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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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  • Number of pages: 2

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Company description

In 1924, under the name of Dassler Brother's Shoe Factory, the three-striped company now commonly known as Adidas was created. Headquartered in Germany, the business is today the largest sportswear manufacturer in Europe and second worldwide, producing more than 900 million sports products every year. Initially known as a football brand, the company has diversified its portfolio and supplies products to a wide range of sports. Currently, Adidas is also the holding company of several other businesses, such as Reebok and TaylorMade. Today, the business is a truly multinational company by providing its products in most of the countries worldwide. The German manufacturer employs more than 55,000 people that worked to generate € 21.218 billion in 2017.

Is Adidas financially healthy?

Is the company financially healthy? - focus on the company's Balance Sheet, Income Statement, Cash Flow Statement (Base your reasoning, discussion and argumentation from the results of your ratio calculations and comparison to the previous year and to the industry):

To analyze Adidas' financial situation, the data used comes from the 2017 Annual Report which can be found on the company's website. For industry standards, the data comes from Adidas' largest competitors worldwide: Nike, Puma and Under Armor. Please refer to the appendix for the ratio matrix.

Balance Sheet:

To start off, lets analyze Adidas' balance sheet. The statement shows healthy numbers. The first figure worth highlighting is total assets, which went down 4.3% from 2016 to 2017. Even though the company had a 5.8% increase in cash and cash equivalents on the same period, other aspects like “other current financial assets” dropped by a massive 46%. This figure would be more alarming if not by the fact that liabilities also decreased during the time. Total current liabilities went down by 7% and total non-current liabilities by 8.2%. This decline is the main aspect that drove current and quick ratios to an improvement from 2016 to 2017. The fact that the current ratio is above 1 is positive because it means that the company is able to meet its short-term obligations, but it is still doing poorly compared to industry standards where the ratio is more than two times larger.  

Furthermore, the German company's debt to equity ratio is a point of concern. Even though the ratio improved from 2016 to 2017 due to a decrease in total liabilities, industry standards are considerably lower. This shows that Adidas has worse financial leverage than competitors. Additionally, the inventory turnover increased slightly in 2017. This means that the business is selling goods quicker than before, which is good, but industry standards are still at a higher figure. Higher inventory turnover indicates that the industry is selling goods faster than Adidas. This must be point of improvement if the multinational wants to compete in the fast-paced sports apparel business.

Additionally, Adidas' return on equity and receivables turnover ratios improved. The main driver of such improvements was an increase in sales. An increase in return on equity means that the business is generating more income per shareholder investment. Also, improvement in receivables turnover means that Adidas is getting more efficient in collecting account receivables, which is a strong financial outlook.

Lastly, Adidas' shareholder equity had minimal change from 2016 to 2017. Their price per earnings ratio did decreased, but this is due to a relatively higher increase in earnings per share than market price per share. The result is still close to industry standards.

Income Statement:

Looking at the income statement, we can see that Adidas' delivered strong financial performance in 2017. Net sales increased by 14.8% from 2016 and reached a maximum in the last 5 years.  Also, operating profit rose by 30.8%. The reason to such strong growth was that Adidas improved sales in every location, except Russia. It is worth highlighting that in Greater China net sales increased by 26% while the USA improved by 25%. Also, net income improved by 7.9%. This was the main driver for improvement in ratios mentioned before like return on equity and return on assets.

On the other hand, profit margin slightly decreased from 5.52% in 2016 to 5.18% in 2017. This should be no point of concern since Adidas is still performing better than industry averages.  The interest coverage ratio illustrates how well Adidas is performing, with an increase of 50% from 2016, which means the business is well within its safety margin, and considerably above industry standards.

Cash Flow Statement:

Adidas' net cash generated from operating activities increased from 1348 million euros in 2016 to 1648 million euros in 2017, an improvement of 22%. Similarly, the free cash flow ratio grew by 27%. The company's cash flow yield increased to achieve 1.5 in 2017 while the cash flow to sales ratio rose slightly from 7.29% in 2016 to 7.77% in 2017. This indicates a higher capacity to turn sales into cash, which is good for the business.

