GLOBAL ECONOMY EXPANDS 2.3% IN 2016 1
2016 marked another challenging year for the global economy, which grew at a slower rate than initially projected. With global gross domestic product (GDP) growth of 2.3%, 2016 experienced the lowest economic expansion since 2009. The weaker-than-expected economic activity reflects sluggish global trade, lacklustre investment spending, policy uncertainties as well as volatile financial markets. These developments, in combination with heightened geopolitical tensions and political discord such as the unexpected UK vote in favour of leaving the European Union (‘Brexit’) as well as the electoral outcome in the
1 Sources: World Bank Global Economic Prospects and HSBC Global Research.
USA, remained major sources of uncertainty and continued to weigh on economic activity. Developing economies grew 3.4% in 2016, mainly reflecting improving domestic demand, the modest stabilisation in commodity prices as well as accommodative macroeconomic policies.
Nonetheless, weak investment and productivity growth negatively impacted the economic recovery in those markets. At 1.6%, growth in developed economies decelerated, as several markets continued to face significant challenges, such as weak external demand, lacklustre investment activity, policy uncertainties and sluggish productivity growth. Nevertheless, improving labour market conditions as well as accommodative monetary policies supported the overall economic activity.
01 REGIONAL GDP DEVELOPMENT 1 IN %
Global 2 Western Europe 3 European
emerging markets 3 USA 2 Asia 3, 4 Latin America 3
5 4 3 2 1 0 (1)
■ 2014 ■ 2015 ■ 2016
1 Real, percentage change versus prior year; 2014 and 2015 figures restated compared to prior year.
2 Source: World Bank.
3 Source: HSBC.
4 Includes Japan and Area Pacific.
1.7 3.0
0.8
2.6 1.6 2.4
4.0 4.1 3.9
1.0 0.2
(0.5) 1.6 2.0 1.7
2.7
2.7 2.3
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Business Performance – Economic and Sector Development
91
3
MOMENTUM IN THE SPORTING GOODS INDUSTRY CONTINUES 2
In 2016, the global sporting goods industry grew at robust rates, supported by rising consumer spending in both developing and developed markets, the ongoing athleisure trend as well as higher sports participation and increasing health awareness around the world. In addition, the industry benefited from major sporting events, such as the 2016 Olympic Games hosted by Brazil as well as the UEFA EURO 2016, held in France. Moreover, social trends including social fitness remained strong catalysts, significantly impacting the overall sports industry. The e-commerce channel continued to see rapid expansion, as retailers leveraged a wide variety of commercial opportunities across mobile technologies and social media. Nevertheless, the industry was negatively impacted by the bankruptcy of several retailers, with the majority of their business not yet fully recovered by other physical stores. From a category perspective, athletic footwear sales posted a strong performance in 2016. In particular, the casual athletic category continued to enjoy strong momentum throughout the year, fuelled by retro running and tennis silhouettes. In addition, running footwear recorded further improvements in 2016, supported by fashion and retro silhouettes. Basketball footwear remained challenged, reflecting the shift in fashion away from the basketball styles. Furthermore, the athletic apparel category delivered solid gains throughout the year, mainly benefiting from stronger demand in activewear apparel, as consumers continued to shift their preferences from more traditional and technical apparel to activewear. Despite the ongoing challenging equipment business environment, the category managed to post sales growth especially in the US market.
