Financial Analysis & Statement Preparation

Introduction

Adidas is a multinational corporation, headquartered in Germany. The company is known for designing and manufacturing high-quality clothing, shoes, and accessories. Its innovation and reliability has made the company the second largest manufacturer of sportswear in the world. Adolf Dassler started the company and later, his brother, Rudolf, joined him. The company made its first innovation when it replaced metal spikes in athletic footwear by rubber and canvas. The company has a vast portfolio, extending from sports clothing and footwear to bags, eyewear, watches, etc. (Lebron, 2010). The company employs around 50,000 employees and also incorporates 170 subsidiaries.

The company employs a vast differentiation strategy. With its corporate strategy focusing on innovation, the company also makes consistent efforts on improving its product line to stay ahead in the competition. The company also strives for investing in potential markets and employing a unique channel approach. The company has a supply chain that maintains a high response rate with the customers by making a quick response to the market changes. The company recently centralized its Excellency and Sales Strategy team so that the company can effectively manage global markets. The company offers high competition because of its multi-brand portfolio. This further helped the company to create an international sales function which, in turn, managed commercial activities of the company. The company also dwelled upon dividing its global sales function- the plan that company implemented later. Retail and wholesale became the two critical elements of the global sales function.

Adidas also strengthened its presence by embracing e-commerce. This helped Adidas to reach and attract more customers. Adidas has a corporate culture that encourages employees to be more innovative. This has supported the company to design products that are highly innovative as well as highly reliable. The company has successfully maintained sustainability by satiating the concerns of employees as well as shareholder’s interest.

Business Model

A business model is often looked upon as a plan that businesses employ for their successful operations (Seelos, 2010). Adidas has been emphasizing upon innovate products to satiate the needs of their customers. The company, in the past few years, has been less focused upon endorsing their products while at the same time, developing and advancing their product line to suit the specific needs of consumers, mostly athletes. The company has also been improving its infrastructure so that they can produce products at a faster rate. They have also streamlined the global range of their products to reduce the complexity. To complement the decrease in complexity, the company moved further and harmonized the above market services and consolidated their warehouse base. The supply chain has also been encouraged by innovating models, and as a result, the response rate with the customers has been increased immensely. This strategy was highly successful in attracting investors from all over the globe and easily persuaded many of them into buying Adidas’ common stock.

Adidas has three product categories. The products in the first category are shoes, perfume, and eyewear (Mahdi, Abbas & Mazar3, 2015). The product in the second category includes vintage clothing and superstar sneakers. The third category of products includes belts, bags, style caps, and handbags. Adidas launches its products at high prices. Adidas uses market skimming strategy to price its products. The company’s price is generally dependent upon color and looks. For example, the price of white color shoes is generally higher than other color shoes, given their same quality. The company is also focused on providing the best shopping experience to its customers by customizing its products according to the needs of its customers (Piller, Lindgens & Steiner, 2012). Due to high prices, the company only focuses on individuals who are in the higher income bracket.

The current and projected costs

The current cost of the company is defined as the cost that is incurred by the company to generate a certain amount of the revenue. It is also known as the cost of revenue. The current costs of the company for the years 2015, 2016 were 8748000000 and 9912000000 Euros respectively. The projected costs of the company were predicted on the basis of the percentage change. The projected costs for the year 2017 was 15175680000 Euros.

Nevertheless, the projected costs for years ahead of 2017 are mentioned in the pro-forma financial statements.

Break-Even Analysis

This is a measurement system that measures the margin of safety by identifying the number of units that are to be sold in order to cover the expenses regarding variable and fixed costs (Catanzaro, 2016). In simple words, it provides insights on when a business will start earning profit. The main purpose of carrying out a break-even analysis is to find out the minimum amount of sales that will make a business eligible to earn some profit.

There are different ways to calculate the break-even; however, the method that I am employing uses contribution margin. Contribution margin is equal to the difference between the selling price of the product and the variable cost that is related to the product (Tambrino, 2001). Now, based on the market research, I have assumed the selling price to be €100 and the variable cost associated with each product to be €75.

Therefore, contribution margin = selling price – variable cost

= €100-€75

=€25.

Calculation of break-even point

Break-even point can be calculated in different ways; however, the method that I have employed uses total fixed costs and contribution margin. Now, from the financial statements of Adidas, I took the fixed costs as €7296000000.

Now, the break-even point is calculated as the ratio between total fixed costs and contribution margin.

