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Adidas Investor Day 2017:Riding the Athleisure and E-Commerce Waves

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Adidas Investor Day 2017:Riding the Athleisure and E-Commerce Waves March 21, 2017 Adidas Investor Day 2017: Riding the Athleisure and E-Commerce Waves 1) In March 2015, Adidas introduced a strategic business plan named “Creating the New,” which defines the company’s strategies and objectives through 2020. Following exceptional financial results in its fiscal 2016 year, the company updated its corporate strategy and introduced an acceleration plan that outlines more ambitious growth targets than those initially set in 2015. 2) Adidas is a major player in an industry that is highly attractive due to its robust growth trends, which have been driven by the rise of athleisure, increasing global concerns regarding health and fitness, and higher sports participation rates. The global sporting goods industry is forecast to grow at a mid-single-digit rate in 2017. 3) The company will propel sales growth by driving brand desirability through product innovation, brand exits and turnarounds, as well as by focusing on strategic growth areas such as e-commerce, greater penetration of the North American market and womenswear. Adidas plans to improve gross margins by minimizing clearance activities, increasing the share of full-price sales and speeding up its sourcing. On March 14, 2017, Fung Global Retail & Technology attended the Adidas annual Investor Day event at its global headquarters in Herzogenaurach, Germany. The company’s new CEO, Kasper Rorsted, presented, as did its Head of Global Brands and CFO. We left the event with a favorable impression. In our view, Adidas is a forward- thinking, agile and innovative company. Here, we discuss the key topics covered during the day and our top takeaways from the event. Deborah Weinswig, Managing Director, Fung Global Retail & Technology deborahweinswig@ fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 1 Copyright © 2017 The Fung Group. All rights reserved. March 21, 2017 CEO Transition Bodes Well New CEO Kasper Rorsted joined Adidas on October 1, 2016, succeeding Herbert Hainer, who had led the company for 15 years, making him the longest-serving CEO of a major German company at the time. Rorsted is a highly regarded corporate executive who previously held the post of CEO at German consumer staples company Henkel. Rorsted has been widely lauded for Henkel’s 6% operating margin expansion from 2008 through 2014. The investor and analyst community is optimistic that, with Rorsted at the helm, Adidas will increase its profitability and margins, and make headway toward closing the operating margin gap with Nike. Adidas’s shares rose by 5.8% on news of Rorsted’s appointment, while Henkel’s declined by 4.5%. Many Investor Day attendees were keen to speak to and question Rorsted. Creating the New In March 2015, Adidas introduced a strategic business plan named “Creating the New,” which defines the company’s strategies and objectives through 2020. Following exceptional financial results in fiscal 2016, the company updated its corporate strategy and introduced an acceleration plan that outlines more ambitious growth targets than those initially set in 2015: • Adidas plans to grow total company sales to €25–€27 billion in 2020, up from €19.3 billion in 2016. The company expects sales growth to be higher than that of the global sporting goods industry, which means Adidas will take market share. • The company also aims to reach a total operating margin of 11% in 2020, up from 7.7% in 2016. This would narrow the company’s margin gap with archrival Nike, which enjoys a 14% annual operating margin. Source: Adidas Deborah Weinswig, Managing Director, Fung Global Retail & Technology deborahweinswig@ fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 2 Copyright © 2017 The Fung Group. All rights reserved. March 21, 2017 Rorsted strongly emphasized that Adidas has the right company strategy in place and that management will now overwhelmingly focus on executing the strategy for the next couple of years. Adidas has had a strong start in terms of accomplishing its 2020 goals, but still has a long way to go to achieve them in full. Source: Adidas 2016: A Blowout Year The company achieved stellar operating results in 2016 and increased its top- and bottom-line guidance several times throughout the year. In 2016: • Net sales increased by 18% year over year. • Gross margin expanded by 30 basis points due to better product pricing and product and channel mix as well as lower input costs, all of which helped to offset severe currency headwinds. • Operating margin expanded by 120 basis points on cost control and operating leverage. • Net income increased by 41% year over year. • The company’s share price surged by 67% over the year, and Adidas was the best- performing stock on the German DAX Index for a second year in a row. Increased Guidance for 2017 Management expects 2017 to be another standout year. For the full year, the company has guided for: • A net sales increase of 11%–13% year over year. • Operating expenses