Berenberg Capital Markets Equity Research Game plan adidas – Buy (initiation) Puma – Hold (initiation) John Guy Analyst +44 20 3465 2674 john.guy@berenberg.com Bassel Choughari Analyst +44 20 3465 2675 bassel.choughari@berenberg.com Rupert Trotter Specialist Sales +44 20 3207 7815 rupert.trotter@berenberg.com 25 April 2013 Sporting Goods For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document. Sporting Goods Table of contents Game plan 4 Market dynamics 5 Routes to 2015 18 Margin and costs metrics 42 Innovation is essential “skin in the game” 45 Commodity cost pressure or relief? 55 Sporting goods events and share price performance 58 Currency 66 Company KPIs 68 Valuation 71 adidas 76 Financials 101 Puma 104 Financials 127 Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) 130 Contacts: Investment Banking 133 3 Sporting Goods Game plan ● We initiate coverage of adidas and Puma. Both companies are in the ● ● ● ● process of implementing 2015 investment strategies. We believe adidas is at an advanced stage in planning, execution and delivery of its targets compared with Puma. However, we acknowledge the possibility of majority shareholder Kering Group (formerly PPR) acquiring the remaining 17.6% stake in Puma that it does not own at a premium to the current share price, hence Puma’s special situation. adidas offers investors a three-year (FY12-15E) sales and EPS CAGR of 5.5% and 23.2% respectively. We expect adidas to increase its share of the global sporting goods market by 560bp, outperforming average market growth of 1.5x global GDP (FY12-15E). We view FY13 as a transitional year with greater operating leverage expected in FY14 and FY15. According to our analysis, adidas ought to exceed its 2015 sales target of €17bn by c.3% to €17.5bn and outperform its FY15 11% EBIT margin target by 90bp. Our FY15 earnings estimates are c.13% ahead of Bloomberg consensus. We initiate with a Buy rating and a €95 price target, providing 25% upside versus current levels. We view Puma as a special situation. Kering currently owns 82.4% of Puma, which has recently experienced footwear market share losses, management departures and weak operating performance. In our view, Puma’s earnings rehabilitation will be accelerated by Kering’s Jean-Francois Palus and a new Puma management team under recently appointed CEO, Bjorn Gulden. However, the pertinent questions remain: how Puma will arrest declining market share and attract quality senior management? If Kering acquires the outstanding 17.6% of Puma’s remaining shares in order to fully access Puma’s balance sheet (FY12 net cash: €249m) and increases the 12-year average pay-out ratio of 13.8% more in line with peers (adidas’s FY12 pay-out ratio was 35.7% compared with a 12-year average of c.24%), we would expect Kering to pay a premium for the outstanding shares. adidas trades on FY13E and FY14E P/Es of 16.1x and 13.2x compared with its seven-year average P/E of c.17x. According to our analysis, adidas has the lowest PEG in the sector at 0.5x versus our market capitalisation weighted average of 1.3x and Puma’s 1.7x. Our €95 target price, based on our P/E analysis and driven by our earnings and cash flow forecasts implies CY13E and CY14E P/Es of 20.1x and 16.6x and is supported by our DCF (€98 assuming 9% WACC and 3% terminal growth). We expect adidas to take 560bp global sporting goods market share (FY12-15E) and drive robust positive operating leverage from FY14 onwards on the back of improved retail/wholesale mix, sourcing, supply and distribution efficiencies. Puma currently trades on FY13E and FY14E P/Es of 16.5x and 14.4x versus its seven-year average of 14.0x. According to our analysis, Puma has the highest PEG versus global peers at 1.7x compared with our market capitalisation average (FY12-15E) of 1.3x and adidas’s at 0.5x (Nike: 1.5x). Our €235 price target, based on our P/E analysis and driven by our earnings and cash flow forecasts, implies CY13E and CY14E P/Es of 17.0x and 14.9x respectively, supported by our DCF (€237 assuming 9% WACC and 3% terminal growth). We acknowledge EBIT margin upside risk in 2014 driven by short-term accelerated restructuring/cost rationalisation as opposed to material market share gains. Moreover, we do not rule out the possibility of Kering acquiring the outstanding free float at a premium to current share price levels. adidas Buy (initiation) Current price EUR75.90 Price target EUR95.00 19/04/2013 Frankfurt Close Puma Hold (initiation) Current price EUR228.00 Price target EUR235.00 19/04/2013 Frankfurt Close Rating system: Absolute 25 April 2013 John Guy Analyst +44 20 3465 2674 john.guy@berenberg.com Bassel Choughari Analyst +44 20 3465 2675 bassel.choughari@berenberg.com Rupert Trotter Specialist Sales +44 20 3207 7815 bassel.choughari@berenberg.com 4 Sporting Goods Market dynamics In our view, global sporting goods companies such as Nike and adidas tend to combine internal and external sources in order to assess global sporting goods market size, share evolution, strengths and opportunities. We believe that Euromonitor defines the global sporting market best as the “aggregation of performance, outdoor and sports inspired clothing and footwear”, adding: “Sportswear includes products for all ages including sportswear for children. Sportswear includes items across all clothing and footwear categories such as shorts, trousers, dresses, skirts, tops, jumpers, jackets, coats, track suits/athletic sets, underwear, swimwear, hosiery, clothing, accessories including headwear, gloves and scarves.” We note that the definition highlights the split between performance and lifestyle categories as well as incorporating category ranges for apparel, footwear, hardware and accessories. According to our estimates, the sporting goods market generated a five-year sales CAGR of 4.3% between 2007 and 2012 and is expected to grow at an estimated three-year sales CAGR of 4.1% from 2012 to 2015. Global sporting goods market value (€m) and estimated growth (%) Source: Berenberg estimates At first glance, it would appear that global sporting goods market growth is cyclical, given the shape of growth within the backdrop of the financial/credit crisis from 2007 to 2010. However, we note that the sporting goods market achieved average annual sales growth at 2.2x the pace of global GDP from 2007 to 2012, which supports our view that the sporting goods market demonstrates cyclical but also secular growth trends supported by health and well-being regimes within a gradually ageing demographic. We believe that the sporting goods market will continue to grow at a faster rate than global GDP, with market share winners such as adidas and Nike growing at above-average sporting goods market growth rates. Our global sporting goods average multiplier from 2012-15E implies 1.5x growth versus global GDP, with adidas at 2.2x versus global GDP, Nike at 2.8x versus global GDP and Puma at 1.6x versus global GDP. 5 Sporting Goods Global sporting goods FX neutral growth (%) vs. adidas, Nike and Puma and implied multiples Real global GDP growth (%) Sporting goods multiplier 2010 4.0 1.8x 2011 2.9 3.1x 2012 2.2 1.8x 2013E 2.4 1.6x 2014E 3.2 1.4x 