Therefore BE= €7296000000/€25

BE= 291840000 units

This reflects the fact that the company has to sell 291840000 units annually, in order to reach the break-even point. In other words, when the company’s amount of sales is beyond 291840000 units, the company will start earning some profits. This is also to say that the number of monthly sales should be 24320000 units.

Pro-forma financial statements

Pro-forma is often looked upon as a method with the help of which the calculation regarding the financial results are executed (Dilla, Janvrin & Jeffrey, 2014). It includes hypothetical conditions and a few assumptions about events that might occur in future, or it also reflects the impact of events that might have occurred in the past. Pro-forma financial statements for Adidas is given below, and it includes various assumptions which are also listed.

Income Statement

From the break-even analysis part, we found out that 24320000 units must be sold monthly to equate revenue with the expense. The number of units sold per year was increased by (10-20) percent. Revenue for years 2017-2021 has been formulated accordingly. From the latest financial statements of Adidas it was found out that, for all the years, the cost of revenue was around 50 percent and therefore, for the upcoming years, the cost of revenue is taken as 52 percent of the revenue.

Operating expenses were also calculated by adding R&D and SG&A costs. R&D was assumed to be 0.8 percent of the revenue, and for all the subsequent years, the research and development costs were also assumed to be 0.8 percent of the revenue. SG&A costs were assumed to be 30 percent of the total revenue, and for all the subsequent years, it was also assumed to be 30 percent of the revenue.

Later, operating income was calculated by subtracting total operating expenses from the gross profit. Provision for income taxes was assumed to be 40 percent of the operating expenses. Later, net income was calculated by subtracting provision for income taxes from the operating income.

 

INCOME STATEMENT
           
Fiscal year ends in December 2017 2018 2019 2020 2021
USD          
Units Sold (monthly) 34320000 41184000 45302400 49832640 54815904
Revenue (Annualy) 41184000000 49420800000 54362880000 59799168000 65779084800
Cost of revenue 21415680000 25698816000 28268697600 31095567360 34205124096
Gross profit (A) 19768320000 23721984000 26094182400 28703600640 31573960704
           
Operating expenses          
Research and development 329472000 395366400 434903040 478393344 526232678
Sales, General and administrative 12355200000 14826240000 16308864000 17939750400 19733725440
Total operating expenses (B) 12684672000 15221606400 16743767040 18418143744 20259958118
           
Operating income (A-B) 7083648000 8500377600 9350415360 10285456896 11314002586
(-) Provision for income taxes 2833459200 3400151040 3740166144 4114182758 4525601034
Net income 4250188800 5100226560 5610249216 6171274138 6788401551

 

Balance Sheet

Cash and cash equivalents and receivables were assumed to be 11 percent of the revenue, and for the subsequent years, they were also assumed to 11 percent of the revenue. Inventories were assumed to be 16 percent of the revenue, and for the subsequent years, they were also assumed to be 16 percent of the revenue. Total current assets were calculated by adding cash and cash equivalents, receivables, and inventories. Total fixed assets were calculated by subtracting depreciation from the sum of the building, equipment, and other assets. Later, total assets were calculated by adding total current assets and total fixed assets.

Short-term debt was assumed to be 4 percent of the revenue, and for all the subsequent years, they were also assumed to be 4 percent of the revenue. Accounts payables were assumed to be 12 percent of the revenue, and for all the subsequent years, they were also assumed to be 12 percent of the revenue. Total current liabilities were calculated by adding short-term debt and accounts payable. Assumptions were also made when the long-term debt was assumed to be 8 percent of the revenue, and for all the subsequent years, they were also assumed to be 8 percent of the revenue. It became the total current non-current liabilities. Later, total liabilities were calculated by adding total current liabilities and total non-current liabilities. Total stockholder’s equity was also calculated by subtracting total liabilities from total assets.

