THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY PEDRO PEREIRA, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT) Page 1/32 MASTERS IN FINANCE After a careful evaluation, our investment recommendation for Adidas AG is BUY, with a target price of EUR 222.33, while the current stock price trades at EUR 167.15. For the last 3 months, the stock decreased 13%, which represents a good opportunity to buy the stock. Share: The company stock price clearly outperformed the German stock index DAX-30, yielding a total return of 173% in the last three years. This development was mainly driven by the continuously release of strong financial performances (revenue growth rate of 16% and 14% in 2015 and 2016, respectively) Growth: Adidas is focused to increase sales growth by driving brand desirability through product innovation, as well as by focusing on several strategic growth areas such as womenswear, athleisure, e-commerce, greater penetration of the North America and Greater China market. The company is also committed to improve margins in order to close the gap to its major rival, Nike (EBITDA margin of 16% vs 8% for Nike and Adidas, respectively) Valuation: The YE18 price target is based on a DCF analysis of Adidas. The price target of EUR 222.33 implies a 33,0% mark-up and a total expected shareholder return of 34,2% on the current share price. Company description Adidas Group, with headquarters in Herzogenaurach (Germany) is the largest company in the sports footwear and apparel industry in Europe and the second largest in the world. With total revenues of EUR 19.3 billion in 2016, its product range covers the entire spectrum of apparel and footwear goods from casual sportive fashion to high performance products for competitive athletes. ADIDAS AG COMPANY REPORT FOOTWEAR AND APPAREL 3 JANUARY 2017 STUDENT: PEDRO PEREIRA [email protected]Sustaining “Brand Momentum” Riding the Athleisure and E-commerce trend Recommendation: BUY Price Target FY18: 222.33 € Price (as of 31-Dez-17) 167.15 € Bloomberg: ADS:GR 52-week range (€) 142.60-202.10 Market Cap (€b) 34.970 Outstanding Shares (m) 209.216 Source: Bloomberg In % based on 100% at 31th December 2014 Source: Bloomberg (Values in € millions) 2016 2017E 2018F Revenues 19,291 21,529 23,743 EBITDA 1,855 2,329 2,730 EBITDA growth 30% 26% 17% Net Profit 1,020 1,075 1,526 EPS 4,87 5,14 7,29 Payout Ratio 39,6% 45,1% 39,7% Dividends per share 2,00 2,40 3,00 Net Debt 235 775 1,156 Net Debt/EBITDA 0,13 0,33 0,42 ROIC (%) 17,0% 21,0% 22,6% Source: Adidas AG Annual Report 2016, Bloomberg, own estimates
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THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY PEDRO PEREIRA, A MASTERS IN FINANCE STUDENT OF THE
NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA SBE FACULTY MEMBER, ACTING IN A MERE
ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF THE DOCUMENT)
Page 1/32
MASTERS IN FINANCE
After a careful evaluation, our investment
recommendation for Adidas AG is BUY, with a target price of
EUR 222.33, while the current stock price trades at EUR 167.15.
For the last 3 months, the stock decreased 13%, which represents
a good opportunity to buy the stock.
Share: The company stock price clearly outperformed the
German stock index DAX-30, yielding a total return of 173% in the
last three years. This development was mainly driven by the
continuously release of strong financial performances (revenue
growth rate of 16% and 14% in 2015 and 2016, respectively)
Growth: Adidas is focused to increase sales growth by
driving brand desirability through product innovation, as well as by
focusing on several strategic growth areas such as womenswear,
athleisure, e-commerce, greater penetration of the North America
and Greater China market. The company is also committed to
improve margins in order to close the gap to its major rival, Nike
(EBITDA margin of 16% vs 8% for Nike and Adidas, respectively)
Valuation: The YE18 price target is based on a DCF
analysis of Adidas. The price target of EUR 222.33 implies a
33,0% mark-up and a total expected shareholder return of 34,2%
on the current share price.
Company description
Adidas Group, with headquarters in Herzogenaurach (Germany) is the largest company in the sports footwear and apparel industry in Europe and the second largest in the world. With total revenues of EUR 19.3 billion in 2016, its product range covers the entire spectrum of apparel and footwear goods from casual sportive fashion to high performance products for competitive athletes.
