Adidas Financial Report 6c5138

ADIDAS ANALYSIS REPORT 2018

APRIL 30 TH Principle of ing Authored by: Ghina Shaikh

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Executive Summary ADIDAS FOR THE YEAR 2018 Adidas is sports apparel global brand which we have chosen as our company for this term project. Their ing and reporting of financial analytics is based on International ing Standards and its t root of International Financial Reporting Standards. They hire an external auditor for making the annual report who has found no flow in their financial report and data gathered and provided to them. As per our findings they are a goal motivated company which has managed to make a 50% margin for their product. They have been efficient with their costs, outsourced inputs to Asia to benefit from the lowest of cost and greater profitability. What was interesting were their ing practices for maintaining the provisions where they had a case-to-case analysis of how much to provision their debtor. While having an in depth review of their annual report we came across hedge ing which was new and something we hadn’t studied before. On research Hedge ing is opted when you want to reduce the volatility of your financial instrument’s value, also known as, marking to market. Though they have been good with their profitability, they have overburdened their debts and equity side of finances. For example, their debt to equity ratio has worsened. Conclusively speaking this company is going good. Their profitability has improved, liquidity has enhanced, board of directors have managed to achieve their goals and Adidas can still work on their debts. Only recommendation that we have for them is to focus on the way they are. Their 2020 plan can be achieved of reaching $4 billion through ecommerce. Bottom line is maintain their progress!

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Table of Contents Executive Summary ....................................................................................................2 Introduction ...............................................................................................................5 Background History of Adidas .....................................................................................5 Current Standing.........................................................................................................6 Fiscal Year of Adidas ..................................................................................................6 Resources ...................................................................................................................6 Financial Statements ..............................................................................................6 Elements of ing ..............................................................................................7 Asset ......................................................................................................................7 Current Assets .....................................................................................................7 Non-Current Assets .............................................................................................8 Liabilities ................................................................................................................8 Current Liabilities ................................................................................................8 Non-current Liabilities .........................................................................................9 Equity .....................................................................................................................9 Share Capital .......................................................................................................9 Reserves..............................................................................................................9 Retained Earnings ...............................................................................................9 Non-controlling interests ..................................................................................10 Income ..................................................................................................................10 Net Sales ..........................................................................................................10 Explanatory Notes ...................................................................................................11 Policies and Regulations ...........................................................................................11 Credit Risk ............................................................................................................11 Sourcing and Purchasing Policy ............................................................................12 3

Auditors Report .......................................................................................................12 Financial Performance ..............................................................................................13 Profitability ..........................................................................................................13 Gross Profit Margin ...........................................................................................13 Operating Expense Ratio ...................................................................................13 Net Profit Margin ..............................................................................................14 Return on Equity ...............................................................................................14 Return on Total Assets ......................................................................................14 Financial Position/Stability .......................................................................................14 Liquidity ................................................................................................................14 Working Capital Ratio .......................................................................................14 Quick Asset Ratio ..............................................................................................15 Solvency ...............................................................................................................15 Debt/Owner Equity Ratio ..................................................................................15 Debt/Assets Ratio .............................................................................................15 Conclusion ................................................................................................................16 Bibliography .............................................................................................................17

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Introduction This report is an analysis of the fiscal year 2018 of the company Adidas. This report has been prepared for Adidas concerning the business performance review for the year 2018. However, for the sake of proper analysis, the previous year i.e. 2017 has been taken into consideration for a proper conclusion. It has been prepared after examining the five financial statements provided, therein the Annual Report for 2018, for both the years. Ratios have been derived from these statements in relation to financial performance through profitability, gross profit margin, expense ratio, net profit margin, etc. as well as the financial position through Quick Asset Ratio, Working Capital Ratio while providing a thorough interpretation of the management effectiveness and procedures of the business. These ratios have proven to be valuable as they summarize extensive data and have equipped us to better evaluate how profitable is the business, whether the business is competent to finance its purchases and expenses, the utilization of assets to generate the revenue and much more. (Wikipedia, n.d.)