2015E 3.0 1.4x Global sporting goods (FX neutral) % adidas growth (FX neutral) % adidas implied multiplier Puma growth (FX neutral) % Puma implied multiplier Nike growth (FX neutral) % Nike implied multiplier 7.1 9.0 2.3x 3.6 0.9x 5.4 1.4x 8.9 13.0 4.5x 12.1 4.2x 12.3 4.2x 4.0 6.0 2.7x 4.6 2.1x 7.5 3.4x 3.9 5.0 2.1x 2.2 0.9x 6.5 2.7x 4.3 6.5 2.1x 5.2 1.6x 7.4 2.3x 4.1 6.4 2.1x 4.8 1.6x 8.0 2.7x Source: Berenberg estimates, company data We acknowledge the opportunity for Kering to fully acquire the outstanding free float in Puma (Kering currently owns 82.4% of Puma) in order to fully utilise the balance sheet (FY12 net cash of €249m, forecast to increase to €446m by FY13E) and increase the lowly pay-out ratio of 10.7% (adidas’s FY12 pay-out ratio increased from 34.1% in FY11 to 35.7% in FY12). Historically, Nike has dominated key sporting goods market regions such as the US. We note that the Nike brand had more than a 30% higher sales base versus adidas and a c.380% higher sales base versus Puma for respective FY11 reporting periods (Nike: May 2011; adidas: December 2011; and Puma: December 2011). The adidas brand increased currency neutral sales by 10% (15% on a reported basis) to €11,344m with e-commerce sales up 78% during the year as management continues to focus on key “attack markets” such as North America, Greater China and CIS/Russia. As the second-largest global sporting goods retailer, adidas has relatively low market share in the US – for example, we estimate adidas apparel brand North American market share in US dollars was just over 4% at a wholesale level (excluding adidas’s TaylorMade-adidas Golf (TMAG) brand and Reebok) in 2011 compared with Nike at c.8%, hence we view the North American market as a great opportunity for the adidas brand given its low share base within the largest and arguably the most dynamic sporting goods market. Moreover, adidas’s regional profitability remains well below the group average (we estimate an FY12 US EBIT margin of less than 6.0% compared with a group EBIT margin of 8.0%). We expect adidas to gain incremental share in this highly competitive market as part of its Route 2015 investment strategy, which is focused on building brand loyalty from the grass roots upwards, principally through connecting US high school children at an early age and acting as clothing and footwear sponsors to high-school football (American football), basketball, soccer, lacrosse, athletic and other sporting/fitness teams. We highlight below the strong progress adidas has made through increasing its North American high school kids (HSK) focus channels from 2009 to 2012 and note the sales channel splits as of August 2012. As more emphasis is placed on retail/shopping mall store destinations as well as shop-in-shop formats inside key wholesalers, so we expect brand momentum, market share and price/mix to improve through adidas’s increasing US retail exposure. 6 Sporting Goods adidas HSK focus channels (%) adidas US channel sales (August 2012) 100% 80% 60% 60% 53% 49% 40% 47% 51% 2009 2010 38% 23% 74% 40% 20% 62% 3% 0% 2011 HSK focus channels 2012 Other channels Wholesale Retail ecomm Source: Berenberg Bank estimates, company data We highlight below the historical global sporting goods market growth and forecast growth versus adidas, Puma and Nike (Bloomberg consensus growth calendarised). Berenberg estimated market growth vs. adidas, Nike and Puma (local FX) 15.0 10.0 5.0 0.0 -5.0 -10.0 2007 2008 2009 adidas 2010 2011 Puma 2012 Nike 2013E 2014E 2015E Market Source: Berenberg Bank estimates, company data, Euromonitor, Bloomberg estimates (Nike) We expect Puma to underperform the market in 2013 by 170bp and we await further details of the new management team (CFO and senior management) structure, which should come to light within the next few months. Forecasted out/underperformance vs. global sporting goods (bp) 2007-15E 500 400 300 200 100 0 -100 -200 -300 -400 2007 2008 2009 2010 adidas 2011 Puma 2012 2013E 2014E 2015E Nike Source: Berenberg Bank estimates, Euromonitor 7 Sporting Goods Assessing the key players By way of background and in order to better understand sales growth and market share opportunities for the three largest global sporting goods players (Nike, adidas and Puma), we compare adidas, Puma and Nike sales exposure by region, brand, channel and product category. As Nike has a May year-end, preliminary tables show FY11 reporting periods for the three brands respectively. Puma vs. adidas (FY11) Puma Sales (EURm) % group (EURm) % group 1,312 44% Western Europe 3,922 29% Americas 967 32% Eastern European EM 1,597 12% Asia/Pacific 730 24% North America 3,102 23% Greater China 1,229 9% Other Asian Markets 2,103 16% Latin America 1,369 10% Total 13,322 100% By region EMEA Total By region 3,009 100% 515 17% Retail 2,793 21% 2,494 83% Wholesale 8,949 67% Other businesses 1,580 12% Total 13,322 100% By channel Retail Wholesale Total adidas Sales By channel 3,009 100% By product By product Footwear 1,540 51% Footwear 6,242 47% Apparel 1,036 34% Apparel 5,733 43% Accessories Total 434 3,009 14% 100% Hardware Total 1,347 13,322 10% 100% adidas 9,867 74% Reebok 1,962 15% TMAG 1,044 8% 261 2% By brand Rockport 188 1% Total 13,322 100% Group total 13,322 Reebok-CCM Hockey Group total 3,009 Source: Berenberg estimates, company data We outline Nike FY11 (May year-end) below and note that Nike brand (FY11) sales were c.32% greater in euros (assuming an average US dollar/euro May 2010 to May 2011 exchange rate of 0.7165) versus the adidas brand in 2011 and c.380% greater than the Puma brand (assuming 90% of total sales are Puma brand). 8 Sporting Goods Nike FY11 (May year-end) sales splits (USDm) Nike Sales (USDm) % of group % of Nike brand Western Europe 3,868 19% 21% Central & Eastern Europe 1,040 5% 6% North America 7,579 36% 42% Greater China 2,060 10% 11% By region Japan Emerging markets Global Brand Divisions 766 4% 4% 2,736 13% 15% 96 0% 1% Nike Brand 18,145 Other businesses 2,786 13% -69 0% 20,862 100% Corporate Nike group 100% By channel Wholesale 15,173 84% Retail 2,876 16% 96 1% 18,145 100% Global Brand Divisions Nike Brand By product Footwear 11,518 55% 63% Apparel 5,513 26% 30% Equipment 1,018 5% 6% 96 0% Global Brand Divisions Nike Brand 18,145 Other 2,786 13% -69 0% 20,862 100% Nike 18,145 87% Converse 1,131 5% Nike Golf 658 3% Cole Haan 521 2% Hurley 252 1% Umbro 224 1% Corporate Nike group 1% 100% By brand -69 0% Nike group 20,862 100% Group total 20,862 Nike brand total 18,145 Other Source: Berenberg estimates, company data We acknowledge that both adidas and Puma have recently reported FY12 results, hence our more recent side-by-side analysis below. 