2 Sources: NPD Market Research and Deutsche Bank Market Research.
02 QUARTERLY UNEMPLOYMENT RATE BY REGION 1 IN % OF TOTAL ACTIVE POPULATION
Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016
USA 2 5.0 5.0 4.9 4.9 4.7
2 Source: US Bureau of Labor Statistics.
3 Source: Eurostat.
4 Source: Japan Ministry of Internal Affairs and Communications.
5 Source: China National Bureau of Statistics.
6 Source: Russia Federal Service of State Statistics.
7 Source: Brazil Institute of Geography and Statistics.
03 QUARTERLY DEVELOPMENT OF CONSUMER PRICE INDEX 1 BY REGION
Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016
USA 2 0.7 0.9 1.0 1.5 2.1
2 Source: US Bureau of Labor Statistics.
3 Source: Eurostat.
4 Source: Japan Ministry of Internal Affairs and Communications.
5 Source: China National Bureau of Statistics.
6 Source: Russia Federal Service of State Statistics.
7 Source: Brazil Institute of Geography and Statistics.
04 QUARTERLY CONSUMER CONFIDENCE DEVELOPMENT 1 BY REGION
Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016
USA 2 96.3 96.1 97.4 103.5 113.3
Euro area 3 (5.7) (9.7) (7.2) (8.2) (5.1)
Japan 4 41.3 41.3 42.1 42.6 42.3
China 5 103.7 100.0 102.9 104.6 108.4
Russia 6 (26.0) (30.0) (26.0) (19.0) (18.0)
Brazil 7 96.3 97.6 101.0 103.1 100.3
1 Quarter-end figures.
2 Source: Conference Board.
3 Source: European Commission.
4 Source: Economic and Social Research Institute, Government of Japan.
5 Source: China National Bureau of Statistics.
6 Source: Russia Federal Service of State Statistics.
7 Source: Brazil National Confederation of Industry.
05 EXCHANGE RATE DEVELOPMENT 1 € 1 EQUALS
Average
rate 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Average rate 2016
USD 1.1101 1.1385 1.1102 1.1161 1.0541 1.1069
GBP 0.7259 0.7916 0.8265 0.8610 0.8562 0.8188
JPY 134.42 127.90 114.05 113.09 123.40 120.40
RUB 67.682 76.971 71.339 70.491 63.938 74.278
CNY 6.9721 7.3561 7.3620 7.4531 7.3123 7.3515
1 Spot rates at quarter-end.
06 2016 OIL PRICE DEVELOPMENT 1 IN US $ PER BARREL
| Jan. 1, 2016 Dec. 31, 2016 |
50
40
30
1 West Texas Intermediate Cushing crude oil. Source: Bloomberg.
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Business Performance – Income Statement
92 93
3 3
INCOME STATEMENT
ADIDAS DELIVERS STRONG FINANCIAL PERFORMANCE IN 2016
In 2016, revenues increased 18% on a currency-neutral basis. In euro terms, revenues grew 14% to € 19.291 billion from € 16.915 billion in 2015. see Diagram 07
From a market segment perspective the combined currency-neutral sales of the adidas and Reebok brands grew at double-digit rates in nearly all regions in 2016. Revenues in Western Europe increased 20% on a currency-neutral basis, driven by double-digit sales growth in all major countries. Currency-neutral sales in North America and Greater China increased 24% and 28%, respectively. Revenues in Russia/CIS grew 3% on a currency-neutral basis. In Latin America, revenues grew 16% on a currency-neutral basis, as all major countries grew at double-digit rates with the exception of Brazil, where sales increased at a low-single-digit rate. In Japan, sales were up 16% on a currency-neutral basis. Revenues in MEAA grew 16% on a currency-neutral basis, reflecting broad-based strength and double-digit growth in almost all of the region’s countries.
Revenues in Other Businesses were up 1% on a currency-neutral basis. Strong increases in Other centrally managed businesses and Runtastic were only partly offset by sales declines at CCM Hockey and TaylorMade-adidas Golf.
ADIDAS BRAND REVENUES GROW AT STRONG DOUBLE-DIGIT RATE
Currency-neutral revenues for the adidas brand increased 22%, driven by double-digit sales increases in the training and running categories as well as at adidas Originals and adidas neo. In addition, high-single-digit sales increases in the football category as well as mid-single-digit growth in the outdoor category also contributed to this development. Currency-neutral Reebok brand sales were up 6% versus the prior year, reflecting double-digit sales increases in Classics as well as mid-single-digit growth in the training and running categories. Revenues at TaylorMade-adidas Golf were down 1% on a currency-neutral basis, as growth at TaylorMade and adidas Golf was more than offset by sales declines at Ashworth and Adams Golf.
