SUBSEQUENT EVENTS AND OUTLOOK
In 2017, despite continuing uncertainties regarding the economic outlook for both advanced and emerging economies, we expect the global economy and consumer spending to grow, providing a positive backdrop for moderate growth and expansion of the sporting goods industry. Through our extensive pipeline of new and innovative products, increased brand-building activities, the tight control of inventory levels and stringent cost management, we project strong top- and bottom-line improvements in 2017. We forecast sales to increase at a rate between 11% and 13% on a currency-neutral basis. Gross margin is projected to grow up to 0.5 percentage points to a level of up to 49.1%. Operating margin is expected to increase between 0.6 and 0.8 percentage points to a level between 8.3%
and 8.5%, reflecting the gross margin expansion as well as the positive effect of lower other operating expenses as a percentage of sales. As a result, we project net income from continuing operations to increase at a rate between 18% and 20% to a level between
€ 1.200 billion and € 1.225 billion.
SUBSEQUENT EVENTS
NO SUBSEQUENT EVENTS
Since the end of 2016, there have been no significant organisational, management, economic, socio-political, legal or financial changes which we expect to influence our business materially going forward.
OUTLOOK
FORWARD-LOOKING STATEMENTS
This Management Report contains forward-looking statements that reflect Management’s current view with respect to the future development of our company. The outlook is based on estimates that we have made on the basis of all the information available to us at this point in time. In addition, such forward-looking statements are subject to uncertainties which are beyond the control of the company. see Risk and Opportunity Report, p. 118 In case the underlying assumptions turn out to be incorrect or described risks or opportunities materialise, actual results and developments may materially deviate (negatively or positively) from those expressed by such statements. adidas does not assume any obligation to update any forward-looking statements made in this Management Report beyond statutory disclosure obligations.
GLOBAL ECONOMY TO GROW IN 2017 1
Global GDP is projected to increase moderately by 2.7% in 2017.
This development will be supported by a further stabilisation in commodity prices as well as continuous accommodative fiscal and monetary policies. Nevertheless, subdued prospects for developed economies, heightened policy uncertainty, weak productivity growth as well as demographic pressures are expected to weigh on the economic recovery. Developing economies are forecasted to remain
1 Sources: World Bank Global Economic Prospects and HSBC Global Research.
a major contributor to the global economic expansion in 2017. At 4.2%, their growth rate is projected to accelerate compared to 2016.
More specifically, developing economies are expected to benefit from the gradual recovery of commodity prices, resulting in improving domestic demand and less divergent growth outlooks for commodity-importing and commodity-exporting countries. However, a risk to growth is forecasted to persist throughout the year, reflecting weak global trade, lacklustre investment and policy uncertainty in developed economies. GDP in developed economies is expected to grow at a level of 1.8% in 2017. This development will be mainly supported by accommodative monetary and fiscal policies, firm export growth as well as improvements in consumer confidence and labour markets. Despite these improvements, political tensions as well as the economic uncertainties arising from the Brexit vote and the outcome of the US elections will continue to pose a threat to the economic outlook.
SPORTING GOODS INDUSTRY EXPANSION TO CONTINUE IN 2017 2
In the absence of any major economic shocks, we expect the global sporting goods industry to grow at a mid-single-digit rate in 2017, in spite of the non-recurrence of major sporting events that took place in 2016, such as the 2016 Olympic Games in Brazil as well as the UEFA EURO 2016 in France. Consumer spending on sporting goods in the developing economies is expected to grow faster than in the more developed markets. Strong wage growth and domestic consumption in many developing economies are predicted to propel industry growth throughout the year. In developed economies, the sporting goods industry is forecasted to improve moderately, as wage increases will support consumer spending on sporting goods and fuel the industry’s growth. In addition, rising sports participation and health awareness globally is projected to continue to boost sportswear demand.
The athleisure see Glossary, p. 216 trend is forecasted to remain a dominant structural growth driver for the industry as a whole,
2 Source: NPD Market Research.
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fuelling the demand for athletic casual and activewear products.
