adidas investor day 2017: riding the athleisure and e ......athleisure and streetwear the casual...

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

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

1) InMarch2015,Adidasintroducedastrategicbusinessplannamed“CreatingtheNew,”whichdefinesthecompany’sstrategiesandobjectivesthrough2020.Followingexceptionalfinancialresultsinitsfiscal2016year,thecompanyupdateditscorporatestrategyandintroducedanaccelerationplanthatoutlinesmoreambitiousgrowthtargetsthanthoseinitiallysetin2015.

2) Adidasisamajorplayerinanindustrythatishighlyattractiveduetoitsrobustgrowthtrends,whichhavebeendrivenbytheriseofathleisure,increasingglobalconcernsregardinghealthandfitness,andhighersportsparticipationrates.Theglobalsportinggoodsindustryisforecasttogrowatamid-single-digitratein2017.

3) Thecompanywillpropelsalesgrowthbydrivingbranddesirabilitythroughproductinnovation,brandexitsandturnarounds,aswellasbyfocusingonstrategicgrowthareassuchase-commerce,greaterpenetrationoftheNorthAmericanmarketandwomenswear.Adidasplanstoimprovegrossmarginsbyminimizingclearanceactivities,increasingtheshareoffull-pricesalesandspeedingupitssourcing.

OnMarch14,2017,FungGlobalRetail&TechnologyattendedtheAdidasannualInvestorDayeventatitsglobalheadquartersinHerzogenaurach,Germany.Thecompany’snewCEO,KasperRorsted,presented,asdiditsHeadofGlobalBrandsandCFO.Welefttheeventwithafavorableimpression.Inourview,Adidasisaforward-thinking,agileandinnovativecompany.Here,wediscussthekeytopicscoveredduringthedayandourtoptakeawaysfromtheevent.

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

CEOTransitionBodesWellNewCEOKasperRorstedjoinedAdidasonOctober1,2016,succeedingHerbertHainer,whohadledthecompanyfor15years,makinghimthelongest-servingCEOofamajorGermancompanyatthetime.RorstedisahighlyregardedcorporateexecutivewhopreviouslyheldthepostofCEOatGermanconsumerstaplescompanyHenkel.RorstedhasbeenwidelylaudedforHenkel’s6%operatingmarginexpansionfrom2008through2014.Theinvestorandanalystcommunityisoptimisticthat,withRorstedatthehelm,Adidaswillincreaseitsprofitabilityandmargins,andmakeheadwaytowardclosingtheoperatingmargingapwithNike.Adidas’ssharesroseby5.8%onnewsofRorsted’sappointment,whileHenkel’sdeclinedby4.5%.ManyInvestorDayattendeeswerekeentospeaktoandquestionRorsted.

CreatingtheNewInMarch2015,Adidasintroducedastrategicbusinessplannamed“CreatingtheNew,”whichdefinesthecompany’sstrategiesandobjectivesthrough2020.Followingexceptionalfinancialresultsinfiscal2016,thecompanyupdateditscorporatestrategyandintroducedanaccelerationplanthatoutlinesmoreambitiousgrowthtargetsthanthoseinitiallysetin2015:

• Adidasplanstogrowtotalcompanysalesto€25–€27billionin2020,upfrom€19.3billionin2016.Thecompanyexpectssalesgrowthtobehigherthanthatoftheglobalsportinggoodsindustry,whichmeansAdidaswilltakemarketshare.

• Thecompanyalsoaimstoreachatotaloperatingmarginof11%in2020,upfrom7.7%in2016.Thiswouldnarrowthecompany’smargingapwitharchrivalNike,whichenjoysa14%annualoperatingmargin.

Source:Adidas

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

RorstedstronglyemphasizedthatAdidashastherightcompanystrategyinplaceandthatmanagementwillnowoverwhelminglyfocusonexecutingthestrategyforthenextcoupleofyears.Adidashashadastrongstartintermsofaccomplishingits2020goals,butstillhasalongwaytogotoachievetheminfull.