9 Sporting Goods Puma vs. adidas (FY12) Puma Sales (EURm) % group By region adidas Group Sales (EURm) % group By region EMEA 1,302 40% Western Europe 4,076 27% Americas 1,127 34% Eastern European EM 1,947 13% 842 26% North America 3,410 23% Greater China 1,562 10% Asia/Pacific Total 3,271 100% By channel Retail Wholesale Total Other Asian Markets 2,407 16% Latin America 1,481 10% Total 14,883 100% By channel 624 21% Retail 3,373 23% 2,647 88% Wholesale 9,533 64% Other businesses 1,977 13% Total 14,883 100% 3,271 109% Footwear 1,595 49% Footwear 6,922 47% Apparel 1,152 35% Apparel 6,290 42% 524 16% Hardware 1,671 11% 3,271 100% Total 14,883 100% adidas 11,344 76% Reebok 1,667 11% TMAG By product Accessories Total By product By brand Group total 3,271 1,344 9% Rockport 285 2% Reebok-CCM Hockey 243 2% Total 14,883 100% Group total 14,883 Source: Berenberg estimates, company data We reference Euromonitor market share analysis in order to highlight historical adidas, Nike and Puma global market share evolution versus global peers – we note that the global sporting goods market size factors both retail and wholesale channels and compares market share evolution from 2007 to 2012. Of the top 10 players, Nike and adidas have been the two largest share winners over the past five years (2007-2012). Nike increased its global sporting goods market share by 200bp to 14.7% over this five-year period, with adidas gaining 140bp incremental market share to 11.5%. Of the top 10 global players, Puma was one of only two companies to lose share, dropping 10bp to 2.1%. VF Corp acquired Timberland in September 2011 for a total consideration of $2.3bn ($43 per share) creating a $10bn apparel, footwear and sportswear company, hence the incremental 100bp of market share gained from 2010 to 2011 to 2.6%. Smaller winners included Asics (+20bp to 1.1%), Mizuno (+50bp to 1.1%) and Under Armour (+40bp to 0.8%). Of the top 10 global players, Skechers USA lost the most market share (down 30bp to 0.7%) and more recently its auditor, KPMG. 10 Sporting Goods Top 10 and others share (2007) Top 10 and others share (2012) Nike 13% Nike 15% adidas 10% Others 72% Others 68% adidas 11% VF Corp 2% Puma 2% Asics 1% VF Corp 3% Asics 1% Puma 2% Source: Berenberg Bank estimates, Euromonitor We expect size and scale advantages to prevail for Nike and adidas. In addition, we explore what it means to innovate in this sector, concluding that major new innovations not only assist with favourable price/mix evolution but represent the “essential skin in the game” required to continue to drive sales volumes higher across a broad range of sales categories and platforms. Furthermore, in our view, innovation remains the key to helping consumers identify with specific brands and allowing companies to significantly leverage higher gross margin lifestyle collections on the back of successful global performance-based product launches. Top four global sporting goods market share evolution (%) (2007-2012) 16.0 14.0 12.0 10.0 14.1 13.5 12.7 10.9 10.1 11.5 11.3 10.7 10.4 14.7 14.0 13.7 8.0 6.0 4.0 2.0 0.0 1.6 2.2 2007 Nike Inc 1.5 2.2 1.5 2.2 2008 2009 adidas AG 1.6 2010 VF Corp 2.2 2.6 2.2 2011 2.6 2.1 2012 Puma/ PPR SA Source: Berenberg Bank estimates, Euromonitor Without sufficient investment in major new innovations (performance-related) coupled with the appropriate air time to showcase the products via global sporting icons, we believe that smaller sporting goods players will continue to become marginalised – take Nike’s Air-Jordan in the 1990s (now the Jordan brand exists in its own right under the Nike parent brand), adidas’s Predator football boot in the 2000s and Puma’s Sparco driving shoe collection, also during the 2000s. Even the largest global players can afford to invest in “anti-big-brand” brands such as the Converse brand (part of Nike), thereby squeezing out niche players while at the same time appealing to the anti-sporting-goods establishment consumer. We believe that market share downside risk remains for Puma as the company has focused too much on higher-margin lifestyle collections without the necessary investment in performance goods over the past few years. As a result, we expect 11 Sporting Goods fast-fashion/fashion retailers such as H&M, Inditex, Lacoste and Boss to compete more closely with Puma and take share. Secular growth drivers H ealth, fitness and well-being As global longevity increases with a greater focus on a health and well-being, so we expect sport and fitness to play a greater role in consumers’ lives. We highlight sustainable high single-digit to low double-digit CAGR rates for the global consumer trends relating to reduced fat and salt content, healthy/well-being, nutritional and sport-related food products. Reduced salt content demand expected to continue at c.12% (FY12-17E) 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 - 2.59 2.02 2.32 2005 4.17 3.03 3.28 3.36 2007 2009 4.75 2011 5.45 2013E 6.21 6.95 2015E Asia Pacific Australasia Eastern Europe Latin America North America Western Europe 7.82 8.34 2017E Source: Berenberg Bank estimates, Euromonitor We note that the expected demand CAGR (FY12-17E) for reduced fat content at 5.3% is expected to increase at a faster rate when compared with demand for global sporting goods products (FY12-15E) of 4.1%. Reduced fat content demand CAGR ahead of global sporting goods growth 140 120 100 80 60 40 20 0 114.8 121.1 103.5 108.9 98.5 90.2 93.7 80.4 82.8 86.3 73.8 65.7 69.1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Asia Pacific Australasia Eastern Europe Latin America Middle East & Africa North America Western Europe Source: Berenberg Bank estimates, Euromonitor 12 Sporting Goods Global sales ($bn) CAGR (FY12-17E) for sports nutrition products 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 - 40.1 34.1 36.0 36.2 28.1 31.3 2005 2007 2009 51.6 44.1 47.8 2011 63.3 55.8 59.6 2013E 2015E Asia Pacific Australasia Eastern Europe Latin America Middle East & Africa North America 67.5 2017E Western Europe Source: Berenberg Bank estimates, Euromonitor Health and well-being ($bn) CAGR (FY12-17E) vs. sporting goods CAGR of 4.1% 6,000 5,000 4,000 3,000 2,000 1,000 - 2005 2007 2009 2011 2013E 2015E 2017E H&W Packaged Food & Beverages Non-H&W Packaged Food & Beverages Source: Berenberg Bank estimates, Euromonitor We appreciate that estimated demand CAGR for more healthy and sportingrelated food and beverages are above our forecasted FY12-15E sporting goods CAGR of 4.1%. As the global population ages for longer, demand for healthier products should rise at a more secular growth rate compared with sporting good demand, which is more cyclical in nature given its reliance on major sporting goods events to act as product launch/demand catalysts. Our future sporting goods growth forecasts are slightly lower compared with historic sales CAGR (FY07-12) of 4.3% according to Euromonitor. However, relative to the market share winners such as adidas and Nike, sales CAGR rates for healthy, sporting and nutritional food and beverages are more closely aligned (adidas’s FY10-15E CAGR is 7.8% versus a FY12-15E CAGR of 5.5%). 