Reebok 2011 Annual Report Download - page 118

adidas Group
2011 Annual Report
GROUP MANAGEMENT REPORT – FINANCIAL REVIEW
114
2011
03.1 Internal Group Management System
Internal Group Management System
The principal financial goal for increasing shareholder value at the adidas Group is maximising operating
cash flow. We strive to achieve this goal by continually improving our top- and bottom-line performance
while at the same time optimising the use of invested capital. Our Group’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 utilise commercial and organisational opportunities.
03.1
Operating cash flow as Internal Group Management focus
We believe operating cash flow is the most important driver to increase
shareholder value. Operating cash flow is comprised of operating
profit, change in operating working capital and net investments
(capital expenditure less depreciation and amortisation) DIAGRAM 01 .
To maximise operating cash flow generation across our organisation,
management of our operating segments together with management
at market level have responsibility for improving operating profit as
well as optimising operating working capital and capital expenditure.
To keep senior management focused on long-term performance
improvements we have adopted a modified economic value added (EVA)
model. The asset base of a market or operating unit within the Group
is subject to a percentage capital charge to the operating profit of the
respective business unit. The asset base includes operating working
capital as well as other assets needed by a market or operating unit in
its day-to-day operations. The resulting internal KPI is called Contri-
bution After Capital Charge (CACC) and is used as one of the primary
targets for the variable component of managers’ compensation. This
concept has been in place Group-wide since 2010.
01 Operating cash flow components
Operating profit
Operating
cash flow
Change in operating working capital
Net investments 1)
1) Capital expenditure less depreciation and amortisation.
Operating margin as important KPI of operational
progress
Operating margin (defined as operating profit as a percentage of net
sales) is our Group’s most important measure of operational success.
It highlights the quality of our top line and operational efficiency. The
primary drivers central to enhancing operating margin are:
– Sales and gross margin development: Management focuses on
identifying and exploiting opportunities that not only provide for
future growth, but also have potential to increase gross margin
(defined as gross profit as a percentage of net sales). Major levers
for enhancing our Group’s sales and gross margin include:
– optimising our product mix
– increasing the quality of distribution, with a particular focus on
controlled space
– minimising clearance activities
– realising supply chain efficiency initiatives
– Operating expense control: We put high emphasis on tightly
controlling operating expenses to leverage the Group’s sales
growth through to the bottom line. This requires a particular focus
on ensuring flexibility in the Group’s cost base. Marketing working
budget is our largest operating expense. It is one of the most
important mechanisms for driving top-line growth sustainably.
Therefore, we are committed to improving the utilisation of our
marketing expenditure. This includes concentrating our communi-
cation efforts (including advertising, retail presentation and public
relations) on key global brand initiatives and focusing our promotion
spend on well-selected partnerships with top events, leagues, clubs
and athletes.
We also aim to increase operational efficiency and reduce operating
overhead expenses as a percentage of sales. In this respect, we
regularly review our operational structure – streamlining business
processes, eliminating redundancies and leveraging the scale of our
organisation. These measures may also be supplemented by short-
term initiatives such as temporarily curtailing operational invest-
ments, for example staff hiring.