TIGHT OPERATING WORKING CAPITAL MANAGEMENT
Due to
a comparatively low level of fixed assets required in our business,
operating working capital management is a major focus
of our efforts to improve the efficiency of the Group’s balance
sheet. We have made major strides in this area through tight
working capital management focused on continuously improving
our Group’s inventories, accounts receivable and accounts
payable.
Our key metric is operating working capital as a percentage of net sales. Monitoring the development of this key metric facilitates the measurement of our progress in improving the efficiency of our business cycle. We strive to manage our inventory levels to meet market demand and ensure fast replenishment. Inventory ageing is controlled to reduce inventory obsolescence and to optimize clearance activities. As a result, stock turn development is the key performance indicator as it measures the number of times the average inventory is sold during a year, highlighting the amount of capital locked in products in relation to our Group’s business. To minimize capital tied up in accounts receivable, we strive to continuously improve collection efforts in order to reduce the Days of Sales Outstanding (DSO) and improve the ageing of accounts receivable. Likewise, we strive to continuously optimize payment terms with our suppliers to best manage our accounts payable.
CAPITAL EXPENDITURE TARGETED TO MAXIMIZE FUTURE
RETURNS
Improving the effectiveness of the Group’s capital
expenditure is another lever to maximize the Group’s free cash
flow. Our capital expenditure is controlled with a top-down,
bottom-up approach: In a first step, Group Management
defines
focus areas and an overall investment budget based
on investment requests by brand management. Our operating
units then align their initiatives within the scope of assigned
priorities and available budget. We evaluate potential return on
planned investments utilizing the net present value or internal
rate of return method, in relation to the cost of capital. Specific
investments are assessed according to the principles of risk-weighted
returns. For large investment projects, timelines and
deviations versus budget are monitored on a monthly basis
throughout the course of the project.
M & A ACTIVITIES FOCUS ON LONG-TERM VALUE CREATION
POTENTIAL
We expect the majority of our Group’s growth to
come from organic business. However, as part of our commitment
to ensuring sustainable profitable development,
we
regularly
review merger and acquisition options
that may provide
additional commercial and operational
opportunities.
Acquisitive
growth focus is primarily related
to a potential for
increasing market penetration, strengthening our Group’s
positioning
within a sports category or addressing new consumer
segments. The strategies of any potential acquisition
candidate must correspond with the Group’s long-term
direction.
Maximizing return on invested capital above the cost
of capital is a core consideration in our decision-making process.
Of particular importance is evaluating the potential
impact
on our Group’s free cash flow. We assess
current and
future projected key financial metrics to evaluate a target’s
contribution potential. In addition, careful consideration is
given to any potential financing implications which may be
required to complete a prospective acquisition.
COST OF CAPITAL METRIC USED TO MEASURE INVESTMENT
POTENTIAL
Creating value for our shareholders by earning a
return on invested capital above the cost of that capital is a
guiding principle of our Group strategy. We source capital from
equity and debt markets. Therefore, we have a responsibility
that our return on capital meets the expectations of both equity
shareholders and creditors. Our Group calculates the cost of
capital utilizing the weighted average cost of capital (WACC)
formula. This metric allows us to calculate the minimum
required
financial returns of planned capital investments. The
cost of equity is computed utilizing the risk-free rate, market
risk premium and beta. Cost of debt is calculated using the
risk-free rate, credit spread and average tax rate.
STRUCTURED PERFORMANCE MEASUREMENT SYSTEM
Our
Group has developed an extensive performance measurement
system, which utilizes a variety of tools to measure the performance
of the adidas Group and our brand segments. To
evaluate the Group’s current sales and profitability development,
we monitor our annual budget on a monthly basis,
addressing
shortfalls and identifying additional opportunities.
Further, we monitor operating margin developments at all
brands on a monthly basis. To optimize the Group’s balance
sheet, we control operating working capital movement via a
monthly monitoring system. When negative deviations exist
between
actual
and target numbers, we perform a detailed
analysis to identify and address the cause. In addition, we
benchmark the Group and brand results with those of our major
competitors on a quarterly basis. We measure the Group’s
future
top-line development on the basis of our order backlog
development. Order backlogs comprise orders received within
a period of up to nine months in advance of the actual sale. Our
order book represents approximately 70 % of future anticipated
revenues. Also
increasingly important are other indicators
such as our own-retail activities and at-once business, which
are not represented
in the order book. We provide updates on
these developments as part of our quarterly reports. 
see Outlook