13 Sporting Goods An ageing demographic coupled with forecast global population growth above sporting goods demand According to the United Nations’ Population division, global population growth is forecast at c.11% from 2010-15E compared with a 7.8% adidas group sales CAGR, 5.9% for Puma and 9.0% for Nike over the same period. Our future sales CAGR estimates for the industry (4.1%) appear to be well supported by both global population and health/well-being consumer trends. United Nations’ forecast global population growth (%) 23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 18.1 18.318.5 20.7 19.6 17.717.6 17.4 15.2 13.4 12.2 11.6 11.0 10.0 8.9 7.8 2025-2030 2020-2025 2015-2020 2010-2015 2005-2010 2000-2005 1995-2000 1990-1995 1985-1990 1980-1985 1975-1980 1970-1975 1965-1970 1960-1965 1955-1960 1950-1955 WORLD Source: United Nations’ Population Division, Berenberg Bank estimates We believe that major sporting companies (with size and scale) possess the ability to outpace market growth over the mid- to long term, and under-represented regions (such as North America for adidas) provide for faster growth albeit from a lower base. Major sporting events incite passion, loyalty and reinforce global brands In our view, major sporting events not only provide entertainment for millions, they also allow leading sporting goods companies to showcase their latest performance and lifestyle-related products, which are worn by the world’s leading sportsmen, women and youth teams across a broad range of sporting categories. All major sporting goods manufacturers and retailers have long since endorsed sporting icons to assist with marketing and brand enhancement, a trend we expect to continue for those sporting goods players which have the size and scale to invest in this expensive but necessary marketing medium. We note that Puma has recently cut back on endorsement-related spending in an effort to improve shortterm profitability. In the mid- to long term, we believe that incremental sporting icon/endorsementrelated investment will be driven by the ongoing facilitation of global sporting event accessibility either through traditional media (television, radio and newspapers) and/or via newer/faster digital and social media forums. According to PricewaterhouseCoopers LLP and Wilkofsky Gruen Associates, the total sporting goods media and event three-year sales CAGR ought to reach 5.4% (FY12-15E) across all formats (gate revenues, media rights, sponsorships and merchandising), which is ahead of our 4.1% sporting goods sales CAGR forecast (4.1%). By format, media rights and sponsorship stand out as the fastest growth categories. 14 Sporting Goods Global sports market by format – ongoing events ($m) 2010 2011 2012E 2013E 2014E 2015E CAGR 2012-15E 38,842 38,761 39,785 41,317 42,794 44,359 3.7% % growth 0.0% -0.2% 2.6% 3.9% 3.6% 3.7% % total 34% 33% 32% 32% 31% 31% 25,459 26,850 28,460 30,062 33,507 35,106 3.6% 5.5% 6.0% 5.6% 11.5% 4.8% Gate revenues Media rights % growth % total 22% 23% 23% 23% 24% 24% 33,055 35,056 37,616 40,236 42,727 45,145 % growth 5.0% 6.1% 7.3% 7.0% 6.2% 5.7% % total 29% 30% 30% 31% 31% 31% Sponsorships Merchandising 17,296 17,483 17,755 18,545 19,226 19,969 % growth -1.6% 1.1% 1.6% 4.4% 3.7% 3.9% % total 15% 15% 14% 14% 14% 14% Total 114,652 2.0% 118,150 3.1% 123,616 4.6% 130,160 5.3% 138,254 6.2% 144,579 4.6% 7.2% 6.3% 4.0% 5.4% Source: PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates By region, we note that Asia-Pacific and Latin America revenues are expected to grow at the fastest rates over the next three years, with FY12-15E CAGR rates of 5.5% and 6.1% respectively. However, the EMEA three-year regional revenue CAGR is also expected to grow at 5.5% (in line with Asia CAGR rates). Global sports market by region – ongoing events only ($m) 2010 2011 2012E 2013E 2014E 2015E CAGR 2012-15E 48,412 49,692 51,733 54,494 58,564 60,770 5.5% % growth 0.2% 2.6% 4.1% 5.3% 7.5% 3.8% % total 42% 42% 42% 42% 42% 42% EMEA 39,407 40,698 42,628 44,807 47,066 49,371 % growth 3.1% 3.3% 4.7% 5.1% 5.0% 4.9% % total 34% 34% 34% 34% 34% 34% Asia-Pacific 21,152 21,868 23,016 24,277 25,630 26,994 % growth 4.0% 3.4% 5.2% 5.5% 5.6% 5.3% % total 18% 19% 19% 19% 19% 19% Latin America 5,681 5,892 6,239 6,584 6,994 7,444 % growth 1.9% 3.7% 5.9% 5.5% 6.2% 6.4% North America % total 5% 5% 5% 5% 5% 5% Total 114,652 2.0% 118,150 3.1% 123,616 4.6% 130,162 5.3% 138,254 6.2% 144,579 4.6% 5.0% 5.5% 6.1% 5.4% Source: PricewaterhouseCoopers, Wilkofsky Gruen Associates Moreover, digital, social and sporting internet forums continue to gain traction. For example, adidas currently has over 30m Facebook fans compared with the world’s leading digital luxury player, Burberry, with c.13m fans. Unlike the luxury goods model, which is founded on pricing power, high barriers to entry and exclusive product ranges, the global sporting goods market has a 15 Sporting Goods broader demographic base which relies heavily on sporting events/icons to help promote product awareness. Sporting goods companies are able to leverage lifestyle products on the back of more costly performance-related products, which tend to benefit from a higher gross margin (which are easier to make with fewer technical components and faster to ship, and thus more positive in terms of working capital). In our view, pricing power is not as prevalent for sporting goods players – for example, the 20-year $99.99 opening price point for trainers in the US remains intact today. We acknowledge that both luxury and sporting goods sectors place research and design/development as a core function of their respective business models, which are aimed at driving product awareness, market share gains and brand loyalty. Moreover, both industries have long since made use of “brand ambassadors” (successful sporting icons, actors, actresses and politicians) in order to promote brands. Sporting goods companies work with such icons in order to develop leading-edge technology, adding value to brand credibility/equity from which to launch more profitable lifestyle brand collections. Interbrand sporting goods movers and shakers According to Interbrand 2012 analysis, two sporting goods players dominate the global market: Nike and adidas. Puma has fallen out of the top 100 global brands, which in our view accentuates the benefits of global size and scale when it comes to increasing consumer brand mind share. According to Interbrand, adidas and Nike ranked 60th and 26th respectively within its top 100 global brands as of 2012. According to Interbrand, “brand strength measures the ability of the brand to create loyalty and, therefore to keep generating demand and profit into the future”. It adds: “Brand strength is scored on a scale of zero to 100, based on an evaluation across 10 key factors that Interbrand believes make a strong brand. The strength of the brand is inversely related to the level of risk associated with the brand’s financial forecasts. A proprietary formula is used to connect the brand strength score to a brand-specific discount rate. In turn, that rate is used to discount brand earnings back to a present value, reflecting the likelihood that the brand will be able to withstand challenges and generate sustainable returns into the future.” Interbrand brand value ($bn) 15 13 11 9 7 5 3 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sporting goods adidas Nike Source: Interbrand 16 Sporting Goods In order for a global brand to be included within Interbrand’s global brand rankings, it must have the following: • at least 30% of revenues must come from outside the brands home country; • a presence in at least three major continents, as well as broad geographic coverage in emerging