Furthermore, net cash used in investing activities decreased due to purchases in property, plant and equipment as well as purchases of investments and other long-term assets. The figure declined by around 10% from 2016 to 2017, which is a good indicator. Also, net cash used in financing activities amounted to 769 million euros in 2017, an increase of almost 40% from 2016.  

Part 2.

Cost controlling strategies

Identify at least 4 independent and separate examples of what your company has done well or poorly to control costs with regards to cost accounting?

1. Outsourcing

According to John McNamara, head of global sourcing, higher labor expenses in countries where Adidas sources their products from has forced the business to shift prices upward. Labor costs are expected to increase more than 10% a year, while direct materials like cotton and nylon could increase up to 4%. Such higher input costs have affected production strategies too. Now, the multinational is looking to move away from China, where there are over 300 factories, into Myanmar. The small south-east Asian country is expected to account for 4% of the overall shoe production by 2020. This situation exemplifies how Adidas has appropriately dealt with cost controlling strategies in order to continue pushing for growth at a worldwide scale. (Dalder, 2015).

2. Technology development

Adidas has also been investing heavily in technology development. As a result of that, the company is rethinking the way they make their products. An example is Adidas new factory in Ansbach, Germany and Atlanta, USA. The concept of the so-called “speedfactory” is to integrate aspects like 3D printing and customization at a mass scale to get products to the market at rates three times faster than traditional ways. The German company expects to produce 1 million shoes a year by 2020 from both factories, which doesn't seem much compared to the 403 million pairs of shoes that the business produces in 2017. At the moment, the speed factories are working as more complementary production to the two biggest markets, Europe and North America, but the ambition is to have more than 20% of its shoe production to come from automated factories by 2023. (Green, 2018).

3. Restructuring operations

Another way Adidas plans to control costs is to continue restructuring the business. In India, for example, the business has adopted new organizational structures. The overall goal is to increase efficiency and reduce costs by streamline operations. Such actions are actually a reaction to fierce competition in India, as companies like Puma are pricing products at more affordable rates, and even lower than half of adidas, according to the article. Moreover, the German manufacturer has also reportedly shut down a number of non-performing stores, out of the 450 stores that the business currently has in India. (Khanna, 2018)

4. Minimizing Waste

Adidas is also working towards minimizing its waste production as a way to reduce costs. The business disclosed a list of objectives it aims to realize by 2020. The list includes aspects like decreasing by 50% eater usage, and completely switching to sustainable cotton by the end of this year. Also stated on the list is the plan to reduce paper usage per employee by 75%. Furthermore, the company is also working closely with suppliers in order to reduce energy usage by 20%, and to increase usage of recycled materials. In fact, the 2nd largest shoe manufacturer in the world also recently partnered with sustainable focused firms to supply shoes from recycled ocean plastic, like the Ultra Boost X shoes. (Kell, 2016) (Leighton, 2018).

Current and long-term liabilities

What are the company's current and long terms liabilities and what effect does it have on the company's performance?

Adidas' total liabilities amounted to 8 billion euros in 2017. Out of that, current liabilities surpassed the 6 billion euros mark, while non-current liabilities were just under 2 billion euros. It is worth highlighting that in 2017, the business was able to cut drastically on short-term borrowings from 2016, a decrease of 78.5%. Moreover, a decrease in around 20% of accounts payable illustrates how the German manufacturer is improving its short-term liquidity stance.

Adidas long-term liabilities comprise of long-term borrowings which had no actual change from the previous fiscal year. Although, Adidas' efforts to reduce overall liabilities from 2016 were effective, since current liabilities dropped 7% and long-term liabilities reduced 8.2%. To conclude, Adidas is working towards reducing its financing and debt levels to improve its profitability.