SALES GROW AT DOUBLE-DIGIT RATES IN FOOTWEAR AND APPAREL
Currency-neutral footwear sales grew 26% in 2016, driven by double-digit increases in all major categories. Apparel revenues grew 11% on a currency-neutral basis, due to double-digit increases in the training and running categories as well as at adidas Originals and adidas neo. In addition, mid-single-digit growth in the football category also contributed to this development. Currency-neutral hardware sales were up 9%, driven by high-single-digit growth in the football and training categories. see Diagram 09
07 NET SALES 1 € IN MILLIONS
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
1 Figures reflect all operating activities of the operating segments, including Other Businesses.
09 NET SALES BY PRODUCT CATEGORY € IN MILLIONS
2016 2015 Change Change
10 NET SALES BY PRODUCT CATEGORY IN % OF NET SALES
53%
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Business Performance – Income Statement
93
3
GROUP SALES DEVELOPMENT SUPPORTED BY DOUBLE-DIGIT GROWTH IN RETAIL
In 2016, retail revenues increased 23% on a currency-neutral basis, mainly as a result of strong double-digit sales growth at the adidas brand. Reebok brand revenues increased at a mid-single-digit rate. In euro terms, retail sales grew 19% to € 5.003 billion from
€ 4.221 billion in the prior year. From a store format perspective, sales from concept stores and factory outlets both grew at double-digit rates, while revenues from concession corners were up at a low-single-digit rate. The company ended 2016 with a total of 2,811 adidas and Reebok brand stores compared to the prior year-end level of 2,722. see Table 11 Currency-neutral comparable store sales increased 12% versus the prior year, with double-digit sales growth in all market segments except Russia/CIS, where comparable store sales increased at a high-single-digit rate. eCommerce revenues grew 59% on a currency-neutral basis.
COST OF SALES INCREASES
Cost of sales is defined as the amount we pay to third parties for expenses associated with producing and delivering our products. In addition, own-production expenses are also included in the cost of sales. However, these expenses represent only a very small portion of total cost of sales. In 2016, cost of sales was € 9.912 billion, representing an increase of 13% compared to the prior year level of
€ 8.748 billion. This development reflects the strong growth of our business.
GROSS MARGIN IMPROVES 0.3 PERCENTAGE POINTS DESPITE SEVERE CURRENCY HEADWINDS
In 2016, despite severe headwinds from negative currency effects, the gross profit increased 15% to € 9.379 billion from € 8.168 billion in 2015, representing a gross margin increase of 0.3 percentage points to 48.6% (2015: 48.3%). see Diagram 12 see Diagram 13 This development was due to the positive effects from a significantly better pricing, product and channel mix as well as lower input costs.
ROYALTY AND COMMISSION INCOME DECLINES
Royalty and commission income for the company decreased 8% both on a currency-neutral basis and in euro terms to € 109 million (2015:
€ 119 million).
OTHER OPERATING INCOME INCREASES STRONGLY In 2016, other operating income rose 175% to € 266 million from € 96 million in 2015. This development mainly reflects two non-recurring gains during the second quarter of 2016, which were related to the early termination of the Chelsea F.C. contract as well as the divestiture of the Mitchell & Ness business.