markets; • sufficient publicly available data on the brand’s financial performance; • positive economic profit expected over the longer term, delivering a return above the brand’s operating and financial costs; and • a public profile and awareness above and beyond its own marketplace. We highlight below Interbrand’s adidas and Nike sporting goods brand summaries for 2012. Interbrand adidas profile (2012) Interbrand Nike profile (2012) adidas Nike Rank: 60 Rank: 26 Value: US$6,699m Value: US$15,126m Despite its challenger position, adidas is still the number one sports brand for millions around the world. The brand’s “adidas is all in” campaign, featuring football/soccer stars Lionel Messi and David Beckham, NBA star Derrick Rose, and pop icon Katy Perry, has effectively united its Sport Performance, Sport Style, and Originals subbrands. This broadened the presence of the iconic three stripes, particularly online. The main clip has had more than 2.5 million views, indicating a worthwhile increase in marketing spend. adidas continues to focus on digital strategies to promote its style in sports position, with some success. The virtual miCoach is a great way to engage with customers, and adidas Originals alone has more than 14 million Facebook fans. The brand’s biggest challenge is to keep expanding its relevance, which should see a boost from heavy media coverage of highprofile adidas-sponsored events such as the London Olympic Games (adidas supplied sportswear and produced many souvenirs) and the FIFA World Cup in 2014 in Brazil. A global icon that transcends its category, Nike continually increases the power of its brand through innovation — its greatest strength. In 2012, Nike delivered numerous gamechanging products and slyly leveraged the London Olympics to its advantage. An “ambush marketer” rather than an official Olympic sponsor, the brand attracted publicity, spotlighted new products and managed, as always, to link world-renowned athletes to its latest offerings. As part of its long-term growth strategy, Nike announced its intention to divest its Cole Haan and Umbro businesses, which will allow it to focus its resources on driving growth in the Nike, Jordan, Converse, and Hurley brands. Nike is also using social media skillfully to generate awareness and buzz, while continuing to engage the public through events and contests like The Chance, an athletic talent search. It is also expanding its breadth by incorporating technology platforms into all of the work it does, which has kept Nike well ahead of competitors. Though Nike is increasingly seen as a sustainability leader, the company still needs to improve its supply chain and environmental record. In this regard, initiatives such as “Zero Discharge of Hazardous Chemicals” in manufacturing by 2020, are highly relevant for the brand. Source: Interbrand Puma failed to reach the top 100 global brands in 2012. We believe that new management’s focus will continue to be on reducing costs through cutting back on the number of loss-making directly-owned stores (the intention is to reduce the European DOS network by c.90 to 2015), terminate several outstanding sporting team/icon endorsements and reduce the number of SKUs (stock-keeping units) manufactured every year. These issues are designed to improve working capital, cash flow, profitability and assist with the implementation of a more streamlined design process from performance to lifestyle sporting goods collections. 17 Sporting Goods Routes to 2015 Each major sporting goods company has outlined respective investment strategies and performance targets to 2015. We highlight below key investment strategies for each company, how each company’s route to 2015 sales and profits differ and conclude by stating which companies we believe will be the winners and losers in the race for incremental market share and positive operating leverage. adidas’s Route 2015 strategy adidas is more than three-fifths through its Route 2015 investment strategy. Its main aims are to: • outperform total market growth (both GDP and the sporting goods market); • achieve group sales growth of 45% to 50% (FY10-15) to €17bn by 2015; • continue growing the bottom line faster than the top line; • outgrowing its major competitors in the next five years; • achieve compounded earnings growth of 15%; and • generate a group EBIT margin of 11% by 2015 at the latest. During the investor/analyst field trip to Carlsbad in California last September, adidas management revised divisional sales targets to 2015 by lowering Reebok sales expectations and increasing both adidas brand and TMAG sales estimates. While the net €17bn estimate was unchanged, the implied mix was positive with TMAG sales forecast to be c.10% greater than Reebok’s by 2015. The table below highlights management’s initial 2015 forecasts and revised targets as of September 2012 with implied sales CAGR rates. adidas old vs. updated brand sales and CAGR forecasts (FY10-15) 2010 2015 (old) FY10-15 CAGR 2015 (updated) FY10-15 CAGR adidas Sport Performance adidas Original & Sport Style €6.5bn €2.1bn €8.5bn €3.7bn +5.5% +12.0% €8.9bn €3.9bn +6.5% +13.2% Total adidas Reebok €8.6bn €1.9bn €12.2bn €3b.0n +7.2% +9.6% € 12.80 €2.0bn +8.3% +1.0% Other brands €1.4bn €1.8bn +5.2% €2.2bn +9.5% Total €11.9bn €17.0bn +7.4% €17.0bn +7.4% Source: Company The table below highlights management’s expectations from a divisional perspective compared with specific brand sales CAGR assumptions. According to our estimates, adidas needs to achieve three-year sales CAGR of just over 5% compared with implied five-year sales CAGR of 7.4% in order to reach its goal of generating €17bn of global sales by 2015 at the latest. In our view, the implied sales CAGR looks reasonable although we expect to see short-term headwinds (FY13) develop in terms of a tough comparison base, negative currency impacts of c.2% and ongoing macro headwinds within southern Europe and South Korea. 18 Sporting Goods adidas old vs. updated divisional sales and CAGR forecasts Wholesale Retail eCOM Other Businesses 2010 €8.2bn €2.4bn €0.1bn €1.4bn 2015 (old) €10.6bn €4.1bn €0.5bn €1.8bn FY10-15 CAGR +5.3% +11.3% +38.0% +5.2% 2015 (updated) €10.2bn €4.1bn €0.5bn €2.2bn FY10-15 CAGR +4.5% +11.3% +38.0% +9.5% Total €11.9bn €17.0bn +7.4% €17.0bn +7.4% Source: Company We expect adidas group to exceed its 2015 EBIT margin target of 11%. Through combined initiatives such as increased retail sales penetration versus wholesale, improved price/mix, best-in-class innovation and strong working capital management on the back of sourcing, supply and distribution efficiencies, we see upside risk to both gross margin (we forecast the group gross margin to increase by 290bp by 2015 to 50.6% compared with the FY12 group gross margin of 47.7%) and EBIT margin targets. As a result, our FY15 group gross margin estimate of 11.9% is 90bp ahead of management’s internal target. Commodity cost pressure ought to abate in 2013 (adidas doesn’t hedge the raw material but the FOB/currency) as cotton, rubber and oil-based plastic prices continue to decline yoy. As a result we expect, COGS as a percentage of sales to fall 150bp to 50.8% in FY13. We expect Chinese labour cost pressure to structurally increase although adidas continues to look for alternate partners and may over time reduce its reliance on Chinese sourcing, though we appreciate that China remains adidas’s most important sourcing market (31% of all suppliers were located in China as of FY12). For example, in footwear, we note that the overall representation of China in adidas’s sourcing mix fell by 200bp in FY12 with an increased focus on regions such as Cambodia and Vietnam where the cost of labour is lower relative to China. Proven track record Adidas’s nine-year sales, EBIT and diluted EPS CAGR rates (FY03-12) are solid within the context of having acquired Reebok in 2006 and in view of the financial crisis (2008-10) at 9.4%, 10.3% and 11.4% respectively. We note that adidas paid $3.6bn (€2.9bn assuming a dollar/euro FX rate of 0.8 or 1.5x sales) for Reebok in 2006 (the deal was completed on 31 January 2006). During its first year with adidas group (February to December), Reebok generated turnover of c.