Competitive advantages and disadvantages of the current financial and operational strategic position held today by Adidas AG as compared to that of Puma SE PDF

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Competitive advantages and disadvantages of the current financial and operational strategic position held today by Adidas AG as compared to that of Puma SE...

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Competitive advantages and disadvantages of the current financial and operational strategic position held today by Adidas AG as compared to that of Puma SE

Table of Contents 1.0.

Executive Summary................................................................................................................2

2.0.

Introduction..............................................................................................................................4

3.0.

Context.....................................................................................................................................4

3.1.

Overview..................................................................................................................................7

3.2.

Ratios Computation & Analysis.............................................................................................8

3.3.

Evaluation: Overall Assessment, Recommendation and Conclusion.............................11

Case B: Gramin plc – The Solway..................................................................................................13 References........................................................................................................................................16 Appendix A.........................................................................................................................................17

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1.0.

Executive Summary

Overview Puma has risen to becoming the third largest sports manufacturer globally. Exploring its financial and operational performance as compared to its rival Adidas AG has provided insight into competitive advantages and disadvantages whilst highlighting areas for improvement. The Problem Puma has a smaller market share compared to Adidas, so steps need to be taken to enhance Puma’s global outreach. The Solution Continuous focus on the consumer, development of products and alliances, preparation for a sustainable future. These vital areas including the competitions’ strengths and weaknesses is recommended for sustainable future growth. The Highlights The following graphs provide interesting facts about the companies.

Retail Sales by Product 2015 - 2019 million (quantity / number of pieces) Puma 2015 Adidas 2015 Puma 2016 Adidas 2016 Puma 2017 Adidas 2017 Puma 2018 Adidas 2018 Puma 2019 Adidas 2019 0

100

200

300

Footwear

400 Apparel

500

600

Hardware

[Retail Sales by Product 2015 - 2019]

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RATIO OF FEMALE TO MALE EMPLOYEES 2019

G l o b a l d i s tr i b u ti o n o f Em p l o y e e s

35000 30957 28576 30000 25000 20000 15000 10000 5000 0

Americas Asia + emerging markets

EMEA Group functions

14288 7374 6913

17265

1

14883

Adidas Adidas; Puma 0 Female

000 000 Male Diverse

0 3606

6538 4144

13097 Ad i d a s

0

0

Puma

[Ratio of Female/Male Employees and Global Distribution 2019]

PRODUCTION & Sourcing mArkets – Puma 2019

EMEA; Americas; 3.00% 2.00%

PRODUCTION & SOURCING mArkets – adidas 2019

EMEA; 9.09%

Americas; 17.17%

Asia; 95.00%

Asia; 73.74% [Production & Sourcing Markets 2019]

Keys to Success Consumer centric approach. Focusing on the shareholders’ needs, increasing the brand, growing the sales, improving working capital ratios, investing in the company through the utilization of assets, developing sustainable products.

Developing further partnerships and securing funding will provide a means for scalable growth and higher global recognition for the brand. This should be prioritized in 2020 and going forward bearing in mind COVID-19 will have an impact on performance and deliverables.

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2.0.

Introduction

This report sets out to provide a thorough and comprehensive analysis of the financial and operational performance of Adidas AG. An in depth comparison of Puma and Adidas will be carried out to highlight competitive advantages, disadvantages, strengths and weaknesses within both organisations with the expectation of strengthening Puma’s overall performance both operationally and financially. More specifically, focus will be placed on disseminating the level of competitive threat Adidas poses to Puma through assessing performance based on the 2018 and 2019 annual reports and evaluating the stock market share performance for both entities.

Financial results will be presented and discussed, recommendations made based assumptions and investigations whilst a conclusion provided to concisely summarize on recommendations brought forward in a consistent manner.

3.0.

Context

Adidas AG and Puma were founded in 1949 in Herzogenaurach, Germany by brothers Adolf and Rudolph Dassler (Rudolph being the brother who broke away to form Puma). Today after 70 years of operation both entities maintain their headquarters in Germany. Adidas is owned by the Adidas Group whereas Puma is partly owned by French luxury group Kering holding 16%, Kering's largest shareholder Artemis SA owns 29% of the share capital1. Since July 2013, the company has been led by former football professional CEO Bjørn Gulden whereas Adidas’ CEO Kasper Rørsted took control of reigns in 2016 coming from an entirely different industry.