Background History of Adidas Adidas AG (styles as adidas since 1949) is a multinational corporation, founded and headquartered in Herzogenaurach, by Adolf “Adi” Dassler. It designs as well as manufactures shoes. In addition, it has a product line of clothing and accessories. Adidas is renowned for its sports related products. Adidas happens to be the largest sportswear manufacturer in Europe and the second largest in the world, after Nike. It has officially been given the ranking of 61st brand amongst the World’s Most Valuable Brands and having more than 92 innovative companies, Adidas has positioned itself as the leader in the world market. It is the holding company for the Adidas Group, which consists of the Reebok sportswear company, TaylorMade-Adidas golf company (including Ashworth), 9.1% of FC Bayern Munich and Runtastic, an Austrian fitness technology company. Adolf Dassler took the initiative of Adidas and had it ed on 18th August 1949. He was ed by his elder brother Rudolf earlier on in 1924, the company’s name at that time was Dassler Brothers Shoe Factory. However, the brothers’ partnership was short lived. Following the family feud in 1949, Adolf created Adidas and Rudolf established Puma, which later went to become Adidas’ business rival. The branding, which Adidas brought in 1952 from Finnish sports company i.e. Karhu Sports, became so successful that Dassler described Adidas as “The three stripes company”. The company's clothing and shoe designs typically feature three parallel bars, and the same motif is incur porated into Adidas's current official logo. (Quick History of Adidas, n.d.)

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Current Standing As of 2019, Adidas was the third largest apparel brand in the world, with a brand value of 16.67 billion U.S. dollars. The company is also one of the most valuable athletic apparel, accessories, and footwear companies in the world. Adidas held a significant share of the U.S. sports apparel market as of 2017. The company employed approximately 57 thousand people worldwide in 2018. The Adidas Group’s global net sales amounted to about 21.92 billion euros in 2018. In that year as well, the North American region of the Adidas Group generated 21 percent of the company’s retail net sales. Footwear and apparel are two of the Adidas Group’s biggest segments. In 2018, the company produced 409 million pairs of shoes worldwide and 457 million units of sports apparel. As a result, Adidas has become one of the most popular brands amongst men and women when it comes to sportswear worldwide. Adidas is also a very popular brand in the United States. As of 2017, 42 percent of U.S. consumers stated that they usually bought adidas clothing, shoes and accessories. Adidas is also a popular brand for high income earners in the United States. In 2018, 42.01 percent of respondents who stated their income was high said they owned Adidas brand apparel, accessories and footwear. (Adidas Succes Story, n.d.)

Fiscal Year of Adidas 1 The fiscal reporting year of Adidas is from January 1 to December 31st. Adidas happens to follow the entire calendar. However, it also does report its finances quarterly as well. The consolidated financial statements and the Group Management Report are prepared in accordance with the principles of the International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), and additional requirements pursuant to the German Commercial Code. (ADIDAS, 2018)

Resources Financial Statements 2 The financial statements Adidas has chosen to include in its annual report are as followed: 01. Consolidated Statement of Financial Position – Balance Sheet. 02. Consolidated Income Statement. 03. Consolidated Statement of Comprehensive Income. 04. Consolidated Statement of Changes in Equity.

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What is the fiscal year of the company? What are the titles of four financial statements that the company presents?

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05. Consolidated Statement of Cash Flows.

Elements of ing The elements of ing i.e. Assets, Liabilities, Equity and Income as well as Expense of the company as stated by the financial statements – Balance Sheet and Income Statement are as follows (ADIDAS, 2018) Asset 3 The three major current assets and the two major non-current assets are as follows (Adidas Assets, n.d.)

Current Assets Cash and Cash Equivalents Cash and cash equivalents consist of cash at banks, cash on hand and short term deposits. Short term deposits are only shown under this head of given that they are readily convertible in to known amount of cash and are subject to an insignificant risk of changes in values. The amount of cash and cash equivalents was €2,628.71 ≈ €2,629 million as compared to the €1,598 million in 2017. There was an increase of 64.5% in comparison. 4 Receivable s receivable consist mainly of the currencies such as US dollars, euro as well as Chinese renminbi. In 2018, there was no material balances of s receivable written-off but subject to enforcement activity. The gross receivable for the year 2018 was €2,612 million, the loss allowance was 7.4% of gross receivable i.e. €193 million. As compared to that of 2017, loss on allowance increased by 0.6% however, the net amount of receivable of 2018 was €102 million dollars more than 2017. Inventories The inventory has been classified into 01. Merchandise and finished goods on hand. 02. Goods in transit. 03. Raw materials. 04. Work in progress.

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What are the five largest assets and five largest liabilities included in the company’s balance sheet at the end of the year? 4 What were the cash balances at the beginning and at the end of the year?

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The inventory amounted up to €3,445 million (Ending inventory) as compared to €3,692(Beginning Inventory)5 in 2017. There was a decrease of 6.7% in comparison.

