MASTERS IN FINANCE ADIDAS AG COMPANY REPORT FOOTWEAR AND APPAREL 3 JANUARY 2017 STUDENT: PEDRO PEREIRA [email protected] Sustaining “Brand Momentum” Recommendation: BUY Riding the Athleisure and E-commerce trend Price Target FY18: 222.33 € . After a careful evaluation, our investment recommendation for Adidas AG is BUY, with a target price of Price (as of 31-Dez-17) 167.15 € EUR 222.33, while the current stock price trades at EUR 167.15. Bloomberg: ADS:GR For the last 3 months, the stock decreased 13%, which represents 52-week range (€) 142.60-202.10 a good opportunity to buy the stock. Market Cap (€b) 34.970 Outstanding Shares (m) 209.216 . Share: The company stock price clearly outperformed the German stock index DAX-30, yielding a total return of 173% in the Source: Bloomberg 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 In % based on 100% at 31th December 2014 Source: Bloomberg 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 (Values in € millions) 2016 2017E 2018F Revenues 19,291 21,529 23,743 analysis of Adidas. The price target of EUR 222.33 implies a EBITDA 1,855 2,329 2,730 33,0% mark-up and a total expected shareholder return of 34,2% EBITDA growth 30% 26% 17% Net Profit 1,020 1,075 1,526 on the current share price. 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 Company description Net Debt/EBITDA 0,13 0,33 0,42 Adidas Group, with headquarters in Herzogenaurach (Germany) is ROIC (%) 17,0% 21,0% 22,6% the largest company in the sports footwear and apparel industry in Source: Adidas AG Annual Report 2016, Bloomberg, own Europe and the second largest in the world. With total revenues of estimates 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. 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 ADIDAS AG COMPANY REPORT Table of Contents ADIDAS CASE ......................................................................................... 3 COMPANY OVERVIEW ........................................................................... 4 COMPANY DESCRIPTION ....................................................................................... 4 BRAND OVERVIEW ................................................................................................ 6 . adidas ............................................................................................ 6 . Reebok .......................................................................................... 7 SHARE PERFORMANCE ......................................................................................... 7 SHAREHOLDER STRUCTURE AND RETURN .......................................................... 8 INDUSTRY OVERVIEW ........................................................................... 9 SECTOR ANALYSIS................................................................................................ 9 PEER COMPANIES ............................................................................................... 10 KEY DRIVERS .........................................................................................13 . Athleisure Trend ......................................................................... 13 . Womenswear .............................................................................. 14 . Digital and Ecommerce ............................................................. 15 . “Speed” ........................................................................................ 15 . Marketing Investments .............................................................. 16 . Economic Drivers ....................................................................... 17 . “Creating the New” ..................................................................... 19 FORECASTS ...........................................................................................19 REVENUES .......................................................................................................... 19 EXPENSES ........................................................................................................... 21 NET WORKING CAPITAL AND CAPEX ................................................................ 22 VALUATION ............................................................................................23 COMPARABLE COMPANY ANALYSIS ................................................................... 23 DISCOUNTED CASH FLOWS ANALYSIS ............................................................... 23 . WACC Calculation ..................................................................... 23 . Perpetual Growth ....................................................................... 25 SENSITIVITY ANALYSIS ........................................................................25 SCENARIO ANALYSIS ...........................................................................26 APPENDIX ..............................................................................................27 DISCLOSURES AND DISCLAIMERS .....................................................30 PAGE 2/32 ADIDAS AG COMPANY REPORT 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 Second largest company in the sports footwear and largest in the world (7,8% of market share - see figure 21). With total revenues of apparel industry 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% More ambitious growth targets after a strong start of operating margin in 2016 and 2015, respectively), the company introduced more the strategic plan “Creating ambitious growth targets. The new bullish forecast to 2020 (10-12% vs high- the New” 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 Several risks associated to sportswear and sports lifestyle markets, no negative impact from any potential the company’s growth US border tax, no significant negative currency effects and no significant strategy 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 Biggest competitor is Nike, total sportswear consumption). Adidas has been successfully gaining market which dominates the US 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 buy recommendation, with a target price of EUR 222.33 for Adidas’ shares, EUR 222.33 target price representing an upside of 33,0% on the current stock price and a total shareholder return of 34,2%. PAGE 3/32 ADIDAS AG COMPANY REPORT 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 Adidas brand linked to sports rapidly gain the trust of world-class athletes through decades, being the footwear world-class events and athletes 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