Key capital investments

Identify a key capital investment made by your company within the last 2 years? What was it? How was the acquisition financed? How will this acquisition improve the company's revenue performance?

One of Adidas latest investments was a $700 million deal with the Major League Soccer to become the official apparel partner of the North American league. The six-year deal is now the largest commercial agreement in MLS history, as well as the largest investment the company has made in football in North America.

The contract was announced in August 2017 and has already impacted sales. Adidas reported an increase of 25% in net sales in North America in 2017, which is currently the second highest segment in sales. Western Europe is still the biggest segment, with 29% of sales while North America represents 21%. The agreement highlights additional investments in youth development, which means that in years to come, it is likely that North America will become the main driver of growth for Adidas. (Smith, 2017).

Has Adidas met its targets for 2017?

Has the company met its financial and or other performance targets for the last financial year? And if not, what were its reasons for not doing so?

In 2017, Adidas recorded strong financial and operational performance. Revenues increased 4% above the targeted 12% and the gross margin recorded was 1% higher than forecasted. The German manufacturer also saw all market segments sales grow by double digits, with the exception of Russia. This was a consequence of an improved pricing and product mix, as well as effective marketing campaigns. Adidas' earnings per share has also been constantly rising since 2010, achieving a figure of € 7.05 in 2017, which represents an increase of 31% from the previous year. On the other hand, capital expenditure was lower than forecasted mostly due to less store openings than the previous year.

Beyond the financial side, Adidas also met its performance targets. For example, the company was once again included in the Dow Jones Sustainability Indices. Adidas was rated industry leaders in aspects like Supply Chain Management, Environmental Policy and Management Systems, Corporate Citizenship and Philanthropy and many more. (Adidas, 2017).

Manufacturing operations

Identify if the company outsources any of its services or manufacturing. Where is it done? Identify the reason or reasons why this has been done.

Adidas outsources most of its manufacturing operations. As stated on the company's website, the business is committed to transparency and public disclosure. It provides a detailed overview of its global factory lists that contains more than 770 factories in over 55 countries. The country with most factories is China with more than 140 factories. The segment breakdown of Adidas global suppliers is as follows, with Asia containing 68% of all suppliers, while the Americas 20% and EMEA with 12%. The reason as to why Asia is the first is indeed because of lower labor costs. In general, it is very common within the apparel and footwear industry for businesses to outsource production to Asia. Nike, Adidas' biggest competitor, also outsources to Asia in large scale. By subcontracting production, Adidas cuts down on costs, which in turn means more competitive prices. Also, by using subcontractors' companies avoids general risks related to producing and faces less tax obligations. Although, as mentioned before on this report, Adidas is slowly looking to move away from its highest production country, as labor costs are rising. Another factor that is influencing a move away from production in China is the higher efficiency levels of their speedfactories, which are automated and located in their most popular continents, which eventually also means less transportation costs. (Adidas, 2018).

Pricing strategies

Identify what pricing policy objective, type of pricing and pricing strategy your company uses? Give your reasons why?

Adidas' makes use of two pricing strategies: Competitive and skimming. Competitive pricing is necessary in the footwear industry because of fierce competition from companies like Nike, Under Armor, Puma and New Balance. Moreover, Adidas makes use of a skimming pricing strategy for launching new products. By investing heavily in marketing and innovative product design, the business is able to gain from setting a high starting price. Once product momentum is lower, there is a decrease in price and promotional efforts to reach larger customer base. This strategy is effective for Adidas because it generally targets the upper middle class.

Conclusion

Give your Conclusions, Analysis and Recommendations of your company from a Cost Accounting Perspective:

After analyzing Adidas' financial performance, it is reasonable to say that the company delivered a strong financial performance in 2017. As revenues increase by double digits in almost every market segment, and the company is able to continually decrease its liabilities levels, Adidas shows its growing at faster rates than its competitors. Also, the fact that the German manufacturer is focused on long-term development and innovation and sustainability shows how the company is committed to achieving the mark of largest sportswear manufacturer in the world.

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