OPPORTUNITIES, AND OUTLOOK
ASSESSMENT OF PERFORMANCE VERSUS TARGETS We communicate our financial targets on an annual basis. We also provide updates throughout the year as appropriate. In 2016, the company delivered a strong operational and financial performance.
Sales development was favourably impacted by rising consumer spending on sporting goods, supported by the ongoing robust athleisure trend as well as increased health awareness and sports participation in most geographical areas. see Economic and Sector Development, p. 90 Major sporting events, such as the UEFA EURO 2016 or the Copa América, also provided a positive stimulus to sales. In light of the accelerating brand momentum, driven by the successful execution of the company’s strategic business plan ‘Creating the New’, innovative and appealing product launches as well as inspiring marketing campaigns, we increased our top- and bottom-line guidance for the full year 2016 several times throughout the year, compared to our initial expectations. see Table 01
In 2016, revenues increased 18% on a currency-neutral basis, driven by strong growth at both the adidas and the Reebok brand. Currency-neutral sales grew at double-digit rates in nearly all market segments.
As a result, revenues increased significantly above our initial guidance of 10% to 12% currency-neutral sales growth. Gross margin increased 0.3 percentage points to 48.6%, exceeding our initial forecast of 47.3%
to 47.8%. This development was due to the significantly larger-than-expected positive effects from a better pricing, product and channel mix as well as lower input costs, which more than offset the severe headwinds from negative currency effects. The operating margin increased 1.3 percentage points excluding goodwill impairment losses in the prior year to 7.7%. This was above our initial guidance of an at least stable operating margin of 6.5% excluding goodwill impairment losses and a direct consequence of the gross margin increase, the positive effects from lower 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. As a result, net income from continuing operations was up 41% excluding goodwill impairment losses in the prior year to € 1.019 billion and therefore well above our initial guidance of an improvement between 10% and 12% to around € 800 million. see Income Statement, p. 92
In 2016, we saw an improvement in operating working capital.
While we had initially expected average operating working capital as a percentage of sales to be around the prior year level of 20.5%, average operating working capital as a percentage of sales ended the year 2016 at 20.2%, thus exceeding our initial expectations. Capital expenditure (excluding acquisitions) amounted to € 651 million in 2016, below our initial guidance of around € 750 million, reflecting fewer-than-expected net store openings throughout the year.
Investments were mainly focused on controlled space initiatives of the adidas and Reebok brands, aimed at further strengthening our own-retail activities, franchise store presence and shop-in-shop presentations. Other areas of investments included logistics infrastructure and IT systems as well as the further development of our corporate headquarters in Herzogenaurach, Germany. see Statement of Financial Position and Statement of Cash Flows, p. 96
Beyond our financial performance, we also actively monitor non-financial KPIs. see Internal Management System, p. 86 In 2016, our Net Promoter Score (NPS) saw a strong improvement relative to our major competitor, reflecting the strong enhancement in the desirability of our brands and products throughout the year. We are confident that this positive trend will continue, as we project strong improvements in our NPS relative to our major competitor in 2017 as well. Also from a market share perspective, we continue to be very encouraged by our strong performance in key categories as well as key markets, as defined in the company’s strategic business plan ‘Creating the New’. In particular, Greater China, North America and Western Europe were notable standouts, as we improved our market share in these regions. In North America, we saw momentum accelerate considerably in the year, following significant investments in the region’s organisational set-up, highly engaging consumer activation initiatives as well as innovative product launches. Our diligence and discipline in sustainability matters continues to yield strong recognition for our company. In 2016, adidas AG was again represented in a variety of high-profile sustainability indices. For the 17th consecutive time, adidas AG was selected to join the Dow Jones Sustainability Indices (DJSI). In the sector ‘Textiles, Apparel &
Luxury Goods’, adidas AG was rated industry best in the criteria Brand
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Management Assessment of Performance, Risks and Opportunities, and Outlook GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
Management Assessment of Performance, Risks and Opportunities, and Outlook
134 135
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Management, Innovation Management, Risk & Crisis Management, Environmental Policy & Management Systems, Operational Eco-Efficiency, Corporate Citizenship & Philanthropy and Stakeholder Engagement. Furthermore, in 2016, adidas was ranked fifth among the Global 100 Most Sustainable Corporations in the World (Global 100 Index), making it to the Top Ten for the third consecutive year.
see Sustainability, p. 78 Finally, while we maintained a strong level of on-time in-full (OTIF) deliveries to our customers and own-retail stores in 2016, the overall performance was slightly below the prior year level, reflecting the strong increase in volumes throughout the year. see Global Operations, p. 62
ASSESSMENT OF OVERALL RISKS AND OPPORTUNITIES Our Risk Management team aggregates all risks and opportunities reported by different business units and functions through the quarterly risk and opportunity assessment process. In addition, the Executive Board discusses and assesses risks and opportunities on a regular basis. see Risk and Opportunity Report, p. 118 Taking into account the potential financial impact as well as the likelihood of materialising of the risks explained within this report, and considering the strong balance sheet as well as the current business outlook, we do not foresee any material jeopardy to the viability of the company as a going concern. This assessment is also supported by the historical response to our financing demands. adidas therefore has not sought
an official rating by any of the leading rating agencies. see Treasury, p. 101 We remain confident that our earnings strength forms a solid basis for our future business development and provides the resources necessary to pursue the opportunities available to the company. Compared to the prior year, our assessment of certain risks has changed in terms of likelihood of occurrence and/or potential financial impact. The partial changes in risk evaluation have no substantial impact on the overall adidas risk profile, which we believe has improved compared to the prior year.
