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Financial Analysis of Adidas Group

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Financial Analysis of Adidas Group - February 18th, 2011

Adidas Group, the parent company of adidas, Reebok and TaylorMade Golf, is the world's second largest maker of athletic footwear, apparel and equipment by sales (2009) after Nike (NKE). [1] Although the company makes most of its money by selling at wholesale rates to large retailers like Dick's Sporting Goods (DKS) , Foot Locker (FL) , and Sports Authority, adidas and Reebok have sought to increase profit margins by increasing retail sales as a percentage of total sales.[2]

From 2006-2010, the two most influential events involving Adidas have been its effort to turn around Reebok and the 2010 FIFA World Cup. Adidas bought Reebok for $3.8 billion in 2006 (a move criticized by many for being too expensive), and has been working to change customers' perception Reebok from that of a discount shoe brand to a premium brand. The 2010 World Cup, however, has been a rousing success for the company. As of June 21 (a mere ten days after the competition began), the company was already projecting record-breaking sales, predicting sales of soccer-related merchandise at least 1.5 billion Euros, surpassing the 1.3 billion in Euros obtained in football sales in 2008, the last time a record was set in the soccer sales category. These record sales included the sale of 6.5 million replica jerseys (more than two times the 3 million sold at the 2006 World Cup) and 20 million soccer balls.[3]

Contents
1 2010 Third Quarter Results
2 Company Overview
2.1 Business Segments
3 Trends and Forces
3.1 adidas group has relatively low US exposure and aggressive growth strategies in emerging markets
3.2 High profile sponsorships heavily boosts ADDYY 2010 worldwide sales
3.3 TaylorMade's North American strength key to helping it become new market leader in world golf market
4 Competition
5 References
Adidas is, at its core, an international company with only 22.7% of its 2009 sales coming from North America.[4] Moreover, it is rapidly expanding its presence in emerging markets like Asia and Latin America, which combined account for 34.8% of net sales,[4] helping the company close in on its goal to increase its exposure to emerging markets to over 35% of sales. [5] Because it targets the wealthiest segments of the market the company leads its competitors in sales in Japan, Korea, India, Thailand, Indonesia, and New Zealand; sales growth in its core emerging markets in Latin America and Asia have topped 24% in the last several years.[6]

2010 Third Quarter Results
Adidas announced its results for the third quarter of fiscal 2010, posting a net income of $373 million, a 25 percent increase from the previous year. Its revenue climbed 20 percent to $4.55 billion. As a result of these figures, the company has raised its forecasts for the full-year to an 8 percent increase from the previous year. Adidas cited the 2010 World Cup, high exposure to fast-growing emerging markets, and strong improvements in its Reebok brand for its success for the quarter.[7]

Company Overview

Adidas Group generates revenue by selling its products to retail stores or directly to the customer via one of the brands' concept stores, factory outlets, concession corners, or online stores. Of this revenue, 45% is from footwear, 45% from apparel, and 10% from hardware. [4] In 2009 the company had €10.4 billion in revenue, down from €10.8 billion in 2008, fueled by decreases in all geographic regions across the board except for Latin America.[4] In 2009, Adidas had a total of 2,212 retail stores in the world (including concept stores, factory outlets, concession corners, and others), up from 1,884 stores in 2008.[8]

Europe continues to be this company's stronghold, with an overall grasp of 42% of Adidas' earnings in 2009, a slight dip from the 43% of overall earning in 2008. Latin America's grasp on the overall market grew the most in 2009, increasing to 9.7% of overall 2009 sales (an increase from 8.3% in 2008), driven by strong currency-neutral sales growth[4]

Business Segments
The Adidas Group organizes its business segments by brand:

adidas (72.4% of 2009 net sales) [9]: The adidas brand is the ultimate profit driver for the adidas Group, accounting for 72.4% of all group sales in 2009.[9] The brand, which was restructured during 2007, now consists of 2 segments: Sports Performance and Sports Style. The adidas segment had total revenues of €7.52 billion in 2009, down from €7.82 billion in 2008, driven by overall struggles for the brand around the world. This brand, which employs a premium-price strategy, sells items in fashion, apparel, and footwear.[10] The combination of the adidas and Reebok brands obtained 53% of sales from Europe, compared to 20% in North America.[8]

Reebok (19.4% of 2009 net sales): Reebok has three different divisions: Reebok (80% of brand revenue in 2009), Reebok-CCM Hockey (8%), and Rockport (12%).[9] Since being acquired in 2006, the group has been trying to reposition the Reebok brand image. Before its acquisition, Reebok had employed excessive discounting in an effort to drive volume sales, but the adidas Group has been raising prices. The group is also trying to position the brand as a specialist in the women's, fitness, and running markets, to limited success.[11] Reebok's sales fell from €2.15 billion in 2008 to €2.01 billion in 2009, driven in part by the fact that same-store sales decreased at a low-single-digit rate.[9] Overall, Reebok's brand image is still diluted because of its previously low prices. Most analysts believe that a Reebok integration and shift in brand image are significant opportunities for the adidas Group.
TaylorMade-adidas Golf (8.2% of 2009 net sales) [9]: TaylorMade-adidas Golf is comprised of TaylorMade (clubs and balls) and adidas Golf, (footwear and apparel). [12] TaylorMade-adidas Golf generated $831 million in 2009 net sales[9], a 2% decrease on a currency-neutral basis, although revenues of the Other Business segment (Taylor Made, Rockport, and Reebok-CCM Hockey) in Western Europe increased 10% on a currency-neutral basis due to higher TaylorMade-adidas Golf sales in the region. The aforementioned Other Business segment obtained most of its business in fiscal 2009 from sales in North America (53%), which is unique as the company as a whole derives most of its sales from Europe.[13]
Trends and Forces

