Financial Analysis of Adidas Group: Sales, Profit Margin, and Competitor Comparison, Study Guides, Projects, Research of Business Finance

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Financial Analysis of Adidas Group

By:

Strategic Management (BMGT 495), Professor Jerald Payne

List of Illustrations:

Introduction:

The Adidas Group or Adidas, as is most commonly known, has been a vital component of the world of sports for over 80 years; delivering state of the art sports footwear, apparel and accessories. These days, the Adidas Group is a global leader in the sporting goods industry and offers a broad, trendy and fashionable portfolio of products. Products from the Adidas Group are sold virtually in every country of the world. The company’s strategy for such success is very simple: “Continuously strengthen our brands and products to improve our competitive position and financial performance”[ CITATION Adi122 \l 1033 ].

History:

In 1925, in a small German village, the world got its first taste of Adidas. It was there, in a village by the name of Herzogenaurach, located 12 miles to the north and the west of Nuremberg, that those simple three stripes were brought to life by Adidas' founder, Adolf "Adi" Dassler. Adi created Adidas after realizing the need for performance athletic shoes. Adidas began small, producing soccer and running shoes, which ironically enough are still the main products that Adidas is known for. Adidas has continued to gain momentum through the years. Many attribute this to Adidas' quality, styling and reputation. Adidas is currently the largest supplier of athletic shoes in Europe. Adidas ranks second worldwide, with their products selling in almost 200 countries. In 1994 alone, Adidas sales totaled 3 billion dollars. In late 1995, Adidas went public with its stock. It was a tremendous success and continues to trade internationally. Adidas posted an amazing 40% increase in net sales in the first half of 1997.

The Dassler family has a rich heritage in shoes. Adi's brother, Rudolf went on to create the puma brand in 1948 after a dispute with Adi. And, another Adi Dassler, who just happens to be the grandson of the founder of Adidas, has launched his own shoe company, A. D One which specializes in adventure and sub-urban footwear.

Summary of Operations:

Total Revenue (Net Sales):

Adidas’ total revenue at the end of the fiscal year 2011 was an impressive $17.323 billion dollars, which represents a 7.69% increase from the previous fiscal year 2010 of $16.085 billion dollars in revenue. Additionally, Adidas 2011 total revenue has increased in 28.62v compared to the total revenue from the fiscal year 2009 of $13.468 billion dollars.

Gross Profit:

Adidas’ gross profit margin for the fiscal year 2011 was of $8.236 billion dollars, which is a positive increase of 7.78% from the previous fiscal year 2010 of $ 7.678 billion dollars, which gives Adidas a gross profit margin of 47.54%. According to Debbie Donner, a professional accountant and contributor to www.smallbusinesses.com, the higher the gross margin, the better as this is an indicator that your company is making more profit on each dollar of sales[ CITATION Don12 \l 1033 ]. This means that Adidas is currently making a profit of 47 cents out of every dollar the company sales.

Financial Information:

Working Capital:

This is the ability of a company to effectively manage accounts receivable, payable, short & long term debt .Adidas has a good standing position when it comes to working capital, the company’s current and total assets have grown steadily in the last three years. The company’s assets are important to shareholders and investors because these assets demonstrate that the company is able to satisfy any short and long term obligations.

Net Property, Plant and Equipment:

Adidas has properties, plants and equipments all over the world. Most of the company’s factories operate in Asia; 337 factories are located in China, which makes for 27%of Adidas’ total factories worldwide, 99 in India, 79 in Indonesia and 76 in Vietnam. The Americas is the second continent, after Asia, which contains the majority of Adidas’ factories; 71 are located in the United States of America (Adidas’ headquarters is located in Portland), 50 in Brazil, 29 in Canada and 19 in Mexico[ CITATION Gra11 \l 1033 ]. Even though Adidas counts with hundreds of properties, plants and equipments in many countries; the company has managed to increase its fixed assets by just 8.24% in the last couple of years.

Total Assets:

Even a company as well established and successful as Adidas, has felt the impact of the current recession hitting most of Europe and the United States of America. Adidas has seen a growth of only 3.54 % on the company’s total assets between 2010 and 2011; this is a tremendous hit for the company compared to the 19.17 % increase in the company’s total assets between the years 2009 and 2010.

Compared to Adidas’ main competitors (Nike and Under Armor), Under Armor is the only company whose total assets have been increasing at a steady and accelerate it pace. Just between the end of the fiscal year 2010 and 2011, where Adidas and Nike’s total assets did not increase more than 5%, Under Armor’s had an incredible 31.87% increase. 2011 2010 2009 $0. $2,000. $4,000. $6,000. $8,000. $10,000. $12,000. $14,000. $16,000. Adidas Group Nike Inc. Under Armor Numbers in the MIllions Figure 1 : Total Assets for Adidas, Nike & Under Armor

Long Term Assets:

Long term assets are the value of a company's property, equipment and other capital assets, minus depreciation. In this case Adidas’ counts with a huge margin in depreciation, since it counts with hundreds of factories around the world, and these buildings depreciate each year. Additionally, investments on the research of more durable, eco-friendly and lighter materials to manufacture its products will be part of Adidas’ long term investments or assets.