ASSESSMENT OF FINANCIAL OUTLOOK
In March 2015, adidas unveiled its 2020 strategic business plan named Creating the New, which defines strategies and objectives for the period up to 2020. The strategy aims at further accelerating growth by significantly increasing brand desirability. This, in turn, is expected to spur top- and bottom-line growth for the company in the years to come. With 2016 marking the first full year of ‘Creating the New’, our success in 2016 is the direct result of our strategic business plan introduced in 2015 and proof positive that our brands and products, as a result of the Brand Leadership approach, are resonating extremely well with the consumer. see adidas Brand Strategy, p. 55 Therefore, going forward we will focus on further executing the strategy, while at the same time fine-tuning it wherever needed and whenever necessary.
This will ensure we continue our momentum in 2017 and beyond,
01 COMPANY TARGETS VERSUS ACTUAL KEY METRICS
2015
currency-neutral) 10% to increase at a rate
between 10% and 12% 18% to increase at a rate
between 11% and 13% to increase at a rate between 12% and 14% 3
Gross margin 48.3% 47.3% to 47.8% 48.6% to increase up to 0.5pp
to a level of up to 49.1% to increase up to 0.3pp to a level of up to 49.5%
Other operating expenses (in % of net
sales) 43.1% below prior year level 42.8% below prior year level below prior year level
Operating profit (€ in millions) 1,094 4 n.a. 1,491 to increase at a rate
between 18% and 20% to increase at a rate between 13% and 15% 5
Operating margin 6.5% 4 remain at least stable
versus prior year level 7.7% to increase between 0.6pp and 0.8pp to a level between 8.3% and 8.5%
to increase between 0.2pp and 0.4pp to a level between 8.6% and 8.8%
Net income from continuing operations
(€ in millions) 720 4 to increase at a rate
between 10% and 12%
to around € 800 million
1,019 to increase at a rate between 18% and 20% to a level between € 1.200 billion and € 1.225 billion
to increase at a rate between 13% and 15% to a level between € 1.200 billion and € 1.225 billion Basic earnings per share from
continuing operations (in €) 3.54 4 n.a. 5.08 to increase at a rate between
18% and 20% to increase at a rate between 13% and 15% 6 Average operating working capital (in
% of net sales) 20.5% around prior year level 20.2% modest increase modest increase
Capital expenditure 7 (€ in millions) 513 around 750 651 around € 1.1 billion around € 1.1 billion
1 As published on March 3, 2016. The outlook was updated several times over the course of the year.
2 In case of the planned divestiture of the TaylorMade business with the brands TaylorMade, Adams Golf and Ashworth as well as the CCM Hockey business; 2016 and 2017 adjusted.
3 Based on adjusted 2016 net sales of € 18,483 million.
4 Excluding goodwill impairment of € 34 million.
5 Based on adjusted operating profit of € 1,552 million.
6 Based on adjusted basic earnings per share from continuing operations of € 5.30.
7 Excluding acquisitions and finance leases.
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resulting in strong top- and bottom-line improvements until 2020.
We project currency-neutral revenues to increase at a rate of 10% to 12% on average per year until 2020 compared to the 2015 results. By outperforming the sporting goods industry, our brands will increase market share over the period. This, in combination with the expected gross margin improvement and our ability to generate operating leverage, will significantly increase our profitability. As a result, net income is expected to grow at a higher rate than the top line and is projected to expand by 20% to 22% on average per year during the five-year period. see Corporate Strategy, p. 48
For 2017, we also project strong revenue and profitability improvements which will be the result of our extensive pipeline of new and innovative products, increased brand-building activities, the tight control of inventory levels and stringent cost management.
Our earnings position is expected to benefit from an expansion in gross margin as well as the positive effect of lower other operating expenses as a percentage of sales. see Subsequent Events and Outlook, p. 115 We believe that our outlook for 2017 is realistic within the scope of the current trading and economic environment.
Assuming no significant deterioration in the global economy, we are confident that we will significantly grow our top and bottom line in 2017. However, ongoing uncertainties regarding the economic outlook and consumer sentiment in both developed and emerging economies as well as persisting high levels of currency volatility represent risks to the achievement of our stated financial goals and aspirations. see Economic and Sector Development, p. 90 No other material event between the end of 2016 and the publication of this report has altered our view.