€2bn compared with FY12 Reebok sales of €1.7bn. Over the past six years (FY06-12), the adidas and TMAG brands have clearly outperformed relative to internal peers and while management has a revitalised plan to re-invigorate and reposition the Reebok brand under the House of Fitness branding, we are sceptical about future Reebok sales and profit generation, which is reflected in our five-year sales CAGR (FY10-15E) estimates for Reebok of -0.6%. We believe FY12-15E growth ought to improve, especially after losses from the Indian operations in 2012, hence our three-year Reebok sales CAGR (FY12-15E) of 3.7%. 19 Sporting Goods adidas six-year CAGR performance (2006 – 2012) adidas Group net sales, €m Gross margin % Adjusted EBIT, €m Operating margin (adj. €m) Diluted adj. EPS P/E at year end DPS FY06 10,084 44.6% 881 8.7% 2.25 16.8x 0.42 FY07 10,299 47.4% 949 9.2% 2.57 19.9x 0.50 FY08 10,799 48.7% 1,070 9.9% 3.07 8.8x 0.50 FY09 10,381 45.4% 508 4.9% 1.22 31.0x 0.35 FY10 11,990 47.8% 894 7.5% 2.71 18.0x 0.80 FY11 13,322 47.5% 953 7.2% 2.93 17.1x 1.00 FY12 14,883 47.7% 1,185 8.0% 3.78 17.8x 1.35 6-year CAGR 6.7% Net sales by brand Adidas Reebok Taylor-Made-adidas Golf Rockport Reebok-CCM Hockey 6,626 1,979 856 293 202 7,113 1,831 804 291 210 7,821 1,717 812 243 188 7,520 1,603 831 232 177 8,714 1,913 909 252 200 9,867 1,940 1,044 261 210 11,344 1,667 1,344 285 243 9.4% -2.8% 7.8% -0.5% 3.1% 5.1% 9.0% Source: Company data We summarise our FY15E brand sales estimates and five-year CAGR evolution below, which highlights our expectation of stronger brands sales and market share evolution for adidas and TMAG brands versus Reebok. In our view, faster sales growth at adidas and TMAG ought to result in margin accretion given the structurally higher gross margins of both adidas and TMAG brands versus Reebok. For example, we note that adidas’s FY12 wholesale margin increased 10bp yoy to 42.1% compared with Reebok’s wholesale gross margin, which declined by 290bp to 26.2%. Within its retail division, adidas’s gross margin declined by 150bp to 62.1% (driven by commodity cost pressures) while Reebok’s retail gross margin declined by 270bp to 55.1%. We note that the FY12 group gross margin increased by 20bp to 47.7% supported by structurally higher gross margins for both adidas and TMAG brands, supportive of our future group gross margin evolution to 50.6% by FY15E. Berenberg FY10-15E brand sales estimates vs. adidas management FY10-15E brand sales guidance adidas Reebok TMAG & Other Total 2010 2015 (Berenberg) Berenberg FY10-15 CAGR adidas updated adidas implied CAGR 8,714 13,534 9.2% 12,800 8.0% 1,913 1,857 -0.6% 2,000 0.9% 1,363 2,064 8.7% 2,200 10.0% 11,990 17,455 7.8% 17,000 7.2% Source: Berenberg Bank estimates, company data 20 Sporting Goods Pillars for growth – adidas’s group strategy The adidas group mission statement states that adidas “strives to be the global leader in the sporting goods industry with brands built on passion for sports and a sporting lifestyle”. In 2012, adidas’s performance met or exceeded expectations across every target except for Reebok-CCM Hockey growth and the wholesale division, due to the irregularities and subsequent write-downs at Reebok India. adidas carried out an internal investigation and uncovered the inappropriate recognition of sales, a failure to book sales and a failure to post credit notes to accounts receivable. This resulted in a significant overstatement of net sales, accounts receivable as well as materially incorrect accounting for inventories and provisions. Management also uncovered four previously undisclosed warehouses not declared in the official accounting records and that the practice of inflating sales and profits had carried on for a few years. adidas restated FY11 accounts in accordance with IAS8, which resulted in lower net income attributable to shareholders of €58m for 2011. In addition, shareholders’ equity in the opening balance for 2011 was negatively impacted by €153m (non-cash) to account for prior year periods. In 2012 goodwill impairment losses of €265m were recognised (within wholesale cash-generating units, goodwill impairment loses amounted to €106m in North America, €41m in Latin America, €15m in Brazil and €11m in Iberia). In addition goodwill of €68m and €24m was impaired at Reebok-CCM Hockey and Rockport resulting in a 17% goodwill reduction and a negative impact on total assets of 2%. adidas’s 2012 targets vs. 2012 results Targets 2012 2012 Results adidas group Wholesale increase at mid- to high single-digit sales % increase at mid-single-digit sales % 6.0% 2.0% Retail segment Other businesses increase at low teens % increase at low to mid-single-digit % 14.0% 17.0% TMAG increase low to mid-single-digit % 20.0% Rockport Reebok-CCM Hockey increase at high single-digit % increase at strong double-digit % 2.0% 9.0% Gross margin Operating margin Average operating working capital (% sales) around 47.5% approaching 8% moderate increase expected 47.7% 8.0% 20.0% Capital expenditure Gross borrowings Net borrowings/EBITDA €400m-450m further reduction maintained below 2.0x EPS to increase by 10% to 15% (€3.52 to €3.68) Shareholder value further increase €434m net cash €448m -0.30x € 3.78 Share price +34% DPS +35% to €1.35 Source: Company data 21 Sporting Goods adidas’s global sales function is broken into three channels – wholesale, retail and e-commerce. Route 2015 priorities include: • an increase in controlled space to over 50% by 2015 (controlled space includes own retail (DOS), e-commerce, mono-branded franchise stores, shop-in-shops, joint ventures with retail partners and co-branded stores with sports organisations and other brands); • the implementation of an integrated distribution road map to ensure future growth and maximise brand potential in key demographic locations and; • a leveraging of cross-channel sales opportunities and range efficiencies. Key growth markets have been identified as North America, Greater China, Russia/CIS, Latin America, Japan and the UK. Key “attack markets” where adidas is dedicated to prioritising investment and time are North America (where adidas remains