Non-Current Assets Property, plant and equipment Land, land leases, buidings and leasehold improvements as well as technical equpment and machinery, furniture and fixture com under this head of . The gross value was €3,582 million whereas the depreciation accumulated amounted to €1,824 million, given that, the net value was €2,237 million in comparison to the €2,000 in 2017. There was an increase by 11.8% Goodwill Goodwill primarily relates to the acquisitions of the Reebok and Runtastic businesses as well as the acquisitions of subsidiaries, primarily in USA, Australia, New Zealand, the Netherlands, Denmark and Italy. Gross Goodwill amounted to €1,642 million whereas the accumulated impairment loss amounted to €396 million rounding up the net value to €1,245 in contrast to the €1,220 in 2017. Goodwill bumped up by 2% The date of purchases for fixed assets haven’t been mentioned neither have the method of depreciation.

Liabilities The major liabilities of the year 2018 that had been mentioned on the balance sheet are

Current Liabilities The top three major current liabilities are s Payable In 2018, the payable amounted to €2,300 million as compared to the €1,975million in 2017. There was a 16.5% increase. Current Accrued Liabilities Accrued liabilities for marketing and sales mainly consist of accruals for distribution, such as discounts, rebates and sales commission whereas for personnel outstanding salary payments, such as bonuses and overtime. Sundry include accruals for interest.

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What is the ending inventory?

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In 2018, the amount rounded up to €2,324 million. There was an increase of 5.7% Other Current Provisions Other provisions consist of marketing provisions i.e. promotion contracts, personnel consists of short and long-term variable compensation components. Provisions are also made for returns and warranty. There was an increase by 66.2% in amount.

Non-current Liabilities The two major non-current liabilities are Long-Term Borrowings Borrowings are denominated in a variety of currencies in which Adidas conducts its business. The largest portions of effective gross borrowing as at Dec 31st 2018 are denominated in euro. Long-term financing arrangements totaled to €3.7billion in 2018 as compared to €3.3 billion in 2017. Pensions and similar obligations Adidas has recognized post-employment benefit obligations arising from defined benefit plans. The benefits depend on the employees’ years of service and remuneration. The total expense for defined contribution plans amounted to €74 million in 2018 as compared to €67 million.

Equity 6 Share Capital As at December 31st 2017, the nominal capital of Adidas AG amounted to €209,216,186 divided into ed no-par-value shares and was fully paid in. However, in October 22 2018 the nominal capital was reduced to €200,416,186 by cancelation of 8,800,000 treasury shares, The balance remained same till the end of the financial year.

Reserves Reserves consist of capital reserve, cumulative currency translation differences, hedging reserve, cost of hedging reserves as well as benefit plans, return on plan assets, asset ceiling effect etc. In 2018 the reserves amounted to €12 million as compared to negative €23 million in 2017.

Retained Earnings

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What are the components of the capital/equity section of the company?

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Comprises both amounts required by AoA and voluntary amounts that have been set aside by Adidas. It includes unappropriated accumulated profit less dividends paid and consideration paid for repurchase of treasury shares exceeding the nominal value. In 2018, the amount was €6,054million. There was an increase by 3.4%

Non-controlling interests Consists of subsidiaries which are indirectly attributable Adidas AG. Non-controlling interest are assigned to three subsidiaries as of December 31st 2018. In 2018, it amounted to €13million as compared to €14 in 2017. There was a decrease of 15.3%

Income Analysis of significant values such as Net Sales, etc.

Net Sales 7 Adidas AG operates under IFRS 15 an IAS18, in accordance to the aforementioned rules, there was no significant change in the revenue computed in comparison to the application of other. Therefore, there wasn’t a significant impact on the Income Statement. The Net Sales of Adidas has been categorized region wise. Deatiled product wise net sales have not been included in the annual report.

A significant impact resulted by the application of IFRS 15 on sales return. Whereas by IAS18, sales return was tabulated in consideration to past experience i.e. the difference between gross sales and cost of goods sold. However, adjustment were made according to IFRS 15.

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What are the total sales of the company? Read the detail of the sales in the notes accompanied and summarize?

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Application of IFRS 15 resulted in an increase in return provision, return assets and a decrease in retained earnings. As of December 31st 2019, return liability and return asset increase by €308million and €258, respectively whereas there was a decrease of €41million in retained earnings.

