adidas AG :ADS-DE: Earnings Analysis: 2016 By the Numbers : March 15, 2017

adidas AG reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of adidas AG – PUMA SE, IC Group A/S and Jimmy Choo PLC (PUM-DE, IC-DK and CHOO-GB) that have also reported for this period.

Highlights

  • Gross margins widened from 46.30% to 46.71% compared to the same period last year, operating (EBITDA) margins now 8.14% from 10.35%.
  • Year-on-year change in operating cash flow of 23.33% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 19291 16915 14534 14492 14883
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 1016 680 558 787 526
Earnings Growth (YOY) 49.41 21.86 -29.1 49.62 -14.19
Net Margin 5.27 4.02 3.84 5.43 3.53
EPS 4.99 3.3 2.35 3.76 2.51
Return on Equity 16.79 12.07 10.05 14.61 9.9
Return on Assets 7.13 5.25 4.62 6.77 4.57

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Earnings Growth Analysis

The company’s earnings growth has been influenced by the year-on-year improvement in gross margins from 46.30% to 46.71%. However the company’s overhead costs have prevented it from fully capitalizing on these gross margin improvements. In fact, the company’s operating margins (EBITDA margins) showed no improvement over the same period last year.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ADS-DE‘s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days have declined to 40.24 days from 55.05 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

ADS-DE‘s change in operating cash flow of 23.33% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s operating (EBIT) margins contracted from 8.35% to 6.20%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 6.14% to 7.49%.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

adidas AG engages in design, distribution and marketing of athletic and sporting lifestyle products. It operates through the following segments: Western Europe, North America, Greater China, Russia or CIS, Latin America, Japan, Middle East, South Korea, Southeast Asia orPacific, TaylorMade-adidas Golf, Reebok-CCM Hockey, Runtastic, and Other Centrally Managed Businesses. The TaylorMade-adidas Golf segment includes designs, develops, and distributes primarily golf clubs, balls and accessories. The Reebok-CCM Hockey segment engages in designs, produces, and distributes ice hockey equipment such as sticks, skates, and protection gear. The Runtastic segment provides a comprehensive ecosystem for tracking and managing health and fitness data. The Other Centrally Managed Brands segment involves in the business activities of labels Y-3 and Porsche Design Sport by adidas. The company was founded by Adolf Dassler in 1920 and is headquartered in Herzogenaurach, Germany.

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