Source:Adidas

2016:ABlowoutYearThecompanyachievedstellaroperatingresultsin2016andincreaseditstop-andbottom-lineguidanceseveraltimesthroughouttheyear.In2016:

• Netsalesincreasedby18%yearoveryear.

• Grossmarginexpandedby30basispointsduetobetterproductpricingandproductandchannelmixaswellaslowerinputcosts,allofwhichhelpedtooffsetseverecurrencyheadwinds.

• Operatingmarginexpandedby120basispointsoncostcontrolandoperatingleverage.

• Netincomeincreasedby41%yearoveryear.

• Thecompany’ssharepricesurgedby67%overtheyear,andAdidaswasthebest-performingstockontheGermanDAXIndexforasecondyearinarow.

IncreasedGuidancefor2017Managementexpects2017tobeanotherstandoutyear.Forthefullyear,thecompanyhasguidedfor:

• Anetsalesincreaseof11%–13%yearoveryear.

• Operatingexpensesasapercentageofsalestodecrease.

• Operatingmargintoexpandby60–80basispointsyearoveryear,to8.3%–8.5%.

• Anetincomeincreaseof18%–20%yearoveryear.

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

AttractiveIndustrySportsfootwearandapparelisahighlycompetitiveindustrydominatedbylarge,globalplayersthatincludeAdidas,NikeandUnderArmour.Numeroussmallerplayersarealsoactiveintheindustry.In2016,Nikereportedtotalcompanysalesof$32.4billion,andthecompanyplanstoincreaseitssalesto$50billionby2020.

Despiteheavycompetition,theindustryisattractiveduetorobustgrowthtrends,whichhavebeenpropelledbytheriseofathleisure,increasingglobalconcernsregardinghealthandfitness,andhighersportsparticipationrates.MarketresearchfirmTheNPDGroupforecaststhattheglobalsportinggoodsindustrywillgrowatamid-single-digitratein2017,eventhoughnomajorglobalsportingeventsarescheduledtooccurthisyear.Consumerspendingonsportinggoodsisexpectedtogrowfasterindevelopingeconomiesthanindevelopedmarkets.

Source:Adidas

AthleisureandStreetwearThecasualathleticcategorycontinuestoenjoystrongmomentum,drivenbyretrorunningandtennisdesignsandsilhouettes.AccordingtoAdidas,theathleisuretrendwillremainastrongstructuraldriverforthesportinggoodsindustry.Adidaswillcapitalizeontheseongoingfavorabletrendsbycreatinganddrivingdemandforstreetwearthroughsports-inspiredlifestyleproducts.

Source:Adidas

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

Mission:ToBetheBestSportsCompanyintheWorldThecompany’smissionistobethebestsportscompanyintheworld,anditsstrategyistoincreasetop-linegrowthandmarketshare,expandgrossmarginandincreaseoperatingleverage.

Source:Adidas

• Adidasplanstopropelsalesgrowthbydrivingbranddesirabilitythroughproductinnovation,brandexitsandturnarounds,aswellasbyfocusingone-commercegrowth,greaterpenetrationoftheNorthAmericanmarketandwomenswear.

• AllP&Litemsareexpectedtocontributetoprofitabilityandmarginimprovement.

• Adidasplanstoimprovegrossmarginbyminimizingclearanceactivities,increasingshareoffull-pricesales,speedingupsourcingandimprovingmanufacturingefficiencies

• Thecompanyaimstoincreaseoperatingmarginsthroughgrossmarginexpansion,costcontrol,moreefficientmarketingprocurementandgreaterreturnonmarketinginvestment.

Source:Adidas

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

NewProductLaunchesAreKeyTheimportanceofmaintainingapipelineofnewproducts,especiallyinfootwear,cannotbeunderestimated.In2016,newlylaunchedproductsaccountedfor77%ofAdidasbrandsalesand73%ofReebokfootwearsales.Newproductshavehighergrossmarginsthandothosethathavebeenonthemarketformorethanoneseason.