Adidas currently stands as being the largest sporting goods manufacturer in Europe and the second largest globally with 59,533 employees and 255 companies in the corporate Group 2 being second to Nike Inc, who dominate the global market being the world’s leading sports good manufacturer, distributor and marketeer 3. Adidas focuses on three main production lines being footwear, apparel and hardware and sell products under their own brand names being adidas, Reebok and Runtastic whilst owning 8.3% of Bayern Munich Football Club4. 1 "PUMA® – PUMA welcomes planned Change in Ownership Structure". about.puma.com. June 2018. 2 Orbis, Bureau Van Dijk, A Moody’s Analytics Company, data update 05.06.2020 3 MBA Skool-Study.Learn.Share, MBA sKOOL.com, 2011-2020 4 Wikipedia, The Free Encyclopedia, June 2020

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In addition to manufacturing sporting goods, Adidas have intensified their focus on the consumer through the development of its strategic operating plan “Creating the New’’. Their ambition is to strive for operational excellence with focus on three main areas being leadership, operating and market efficiency enabling them to realize their robust growth ambitions by significantly increasing their brand prestige and attractiveness. Their mission is to be the best sports company in the world 5. They have created a customer centric approach that not only allows for a more scalable global operation but also sets standards for harmonization and standardization both internally within the Group and externally towards their consumer market share, environment and shareholders. Their initiatives have allowed them to focus on speed of delivery in their production lines, cities and urbanization whereby 80% of global GDP is generated in the world’s largest cities and finally open source. Open source refers to their innovation model that invites consumers to co-create the future of sports and the future of sports culture. This is facilitated through partnerships, athletes and creativity teams. Puma, being the third largest sports manufacturer globally employs 13,348 personnel within approximately 101 companies in the Group. Their mission is to be the ‘Fastest sports brand in the world’’6 combined with a focus on six strategic priorities in addition to exciting collaborations with well-known names in sports and showbiz has helped boost their image and branding.

Adidas and Puma both have clear directive in term of Corporate Governance and their commitment to sustainable corporate success. In addition, their core belief and mission having the power to change lives and being the best sports company in the world will be the core of their corporate strategy.

Women empowerment and employee performance and satisfaction are among the initiatives taken by both organizations to ensure their focus on operations excellence is supported through making their employees successful and motivated.

Through the utilization of international frameworks such as the UN Sustainable Development Goals (SDGs), the Groups have made extensive progress in terms of sustainable material usage and process reducing CO2 emissions, reduction in waste and water consumption and improving their supply chain with a focus on human rights aspects and equality. 5 Adidas 2019 Annual Report, 2020 Adidas AG 6 Puma SE, Annual Report 2019, https://about.puma.com/en/investor-relations/financial-reports

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Competition remains stiff between the three largest sporting goods manufacturers who dominate the global market. They each have a global presence especially focused on the Americas, EMEA and Asia and although they are within the same sector, they have each succeeded at developing certain products and brands that are unique yet dominant products.

SWOT Analysis Adidas vs Puma Although we see similarities between the two brands, the differences are quite vast as depicted below.

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3.1.

Overview

Looking at the 2019 annual results compared to that of 2018, Adidas has seen a steady increase in growth in terms of turnover with an increase in margin of 7.90%. Operating profit or profit before interest and tax, saw an increase of 12.4% which is expected bearing in mind the rise in turnover which is in line with the cost of sales’ similar increase indicating growth of the business. Additionally, basic earnings per share (EPS) saw an increase of 14.66% for EPS and a RoE of 8.33%. Adidas increased their dividend payments to shareholders by 14.93% and enjoyed an increase on market capitalization of 56.33% from €36,328,790 to €56,791,816 respectively. Working capital improved by 8.27% after adjustments due to IFRS and as a result of inventories increasing by 18.60%. For this calculation, inventories, trade receivables and trade payables were taken into consideration. Although capital investing in their brand. Debt, meaning short-term and long-term borrowing is also affected by the adoption of IFRS 16 whereby non-current lease liabilities are also included for the first time leading to an increased debt. Whereas, before the adoption of IFRS 16, debt was lower.