11 RETAIL NUMBER OF STORES DEVELOPMENT
Total Concept
stores Factory outlets Concession
corners
December 31, 2015 2,722 1,698 872 152
Opened 337 235 85 17
Closed 248 176 55 17
Opened (net) 89 59 30 –
December 31, 2016 2,811 1,757 902 152
12 GROSS PROFIT 1 € IN MILLIONS
2016 9,379
2015 8,168
2014 6,924
2013 7,001
2012 7,103
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
13 GROSS MARGIN 1 IN %
2016 48.6
2015 48.3
2014 47.6
2013 49.3
2012 47.7
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Business Performance – Income Statement
94 95
3 3
OTHER OPERATING EXPENSES AS A PERCENTAGE OF SALES DOWN 0.3 PERCENTAGE POINTS
Other operating expenses, including depreciation and amortisation, consist of expenditure for point-of-sale and marketing investments as well as operating overhead costs. In 2016, other operating expenses were up 13% to € 8.263 billion (2015: € 7.289 billion), reflecting an increase in expenditure for point-of-sale and marketing investments as well as higher operating overhead expenditure. see Diagram 14 As a percentage of sales, other operating expenses decreased 0.3 percentage points to 42.8% from 43.1% in 2015. see Diagram 15
EXPENDITURE FOR POINT-OF-SALE AND
MARKETING INVESTMENTS AS A PERCENTAGE OF SALES DECREASES 0.8 PERCENTAGE POINTS
Expenditure for point-of-sale and marketing investments see Glossary, p. 218 relates to the company’s initiatives to strengthen the desirability of our brands and products. While expenditure for point-of-sale investments mainly consists of expenses to support the company’s full-price sell-through development at the point of sale, expenditure for marketing investments consists of items such as expenses for promotion partnerships, advertising, public relations and other communication activities. In absolute terms, expenditure for point-of-sale and marketing investments amounted to € 2.521 billion in 2016 compared to € 2.348 billion in the prior year, which represents an increase of 7%. By brand, expenditure for point-of-sale and marketing investments increased 11% to € 2.102 billion (2015: € 1.897 billion)
for the adidas brand. Expenditure for point-of-sale and marketing investments for the Reebok brand was down 1% to € 265 million from € 267 million in the prior year. As a percentage of sales, the company’s expenditure for point-of-sale and marketing investments declined 0.8 percentage points to 13.1% from 13.9% in 2015, reflecting the company’s strong top-line improvement. see Diagram 17
OPERATING OVERHEAD EXPENSES AS A PERCENTAGE OF SALES GROW 0.6 PERCENTAGE POINTS
Operating overheads include overhead costs related to marketing, logistics, sales and R&D as well as central administration. In 2016, operating overhead expenses grew 16% to € 5.742 billion versus
€ 4.941 billion in 2015, and, as a percentage of sales, increased 0.6 percentage points to 29.8% (2015: 29.2%). This development was primarily a result of an increase in costs related to central administration and sales expenditure, which primarily includes further investments to spur the strategic business plan ‘Creating the New’, accruals for bonus payments for employees due to the company’s strong operational performance as well as restructuring costs at Reebok and TaylorMade.
14 OTHER OPERATING EXPENSES 1 € IN MILLIONS
2016 8,263
2015 7,289
2014 6,203
2013 6,013
2012 6,150
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
16 OTHER OPERATING EXPENSES BY AREA € IN MILLIONS
2016 2015
17 POINT-OF-SALE AND MARKETING INVESTMENTS 1 IN % OF NET SALES
■ Point-of-sale investments ■ Marketing investments
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Business Performance – Income Statement
95
3
EBITDA INCREASES 28%
Earnings before interest, taxes, depreciation and amortisation as well as impairment losses/reversal of impairment losses on property, plant and equipment and intangible assets (EBITDA) increased 28%
to € 1.883 billion in 2016 versus € 1.475 billion in 2015. see Diagram 18 Depreciation and amortisation expense for tangible and intangible assets (excluding impairment losses/reversal of impairment losses) increased 10% to € 373 million in 2016 (2015: € 338 million). This development is mainly due to an increase in property, plant and equipment. In accordance with IFRS, intangible assets with indefinite useful lives (goodwill and trademarks) are tested annually and additionally when there are indications of potential impairment. In this connection, no impairment of intangible assets with unlimited useful lives was incurred in 2016.
NO GOODWILL IMPAIRMENT LOSSES IN 2016
No goodwill impairment losses occurred in 2016. In the prior year period, the company recorded goodwill impairment losses in an amount of € 34 million, mainly related to the company’s Russia/CIS and Latin America cash-generating units.