REVENUES .......................................................................................................... 19 EXPENSES ........................................................................................................... 21 NET WORKING CAPITAL AND CAPEX ................................................................ 22
DISCLOSURES AND DISCLAIMERS .....................................................30
ADIDAS AG COMPANY REPORT
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Adidas Case
Adidas Group, with headquarters in Herzogenaurach (Germany) is the largest
company in the sports footwear and apparel industry in Europe and the second
largest in the world (7,8% of market share - see figure 21). With total revenues of
EUR 19.3 billion in 2016, its product range covers the entire spectrum of apparel
and footwear goods from casual sportive fashion to high performance products
for competitive athletes.
In March 2015, Adidas presented a new acceleration plan called “Creating the
New” that raised Adidas’ growth expectations. Actually, due to the strong start of
the strategy (EUR 19.3 billion vs EUR 16.9 billion net sales and 7.7% vs 6.5%
operating margin in 2016 and 2015, respectively), the company introduced more
ambitious growth targets. The new bullish forecast to 2020 (10-12% vs high-
single digit sales growth per year, EUR 22 billion vs EUR 25-27 billion net sales,
11% vs 9,9% operating margin and 20-22% vs 15% EPS growth per year) are
clearly possible and credible given the current brand strength, CEO Kasper
Rorsted’s reputation for operational improvements and clear potential to improve
direct distribution.
However, all these objectives rely on great execution, continued strength in both
sportswear and sports lifestyle markets, no negative impact from any potential
US border tax, no significant negative currency effects and no significant
fightback by global peers (Nike and Under Armour) or the significant niche
brands (such as Puma) or local players in markets such China (Li Ning).
The company’s biggest competitor is Nike, mainly due to its dominant market
position in the US, the industry’s most lucrative and important region (36% of
total sportswear consumption). Adidas has been successfully gaining market
share in this region by altering its strategy, which appears to be paying off (+27%
sales growth in the third quarter of 2017). Conversely, Nike has been investing
more in other regions driven by their high dependence of US market (44% of total
revenues).
The target price was calculated through a DCF model. The valuation leads to a
buy recommendation, with a target price of EUR 222.33 for Adidas’ shares,
representing an upside of 33,0% on the current stock price and a total
shareholder return of 34,2%.
BUY recommendation with EUR 222.33 target price
Second largest company in the sports footwear and apparel industry
More ambitious growth targets after a strong start of the strategic plan “Creating the New”
Several risks associated to the company’s growth strategy
Biggest competitor is Nike, which dominates the US market
ADIDAS AG COMPANY REPORT
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Company Overview
Company description
The Adidas Group is a German based company that designs, develops,
produces and markets athletic and sports lifestyle products worldwide. With more
than 60.000 employees in over 160 countries, the company produces more than
850 million product units every year.
In 1949, the company was registered by Adolf Dassler after a disagreement with
his brother Rudolf, who ended up creating Puma. The “three parallel bar” brand
rapidly gain the trust of world-class athletes through decades, being the footwear
for gold medals winners in Olympic Games, apparel for record breakers and
responsible for the creation of the official match ball for the 1970 FIFA World Cup
and several other competitions that followed.
After the end of the Dassler family control, in 1987, questionable strategic
decisions put the company near bankruptcy with a record loss in 1992. Three
year afterward, the company went public and, as the new century started, a new
lifestyle segment was introduced, focusing on sport-inspired streetwear in
addition to its sport performance products, being the pioneer in the industry.
Several collaborations were established with famous designers and athletes such
as Yohji Yamamoto and David Beckman in order to prove that “impossible is
nothing”, one of the most memorable marketing campaigns for sports lovers.
Throughout the years, the company tried to grow by doing major acquisitions and
just from that moment onwards through organic growth. In 2006 Adidas acquire
its British rival Reebok for UDS 3.8 billion, in order to increase its market share in
the North America market. In 2011, the company acquired outdoor specialist Five
Ten for USD 25 million, and through the acquisitions of Ashworth in 2009,
TaylorMade in 2011 and Adam Golf in 2012, Adidas gained access to the golfing
market. More recently, the acquisition of Runtastic GmbH by EUR 220 million, an
Austrian based fitness app-maker which tracks and manages health and fitness
data, allowed the company to enter in the digital market.
However, included in the “Creating the New” plan, the divestiture of Mitchell &
Ness as well as the decision to exit the golf and hockey business through the
sale of TaylorMade, Adams Golf, Ashworth and CCM Hockey brands, marked a
change in the growth strategic plan. This allows the company to reduce the
complexity in their brand portfolio and to focus even more strongly on the core
competencies in the areas of footwear and apparel with just the Adidas and
Reebok brands.
