Internal Management System
We are committed to significant value creation – for our company and all its stakeholders. We strive to create value by converting sales and profit growth into strong operating cash flow, while at the same time managing our asset base proactively. Our company’s planning and controlling system is therefore designed to provide a variety of tools to assess our current performance and to align future strategic and investment decisions to best utilize commercial and organizational opportunities. As a result of our new strategy ‘Own the Game,’ our business is becoming significantly more cash generative than ever before. Consequently, we enhanced our internal management system. Strategy
INTERNAL MANAGEMENT SYSTEM DESIGNED TO DRIVE SHAREHOLDER VALUE
In order to drive and steer value creation, the company’s Management focuses on a set of major financial key performance indicators (KPIs). Sales and operating profit growth, paired with a focus on management of operating working capital, are the main contributors to operating cash flow improvements. At the same time, value-enhancing capital expenditure benefits future operating profit and cash flow development. In addition, the development of the company’s net income from continuing operations is of high importance as it directly drives returns in the interest of our shareholders. Our strong focus on value creation is reflected in the fact that our Management’s short- and long-term variable compensation is closely linked to the company’s growth in sales, profitability, and net income from continuing operations. Compensation Report
OPERATING MARGIN AS MAJOR KPI FOR OPERATIONAL PROGRESS
Operating margin (defined as operating profit as a percentage of net sales) is one of the major KPIs to drive and improve our company’s operational performance. It highlights the quality of our top-line and operational efficiency. The primary drivers to enhance operating margin are as follows:
- Sales and gross margin development: Management focuses on identifying and exploiting growth opportunities that not only provide for future top-line improvements but also have potential to increase our gross margin. Major levers for enhancing our sales and gross margin include:
- Planning pricing and clearance activities according to market realities
- Optimizing our product and channel mix
- Improving the quality of distribution, with a particular focus on our direct-to-consumer business
- Operating expense control: Management puts high emphasis on tightly controlling operating expenses to leverage sales growth through to the bottom line. This requires a particular focus on ensuring flexibility in the company’s cost base. This flexibility helped us manage the covid-19 pandemic in 2020 and 2021, when we adopted a disciplined approach to both marketing and operating overhead expenses. More broadly, is one of our largest operating expenses, and at the same time, one of the most important mechanisms for driving brand desirability and top-line growth. Therefore, we are committed to improving the efficiency of our marketing investments. This includes concentrating our communication efforts on key global brand initiatives and focusing our promotion spend on well-selected partnerships with top events, leagues, clubs, federations, athletes, and artists. We also aim to increase operational efficiency by tightly managing operating overhead expenses. In this respect, we regularly review our operational structure by harmonizing business processes, standardizing systems, eliminating redundancies, and leveraging the scale of our organization. expenditure
CASH FLOW AND OPERATING WORKING CAPITAL MANAGEMENT
Actively managing our liquidity, cash flow and operating working capital remains a key focus for us and continues to be monitored closely by Management. Generally, due to a comparatively low level of fixed assets required in our business, the efficiency of the balance sheet depends to a large degree on our operating working capital management. Operating working capital comprises accounts receivable plus inventories minus accounts payable. Statement of Financial Position and Statement of Cash Flows
In this context, the KPI we use is average operating working capital as a percentage of net sales. Monitoring the development of this metric facilitates the measurement of our progress in improving the efficiency of our business cycle.
We strive to proactively manage our inventory levels to meet market demand and ensure fast replenishment. Inventory aging is controlled carefully to reduce inventory obsolescence and to minimize clearance activities. As a result, ‘Inventory Days Lasting’ (IDL) is monitored and assessed regularly as it measures the average number of days goods remain in inventory before being sold, highlighting the efficiency of capital locked up in products. To optimize capital tied up in accounts receivable, we strive to improve collection efforts in order to reduce the ‘Days of Sales Outstanding’ (DSO) and minimize the aging of accounts receivable. Likewise, we strive to optimize payment terms with our suppliers to manage our accounts payable in the best possible way.
CAPITAL EXPENDITURE TARGETED TO MAXIMIZE FUTURE RETURNS
Improving the effectiveness of capital expenditure is another major lever to drive our cash flow generation. We control capital expenditure with a top-down, bottom-up approach. In a first step, Management defines focus areas within the framework of our strategy and an overall investment budget based on investment requests from various functions within the organization. Then, in a second step, our operating segments align their initiatives within the scope of assigned priorities and available budget. We evaluate potential return on planned investments utilizing the net present value method. Risk is accounted for by adding a risk premium to the cost of capital, and thus reducing our estimated future earnings streams where appropriate. By means of scenario planning, the sensitivity of investment returns is tested against changes in initial assumptions. For large investment projects, timelines and deviations versus budget are monitored on a monthly basis throughout the course of the project. In addition to optimizing return on investments, we evaluate larger projects upon completion and document learnings for future capital expenditure decisions.