under-represented versus its main rival, Nike, and has the lowest regional EBIT margin – we estimate less than 6%), Greater China and Russia/CIS. Internal expectations are for these three regions to generate c.50% of group sales growth by 2015 (we estimate European emerging markets, North America and Greater China to account for 47% of adidas group sales by 2015 with €8.3bn). Controlled space The rationale for increasing controlled space is clear – adidas brands need to be well represented across sales platforms in order to capitalise on consumer convenience and product accessibility and assortment. In our view, the greater percentage of controlled space adidas group has, the easier it will be to monitor sell-in rates (selling into third party retailers) and sell-out rates (selling to the end-consumer), thereby improving stock management, reducing mark-down risk and optimising future cash flow. Integrated distribution road map The road map encompasses a joint approach between the three sales channels, allowing the group to define how best to capture incremental sales and market share without cannibalising the brands and distribution mix. We believe this insight is a key function with an emphasis on product availability. Perhaps slightly tenuous but should consumers confuse the adidas brands with Reebok, this may result in a reduction of adidas sales (at higher wholesale and retail margins) versus Reebok, which would have negative implications for the group’s product and margin mix, thereby placing Route 2015 sales and margin targets at risk. We expect the road map will assist with sales and market share gains in historically under-penetrated markets such as North America and help the company to implement successful best practice operations, as in Russia (retail) and Greater China, where adidas group enjoys its highest EBIT margins. 22 Sporting Goods Online multi-channel growth tool kit E-commerce sales increased by 78% to €158m in FY12, well short of adidas’s €500m 2015 target. While the two-year sales CAGR is impressive at 69.5%, the sales base is low. adidas group e-commerce revenue (FY10-15E), €m 450 400 350 300 250 200 150 100 50 0 FY10 FY11 FY12 FY13E FY14E FY15E eCommerce Source: Company data According to our estimates, adidas group e-commerce sales will reach €412m by FY15, c.18% below target. The implied five-year CAGR is 50% based on our estimates and would be 56% assuming the €500m target was achieved. We believe there are considerable opportunities to improve the global online offering, firstly by aligning online brand activities across sales channels and different geographies in order to achieve faster route to market, and secondly via greater brand messaging/offering consistency coupled with increased consumer focus. In FY12, adidas launched a single e-commerce destination for the adidas brand. The website fully integrates the adidas brand website and the brand’s e-shop in one place. New country-specific e-shops have been established globally for both adidas and Reebok with a full product/service offering in 20 countries. “Mi adidas” and “Miteam”, two customisation sites for men and women, have also been created. During FY13, the “mi adidas” and “your Reebok” sites will be evolved further and the adidas e-commerce team will work more closely in conjunction with its CRM database in order to improve consumer personalisation levels. Global foundation range (GFR) As part of a joint initiative between the global sales and global brands functions, GFR was established to represent a set of products which must be sold through all of the adidas group’s sales channels on a global basis. As part of reducing selective SKUs across the different brands, we expect adidas to continue to increase its product commonality, thereby improving the consistency of the global offering, which ought to result in a higher stock turn and, as a consequence, a working capital inflow. 23 Sporting Goods Wholesale pillars adidas strives to be the global leading sales organisation in the sporting goods industry through: • amplification of group brands across points of sale (POS) in all relevant channels; • strong relationships with the leading and most dynamic retailers; • a highly motivated and highly skilled sales team; • an industry-leading sales toolkit to drive sell-out rates (sell out to the end-consumer); and • a benchmark in servicing retailers with “world-class” efficiency. The main strategic goal of the wholesale channel is to deliver profitable market share growth. adidas’s most important third-party retail channels are sporting goods chains, department stores, independent sporting goods buying groups, lifestyle retail chains and e-tailers. A faster product route to the wholesale market is important in terms of ensuring share of third-party sponsored advertising, and market share, gross margin and cash flow increases - the more stock sold early at full price, the less mark-down risk. We note that adidas offers clients access of a virtual sell-in tool, which provides adidas sales teams with the full range in their pocket. Moreover, marketing a reduced amount of SKUs to sell into third party retailers ought to increase speed to market and save costs. The new tool is currently being rolled out across different regions and is expected to cover c.60% of global wholesale pre-orders by the end of 2013. Retail space management (RSM) – POS level The RSM project is designed to increase POS shelf space compared with external peers’. Wholesale is cooperating with Retail along the full supply chain to the POS with a goal of improving profitability per square metre as well as product availability. The two predominant models, which are expected to drive the success of the RSM project are 1) franchising and, 2) never-out-of-stock (NOOS). adidas is working ever closer with franchise partners, advising them on range propositions, merchandising, training and guidelines in relation to store formatting, location and product layout. In our view, this is standard best-practice for retailers and luxury goods players. Not only does the retailer build a closer partnership with the franchisee, the franchisee is more likely to position adidas brands in the best selling areas in store, thereby enabling adidas to steal an advantage over its competitors. The NOOS programme comprises a core range of basic articles, the bulk of which are on 12-24 product life-cycles and sell across all third-party channels and markets. NOOS replenishment is designed to provide high levels of product availability all year-round and is a radical improvement on the old twoseason/collection model, which relied on filling c.80% of the order book prior to product delivery. In our view, Puma still suffers from this legacy, which over the years has resulted in either too much stock in the channel (leading to high-margin and brand equity erosion on incremental product mark-down) or not enough supply to satisfy 24 Sporting Goods demand. We note local Chinese sporting goods retailers such as Li Ning and Anta are still suffering from having over-supplied the channel so aggressively ahead of the Beijing Olympic Games in 2008. We note that adidas has 40,000 