Divestiture in brands in order
to reduce brand portfolio
Adidas brand linked to sports world-class events and athletes
Introduction of sport-inspired streetwear segment
Major acquisitions in order to gain market share in specific
market segments
ADIDAS AG COMPANY REPORT
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Figure 1: Sales by brand
Figure 2: Sales by product category
Figure 3: Sales by geographical region
Figure 4: Footwear production by region
Business Overview
The company separates its business by brands, product category, geographical
region and distribution channels in order to tackle different markets and customer
targets at the same time.
As can be seen from figure 1, the company’s original brand adidas is the biggest
source of revenue which accounts for 85% of total group’s revenues with EUR
16.3 billion. Currency-neutral revenues for adidas brand increased 22% in 2016
mainly driven by double-digit sales increase in training and running categories as
well as high-single-digit sales increase in football category. Reebok brand
accounts for 9% of total sales with EUR 1.8 billion and currency-neutral sales
were up 6% in 2016 versus the previous year. Other businesses include all the
other brands.
In terms of product category, Adidas separates its revenues by footwear, apparel
and hardware. Footwear accounts for 53% of the group’s revenues and in the
recent years it has registered a strong increase, especially in the casual athletic
category which continued to yield high growth rate in the last two years (double-
digit growth). Regarding the other categories, the apparel represents 39% of the
total group’s revenues but even though it has increased from the previous year, it
has lost some importance in terms of share in relation to the value for Adidas.
Finally, the hardware, which includes bags, balls, watches or fitness equipment,
is the smallest category in terms of revenues accounting around 8% of the
group’s revenues (see figure 2).
As per the regional distribution, Western Europe continues to be the core-market
generating about 30% of total revenues, followed by North America (21%),
Greater China (16%) and MEAA1 (14%) (see figure 3). In 2016, currency-neutral
revenues increased in all regions, with emphasis for Greater China (28%), North
America (+24%) and Western Europe (+20%). Russia/CIS registered the lowest
currency-neutral revenue growth with +3%.
To minimise production costs, Adidas outsources almost 100% of manufacturing,
primarily located in Asia. The company also operates a limited number of own
production and assembly facilities in USA (4), Canada (3) and Germany (1). Asia
accounts for 97% of footwear volume produced (see figure 4), where Vietnam
represents the largest sourcing country (42%), followed by Indonesia (24%) and
China (22%). Regarding apparel, Asia produced 93% of the total volume
produced (see figure 5) but, in this case, China is the largest source country
(27%), followed by Cambodia (22%) and Vietnam (17%).
1 Middle East, Africa and other Asian markets
ADIDAS AG COMPANY REPORT
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Figure 6: Sales by distribution channels
Figure 5: Apparel production by region
Figure 7: CAPEX by region
Figure 8: Other Operating Expenses
In order to distribute the products produced to the clients, Adidas AG relies on
three different distribution channels: wholesale, retail and e-commerce. The
biggest part of revenues is generated through wholesale, contributing 64% in
2016. The retail and e-commerce channels accounted for 31% and 5%,
respectively (see figure 6). Adidas’ network is composed by 2.800 own-retail
stores, more than 12.000 mono-branded franchise stores, over 120.000
wholesale doors and more than 50 own e-commerce sites.
The majority of the company’s capital expenditure is related to controlled space
initiatives. In 2016, these investments in new or remodelled own-retail and
franchise stores accounted for 55% of the total capital expenditure, followed by
IT, administration and logistics with 10%, 9% and 8%, respectively. From a
regional perspective, just the company’s headquarters in Herzogenaurach,
Germany, accounted for 33%. In addition, Greater China, North America and
Western Europe were the regions where the company invested more with 15%,
13% and 12%, respectively (see figure 7).
In 2016, other operating expenses were mainly comprised of point-of-sale and
marketing investments, which represents 31% of total amount spent, and
operating overhead expenses, which include marketing, logistics, sales force,
administration and R&D related costs, accounts for 59% (see figure 8). The first
category consists of expenses to support company’s development at the point of
sale, promotion partnerships, advertising, public relations and other
communication activities, while the second category refers to expenses
associated with running the business.