Thecompany’snewproductdesignshavebeenbasedon:

• Designcollaborationpartnershipswithathletes,performingartists,designers,models,celebritiesanddigitalinfluencerssuchasKanyeWest,PharrellWilliamsandStellaMcCartney.

• Therelaunchofhistoricdesignsandstyleswithmodernsilhouettesanddetailing,usingnewmaterialsandfabrics.Forexample,Adidashasleveragedsomeofitsiconicfranchises,suchasStanSmithandGazelle,tocapitalizeonretroandnostalgiaconsumertrends.

• Theuseofinnovativematerialssuchasrecycledpolyesterandbiodegradablefabricsinordertoleverageconsumerconcernsregardingsustainabilityandenvironmentalism.Forexample,Adidasunveiledthefirstmass-producedrunningshoecreatedwithrecycledoceanplastic;the7,000pairsoflimited-editionshoessoldoutin24hours.

MarketingandDistributionStrategyMarketingspendingconstitutesasizableportionofthecompany’soperatingexpensesandrepresentsanimportantmechanismfordrivingbranddesirability.Thecompanyiscommittedtoimprovingmarketingefficiencybyfocusingcommunicationeffortsandbrandinitiativesonthemostimpactfulpartnershipswithsportsteams,events,athletesandartists.

• Adidaswillfocusmarketingspending,productintroductionsandretailstoreinvestmentonsixkeycitiesthatinfluenceglobalconsumertrends:NewYork,LosAngeles,London,Paris,ShanghaiandTokyo.

• Thecompanyplanstoexpanditscontrolledspace,whichisretailspacewhereAdidasisabletomanagethewaybrandsandproductsarepresented.Thesespacesincludeownretailstoresandfranchises,andshops-in-shopsatcertainwholesaleaccounts.Thecompanyaimstogenerate60%ofrevenuesincontrolledspacesby2020.

• ThecompanyrecentlyopeneditslargestglobalflagshipstoreinNewYorkCity,onFifthAvenueand46thStreet.Thestorefeaturesaninnovativehighschoolsportsstadiumconcept.

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

StreamliningandRevampingtheBrandPortfolioAdidashasannouncedthatitwillexitlow-growth,noncoreandlow-profitabilitybusinessessuchastheTaylorMadegolfandCCMhockeybusinesses,asthesearedilutivetooveralltop-lineandprofitabilitytrends.Ifthedivestituresoccurin2017,annualsales,marginsandearningswouldincreaseevenmorethanoutlinedinthecompany’sfull-yearguidance.

Source:Adidas

• Thegolfandhockeybusinessescontributed6%tototalcompanyrevenuesin2016,butconstantcurrencysalesdeclinedby1%inthegolfbusinessandby13%inthehockeysegment.

• ThecompanyisalsoimplementingaturnaroundplanforReebok,whosesalesgrowthandmarginsarelowerthanthoseoftheAdidasbrand.Reebok’ssalesgrowthisalsolowerthanthatoftheoverallsportinggoodsindustry,anditsmarginsandoperatingprofitsarelowerthanthoseofitsmaincompetitors.Asaresult,Reebok’sperformanceisdilutivetototalcompanyearnings.

• ManagementhaschosentorevamptheReebokbrandinsteadofdivestit,asReebokhasalreadymadesomeoperationalheadway.Thebrandhasposteddouble-digitrevenuegrowthoutsidetheUSforthelastthreeyears.

• ThekeyistonowincreasegrowthintheUSmarket,especiallygivenReebok’shistoricrootsintheUS.ReebokNorthAmerica’sconstantcurrencysalesdeclinedby1%yearoveryearin2016.Managementandorganizationalchangeshavebeenmadeatthebrand’sheadquartersinBoston.ThenumberofReebokUSfactoryoutletstoreshasbeenreducedandmorebrandstoreswillbeclosedin2017.

