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 proactively managing our asset base. 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 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 the 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 Management’s short- and long-term variable compensation components, which are closely linked to the company’s growth in sales and profitability. ADIDAS-GROUP.COM/S/COMPENSATION
Net sales and operating profit growth
Net sales growth is a reflection of the attractiveness of our product offering driven by innovation and our ability to create, identify, and respond to the 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 the potential to increase our gross margin. Major levers include reducing promotional activity, driving full-price sales, and managing product and supply chain costs.
- Operating expense control: Management puts an emphasis on ensuring efficiency and flexibility in the company’s cost base, especially in marketing and operating overhead expenses. 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 increasing investments into our brand and products as well as ensuring the effectiveness and efficiency of our marketing activities. We also aim to improve our operational efficiency by actively managing our operating overhead expenses. In addition to leveraging our top-line growth, we regularly review our organizational set-up to reduce complexity.
Cash flow and operating working capital management
Actively managing our liquidity, cash flow, and operating working capital remains a focus for us and continues to be monitored closely by Management. In general, 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 is comprised of 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 demand in our markets, ensure fast replenishment, and reduce promotional activity. 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 and accounts payable, we focus on managing collection efforts and payment terms.
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 the first step, Management defines focus areas and an overall investment budget based on investment requests from various functions within the organization. In the 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, 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, which assess the performance and operational success of our company, as outlined above, we have also identified a set of KPIs that help us track our progress in other areas we deem important for success. These KPIs are assessed on a regular basis and include, among others, employee engagement, the share of female leadership, and carbon intensity per product. SEE SUSTAINABILITY STATEMENT SEE MANAGEMENT ASSESSMENT OF PERFORMANCE, RISKS AND OPPORTUNITIES, AND OUTLOOK ADIDAS-GROUP.COM/S/COMPENSATION
Structured performance measurement system
We have developed an extensive performance measurement system that uses 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. 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 financial performance is assessed regularly. Finally, as an early indicator of future performance, the results of any relevant market or consumer research are assessed as available.