Adidas 1997 Annual Report Download - page 9

7
EXCHANGE RISKS HEDGED
During the last fiscal year, currency risk was
again minimized for the most part through
hedging contracts. It is the Company’s policy
to hedge up to 90% of its seasonal purchas -
ing volume up to one year in advance with
a variety of hedging instruments. In addition
to forward contracts, which are arranged
primarily for shorter periods, the Company
employed, and continues to employ, various
forms of currency options to manage its
cur
rency exposure. The impact of such con-
tracts,
which have their effect at the time of
the underlying commercial
transactions, is
reflected in cost of sales and consequently
influences gross margin.
OPERATING RESULT IMPROVED
BY TWO THIRDS
The operating result increased by 66.9%
year-over-year. Selling, general and adminis-
trative expenses (SG&A) including deprecia-
tion grew slightly faster than net sales and
increased by 45.6% (44.2% after elimination
of the expense related to a special reward
and incentive plan for Management). The
increase in SG&A, however, was more than
offset by the improvements in gross margins,
leading to the higher operating result.
Spending related to promotion and adver-
tising increased by 48%. These expenses
account for a total of 12.8% of net sales
(1996: 12.3%). Additional expenditure was
primarily incurred in the United States. Through
new contracts, adidas is represented for the
first time in all major professional leagues of
the traditional American sports – expenditure
which in the long term will represent a major
building block for success in the world’s most
important sporting goods market.
Depreciation and amortization increased by
29% to DM 80 million, reflecting both higher
depreciation on equipment, in particular furni-
ture and fittings and computer hardware, and
slightly higher goodwill amortization.
ROYALTY AND COMMISSION INCOME
DECLINED
Royalty and commission income decreased by
12% to DM 85 million in 1997. This develop-
ment is in line with the Company’s policy not
to extend licensee and distributor agreements
upon expiry and to assume full control of dis-
tribution instead. One of the factors affecting
royalty and commission income for fiscal 1997
was the loss of royalty income from South
Korea (DM 7 million in 1996). The South Korean
market is now served by a joint vent ure .
DECREASE IN THE
NET FINANCIAL RESULT
The net financial result declined substantially
to a loss of DM 31 million in 1997 compared to
a loss of DM 13 million in 1996. The interest
balance remained essentially unchanged
at negative DM 33 million (1996: negative
DM 34 million).
Management Discussion and Analysis
nGross profit in % of net sales
nChange year-over-year in %
1993 1994 1995 1996 1997
Gross Margin
(%)
45
40
35
30
25
20
15
10
5
n
n
n
n
n
n
n
n
n
n
1995 1996 1997
Income from Operations
and SG&A
(%)
170
70
60
50
40
30
20
10
n
n
n
n n n
nIncome from operations,
change year-over-year in %
nSG&A in % of net sales