Adidas 2002 Annual Report Download - page 94

92 REPORTING MANAGEMENT DISCUSSION & ANALYSIS /// OUTLOOK
GROSS MARGIN TARGET NARROWED TO BETWEEN 42 AND
43% /// The adidas-Salomon Group plans to deliver gross
margins in a range of 42 to 43% during 2003. This represents
a tighter range than we have given for the last two years and
reflects our confidence in the Group’s ability to continue to
improve its product mix and increase its proportion of adidas
own-retail sales. Gross margin in Europe will also be helped
by the improving euro/US dollar exchange rate, although it is
likely that a portion of this improvement will be compensated
for by gross margin declines associated with lower Japanese
yen/ US dollar and pound sterling/ US dollar exchange rates
and concessions that may need to be given to European
retailers as sourcing prices decline. As a result of these
developments, adidas-Salomon is now targeting near stable
gross margins in 2003.
OPERATING MARGIN IMPROVEMENT EXPECTED /// Operating
expenses as a percentage of net sales are expected to decline
in 2003. In 2003 and beyond, strict cost control will continue to
be a top priority throughout all divisions of the Group as part
of our ongoing efforts to achieve further efficiency improve-
ments. Cost-saving initiatives will gradually reflect selective
structural organization changes. One example of this is the
“Winning in Europe” project that is expected to significantly
streamline the adidas Europe organization over the next three
years. As a result, operating margin is expected to improve in
2003.
NET INCOME TO INCREASE 10 TO 15% /// As a result of all
the positive developments mentioned above, we expect an
acceleration of the Group’s earnings growth in 2003. We are
targeting 10 to 15% net income growth. The primary drivers of
this increase will be top-line improvements, a constant gross
margin and an improving operating margin.
CAPITAL EXPENDITURE WILL BE STABLE /// In 2003,
capital expenditure for the Group is expected to be between
€ 150 million and € 200 million and should remain relatively
constant for the next few years. Major projects for the year
include the expanded adidas own-retail activities and global
supply chain improvements, in particular IT hardware and
software.
EFFECTIVE CASH FLOW MANAGEMENT REMAINS A MAN-
AGEMENT PRIORITY /// The further optimization of working
capital levels and continued careful scrutiny of capital invest-
ments will remain a top Management priority in 2003. We are
committed to reducing working capital as a percentage of
net sales in 2003 and beyond. It is adidas-Salomon’s goal to
further decrease net borrowings by at least € 100 million per
year for the Group going forward.
SALOMON GROWTH TO RETURN IN 2003 /// 2003 will be
another important year for the repositioning of Salomon
towards a more seasonally-balanced group of brands. In
particular, we will put much stronger emphasis on footwear
and apparel products, which we believe should play an impor-
tant role in Salomon’s future profitability. On a regional level,
the strongest growth will come from North America as a
result of the improving outdoor footwear sales and the contin-
ued strength of Arc’Teryx. Product category increases are
again likely to be highest for apparel, where Salomon’s multi-
brand strategy and in particular Arc’Teryx will allow Salomon
to expand its outdoor technical apparel at double-digit rates.
Inline skate sales are expected to decline in light of the global
softening of this market.
OPERATING PROFIT GROWTH TO CONTINUE AT TAYLOR-
MADE-adidas GOLF DUE TO STABLE SALES DEVELOPMENT
/// At TaylorMade-adidas Golf, 2003 is expected to be a year of
business stabilization following the rapid growth of the last
three years. Successful integration of the Maxfli brand is criti-
cal to this effort. adidas Golf footwear and apparel categories
are likely to generate the highest growth rates, capitalizing on
the strength of the adidas brand in our golf business. Other
products to watch include the R500 Series and TaylorMade’s
new line of RAC irons.