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

OpportunitiesforGrowthE-CommercetoQuadrupleAdidasplanstoincreaseitstoplineandmarketsharebygrowinge-commercerevenuefrom€1billionin2016to€4billionin2020.In2016,e-commerceconstantcurrencysalesgrewby59%yearoveryear.

WomenswearOneofthecompany’stargetedgrowthareasiswomenswear(boththefootwearandathleticapparelcategories).Managementstatedthatitisnothappywiththecompany’scurrentpositioninthewomenswearmarketandthatitseekstodoubleitsshareofthesegmentby2020.Womenswearrepresented23%ofAdidas’srevenuesin2016,andthecompanywantsthatfiguretoreach28%by2020.

• Adidasisformingcollaborationswithfemaleinfluencers,leaders,athletesandmodels.Thecompany’scurrentteamof25femaleinfluencersincludesformerLululemonAthleticaCEOChristineDay.

• In2016,afterteamingupwithglobalfemaleathletestostudythefemalefootandhowitmovesduringrunning,Adidascreatedthefirstrunningshoedesignedspecificallyforwomen.Traditionally,runningshoesforwomenwereadaptationsofmen’sshoes.

FocusonNorthAmericaThecompanyhasidentifiedtheNorthAmericanmarketasastrategicgrowthdriver.

• NorthAmericasalesrepresented21%oftotalcompanysalesin2016.ThecompanyplanstogrowtheAdidasbrandinNorthAmericato€5billioninsalesby2020,upfrom€3.4billionin2016.NikecurrentlydominatestheNorthAmericanmarket,andsawUSsalesof$14.8billionin2016.

• Adidas’smomentumintheNorthAmericanmarketacceleratedconsiderablyin2016followingorganizationalsetupimprovementsandnewproductlaunches.Salesintheregionincreasedby24%yearoveryear,vastlyoutpacingtotalsportinggoodsmarketgrowth.

Source:Adidas

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

SourcingAdidasisfocusingonimprovingsourcingandlogisticsandincreasingspeedtomarket.Thecompanystatedthatthefuturesbusinessmodel,withretailersbookingorderssixtoninemonthsinadvance,isantiquatedandnotrepresentativeofcurrentdynamicworldtrends.Continuedinnovationsinthesupplychainandadvancesinproductiontechniqueswillspeedthedesignandmanufacturingprocesses,enablingthecompanytogetproductstoconsumersfaster.

SpeedProgramsAdidaswillmoveawayfrommainlydevelopingproductrangesinadvanceofseasonalmerchandisingcalendarsandtowardin-seasonproductionprocessesandrapidreplenishmentmanufacturing.

Improveproductavailability:Thecompanyseekstoenableconstantproductavailabilityandensurefasterdeliveryofproducts.

Decreaserisk:Adidasislookingtoreducetheriskofoverbuyinganddecreaseend-seasoncleanupbycreatingmorerelevantproductpropositions.

Createadditionalnetsales:Adidasaimstocapturehigherdemandwithshorterlead-timeproductionandavoidseasonalproductsuccessesgoingoutofstock.

Generatemorecontribution:Thecompanyplanstoreducemarkdownsonarticlessoldbyincreasingtheshareofvolumessoldatfullprice.

Adidasisstrivingforquickreplenishmentcapabilitiesforfast-sellingitems.Currently,about15%ofsalesaregeneratedonspeedprograms,butthecompanyplanstoincreasetheshareofspeed-enabledproductstoatleast50%ofnetsalesby2020.Adidasexpectsthistohelpitachieve20%highershareoffull-pricesales.

• Some80%oftheapparelvolumesforthefall/winter2017seasonwereproducedwith60days’leadtime.

• Themajorityoffootwearvolumesarealreadyproducedwithleadtimesof60daysorless.

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March21,2017

DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comEvaK.SeniorResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242–246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

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