Financial Position Data Assessment/ Interpretation Summary:

Despite the current recession affecting most of Europe and the United States of America, both vital components of Adidas’ international markets, Adidas has managed to not only survive the crisis but at the same time increase the company’s total assets, gross profit and net income. Additionally, Adidas has been able to reduce the company’s total liabilities in 2.36% reducing it from $8,043 million dollars to $7,853 million dollars.

Financial Ratios

Liquidity:

Liquidity is often measured by two ratios; Current and Quick (or also known as Acid Test) Ratios; these two of the most commonly cited financial ratios used by investors because it helps investors realize the ability of the company to meet its short-term obligations[ CITATION Git121 \l 1033 ]. Adidas has a 0.92 quick ratio and a 1.50 current ratio, which means that Adidas has a very good liquidity to cover any short terms or unexpected debts. Additionally, a famous and massive company like Adidas probably has a well established relationship with different financial institutions like Bank of America, Wells Fargo, among others; which can provide a vast array of different products (line of credits or short term loans) if Adidas ever needed help to cover any short term debts.

Leverage:

These ratios measure the extent to which a firm has been financed by debt; the most common ratios used are Debt to total assets ratio, debt to equity ratio, long term debt to equity ratio and times interest earned ratio[ CITATION Dav \l 1033 ]. Adidas does have expenses, which are paid for, but so far the company has not accumulated any standing debt.

Activity:

These ratios measure how effectively a firm is using its resources using the following ratios; inventory turnover, and average collection period. Adidas does a great job at collecting its accounts payables from customers; on average it takes the company 48 days to receive full payment for its products from customers. This ratio is an improvement from the previous two years, when it would take the company 52 days in 2010 and 56 days in 2009 to be fully reimbursed. Ideally, a company would want to keep this number the lowest possible.

Profitability:

This measure a management’s overall effectiveness as shown by the returns generated on sales and investments; some of the ratios used to calculate the profitability of a company are: Gross profit margin, return on assets ratio and return on net worth. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Adidas’ profit margin has increased over the last three years, going from 2.36% in 2009 to 5.02% in 2011, these ratios indicate that the company is making bigger profits from its sales and investments.

On the other hand, Nike has the upper hand in the athletic footwear and apparel world because it surpasses Adidas in sales, net income and profit margin. However, Nike’s ability to collect its accounts payable from its customers is still higher than Adidas; this is demonstrated by the Nike’s collection period ratio of 54 days compared to Adidas of 48 days. Out of the three main competitors, Adidas Nike and Under Armor, Nike is the only company whose profit margin has actually decreased over the last three years going from 10.03% in 2009 to %9.21 in 2011. On the other hand, Adidas’ profit margin has increased considerably since 2009 to 2011, going from 2.36% to 5.02% in just two years. 2009 2010 2011 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% Nike Under Armor Adidas Nike Under Armor Adidas Figure 3 : Increase in Profit Margin for Adidas, Nike & Under Armor

Historical Financial Performance and 3-year Trend Analysis data Assessment/

Interpretation Summary:

In conclusion Adidas has demonstrated to be a one of the most profitable companies in the athletic footwear and apparel market. As shown on the company’s income statement, balance sheet, cash flow and ratios, Adidas has been able to increase its profits while maintaining and in some cases even decreasing the company’s expenses and liabilities. Due to Adidas’ ability to keep up with continuous changes in technology as well as in fashion, as demonstrated in the pictures below, the company has been able to continuously increase its popularity and establish itself as one of the most recognizable and reliable sports brands in the world. Figure 4 : On the left Adidas’ first track shoe; on the right Adidas’ newest track shoe.

Bibliography

CITATION Adi122 \l 1033 : , (Adidas Group, 2012), CITATION Don12 \l 1033 : , (Donner, 2012), CITATION Gra11 \l 1033 : , (Grahame, 2011), CITATION Git121 \l 1033 : , (Gitman & Zutter, 2012), CITATION Dav \l 1033 : , (David, 2011),

Appendix:

1. Adidas’ Income Statement and Balance Sheet (Excel).
2. Adidas’ Financial Ratios (Excel).
3. Nike’s Income Statement and Balance Sheet (Excel).
4. Nike’s Financial Ratios (Excel).
5. Under Armor’s Income Statement and Balance Sheet (Excel).
6. Under Armor’s Financial Ratios (Excel).