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Puma’s performance during 2019 has been noteworthy when looking at their performance in €:

[Puma SE, Annual Report 2019]

Both Adidas and Puma have seen a record year in 2019 in terms of performance and shareholders’ returns thus predicting continued growth for 2020 and onwards. Although the onset of a global pandemic in December 2019 did not affect the 2019 results, it is important to note that robust growth as seen in 2019 will not materialize in 2020 due to the COVID-19 crisis affecting global commerce.

3.2.

Ratios Computation & Analysis

The following ratios have been calculated to provide a comparison between both 2019 and 2018 audited years in relation to both Adidas7 and Puma8.

Adidas9 2019 vs 2018

Puma 2019 vs 2018

2660/11926 = 22.30% 2368/8778 = 27.00%

440.2/2819.3 = 15.61% _________337.4/2012.2 = 16.76%

Asset Turnover

23640/20680 = 1.14x 21915/15612 = 1.40x

5502.2/4378.2 = 1.26x 4648.3/3207.2 = 1.45x

Financial Leverage

20680/6796 = 3.04x 15612/6377 = 2.49x

4378.2/1920.3 = 2.23x 3207.2/1722.2 = 1.86x

Profit Margin

12293/23640 = 52% 11363/21915 = 52%

2686.4/5502.2 = 49% 2249.4/4648.3 = 48%

Working Capital

6710/2703 = 2.50x 5863/2300 = 2.55x

1721.9-843.7 = 2.04x 1468.8-705.3 = 2.08x

Financial Ratio Return on Capital Employed (RoCE)

7 Adidas AG, Annual Report 2019, https://report.adidas-group.com/2019/en/ 8 Puma SE, Annual Report 2019, https://about.puma.com/en/investor-relations/financial-reports 9 Investing.com, ADSGn Ratios, 2020, https://www.investing.com/equities/adidas-salomon-ratios

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Inventory days

Receivable days

Payable days

Current

Acid test

Interest Cover

Gearing Return on Equity (RoE) Earnings Per Share (EPS)

1491025/11347 = 131 days 1257425/10552 = 119 days

405223/2815.8 = 144 days 334012/2399 = 139 days

958125/23640 = 41 days 882570/21915 = 40 days 986595/11347 = 87 days 839500/10552 = 80 days 10934/8754 = 1.25x 9813/6834 = 1.44x 6849/8754 =0.78x 6368/6834 = 0.93x 2660/159 = 16.73 2368/42 = 56.40 4770/7058 = 0.675 1675/6364 = 0.263 1977/7058 = 29.01% 1704/6364 = 26.78% 1917/197606107 = €9.70 1707/201759012 = €8.46

223271/5502.2 = 41 days 202101/4648.3 = 43 days 307951/2815.8 = 109 days 257435/2399 = 107 days 2481.2/1558.9 = 1.59x 2192.8/1195.2 = 1.83x 1371/1558.9 = 0.88x 1277.7/1195.2 = 1.07x 440.2/43.6 = 10.10 337.4/15.1 = 22.34 745.30/1920.30 = 0.38 8.30/1722.20 = 0.004 262.4/1920.3 = 13.66% 187.4/1722.2 = 10.88% 262/149521683 = €1.76 187/149473228 = €1.25

Looking at performance, the RoCE for Adidas had a 21.10% decrease in 2019 compared to 2018 indicating a high utilization of capital employed. The RoCE for Puma decreased from 2018 to 2019 by 7.37%. As Puma’s sales margin increased by 18.11% whereas Adidas had a smaller increase by 7.18%, Adidas’ profit margin remained strong but stagnant and Puma saw an increase in profit margin by 2.08%. Puma therefore likely need to decrease their value of capital employed by increasing their utilisation of total assets thus improving their RoCE10.

