Reebok 2011 Annual Report Download - page 120

adidas Group
2011 Annual Report
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
116
2011
Cost of capital metric used to measure investment
potential
Creating value for our shareholders by earning a return on invested
capital above the cost of that capital is a guiding principle of our Group
strategy. We source capital from equity and debt markets. Therefore,
we have a responsibility that our return on capital meets the expec-
tations of both equity shareholders and creditors. We calculate the
cost of capital utilising the weighted average cost of capital (WACC)
formula. This metric allows us to calculate the minimum required
financial returns of planned capital investments. The cost of equity is
computed utilising the risk-free rate, market risk premium and beta
factor. Cost of debt is calculated using the risk-free rate, credit spread
and average tax rate.
Structured performance measurement system
We have developed an extensive performance measurement system,
which utilises a variety of tools to measure the performance of the
adidas Group. The Group’s key financial metrics are monitored
and compared against budget as well as a rolling forecast on a
monthly basis. The focus is on operating cash flow, CACC, sales,
operating margin, operating working capital and net debt develop-
ment DIAGRAM 02 . 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
optimise the develop ment of the Group’s operating performance. We
also benchmark the Group’s financial results with those of our major
competitors on a quarterly basis. To assess current sales and profit-
ability development, Management analyses sell-through information
from our own-retail activities as well as short-term replenishment
orders from retailers.
Taking into account year-to-date performance as well as opportunities
and risks, the Group’s full year financial performance is forecasted
on a monthly basis. In this respect, backlogs comprising orders
received up to nine months in advance of the actual sale are also used
as an indicator. However, due to the growing share of own retail in
our business mix as well as fluctuating order patterns among our
wholesale partners, our order books are less indicative of anticipated
revenues compared to the past. Therefore, qualitative feedback from
our retail partners on the success of our collections at the point of sale
as well as data received from our own retail are becoming even more
important. Finally, as a further early indicator for future performance,
we also conduct market research to better measure brand appeal,
brand awareness and resulting purchase intent.
Enhanced integrated planning and management
approach
In order to further improve profitability and working capital efficiency
as well as operating cash flow development, in 2011 we started to
introduce an enhanced forecasting approach around full integration of
the major business functions such as marketing, sales and operations
at a market and global level. The centre-point of this approach is
improving the accuracy of future business planning, leading to a new
efficiency level of order book building and conversion. We connect
all relevant financial KPIs with the corresponding operational KPIs,
resulting in a comprehensive understanding of all interdependencies.
The whole process is set up in a rhythm and timeframe to facilitate
full management alignment and forecasting clarity in advance of
important business decision processes – in particular those related
to product pricing, range building, material purchasing or production
capacities. To create a seamless flow between achieving our strategic
objectives and implementing operational plans, we follow a rolling
two-year time horizon. All target-setting is fully embedded into the
integrated planning process and communicated in advance of all
relevant business decision processes.
03.1 Internal Group Management System
03.1
02 Key financial metrics
1) Excluding acquisitions and finance leases.
Gross margin Gross profit = × 100
Net sales
Operating margin Operating profit = × 100
Net sales
Average operating
working capital
Sum of operating working
capital at quarter-end
=
4
Operating working capital
in % of net sales
Average operating
working capital
= × 100
Net sales
Capital expenditure 1) =
Additions of property,
plant and equipment plus
intangible assets