FOCUS ON NET INCOME IN THE INTEREST OF OUR SHAREHOLDERS
We are committed to a continuous improvement in the company’s bottom line. Management closely monitors the development of net income from continuing operations and executes against this KPI. Our strong focus on driving sustainable expansion to the company’s bottom line is also reflected in the fact that, as the most significant part of the Long-Term Incentive Plan 2021/2025, the variable compensation for our Management is directly linked to the growth of the company’s net income from continuing operations. Compensation Report
STRATEGIC KEY PERFORMANCE INDICATORS
In addition to the major financial KPIs to assess the performance and operational success of our company, as outlined above, we have identified a set of strategic KPIs that help us track our progress in areas that are critical for our long-term success. The strategic KPIs also play a major role in measuring the success of our strategy ‘Own the Game’ for the period until 2025. These strategic KPIs are assessed on a regular basis and managed by the respective business functions. Strategic KPIs we are monitoring include, among others, women’s business and DTC share of net sales, e-commerce net sales, the development of our member base, our sustainable article offering, employee engagement, and the share of female leadership.
With our strategy ‘Own the Game,’ we have identified several areas that are of particular strategic relevance in addition to the already existing focus on net sales:
- We aim at driving overproportionate growth in our women’s business to increase its overall share.
- Through our focus on DTC, we defined the share of our DTC business in relation to total net sales as our metric to measure the success of our strategy.
- With e-commerce being an integral part of our growth plans, we monitor and assess the absolute net sales amount for this channel on a regular basis. Strategy
We want to grow long-term relationships with our consumers who are at the center of our strategy ‘Own the Game.’ Our membership program offers personalized experiences and rewards our most valued consumers’ engagement and purchasing activity. Therefore, our goal is to increase the member base over the years, and its growth serves as the metric to measure our success. Strategy
EMPLOYEE ENGAGEMENT AND EXPERIENCE
We are convinced that listening to employees plays a crucial role in our pursuit of creating a best-in-class employee experience and continuing to attract and retain top talent. We can only tell if we are successful by asking our people, hence we empower them to share their feedback. We launched the ‘Employee Listening Survey’ in 2021 – our new approach to measure the level of employee engagement and experience that adidas provides as an employer. Our People
Through our focus on Diversity, Equity, and Inclusion, we are committed to providing an equal starting line for all our people, ensuring that everyone has the same career opportunities. One of our commitments is to increase the share of women in management positions (Director level and above) globally to more than 40% by 2025. Our People Strategy
We have a strong commitment to enhance the social and environmental performance of our company. By doing so, we firmly believe we will not only improve the company’s overall reputation but also increase its economic value. We therefore made sustainability one of the focus areas in our strategy ‘Own the Game.’ To measure our progress, we have developed and implemented the strategic KPI ‘Sustainable Article Offering.’ In addition, we have already been following a comprehensive roadmap with clear targets for years, and regularly track our progress toward these targets with regard to the environmental and social impact. We are measuring the environmental footprint of our own sites globally as well as monitoring and rating our supplier factories with regard to social and environmental compliance with our Workplace Standards. We have a long-standing commitment to sustainability disclosure, providing regular updates about our sustainability performance in this Annual Report as well as on our corporate website. MANAGEMENT ASSESSMENT OF PERFORMANCE, RISKS AND OPPORTUNITIES, AND OUTLOOK Sustainability Strategy Compensation Report-group.com/s/sustainability
STRUCTURED PERFORMANCE MEASUREMENT SYSTEM
We have developed an extensive performance measurement system, which utilizes a variety of tools to measure the company’s performance. Key performance indicators and other important financial metrics are regularly monitored and compared against initial targets as well as rolling forecasts on a monthly basis. When negative deviations exist between actual and target numbers, we perform a detailed analysis to identify and address the cause. If necessary, action plans are implemented to optimize the development of our operating performance. To assess current sales and profitability development, Management continuously analyzes the performance of our operating segments. We also benchmark our financial results with those of our major competitors on a regular basis.
Taking into account the year-to-date performance as well as opportunities and risks, the company’s expected full-year financial performance is assessed on a monthly basis. Finally, as a further early indicator for future performance, the results of any relevant recent market and consumer research are assessed as available.
Expenditure that relates to point-of-sale and marketing investments. While point-of-sale investments include expenses for advertising and promotion initiatives at the point of sale as well as store fittings and furniture, marketing investments relate to sponsorship contracts with teams and individual athletes as well as to advertising, events and other communication activities. Marketing overhead expenses are not included in marketing expenditure.