Brand Overview
As aforementioned, the Group separates its business through two main brands,
adidas and Reebok. Known as “The Badge of Sports” and “House of Fitness”,
both brands have a clear core focus in the sports and fitness world, respectively.
adidas
The original brand, adidas, is separated into other several sub-brands. Adidas
Sport Performance has a clear focus on sports athletes, developing products
that are able to boost their performance. Its products cover a wide range of
sports such as football, basketball, running, baseball, American football, etc.
Adidas Originals and adidas neo are focus on sports fashion lifestyle products.
While the first one brings the “iconic DNA from the courts to the street”, the latter
is focus on trending fashion products. All together, they generated EUR 16.3
ADIDAS AG COMPANY REPORT
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Figure 9: Revenue Adidas brand (EUR billion)
Figure 10: Revenue Reebok brand (EUR billion)
Figure 11: Adidas vs market indices
Figure 12: Peer comparison
billion of sales in 2016. In the last four years their revenues increased by 48%
(see figure 9).
Reebok
The American fitness-inspired company Reebok was acquired by USD 3.8 billion
in 2006, in order to increase Adidas market share in the North America market
and to expand its brand portfolio. It offers a wide range of specialised products
for the categories fitness training, studio, classics, fitness running and walking.
The brand generated EUR 1.8 billion of sales in 2016 and in the last few years it
has been struggling to increase its revenues, with a growth of 14% for the period
2013-2016 (see figure 10).
Other businesses include all the others brands such as Runtastic (fitness app),
Five Ten (outdoor climbing products), as well as other business activities of the
labels Y-3, collaboration with the Japanese designer Yohji Yamamoto, and
Porche Design Sport. This segment generated EUR 1.5 billion sales in 2016.
Share performance
In November 1995, Adidas went public by raising 1.8 billion marks in an issue
that was 10 times oversubscribed. Since then, the company has been listed on
the Frankfurt Stock Exchange (Deutsche Börse) and three years afterwards its
share was included in the German stock market index DAX-30. Nowadays,
Adidas share is included in several stock indices, among them the MSCI World
Textiles, Apparel & Luxury Goods and, as of September 16, 2016, the EURO
STOXX 50 Index.
Over a 5-year period, Adidas share price registered a compound annual growth
of 20%, while the DAX-30, MSCI World Textiles, Apparel & Luxury Goods and
EURO STOXX 50 ranked behind with 11%, 9% and 6%, respectively (see figure
11). Comparing with its peers, Adidas outperformed Nike, Puma and Under
Armour which had recorded a compound annual growth of 19%, 10% and 3%,
respectively. From figure 12, one can conclude that this result was mainly driven
by Adidas strong performance and, conversely, the weak performance of Nike
and Under Armour since the year of 2015, establishing a turning point within the
industry. This development was driven by the continuously release of strong
financial performances, which supports the successful execution of the strategic
plan “Creating the New”, the consequently increase of the company’s outlooks,
as well as the positive impact of the CEO succession and the inclusion in the
EURO STOXX 50 Index. As a result, the Adidas AG share reached a new all-
time high of EUR 199.95 on August 4, 2017.
ADIDAS AG COMPANY REPORT
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Figure 13: Shareholder structure
Figure 14: Shareholder structure by region
Figure 15: Dividend policy
Shareholder Structure and Return
The current shareholder structure of Adidas AG has more than 60.000
shareholders and it is mainly comprised by institutional investors, who represent
the largest investor group, holding 87% of shares outstanding and private
investors and undisclosed holdings, accounting for 8%. Adidas currently holds
4% of the company’s shares as treasury shares, reflecting the share buyback
programme and, lastly, current members of the Executive and Supervisory
Boards hold less than 1% (see figure 13).
In terms of geographical spread of shareholders, North America market accounts
for 40% of institutional investors, followed by the UK, France and Germany with
21%, 9% and 8% respectively (see figure 14). There is no investor holding a
majority of the voting rights. BlackRoc, Inc., Elian Corporate Trustee Limited and
FMR LLC are biggest institutional investors with 7,38%, 5,71% and 5,31%
respectively.
The group’s dividend policy aims to distribute 30%-50% of its annual earnings to
shareholders. In the past few years, Adidas was able to increase the payout ratio,
reaching 39,6% in 2016, corresponding to EUR 2.00 dividend per share (see
figure 15). The company does not have outstanding preferred shares.
In 2014, the company announced a share buyback programme of up to EUR 1.5
billion. The purpose of the programme was to repurchase shares in order to
reduce capital and to meet obligations that could arise from the potential
conversion of the convertible bonds issued at the same year with maturity until
June 2019.