BALANCE SHEET
Fiscal year ends in December 2017 2018 2019 2020 2021
USD          
Assets
Current assets          
Cash and cash equivalents 4530240000 5436288000 5979916800 6577908480 7235699328
Receivables 4530240000 5436288000 5979916800 6577908480 7235699328
Inventories 6589440000 7907328000 8698060800 9567866880 10524653568
Total current assets (A) 15649920000 18779904000 20657894400 22723683840 24996052224
           
Building 2242000000 2466200000 2712820000 2984102000 3282512200
Equipment 2425000000 50000 50000 50000 50000
Other assets 242500000 278875000 320706250 368812188 424134016
Depreciation 245475000 137256250 151678813 167648209 185334811
Total Fixed assets (B) 4664025000 2607868750 2881897438 3185315978 3521361405
           
Total assets (A+B) 20313945000 21387772750 23539791838 25908999818 28517413629
           
Liabilities
           
Short-term debt 1647360000 1976832000 2174515200 2391966720 2631163392
Accounts payable 4942080000 5930496000 6523545600 7175900160 7893490176
Total current liabilities (A) 6589440000 7907328000 8698060800 9567866880 10524653568
           
Long-term debt 3335904000 4003084800 4403393280 4843732608 5328105869
Total non-current liabilities (B) 3335904000 4003084800 4403393280 4843732608 5328105869
           
Total liabilities (A+B) 9925344000 11910412800 13101454080 14411599488 15852759437
           
Stockholders’ equity
Total stockholders’ equity 10388601000 9477359950 10438337758 11497400330 12664654192

 

Cash Flows

Cash from operations was calculated by adding depreciation and profit after tax. Total source of cash was calculated by adding cash from financing and cash from operations. Later, the total change in working capital was calculated by subtracting accounts payable from the sum of inventory and accounts receivable. Values for total fixed assets, total financing and total use of funds are also mentioned in the pro-forma cash flow cash flow statements.

 

Cash Flow
Funds 2017 2018 2019 2020 2021
Profit After Tax 10090080000 12108096000 13318905600 14650796160 16115875776
Depreciation 245475000 137256250 151678812.5 167648209.4 185334810.8
Cash from Operations 10335555000 12245352250 13470584413 14818444369 16301210587
           
Cash from Loan instrument 3335904000 4003084800 4403393280 4843732608 5328105869
Cash from Financing 3335904000 4003084800 4403393280 4843732608 5328105869
Total Source of cash 13671459000 16248437050 17873977693 19662176977 21629316456
           
Changes in Working Capital          
Inventory 6589440000 7907328000 8698060800 9567866880 10524653568
Accounts Receivable 4530240000 5436288000 5979916800 6577908480 7235699328
Accounts Payable 4942080000 5930496000 6523545600 7175900160 7893490176
Total Change in Working Capital 6177600000 7413120000 8154432000 8969875200 9866862720
           
Acquisition of Fixed and other assets          
Total Fixed Asset 4664025000 2607868750 2881897438 3185315978 3521361405
           
Repayment of financing          
Dividend Payment          
           
Total Financing 3335904000 4003084800 4403393280 4843732608 5328105869
           
Total Use of Funds 10841625000 10020988750 11036329438 12155191178 13388224125

 

Key financials details

All the key ratios that are crucial to the company are listed in the table named Key Financial Details. Key financial details in this pro-forma statements include inventories, amount of sales (also known as the number of units sold), total asset, long-term debt, total liabilities etc.

 

Key Financial Details
  2017 2018 2019 2020 2021
Inventories 6589440000 7907328000 8698060800 9567866880 10524653568
Units sold (monthly) 24320000 29184000 32102400 35312640 38843904
Total Asset 20313945000 21387772750 23539791838 25908999818 28517413629
           
Long Term Debt 3335904000 4003084800 4403393280 4843732608 5328105869
Total Liabilities and Equity 9925344000 11910412800 13101454080 14411599488 15852759437
           
Revenue 41184000000 49420800000 54362880000 59799168000 65779084800
Margin 14414400000 17297280000 19027008000 20929708800 23022679680
           
Operating Expense 12684672000 15221606400 16743767040 18418143744 20259958118
           
Depreciation 245475000 137256250 151678812.5 167648209.4 185334810.8
Tax 4324320000 5189184000 5708102400 6278912640 6906803904
           
Profit After Tax 10090080000 12108096000 13318905600 14650796160 16115875776

 

Sales forecast

This is the method by which a business determines its future sales. If companies predict their sales accurately, then it helps them to implement informed decisions and also helps them to predict both short and long term performances (West, 1994). Most companies forecast their sales by taking into account their data from past sales, economic trends and industry-wide comparisons.

Since Adidas is an established company, it is easy to predict their sales on the basis of the available data. An accurate forecast allows companies and businesses to predict attainable future sales, allocate resource efficiently and to draft plan for future growth.

