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.
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. 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 and profitability. adidas-group.com/s/coMPENSATION
Net sales and operating profit growth
While in 2022 net income from continuing operations was one of our major financial KPIs, 2023 will be a transition year where we will be focusing on incremental net sales generation and absolute operating profit stabilization.
Net sales growth is the reflection of the attractiveness of our product offering driven by innovation and our ability to identify and respond to latest consumer trends. To ensure that we have the most relevant information to assess our respective performance, we exclude foreign currency effects and use currency-neutral net sales growth as one of our major KPIs.
Operating profit as another major KPI helps to drive and improve our company’s operational performance. The primary drivers to enhance operating profit 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 include planning pricing and clearance activities according to market realities, optimizing our product and channel mix as well as managing product and supply chain costs.
- Operating expense control: Management puts high emphasis on tightly controlling operating expenses. This requires a particular focus on ensuring flexibility in the company’s cost base, especially in marketing and operating overhead expenses. More broadly, marketing expenditure 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 cultural marketing partners. 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.
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. SEE STATEMENT OF FINANCIAL POSITION AND STATEMENT OF CASH FLOWS
In this context, the major 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 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.
Other 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 KPIs that help us track our progress in areas that are important for our success as well. These KPIs are assessed on a regular basis and managed by the respective business functions. These other KPIs we are monitoring and that are also part of the strategic review we are currently conducting include, among others, the development of our member base, employee engagement, the share of female leadership, and our sustainable article offering.
We want to grow long-term relationships with our consumers. 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.
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 through our ‘Employee Listening Survey.’ SEE 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. SEE OUR PEOPLE
We have a strong commitment to enhance the environmental and social 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. To measure our progress, we have developed and implemented the 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 entire value chain including our own operations globally as well as monitoring and rating our supplier factories for environmental and social 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. SEE MANAGEMENT ASSESSMENT OF PERFORMANCE, RISKS AND OPPORTUNITIES, AND OUTLOOK SEE SUSTAINABILITY adidas-group.com/s/COMPENSATION ADIDAS-GROUP.COM/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.