ADIDAS AG COMPANY REPORT
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Figure 17: Industry Sales by region
Figure 16: Industry Sales Forecast (USD billion)
Figure 18: Industry sales forecast by region
Industry Overview
Sector Analysis
Adidas Group is included in the apparel, footwear and accessories design
industry, which is estimated to have total revenues of EUR 353 billion in 2017,
according to Bloomberg. This industry is strongly fragmented not only because
the numerous smaller players active in the market but also due to the fact that
some corporation’s revenues come from several products categories (VF Corp
for example) and, hence, just a share are included in the industry’ revenues.
Thus, in order to have an accurate analysis of the industry that Adidas are
integrated, one must take into consideration just the athletic footwear and apparel
industry, also known as Sportswear industry. According to the Societe Generale’s
report2, USD 282 billion were spend on sportswear in 2015. From 2010 to 2015,
this industry has grown at a CAGR of 6% and is forecasted to reach USD 365
billion in 2020, implying a 2015-2020 CAGR of 5.3% (see figure 16). According
to another market research, Euromonitor International, this market will reach
USD 357 billion in 2021, implying a CAGR of 5.1%.
As per geographical region, North America represents the largest market with
more than one third (36%) of the total consumption, followed by Asia and
Western Europe with 23% and 21%, respectively (see figure 17). The same
report also forecast the growth rate per region for the period 2015-2020.
Comparing to the growth registered in the previous period (2010-2015), it is
expected to accelerate in Asia and EMEA (Europe, Middle East and other Asian
markets). Conversely, it is expected to decelerate in North America and Latin
America (see figure 18).
2 “Global sportswear industry: Steadily growing but fragmented”
ADIDAS AG COMPANY REPORT
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Figure 19: Number of health and fitness clubs (thousands)
This industry is very appellative due to its attractive growth trends, which have
been driven by the rise of athleisure, increasing global concerns regarding
healthy lifestyles and higher sports participation rates. A prime example of this
sportive movement is the increase of the number of health and fitness clubs. In
2016, there were over 201 thousand health clubs worldwide, a significant
increase from the 128 thousand in 2009 (see figure 19). The fact that the so
called stars of the sports are gaining more and more recognition and icon status,
the large coverage by TV channels and internet also contributes for this positive
momentum of the industry.
Since the industry is highly segmented and competitive, the barriers of entry are
high, as the existing competition has high bargaining power. Adidas and Nike
have a really strong market position (see figure 21), taking advantage of long-
standing relationships with distributors, clients, retails and suppliers. In order to
have a chance of establishing in this market, next to these apparel and footwear
giants, it is vital to create something new and innovative. Under Armour and
Lululemon Athletica are two examples of companies who were successful in their
niche, tight-fitting synthetic t-shirts and yoga pants, respectively, and from that
moment thereon, they were able to increase their product portfolio and establish
a solid position within the market, although still far away from Adidas and Nike.
As such, one can conclude that customers are quality sensitive, since they are
more and more interested in the use of advanced materials and technologies that
could increase not only their performance but also their experience while wearing
the products on a daily basis. Thus, having a well-established brand that
customers trust due to their continuously release of innovative and fashionable
products is a sustainable competitive advantage that Nike and Adidas enjoy and
differentiate them from the competition.
Peer Companies
A broad list of companies that share key performance drivers and business
characteristics is obtained and investigated thoroughly in order to select the
closest comparable firms for further analysis. These companies, identified in
figure 20, were generated from Bloomberg. This list is composed only by
publicity listed companies, sorted by 2016 revenues.
As stated before, Adidas is the largest company in the sports footwear and
apparel industry in Europe and the second largest in the world. So, based on the
companies’ reports and Societe Generale Report industry’ estimation, one is able
to reach the market share of each company.
Figure 20: Athletic footwear and apparel companies
In EUR B Revenue
Nike 29.25 Adidas 19.29 VF Corp 10.86 Under Armour 4.36 Puma SE 3.63 ASICS Corp 3.32 Skechers USA 3.22 Amer Sports Corp 2.62 Columbia Co 2.15 Li Ning 1.09
High bargaining power of well-established companies (Nike
and Adidas)
ADIDAS AG COMPANY REPORT
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Figure 21: Industry market share
It is observable that the main competitor of Adidas is, by far, Nike. In addition,
there are some other competitors in the market which are smaller in size such as,
VF Corp, Asics, Puma, Under Armour and Skechers, operating mainly in the US
and European countries, while in Asia, Li Ning is the main rival.