as a percentage of sales to decrease. • Operating margin to expand by 60–80 basis points year over year, to 8.3%–8.5%. • A net income increase of 18%–20% year over year. Deborah Weinswig, Managing Director, Fung Global Retail & Technology deborahweinswig@ fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 3 Copyright © 2017 The Fung Group. All rights reserved. March 21, 2017 Attractive Industry Sports footwear and apparel is a highly competitive industry dominated by large, global players that include Adidas, Nike and Under Armour. Numerous smaller players are also active in the industry. In 2016, Nike reported total company sales of $32.4 billion, and the company plans to increase its sales to $50 billion by 2020. Despite heavy competition, the industry is attractive due to robust growth trends, which have been propelled by the rise of athleisure, increasing global concerns regarding health and fitness, and higher sports participation rates. Market research firm The NPD Group forecasts that the global sporting goods industry will grow at a mid-single-digit rate in 2017, even though no major global sporting events are scheduled to occur this year. Consumer spending on sporting goods is expected to grow faster in developing economies than in developed markets. Source: Adidas Athleisure and Streetwear The casual athletic category continues to enjoy strong momentum, driven by retro running and tennis designs and silhouettes. According to Adidas, the athleisure trend will remain a strong structural driver for the sporting goods industry. Adidas will capitalize on these ongoing favorable trends by creating and driving demand for streetwear through sports-inspired lifestyle products. Source: Adidas Deborah Weinswig, Managing Director, Fung Global Retail & Technology deborahweinswig@ fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 4 Copyright © 2017 The Fung Group. All rights reserved. March 21, 2017 Mission: To Be the Best Sports Company in the World The company’s mission is to be the best sports company in the world, and its strategy is to increase top-line growth and market share, expand gross margin and increase operating leverage. Source: Adidas • Adidas plans to propel sales growth by driving brand desirability through product innovation, brand exits and turnarounds, as well as by focusing on e-commerce growth, greater penetration of the North American market and womenswear. • All P&L items are expected to contribute to profitability and margin improvement. • Adidas plans to improve gross margin by minimizing clearance activities, increasing share of full-price sales, speeding up sourcing and improving manufacturing efficiencies • The company aims to increase operating margins through gross margin expansion, cost control, more efficient marketing procurement and greater return on marketing investment. Source: Adidas Deborah Weinswig, Managing Director, Fung Global Retail & Technology deborahweinswig@ fung1937.com US: 917.655.6790 HK: 852.6119.1779 CN: 86.186.1420.3016 5 Copyright © 2017 The Fung Group. All rights reserved. March 21, 2017 New Product Launches Are Key The importance of maintaining a pipeline of new products, especially in footwear, cannot be underestimated. In 2016, newly launched products accounted for 77% of Adidas brand sales and 73% of Reebok footwear sales. New products have higher gross margins than do those that have been on the market for more than one season. The company’s new product designs have been based on: • Design collaboration partnerships with athletes, performing artists, designers, models, celebrities and digital influencers such as Kanye West, Pharrell Williams and Stella McCartney. • The relaunch of historic designs and styles with modern silhouettes and detailing, using new materials and fabrics. For example, Adidas has leveraged some of its iconic franchises, such as Stan Smith and Gazelle, to capitalize on retro and nostalgia consumer trends. • The use of innovative materials such as recycled polyester and biodegradable fabrics in order to leverage consumer concerns regarding sustainability and environmentalism. For example, Adidas unveiled the first mass-produced running shoe created with recycled ocean plastic; the 7,000 pairs of limited-edition shoes sold out in 24 hours. Marketing and Distribution Strategy Marketing spending constitutes a sizable portion of the company’s operating expenses and represents an important mechanism for driving brand desirability. The company is committed to improving marketing efficiency by focusing communication efforts and brand initiatives on the most impactful partnerships with sports teams, events, athletes and artists. • Adidas will focus marketing spending, product introductions and retail store investment on six key cities that influence global consumer trends: New York, Los Angeles, London, Paris, Shanghai and Tokyo. • The company plans to expand its controlled space, which is retail space where Adidas is able to manage the way brands and products are presented. These spaces include own retail stores and franchises, and shops-in-shops at certain wholesale accounts.
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