Results from the break-even analysis concluded that Adidas has to sell 291840000 units in a year to make the company eligible for earning profits. Therefore, for 2017, it was expected that the company would cross the break-even point by selling 34320000 products monthly.

I have assumed that the sales forecast for the subsequent years will increase by 10 to 12 percent annually. As a result, the monthly sales forecast for the next four years, starting from 2018, will be 41184000, 45302400, 49832640 and 54815904 respectively.

The complete sales forecast is also shown in the pro-forma financial statements.

Potential challenges to Adidas

From the available financial statements and the pro-forma financial statements, it can be said that Adidas is performing better every year and if the company continues to implement the innovative business model, it will carry on this performance. Nevertheless, the company is surrounded by considerable risks as the company incurs huge operating expenses that can change the performance track of the company.

If we calculate the company’s Return on Capital Employed ratio, which is the ratio between EBIT and capital employed, we will find out that Adidas had € 0.1 ROCE (Jayawardhana, 2016). This value of ROCE signifies that the company has less efficiency in the capital that is employed and investors always favor a stable and increasing value of ROCE. Therefore, the company should draft strategies to invest money prudently, and the company should also dwell upon selling off the unproductive assets. Also, the company should make wise investments on the productive assets such as vehicles for showrooms and sales, and equipment for their factory. In addition to their investment struggles and rising operating costs, the company is also facing few external and internal challenges. The company can incorporate an external approach to reducing the operating costs by improving their supply chain.

Adidas’ Supply Chain Structure

For big companies, the operating efficiency is dependent on their supply chain system (Joyce, 2006). The company, for several years, has been working with independent suppliers who manufacture the company’s product globally. The company has a multi-layered and global supply chain system that incorporates several types of business partners. Among these business partners, some are contacted directly, and some are indirectly contacted. This has created a complex supply chain structure for Adidas, and therefore, the company has to bear huge operating expenses to manage its supply chain. One thing that the company can do is to unify its supply chain by using fewer, however, bigger factories with larger order volumes.

Sourcing Strategy

Adidas should also focus on its sourcing strategy by balancing security with growth and flexibility. The major outsourcing countries for company’s products are China, Vietnam, Indonesia, Turkey, and Thailand. The company should take initiatives for improving competitiveness and managing their cost-control system.

Conclusion

It is evident that a company’s success is defined by its understanding of the market trends. The company should be able to analyze the market and should identify its core capabilities to mitigate the risks that come along the way. The company should be well prepared to give a subtle response to the changing market trends. A company should streamline its business and should make sure that their success and their investments are in the same direction. Overall, the success of a company goes hand in hand with the strategies that the company follows.

Adidas has always been a company that challenges the market trends and streamlines its strategies accordingly. The main focus of Adidas has been on reducing the production costs and at the same time, expanding its market. The company has attracted a huge market share with its sports equipment; however, it has come at the cost of increased operating costs.

 

 

 

 

 

References

Catanzaro, T. (2016). Break Even Analysis. Journal Of Global Economics4(2).

Dilla, W., Janvrin, D., & Jeffrey, C. (2014). Pro forma accounting disclosures: The effect of reconciliations and financial reporting knowledge on nonprofessional investors’ judgments. Advances In Accounting30(1), 43-54.

Jayawardhana, A. (2016). Financial Performance Analysis of Adidas AG. European Journal Of Business And Management8(11).

Joyce, W. (2006). Accounting, purchasing and supply chain management. Supply Chain Management: An International Journal11(3), 202-207.

Lebron, W. (2010). Adidas Latest Shoes. SSRN Electronic Journal.

Mahdi, H., Abbas, M., & Mazar3, T. (2015). A Comparative Analysis of Strategies and Business Models of Nike, Inc. and Adidas Group with special reference to Competitive Advantage in the context of a Dynamic and Competitive Environment. International Journal Of Business Management And Economic Research6(3), 167-177.

Piller, F., Lindgens, E., & Steiner, F. (2012). Mass Customization at Adidas: Three Strategic Capabilities to Implement Mass Customization. SSRN Electronic Journal.

Seelos, C. (2010). Theorizing and Strategizing with Models: Generative Models of Business Models. SSRN Electronic Journal.

Tambrino, P. (2001). Contribution Margin Budgeting. Community College Journal Of Research And Practice25(1), 29-36.

West, D. (1994). Number of sales forecast methods and marketing management. Journal Of Forecasting13(4), 395-408.

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