In order to identify the closest comparable companies, several firms from the
above list were eliminated due to their small size and others were removed due
to its current unique market focus, either in terms of product categories (eg: Asics
in footwear) or geographical region (Li Ning in Asia). Finally, the firms that share
most business attributes are the following: Nike, Puma, Under Armour and
Skechers.
Nike Inc. - Considered the most valuable brand among sports business, this
American multinational corporation is engaged in the design, development and
manufacturing and sales of footwear, apparel and accessories. Nike’s dominant
position in the North America market, which is considered the most valuable
region within the sporting goods industry have been allowing the company to
have a big advantage against its competition .The company was founded in 1964
and has currently a market capitalisation of EUR 85 billion. With total revenues of
USD 32.4 billion in 2016, the company aims to reach USD 50 billion sales for the
year 2020.
Puma SE - This German multinational company also designs and manufactures
athletic and casual footwear, apparel and accessories products. Founded in the
same year of Adidas, 1949, after the family disagreement that resulted into the
creation of Adidas and Puma, quickly became business rivals since then.
Currently has a market capitalisation of EUR 5.5 billion and total revenues of
ADIDAS AG COMPANY REPORT
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Figure 22: Financial performance (EUR billion) and margins (%)
EUR 3.63 million in 2016, 14% higher than the previous year. In 2017, the
company raised its outlook for sales and operating earnings for the third time,
enjoying a revival especially in the US market.
Under Armour Inc. - This American group was founded in 1996 by a former
University football player which originally started with a simple plan to make
superior quality t-shirts. Nowadays, it is a global corporation that manufactures
sports and casual footwear and apparel products with EUR 5.1 billion of market
capitalisation and total revenues of USD 4.83 million in 2016. The company,
which has been seen as the biggest up-and-comer in this industry, having
counted almost seven straight years of 20% or better sales growth, already cut its
2017 full year sales forecast twice, presenting a 5% decline in revenues in the
third quarter of 2017.
Skechers Ltd. - It is an American corporation that offers lifestyle and
performance footwear for men, women and children. Founded in 1992, the
company is one of the fastest growing footwear companies recording impressive
sales growth year over year (higher than 100% in some years). Currently has a
market capitalisation of EUR 5.0 billion and total revenues of EUR 3.22 million in
2016, 12% higher than the previous year.
When analysing the financial performance of these five companies, one can
easily point out that Nike has the leading position within the group. Together with
Adidas, their aggregate revenue accounts for 82% of the total revenues of the
group. Regarding margins, Nike continues to yield better results regarding
EBITDA margin (16%) and income margin (12%). On the opposite side, Puma
presents the worst margins, both in EBITDA (5%) and net income (2%).
ADIDAS AG COMPANY REPORT
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Figure 23: Peer comparison - Revenue growth rate
Figure 24: Category analysis of global apparel and footwear industry
From the figure 23, one is able to conclude that Under Armour and Skechers
have been releasing some impressive results regarding revenue growth rate, with
double-digit growth for four consecutive years. It is also important to emphasize
the positive results of all the five companies in the last two years, reflecting the
positive momentum of the industry.
Key Drivers
Identifying monitoring the key drivers of a business is extremely important in
order to understand where growth is coming and, hence, allows for more reliable
forecasts. These may arise from internal or external factors and from the
company’s ability to adapt from the latter. The following categories are some of
key drivers that drive Adidas’ growth:
Athleisure Trend
Nowadays, “athleisure” is the hottest trend in the industry. The term stands for
wearing sports gear outside the gym or while doing sports, such as at the
workplace, at school, etc. Known as “Gym-to-the-office” clothes, this trend has
becoming more and more acceptable and wide-spread across genders and
geographies. While the customer is still accustoming to its comfortable fell, due to
the improvement in materials and new manufacturing processes, demand is
estimated to further increase leading to ample opportunity for companies to build
a high-profitable business around this trend.
The report provided by the strategic market research Euromonitor International,
points out that the sales of sportswear outpaced all other categories for three
consecutive years, increasing 7% in 2016 (see figure 24). Although performance
sportswear is still the leader in terms of market size, “sports-inspired is the
category driving growth”, according to the report. Sports-inspired footwear
registered an increase of 10%, reflecting the continued dominance of casual
sneakers, while apparel increased by 6%.