Explanatory Notes 8 Much like many other annual reports, Adidas as well has provided certain explanatory notes that equip its readers to better understand and get a broader picture of Adidas and its operational elements. 1. ing principles used 2. Sales 3. Net financial income 4. Main events of the period 5. Other operational incomes and expenses 6. Number of employees, personnel costs and employee benefits 7. Income tax 8. Research costs 9. Tangible 10. Intangible assets 11. Financial assets and liabilities- Cost of debt 12. Equity- Earnings per share 13. Changes in working capital 14. Provisions for liabilities and charges- Contingent liabilities and material ongoing disputes 15. Cash and cash equivalents at the end of the year 16. Disclosures

Policies and Regulations Credit Risk 9 Under the company’s credit risk policies, new customers are at first analyzed for their creditworthiness before standard payment and delivery as well as conditions are offered. Tolerance limits for receivable are also established. Both the creditworthiness as well as limits are monitored on ongoing basis. Failure to comply results into limited prepayment purchases. Other measures to mitigate credit risks include retention of title clause, credit insurance, without recourse sale and bank guarantees, all on selective basis.

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The financial statements are followed by a series of explanatory notes. What are some of the subjects covered by the notes? (mention at least ten) 9 What are the s receivable and allowance for bad debts policy of the company?

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In accordance with IFRS 7, certain set-off possibilities of derivative financial assets and liabilities.

Sourcing and Purchasing Policy 10 Responsible sourcing and purchasing practices are to be embedded in all relevant sourcing and purchasing policies and procedures. These shall decision making and processes that are aligned with: • Contractual and financial that do not adversely impact compliance with the Adidas Workplace Standards, including the safeguarding of legally mandated wages, benefits & compensation; •

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Product development, order placement/purchasing, and production lead times that reduce the risk of excessive overtime, unauthorized subcontracting, or other negative supply chain impacts; and A commitment to long term partnerships with suppliers, which recognize those suppliers delivering sustainable compliance, in accordance with the Workplace Standards, a track record in reducing environmental impacts and maintaining and achieving product safety standards.

Auditors Report 11 The annual consolidated financial statements and the interim financial report of the Adidas Group are prepared by the Executive Board in accordance with the principles of the International Financial Reporting Standards (IFRS) as applicable in the European Union. KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, audited the consolidated financial statements for 2018 prepared by the Executive Board in accordance with the above-mentioned provisions and issued an unqualified opinion thereon. The auditor also approved without qualification the 2018 annual financial statements of Adidas AG prepared in accordance with HGB requirements. On May 9, 2018, the Annual General Meeting appointed KPMG AG Wirtschaftsprüfungsgesellschaft, Berlin, as auditor for the Adidas AG annual financial statements and the consolidated financial statements for the financial year 2018, after the Supervisory Board had confirmed the independence of the auditor.

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Read the notes related to the sales and purchase policy and summarize? Which public ing firm (or auditor) audited the annual report, and what was the general conclusion the auditor reached? 11

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Financial Performance The financial performance of Adidas has been examined and analyzed by the calculation of relevant ratios, that are as follows

Profitability 12 Profitability happens to the utmost priority of any business venture regardless of the field it operates in. It is the extent to which the business can earn income to cover its expenses. Computing profitability is essential in order to fully grasp the financial performance any company. To fully analyze Adidas’ performance five ratios have been calculated.

Gross Profit Margin It represents the capacity of the business to generate sufficient revenue to cover the expense incurred.

Gross Profit Margin= (Gross Profit/Net Sales) x100 Give that the gross profit amounted to €11,363 whereas the Net Sales were €21,915. The Gross profit margin is 51.8%. The gross profit margin has shown a significant increase of 1.4% as compared to 2017 which indicates that Adidas is in a good financial position and able to earn a reasonable net profit all the while providing a decent return to investors. There’s growth. 13

Operating Expense Ratio The expense ratio is beneficial in cost control actions. Lower expense ratio indicates increased profits.

Expense Ratio= (Total Expense/Net sales) x100 The total operating expense totaled to €9,172 million. The expense ratio was 41.9% which is 0.3% increased as compared to that of 2017. There is an increase, total expense ratio has risen and it may be due to the trend of fall net sales comparatively.

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Calculate and explain the company’s ratios? Calculate the gross profit percentage of the company?

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Net Profit Margin Net profit margin is the most accurate depiction of a company’s performance. It also is a massive indicator of whether the business has control over revenues and expenses. Unlike gross profit, net profit takes into expenses as well.