OPERATING MARGIN EXCLUDING GOODWILL IMPAIRMENT INCREASES 1.3 PERCENTAGE POINTS Excluding the goodwill impairment losses in the prior year, operating profit grew 36% to € 1.491 billion in 2016 versus € 1.094 billion in 2015. see Diagram 19 This represents an operating margin increase of 1.3 percentage points to 7.7% compared to the prior year level of 6.5%. see Diagram 20 This development was due to the gross margin increase, the positive effects from lower other operating expenses as a percentage of sales as well as the non-recurring gain related to the early termination of the Chelsea F.C. contract.
NET FINANCIAL EXPENSES INCREASE STRONGLY Financial income decreased 40% to € 28 million in 2016 (2015:
€ 46 million), mainly due to the non-recurrence of positive exchange rate effects. Financial expenses were up 11% to € 74 million compared to € 67 million in 2015, reflecting an increase in interest expenses. As a result, the company recorded net financial expenses of € 46 million. This represents a significant increase compared to net financial expenses of € 21 million in the prior year. see Diagram 21
NET INCOME FROM CONTINUING OPERATIONS EXCLUDING GOODWILL IMPAIRMENT INCREASES 41%
Excluding the goodwill impairment losses in the prior year, the 2016 tax rate reached a level of 29.5%, representing a decline of 3.4 percentage points compared to the prior year level of 32.9%. Net income from continuing operations was up 41% to € 1.019 billion versus € 720 million in 2015. Basic EPS from continuing operations increased 43% from € 3.54 in 2015 to € 5.08 in 2016. Diluted EPS from continuing operations was up 41% to € 4.99 in 2016 (2015: € 3.54).
18 EBITDA 1 € IN MILLIONS
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
2 2015 excluding goodwill impairment of € 34 million.
3 2014 excluding goodwill impairment of € 78 million.
4 2013 excluding goodwill impairment of € 52 million.
5 2012 excluding goodwill impairment of € 265 million.
20 OPERATING MARGIN 1, 2, 3, 4, 5 IN %
1 2016, 2015, 2014 and 2013 reflect continuing operations as a result of the divestiture of the Rockport business.
2 2015 excluding goodwill impairment of € 34 million.
3 2014 excluding goodwill impairment of € 78 million.
4 2013 excluding goodwill impairment of € 52 million.
5 2012 excluding goodwill impairment of € 265 million.
21 NET FINANCIAL EXPENSES € IN MILLIONS
2016 46
2015 21
2014 48
2013 68
2012 69
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Business Performance – Statement of Financial Position and Statement of Cash Flows
96 97
3 3
The company’s net income attributable to shareholders, which in addition to net income from continuing operations includes the result from discontinued operations, grew 52% to € 1.017 billion (2015: € 668 million). see Diagram 22 Basic EPS from continuing and discontinued operations increased 53% to € 5.08 versus € 3.32 in 2015. Diluted EPS from continuing and discontinued operations grew 51% to € 4.99 (2015: € 3.32). see Diagram 23 The weighted average number of shares used in the calculation of basic earnings per share was 200,188,276 (2015: 201,536,418).
NET INCOME FROM CONTINUING OPERATIONS INCLUDING GOODWILL IMPAIRMENT UP 49%
Including the goodwill impairment losses in the prior year, operating profit grew 41% to € 1.491 billion in 2016 (2015: € 1.059 billion), representing an operating margin increase of 1.5 percentage points versus the prior year to 7.7% (2015: 6.3%). The company’s tax rate decreased 4.5 percentage points to 29.5% from 34.0% in 2015. Net income from continuing operations was up 49% to € 1.019 billion (2015: € 686 million). Basic EPS from continuing operations increased 50% from € 3.37 in 2015 to € 5.08 in 2016. Diluted EPS from continuing operations was up 48% to € 4.99 in 2016 (2015: € 3.37). Net income attributable to shareholders grew 60% to € 1.017 billion versus
€ 634 million in 2015. Basic EPS from continuing and discontinued operations increased 62% to € 5.08 (2015: € 3.15) and diluted EPS from continuing and discontinued operations was up 59% to € 4.99 compared to € 3.15 in 2015.