The two main regions driving this growth are the USA, the world’s largest
activewear market, and China with 40% and 37%3 of the total athletic-wear
market in 2015, respectively. For Instance, in China, the share of population aged
6-69 that exercise at least three times a week rose 28% in 2007 to over 31% in
2014, according to the report from Morgan Stanley4. Moreover, the Chinese
3 Source: Euromonitor International 4 “Global Athletic Wear: Very Bullish Five-Year Outlook.”
ADIDAS AG COMPANY REPORT
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Figure 25: Category distribution for apparel industry
government is planning to develop sports infrastructures by 60% by 2025,
making China a strategic key market-target for the following years.
Adidas has been able to capitalise the consumer shift away from regular apparel
and footwear products to retro and lifestyle products (adidas Originals and adidas
neo brands), stealing some market share from non-athletic apparel brands (see
figure 25)5. The relaunching of historic designs, such as Adidas Superstar and
Stan Smith, and the development of new styles with modern details, such as the
Kanye West designed “Yeezys”, were some of the company’s recent successful
products.
Womenswear
The importance of women in the global sports sector has been significantly
increasing, due to the fact that women are at the forefront of this athleisure trend
by wearing yoga pants and other apparel outside of the sports spaces. Several
innovations, such as the sport bra and the tank, have increase comfort while
exercising and simultaneously their fashionable look creates an incremental
driver for growth in the women’s market. This trend is also related to lifestyle, with
activities such as yoga, zumba and spinning becoming even more common in
health and fitness clubs, being one of the main reasons for its increase (see
figure 19)
According to Verdict report, almost 70% of women want activewear that is
fashionable and stylish, whereas men are more interested in technical attributes.
The same report also reveals that between 2010 and 2015 the women’s
activewear market grew 26.1%, against 22.6% for men’s and forecasts that
female related sales will increase 22.6% by 2020, against 19.9% for men’s.
As such, it is imperative to focus on this tremendous growth potential market and,
indeed, womenswear is one of the Adidas’ targeted growth areas. Currently, it
represents 23% of Adidas’ revenues in 2016 and the company is committed to
reach 28% by 2020. In order to achieve this goal, the company already started to
create specific women design shoes, rather than adaptations of men’s shoes,
and included a former Lululemon Athletica CEO to the Group as a strategic
adviser, best known for being one of the pioneers of this athleisure era by
creating yoga pants for women to wear all day. Besides, several partnerships
were established with famous athletes, supermodels and fitness icons.
Nike, which is currently the market leader in both men’s and women’s activewear,
according to NPD Group, is also capitalizing this athleisure trend, especially in
women’s category. Currently, this category represents around 20% of Nike’s
Net Income margin 3,8% 5,3% 5,0% 6,4% 6,9% 7,1% 7,1%
Net working Capital and CAPEX
Regarding Net Working Capital, all assets and liabilities that derive from the
operational activity of the company were included. A historic ratio of revenues or
cost of sales were used in order to determine the majority of the items. The
estimation for 2017 were adjusted taking into consideration the formally
completed divestiture of CCM Hockey and TaylorMade brands.
The company did not disclose any future forecasts regarding capital
expenditures, rather than the projected value for the following year. In the last
two years, the company achieved a lower CAPEX than the one reported in the
company’s outlook, mainly due to the delay of new stores openings. Thus, the
estimated capital expenditure for 2017 was considered to be at a lower value
(EUR 900 million) of the investment target reported in Adidas annual report in
2016 (EUR 1.1 billion).
This value for 2017 represents a significant increase from EUR 651 million in
2016 and it can be explained by the new corporate strategy. By 2030, it is
forecasted that around 60% of the global population will live in cities and, hence,
Adidas began to “disproportionally” invest in six major metropolitan centres:
London, Los Angeles, New York, Paris, Shanghai and Tokyo.
Taking into consideration the CAPEX distribution (see page 6), the historic
percentage of the investment made in the company’s headquarters in
Herzogenaurach (Germany) in 2016 was used in order to calculate its value for
2017 onwards. For the investments in the reportable segments, it is expected
that the company will continue the aforementioned major investments and the
historic percentage of revenues in 2016 was used in order to reproduce the
projected expansion (see appendix 3).