Regarding asset utilisation, the lower turnover asset ratio relates to the increase of total assets (Right-of-use) due to IFRS 16. When adjusted, we still see a lower asset turnover which would indicate higher utilisation of assets. For Puma, this is the opposite after adjustments due to right-of use assets which indicate a lower utilisation of current assets and room to invest further. 10 eFinance Management, Return on Capital Employed, 2020, https://efinancemanagement.com/financialanalysis/return-on-capital-employed-roce

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For working capital ratios being a measure of liquidity, reveal whether a company can meet its obligations. Therefore, an optimal working capital ratio is between 1.2 - 2 times the amount of current assets to current liabilities and anything higher could indicate an underutilisation of current assets. The case of low working capital can be an indication of two things. Generally, it can indicate that the business is just getting by and narrowly has enough capital to cover its short-term expenses. In other cases, however, a business with a solid operating model that is precise with knowing how much cash they require to operate efficiently may have low working capital after investing their excess cash to create investment income or fund growth projects thereby increasing the businesses total value. This is therefore in line with Adidas’ strategy and their heavy investment in branding thus indicating efficiency in terms of capital utilisation which of course needs to be carefully monitored so as not have an opposite affect if overspending occurs. For Puma, there is an opportunity to better utilise currents assets where the ratio comparatively is higher.

This is evident when looking at the inventory ratios. As this ratio measures the average number of days a company holds on to their inventory before selling it, we can see from Adidas they manage to sell their inventory on average, 12.5 days quicker than Puma. This could potentially be down to their investment in marketing and having a higher turnover. Additionally, inventory days increased for Adidas by 12.24 days whereas Puma saw an increase of 4.68 days respectively in comparison to 2018 meaning inventories are moving quicker despite still taking several days longer to move than Adidas’ merchandise.

For liquidity and solvency ratios, the interest cover ratio for Adidas reveals new debt due to the application of IFRS 16 making the liquidity ratio worse as compared from 2018 thus revealing a weakness. On the other hand, Puma did not take on new debt in 2019 so their liquidity ratio went down meaning they paid off some debt hence the interest ratio decreasing as compared from 2018 to 2019. The acid test reveals Adidas having fewer liquid assets and we can see this is still prevalent after IFRS adjustments. A ratio above 1 for Puma is favorable indicating liquid assets are available to pay their current liabilities. The acid test ratio is much lower than the current ratio indicating both companies are highly dependent on inventory.

In terms of the shareholder’s view, the RoE is a profitability ratio that measures how efficient an organization can use and therefore utilize the money from the shareholders, i.e., shareholders to generate profits, grow the company and therefore give a higher return to its shareholders. Although the RoE of Adidas is 29.01% in comparison to Puma which is

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13.66%, Puma, during 2019 managed to increase the RoE by 3% [2018 = 10.88% versus 2019=13.66%] whereas Adidas increase in 2019 was 2.23% [2018 = 26.78% versus 2019=29.01%]. This shows that Puma managed to use shareholders funds more efficiently during 2019. This is an important indication for currents shareholders as well for potential shareholders that are looking to invest.

EPS shows how much money a company makes for every share of its stock. Meaning, a higher EPS indicates higher value because investors will be willing to pay more for a company that has higher profits. Although the profit of Adidas for the year ending 31.12.2019 was €1,918M versus €262M of Puma, percentagewise, Puma had an increase of EPS of 40.8% from 2018 whereas Adidas 14.6%. For investors this is a much better indication when considering investing their money and seen as a more favorable investment.

3.3. Evaluation: Overall Assessment, Recommendation and Conclusion We have discussed Adidas’ position as the second largest global sports manufacturer and its relationship to Puma both operationally and financially. We have taken note of Adidas’ position and the intentions to focus on strategic objectives which will bring the desired effect of catapulting the company and surpassing its rival. This however will require great efforts as they recognize risk. So where does that leave Puma?

Puma has been evaluated as a robust, dynamic and competitive company successfully competing for a larger stake in the global domination of sports manufacturing. This is evident in the price-earning ratio for Puma being €41.57 as of 31.01.2020 compared to €28.19 for Adidas, valuing Puma’s shares at a 47.50% higher growth despite the share price being 4 times lower.

Puma has several strengths not only as a brand but as a global leader in sports manufacturing. The investment in collaborations with popular celebrities and athletes has improved their branding based on their sales. The sustainability programs and focus on performance is necessary to enable continued growth as experienced in 2019. Their RoE and EPS are a strength compared to Adidas and indicate a share that is very sought after by investors, so it is recommended that Puma continue investing and utilizing its assets towards marketing and branding as this will hel...