adidas group has relatively low US exposure and aggressive growth strategies in emerging markets
In 2009, the adidas Group saw overall sales in North America decrease to €2.36 billion from €2.52 billion in 2008, in conjunction with the United States' economic downturn.[4] However, adidas has relatively low US exposure overall, with 23% of 2009 sales coming from all of North America.[4] In contrast, adidas Group's continuing expansion into the growing economies in Asia and Latin America led to significant sales growth in those regions. The company aims to have emerging markets represent over 35% of global sales, and approached its goal with 34.8% in 2009.[4] The group has captured a majority of the premium athletic apparel market in several countries including India and Japan (it is tied with Nike in China).[14] Latin America has had sales grow 53% and 38% the past two years.[15][16] The company's strategy in these emerging markets is to target the wealthiest segments, establishing the group's output as premium products in the industry.

High profile sponsorships heavily boosts ADDYY 2010 worldwide sales
In 2010, South Africa hosted the FIFA World Cup, an event of which Adidas is a primary sponsor. As of June 21st (a mere ten days after the beginning of the tournament), Adidas had already seen more than 6.5 million replica jerseys sold in the first quarter of 2010 (more than double the 3 million sold in 2006, during the last World Cup). Overall sales of soccer products were already up 26% in the first quarter of 2010, leading Adidas to expect record sales of at least 1.5 billion Euro, an increase of more than 15% compared to current record sales in 2008, when sales added up to 1.3 billion Euro. Although the World Cup is a singular event, it has always brought great success and profit to its sponsors, a trend that continues to develop for Adidas in 2010.[3]

TaylorMade's North American strength key to helping it become new market leader in world golf market
At the TaylorMade-adidas Golf Pro-Am Tournament in Herzogenaurach in June 2010, adidas AG CEO Herbert Hainer announced that TaylorMade had become the new market leader in the world golf market, a title previously held by Callaway Golf Company (ELY).[17] Hainer attributed this to TaylorMade's standing as the unrivaled leader in golf's key revenue driver - the production and sale of metalwoods North America. This is key because, although adidas AG is a company that usually struggles in the North American market, North America is golf's largest market. As the company behind the number one driver used in the PGA Tour, TaylorMade has used the proven results of its products to gain the necessary confidence of the North American consumers to overtake Callaway.[18]

In the first quarter of 2010, TaylorMade-adidas Golf's revenues increased by 16% on a currency-neutral basis, from €194 million in Q1 2009 to €223 million. This is no real shock, however, since TaylorMade-adidas Golf sales have continually increased since its acquisition by the adidas Group in 1997, reaching €831 million in 2009, and is well-positioned to continue to thrive as world golf's new market leader.[19] However, it is important to note that the economic recession has hit many facets of the golf market fairly hard (playing a big role in Callaway's fallback), and could certainly affect TaylorMade's success in the North American golf market.[20]

Competition

For comparison purposes, adidas Group generated €10.4 billion in revenue in 2009[4]

Nike (NKE): 2009 revenue - $19.2 billion.[21] Nike competes with the adidas group on all fronts: footwear, apparel, accessories, and equipment and it has the most sales in the sporting goods industry. As mentioned, Nike has a sizable advantage when it comes to economies of scale. adidas Group is second only to this company in terms of sales and market share.
Puma AG: 2009 revenue - $3.5 billion.[22] Puma AG is a Germany-based competitor in the sporting goods market, designing and producing sports footwear, apparel, accessories, and equipment. It operates through two brands, Puma and Tretorn.[23]
Skechers U.S.A. (SKX): 2009 revenue - $1.44 billion.[24] Skechers designs, markets, and sells contemporary footwear. It does so under a Skechers brand, as well as 8 other unique brands targeted at specific audiences. Skechers sells its products through traditional retail channels; it also owns over 180 retail stores worldwide. [25]
Columbia Sportswear Company (COLM) 2009 revenue - $1.24 billion. Columbia Sportswear designs annk;nskdnvknssvbsd sells active outdoor apparel, footwear, accessories, and equipment. In 2007, Columbia distributed its products to over 14,000 retailers worldwide.[26]
Callaway Golf Company (ELY): 2009 revenue - $950.8 million. Callaway Golf Company competes with TaylorMade-adidas Golf (2007 revenues of $1.1 billion) in the golf market. It designs and sells clubs and balls through its brands: Callaway Golf, Top-Flite, Ben Hogan, and Odyssey.[20]
Under Armour (UA): 2009 revenue - $856.4 million.[27] Under Armor is a fairly new company (incorporated in 1996) that designs and sells sports performance footwear, apparel, and accessories. Its products, which are designed with microfibers intended to wick away perspiration, extend across the sporting goods, outdoor, and active lifestyle markets. [28] Under Armor's sales are growing rapidly, with a 5 year growth rate of 65.03% (industry average is 16%). [29]

Company Revenue 2009 (Millions) Net Income 2009 (Millions)
Adidas AG[30] $13,377 $316
Nike (NKE)[21] $18,627 $1,883.4
Puma AG[23] $3,261 $167
Skechers U.S.A.[25] $1,436 $55
Columbia Sportswear Company (COLM)[26] $1,244 $67
Callaway Golf Company (ELY)[20] $951 -$15
Under Armour (UA) [27] $857 $47
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