Furthermore, innovation in the supply chain and breakthroughs in new manufacturing techniques are projected to improve the speed-to-market capabilities of sports brands, getting products more quickly and more sustainably to the marketplace. E-commerce, which is already a significant growth driver for the industry, is anticipated to expand further and investments in digital transformation are projected to rise across the sporting goods industry.
CURRENCY-NEUTRAL SALES TO INCREASE AT A RATE BETWEEN 11% AND 13% IN 2017
We expect sales to increase at a rate between 11% and 13% on a currency-neutral basis in 2017. see Table 01 Despite continued uncertainties regarding the global economic outlook, the company’s sales development will be favourably impacted by rising consumer spending, the ongoing robust athleisure trend as well as increased health awareness and sports participation in most geographical areas. In addition, the further expansion and improvement of our controlled space initiatives, in particular through our own eCommerce channel, as well as major product launches will more than offset the non-recurrence of sales related to the UEFA EURO 2016 and the Copa América. see Table 02
CURRENCY-NEUTRAL COMBINED SALES OF THE ADIDAS AND REEBOK BRANDS EXPECTED TO INCREASE IN ALL MARKET SEGMENTS
In 2017, we expect currency-neutral combined revenues of the adidas and Reebok brands to increase in all our market segments.
While currency-neutral sales are expected to grow at double-digit rates in Western Europe, North America, Greater China and Russia/
CIS, currency-neutral sales in Latin America, Japan and MEAA are forecasted to improve at a high-single-digit rate each. Currency-neutral revenues of Other Businesses are expected to be below the prior year level, due to currency-neutral sales decreases at CCM Hockey. Currency-neutral sales at TaylorMade-adidas Golf are expected to grow at a mid-single-digit rate.
GROSS MARGIN EXPECTED TO INCREASE TO A LEVEL OF UP TO 49.1%
In 2017, the gross margin is forecasted to increase up to 0.5 percentage points to a level of up to 49.1% (2016: 48.6%). see Table 01 Gross margin will benefit from the positive effects of a more favourable pricing, product, channel and regional mix. Higher product margins at TaylorMade-adidas Golf compared to the prior year are also expected to positively impact the company’s gross margin development. These improvements will be partly offset by the projected increase in costs for our Asian-dominated sourcing as a result of less favourable US dollar hedging rates, rising labour expenditures as well as higher commodity prices.
01 2017 OUTLOOK
Currency-neutral sales development (in %):
adidas to increase at a rate between 11% and 13%
Western Europe 1 double-digit rate increase
North America 1 double-digit rate increase
Greater China 1 double-digit rate increase
Russia/CIS 1 double-digit rate increase
Latin America 1 high-single-digit rate increase
Japan 1 high-single-digit rate increase
MEAA 1 high-single-digit rate increase
Other Businesses below prior year level
TaylorMade-adidas Golf mid-single-digit rate increase
CCM Hockey below prior year level
Gross margin to increase up to 0.5 percentage points to a level of up to 49.1%
Other operating expenses in % of sales below prior year level
Operating profit to increase at a rate between 18% and 20%
Operating margin to increase between 0.6 and 0.8 percentage points to a level between 8.3% and 8.5%
Net income from continuing operations to increase at a rate between 18% and 20% to a level between € 1.200 billion and € 1.225 billion Basic earnings per share from continuing operations to increase at a rate between 18% and 20%
Average operating working capital in % of sales modest increase
Capital expenditure around € 1.1 billion
1 Combined sales of the adidas and Reebok brands.
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OPERATING MARGIN TO GROW TO A LEVEL BETWEEN 8.3% AND 8.5%
In 2017, other operating expenses as a percentage of sales are expected to be below the prior year level of 42.8%. This, together with the strong top-line growth and the projected gross margin improvement, is expected to drive an increase in operating profit of between 18% and 20%. Consequently, we expect the operating margin to increase between 0.6 and 0.8 percentage points to a level between 8.3% and 8.5% compared to the prior year level of 7.7%. see Table 01
NET INCOME FROM CONTINUING OPERATIONS TO INCREASE AT A RATE BETWEEN 18% AND 20%
Net income from continuing operations is projected to increase at a rate between 18% and 20% to a level between € 1.200 billion and
€ 1.225 billion compared to € 1.019 billion in 2016. Basic earnings per share from continuing operations are also expected to increase at a rate between 18% and 20% compared to the prior year level of € 5.08.