Net profit margin= (Net Profit/Net sales) x100 The net profit amounted to €1,704 million. The net profit margin rounded up to 8% which is 2.8% increased from that of 2017. This indicates that there is high possibility of getting profit. 14

Return on Equity The possible return an owner is bound to receive on their investment. High ratio is indicative of better performance.

Return on Equity ratio= (Net Profit/Owner’s Equity) x100 The owner’s equity totaled to €6,364million. The ratio was 26.7%. It experienced a 8.41% increase from as compared to the 18.28% ration in 2017. It is indicative of the fact that Adidas is performing quite well and possibly is attracting more investments.

Return on Total Assets Determines the businesses’ abilities to properly utilize assets into generating profit. However, it is exclusive of financial source used in obtaining the assets.

Return on Equity ratio= (Net Profit+ Interest Expense/Total Assets) x100 The return on total assets in 2018 is 10.9%. It has increased from the 9.65% return in 2017. There has been a significant fall in the interest expense. The rise in the net profit has cushioned the effect of fallen interest expenses.

Financial Position/Stability Liquidity The capacity of the business to withstand cash disbursement without any excessive burden on lack of money sources. The two indicators of liquidity are

Working Capital Ratio

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Did the company have a net income or net loss for the year? How much?

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It depicts whether or not the business has sufficient short-term assets to cover its immediate and imminent liabilities over the span of a year.

Working Capital Ratio= Current Assets / Current Liabilities The working capital has suffered a downfall from 1.43 (2017) to 1.37. The increase is largely due to the decrease in creditors. The decrease has resulted in drop down in current liabilities. The increase indicates that the business has liquidity i.e. 1.4 euro for each 1 euro of liability.. This is also indicative of the fact that the Adidas AG might face meet ongoing and unexpected bills better in comparison.

Quick Asset Ratio The ability of business to meet cash commitments due within quick span of time.

Quick Asset Ratio= Current Assets – Inventory / Current Liabilities The quick asset ratio of 2018 is 0.93 whereas 2017 had a ratio of 0.78. Adidas has increased 0.15 with its ability to pay off its current liabilities with its current assets.

Solvency Measurement of the business to meet its long-term fixed expenses. It is a measurement of risk involved in business, the ability to pay up despite the lack of cash flows. Inventors take keen interest. The two indicators for solvency are

Debt/Owner Equity Ratio Financial leverage used to enhance the possibility and extent of return on equity.

Debt/Owner Equity ratio= Liabilities/Owner’s Equity In 2018, Adidas had the debt equity ratio 1.07. Compared to 2017’s 1.04 there has been a 0.03 increase. Although, the increase is not significant however, it is indicative of increased creditors claim. It is due to the slight increase in liabilities.

Debt/Assets Ratio It indicates the creditors claim on the assets. It is ideal to maintain the ration below 50%

Debt/Assets ratio= Liabilities/Assets Adidas has the ratio of 59%. As compared to 2017’s 57% it happens to be a 2% increase. Either ratios aren’t good as they indicate Adidas depends on borrowing more than sourcing itself on its own.

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Conclusion Our overall understanding of both Adidas Group’s financial position and the conditions of the market it operates in can lead us to multiple, consistent conclusions. Adidas is rapidly growing firm. However, from the results of ratios, it can be assessed that it is not making the most of its assets and has a higher debt ratio. There is plenty of room for improvement. It already has improved in comparison to 2017. Nonetheless, the firm sees most ratios improving favourably over the most recent ing trends.

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Bibliography ing Summary. (n.d.). Retrieved from https://studymoose.com/sampleing-report-writing-essay ADIDAS. (2018, DECEMBER 31). Retrieved from ADIDAS: https://report.adidasgroup.com/file/_/adidas_Annual_Report_GB-2018-EN.pdf Adidas Assets. (n.d.). Retrieved from Tradingeconomics: https://tradingeconomics.com/ads:gr:assets Adidas Succes Story. (n.d.). Retrieved from successtory: https://successstory.com/companies/adidas-ag Quick History of Adidas. (n.d.). Retrieved from thoughtco: https://www.thoughtco.com/quick-history-of-adidas-1444319 Wikipedia. (n.d.). Adidas. Retrieved from Wikipedia: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad =rja&uact=8&ved=2ahUKEwiByIuEi_fhAhWGyKYKHeEaAFoQFjACegQIDxAK&ur l=https%3A%2F%2Fen.wikipedia.org%2Fwiki%2FAdidas&usg=AOvVaw2S0eIG WhyLV2esFLTupHCZ

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