a mobile game called “Kim Kardashian: Hollywood.” Electronic Arts (EA) bought Glu Mobile last February for $2.4 billion. Shares of Electronic Arts are down roughly 10% since then.

And actor Jessica Alba founded natural products maker Honest (HNST) in 2012. Her company went public in May 2021. Shares are down more than 80% since the initial public offering. Alba remains the company’s chief creative officer and still owns roughly 5% of the company.

But for now, Adidas will need to figure out life after Kanye.

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Sources: Morningstar, S&P Global Market Intelligence