see Table 01 Net financial expenses are forecasted to increase slightly in 2017, mainly as a result of an increase in interest expenses. The tax rate is projected to be around the prior level of 29.5%.
AVERAGE OPERATING WORKING CAPITAL AS A PERCENTAGE OF SALES TO INCREASE MODESTLY In 2017, average operating working capital as a percentage of sales is projected to increase modestly compared to the prior year level (2016: 20.2%).
CAPITAL EXPENDITURE TO INCREASE TO A LEVEL AROUND € 1.1 BILLION
In 2017, capital expenditure is expected to be around € 1.1 billion and thus significantly above the prior year level (2016: € 651 million).
Investments will mainly focus on controlled space initiatives of the adidas and Reebok brands, the company’s logistics infrastructure as well as the further development of the corporate headquarters in Herzogenaurach, Germany.
MANAGEMENT TO PROPOSE DIVIDEND OF € 2.00 As a result of the strong operational and financial performance in 2016, our strong financial position as well as Management’s confidence in our short- and long-term growth aspirations, the adidas AG Executive and Supervisory Boards will recommend paying a dividend of € 2.00 per dividend-entitled share for 2016 to shareholders at the Annual General Meeting (AGM) on May 11, 2017 (2015: € 1.60), representing an increase of 25% compared to the prior year. see Our Share. p. 41
IMPACT OF PLANNED DIVESTITURES ON 2017 OUTLOOK
As part of the company’s ‘Creating the New’ acceleration plan, it is our ambition to focus even more on the adidas and Reebok brands going forward. In this context, we announced our intention to divest the TaylorMade business with the brands TaylorMade, Adams Golf and Ashworth as well as the CCM Hockey business. see Corporate Strategy, p. 48 These divestitures are likely to occur in 2017. In this case, the company’s outlook for 2017 will be impacted to the extent that both 2016 and 2017 will be reported excluding the respective businesses expected to be divested in the financial year. In the event that the planned divestitures occur, we project currency-neutral sales in 2017 to increase between 12% and 14% (2016 adjusted net sales: € 18.5 billion). In addition, the gross margin would increase by up to 0.3 percentage points to a level of up to 49.5%. This together with lower other operating expenses as a percentage of sales will result in an increase in the company’s operating margin of between 0.2 and 0.4 percentage points to a level between 8.6% and 8.8%. Net income from continuing operations is forecasted to increase at a rate between 13% and 15% to a level between € 1.200 billion and € 1.225 billion in 2017. see Management Assessment of Performance, Risks and Opportunities, and Outlook, p. 133
02 MAJOR 2017 PRODUCT LAUNCHES
Product Brand
Ace 17 football boot adidas
COPA 17 football boot adidas
Glitch 17 football boot adidas
UltraBOOST Cleat football boot adidas
adidas x Paul Pogba collection adidas
UltraBOOST X running shoe adidas
EQT Support ADV Originals shoe adidas
EQT Support Ultra Originals shoe adidas
Originals by Kanye West Yeezy Season 5 collection adidas
neo cloudfoam QT Racer shoe adidas
Club C 85 Classics shoe Reebok
Nano 7.0 training shoe Reebok
Pump Supreme training shoe Reebok
Floatride running shoe Reebok
All-Terrain Super 3.0 running shoe Reebok
Spider Tour putter TaylorMade
Powerband Boa BOOST golf shoe adidas Golf
Crossknit BOOST golf shoe adidas Golf
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