ADIDAS AG COMPANY REPORT
PAGE 23/32
Peer Group Price/Earnings EV/Sales EV/EBITDA
Adidas AG 25,21 1,43 14,41
Nike Inc. 27,08 2,47 15,52
Puma SE 42,06 0,94 18,26
Under Armour Inc. 34,05 2,76 23,66
Skechers USA Inc. 23,63 0,91 7,44
Peer Group Average 31,71 1,77 16,22
Implied price per share 210,2 205,9 187,3
Adj. Peer Group Average 28,09 2,32 15,68
Implied price per share 186,2 270,4 181,0
Figure 36: Comparable Analysis
Valuation
Comparable Company Analysis
This methodology functions as a market benchmark for the current valuation of
Adidas. In this sense, the EV/EBITDA, EV/Sales as well as the Price/Earnings
multiples were used for this valuation. All the peer group average multiples yield
an implied higher price per share compared to the current market value (EUR
167.15), indicating that the market may be underestimating Adidas.
In addition, all multiples were adjusted according to their market capitalisation
which gives Nike, the closest comparable firm, a large weight on the valuation. In
this case, all multiples yield the same conclusion as before, which given even
more support that the market is, indeed, underestimating Adidas (see figure 36).
Discounted Cash Flows Analysis
WACC Calculation
In order to evaluate the Adidas Group business, the Weighted Average Cost of
Capital (WACC) was estimated. Since the group’s financial structure includes
both debt and equity, the cost of each was calculated separately.
The cost of debt was estimated by subtracting the credit loss rate (probability of
default multiply by the loss given default) from the company’s debt yield. For
calculating the latter, it is crucial to analyse all public bonds outstanding, where
two Eurobonds with an overall volume of EUR 1 billion were identified. One
matures in 2021 and has a coupon rate of 1,25% and the other matures in 2024
and has a coupon rate of 2,25%. Taking only into consideration the longer-
maturity bond, its yield (1,42%) was considered as a good proxy for the
company’s current debt yield since it reflects the future market cost of debt.
ADIDAS AG COMPANY REPORT
PAGE 24/32
Figure 37: Linear regression Adidas vs MSCI World
Regarding the other component, a process that estimates a synthetic credit rating
was used due to the fact the company’s debt is not rated. By calculating the
interest coverage ratio, which is commonly used as an auxiliary to estimate credit
ratings, one is able to estimate the probability of the default. By applying this
procedure, a synthetic credit rating of AAA was achieved, which corresponds to
an annualized default probability of 0,139%. Assuming a recovery rate based on
Moody’s historic average (49,5%), the estimated cost of debt for Adidas is 1,41%.
The cost of equity was calculated using the Capital Asset Pricing Model (CAPM).
The risk-free rate, the levered beta and the market risk premium (MRP) are the
inputs needed. The current 10-year German Treasury Bond yield was used as
the risk-free rate and yields a value of 0,427%10. The MRP was estimated to be
5,75%, based on the recommendation of KPMG research11.
The beta factor was calculated by regressing the excess returns of Adidas
against the excess returns of the MSCI World index of the past five years (see
figure 37)12. The resulting levered beta equals 0.89, with a 95% confidence
interval between 0,25 and 1,54. In addition, a comparable method was
conducted, using the four peer companies previously selected, in order to
complement and support the previous assumption. The obtained levered betas
for each company were unlevered at their current financial leverage (Debt-to-
equity ratio), respectively. Then, the unlevered beta for Adidas is calculated
through an average of the peers’ unlevered betas, including Adidas’s and, finally,
on the basis of Adidas’ target level of financial leverage, one is able to reach the
levered beta. The company’s capital structure is characterized for having
relatively low and stable financial debt due to the issuance of instruments with
mid to long term maturities and the subsequent renewal throughout the years,
while market capitalisation is expected to increase. Consequently, the target
debt-to-equity ratio is expected to be close to 3%13, lower than its current value
(5%)14.
A levered beta of 1.05 was reached, which includes the outlier value of Under
Armour (1.65)15. Taking only into consideration Nike’s, Puma’s and Skechers’
levered betas, this value decrease to 0.93, close to the value previously
calculated through the linear regression (see figure 38).
Lastly, with all the inputs needed for the calculation of WACC, a cost of capital of
5,43% was used to discount the company’s free cash flow (see figure 39).
10 As of 31th December 2017 11 “Equity Market Risk Premium – Research Summary” 12 Weekly data, two years 13 The same D/E ratio is used for the WACC calculation 14 All peer companies have debt-to equity lower than 5%, except Under Armour (18%) 15 This value can be explained due to inconstant behavior of the stock over the last few years (see figure 12)