Adidas (OTCMKTS:ADDYY) said in early February that its operating profit in 2023 would be 500 million Euros ($534.2 million) less than in 2022 due to its breakup with Kanye West. The company’s profit warning was its fourth since last July. In my book, that makes it one of three celebrity stocks to sell.
Celebrity partnerships are worthwhile ventures until they fall apart, either through the celebrity’s reckless actions as in West’s situation or by overestimating a star’s drawing power. Either way, history is littered with celebrity endorsements going wrong.
Just as plenty of retailers may go bankrupt, there are always retailers and consumer brands that have been financially hurt by their CEOs’ desire to make a splash with customers and shareholders, using celebrities.
Sometimes that strategy works, and sometimes it doesn’t. It didn’t work out for Adidas. That’s why the sneaker retailer is on my list of three celebrity stocks to sell.
| PTON | Peloton | $13.60 |
| YUM | Yum! Brands | $132.04 |
| ADDYY | Adidas | $77.05 |
Peloton Interactive (PTON)
Peloton Interactive (NASDAQ:PTON) announced in July 2022 that Ashton Kutcher — the actor famous for his starring role in That ‘70s Show television series which ran eight years from 1998 to 2006 — would host its 10-week “Our Future Selves” series. As part of the show, Kutcher was supposed to train for a marathon.
The marathon was Kutcher’s first. He was running to support Thorn, a non-profit that he co-founded in order to fight the exploitation of children. Kim Kardashian and other celebrities made guest appearances on the series.
I don’t think there’s anything bad about a celebrity trying to publicize a cause that’s near and dear to him or her. However, there’s no question that naïve investors could view the appearances by Kutcher and Kardashian as endorsements of Peloton’s products and, by extension, the company, itself. As a result, a number of those investors may have bought Peloton stock.
Since the July 2022 announcement through Feb. 17, PTON stock was up 52%. If you are one of those naïve investors who bought on the Kutcher news and are still holding, you’d be wise to sell your shares before your luck runs out.
The company is in the middle of being turned around by Barry McCarthy, a former executive at both Spotify (NYSE:SPOT) and Netflix (NASDAQ:NFLX). Under the new CEO, PTON managed to barely generate positive free cash flow last quarter.
But Until the company figures out how to separate its subscription business from its hardware business, it will continue to be overvalued at 1.51x times its sales.
Yum! Brands (YUM)
The celebrity in question when it comes to Yum! (NYSE:YUM) is Pete Davidson, the former Saturday Night Live comedian and performer and one-time boyfriend of Kim Kardashian.
Davidson endorsed Taco Bell’s breakfast business through his 2022 ads promoting the morning part of the restaurant chain’s overall day. According to Fortune, Yum! Brands (NYSE:YUM) Q4 2022 results were better than analyst expectations, thanks largely to Taco Bell.
But Davidson’s long list of girlfriends and girlfriend troubles could ultimately blow up for any company using the wildly energetic comedian as its spokesperson.
And while there’s no question, Yum! Brands and Taco Bell will be tempted to dip into the well of success a second time to continue driving 9% transaction growth for Taco Bell’s breakfast business; the risk is that the talented comedian will go off the rails and somehow tarnish the brand’s reputation.
It can happen. I’m not saying it will, but it’s something to be aware of.
If you look at the company’s overall financial performance in 2022, it’s nothing special.
On the top line, its revenues climbed 4% year-over-year to $6.84 billion, while on the bottom line, its operating profit was 2% higher year-over-year at $2.19 billion. Its business model extracts a little from a lot of customers. It can’t afford a misstep or its growth will decelerate.
Its enterprise value is 20.8x times earnings before interest, taxes, depreciation and amortization, higher than its five-year average of 18.7 times. So its stock isn’t cheap at its current prices.
Adidas (ADDYY)
As I mentioned in the intro, the Kanye West experiment has been a financial boondoggle for the German company. It’s left reeling at a time when Nike (NYSE:NKE) continues to perform at an exceptional level despite the inflationary pressures faced by all global companies.
In its fiscal Q2, Nike easily beat analysts’ average expectations for its revenue and earnings, with its Nike Direct business growing by 16% YOY to $5.4 billion. Its online and retail stores account for 41% of its overall business.
Meanwhile, at Adidas, its new CEO Bjørn Gulden, who came over after doing a masterful job at Puma (OTCMKTS:PUMSY), has been very transparent about the company’s underperformance.
“‘The numbers speak for themselves. We are currently not performing the way we should,’ said Bjørn Gulden, the chief executive of Adidas, who joined the company last month. ‘2023 will be a year of transition to set the base to again be a growing and profitable company,’” The Guardian reported on Feb. 10.
ADDYY has lost nearly 40% of its value over the past year. The one bright spot: Since announcing it was terminating its partnership with Ye (Kanye West), its shares have rebounded, gaining 54% in the four months since it released the news.
Adidas’ relationship with Kanye dates back to November 2013, when it announced an endorsement deal with the musician. By 2019, Adidas’ Yeezy brand generated more than $1 billion of annual revenue, with 2021 sales of $2 billion.
However, the CEO at the time, Kasper Rorsted, knew West was starting to fall apart at the seams. It was only a matter of time before he would crash the partnership and possibly the Adidas brand.
Ironically, West was initially hired to make the brand “cool again.” Unfortunately, it has got a long way to go to reach that milestone.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.