partners globally, selling into 100,000 POS (7,500 are in China). As a result, we believe that selling tools and working closely with retail all the way through the supply chain will be critical if adidas is to a) fully understand local demand and consumption behaviour, b) monitor effectively sellin and sell-out rates of its brands versus peers, and c) ensure that it builds stronger relationships for the future ensuring brand loyalty and incremental shelf space/POS market share. We forecast adidas wholesale to account for 60.2% of group sales by FY15 compared with 64.1% in FY12. The decline is due to the adidas group’s internal focus on retail as the brand looks to increase its footprint in higher-margin emerging-market regions and improve the price/mix while simultaneously taking more control over its working capital management (stock turn, markdown and replenishment rates). Adidas Wholesale evolution to FY15E vs. Retail and other businesses 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12% 12% 12% 12% 13% 14% 13% 14% 16% 18% 20% 21% 23% 24% 25% 26% 72% 69% 68% 67% 64% 63% 62% 60% FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Wholesale Retail Other Businesses Source: Company data, Berenberg estimates Retail strategic pillars adidas aims to become a top retailer by delivering “healthy, sustainable growth with outstanding return on investment”. Key focus areas are: • the global consumer; • the pursuit of operational excellence; • successful exploitation of a portfolio of brands; and • to drive operating leverage through global size and scale. As of FY12, the adidas group operated out of 2,446 of its own stores for the adidas and Reebok brands worldwide. We expect the number of stores to increase as the adidas group looks to drive up its retail representation as a percentage of sales and by so doing improve its price/mix architecture. Our model estimates that Retail as a percentage of sales will increase by more than 1,000bp from FY08 to FY15 to 26%. 25 Sporting Goods In order to simplify the shape of adidas group’s store chain, it has been clustered into three different store types: • brand centres – these are large stores carrying the full range of all adidas sub-brands under one roof; the formats are limited and in exclusive locations such as New York, Paris and Shanghai; • concept stores – described as the commercial engine for sales and profit across the group’s retail organisation (adidas, Originals and Reebok concept stores); and • factory outlets – this format facilitates the controlled clearance of excess or out-of-date stock (returned by franchise partners, DOS and ecommerce). Real estate teams ensure that each format fits the local market appropriately in order to maximise sales and profit densities and new store openings will only be permitted as long as they are supported by a business plan that meets pre-defined criteria such as IRR, sales densities, a suitable pay-back period, traffic flow, average ticket value and full price sell-through as a percentage of total sales. The adidas group’s brand strategy “The Global Brands division is responsible for brand positioning, brand strategy, product creation, innovation and all the product and brand marketing functions of the adidas and Reebok brands. The primary objective of this portfolio strategy is to ensure that our brands seize market and category opportunities through well- defined and coordinated go-to-market strategies. Each brand is responsible for the execution of its strategic focus by creating a constant stream of innovative and inspiring products and generating communication strategies that represent each brand category in an engaging and compelling way.” When comparing adidas brands versus Puma’s, the primary observation to make is the increased product and brand diversity at adidas compared with Puma. adidas’s and Puma’s flagship brands accounted for 76% and c.95% of respective group FY12 sales, yet adidas group brands are represented across every major sporting category (Puma is not represented in basketball for instance – a major sporting category in the US – and has claimed that expanding into other sporting goods categories at this time would prove too costly) and have a much stronger presence in performance-related products whereas Puma has historically been too concentrated at the higher-margin end of the Lifestyle sporting goods category. We compare and contrast adidas and Puma group sales by region, channel, brand and category. We see material upside risk to adidas margin evolution predicated around an improving price/mix, greater emphasis on innovation, increased retail presence versus wholesale (positive for margin and working capital/cash flow) and incremental regional market share. adidas group regional mix (FY12) Western Europe, 27% European Emerging Markets, 13% Latin America, 10% Other Asian Markets, 16% North America, 23% Greater China, 10% adidas group regional mix (FY15E) Western Europe, 27% European Emerging Markets, 14% Latin America, 9% Other Asian Markets, 17% North America, 22% Greater China, 11% Source: Company data, Berenberg Bank estimates 26 Sporting Goods We forecast that the adidas group’s eastern European emerging markets’, Greater Chinese and other Asian markets’ sales will grow above the group average, hence the forecast increase in regional sales representation. We appreciate that the North American market is a key focus for adidas and currently represents a great opportunity to improve below-group-average market share and returns. We believe that the HSK strategy is sound and that our FY15E North American regional mix of 22% versus 23% in FY12 may prove conservative. Puma regional mix (FY12) Asia/Pac, 25.7% Puma regional mix (FY15E) EMEA, 39.8% Asia/Pac, 28.1% EMEA, 38.4% Americas, 33.5% Americas, 34.5% Source: Company data, Berenberg Bank estimates We expect EMEA sales representation to decline for Puma, which is consistent with its current transformation plan (rationalising 90 loss-making stores primarily based in EMEA and North America). As we shall highlight under Puma’s strategic investment plan to 2015, the short-term focus is on rebuilding profitability as well as steadily increasing its investment in the lower margin Performance category. adidas group brand mix (FY12) adidas group brand mix (FY15E) Reebok, 11% TMaG, 7.8% adidas, 76% Reebok, 11% adidas, 78% Rockport, 2% Reebok - CCM Hockey, 2% TMaG, 7.8% Rockport, 2% Reebok - CCM Hockey, 1% Source: Company data, Berenberg Bank estimates The adidas brand portfolio is broken down as follows. 1) adidas – encompasses Sports Performance (football, basketball, running, training and outdoor), Sports Style (Y-3, Porsche Design Sport, SLVR and adidas NEO which is now a c.€600m brand with a target of €1bn by 2015. 2) Reebok – currently being rebranded as the Fitness brand. 3) TMAG – the global leader in golf apparel, the second-largest player in Footwear (volume and value). 4) Brands include TaylorMade (metal woods, irons, accessories, apparel and footwear), adidas Golf (footwear and apparel), Ashworth (more traditional golfing apparel) and Adams Golf (acquired in 2012 and aimed at the less traditional golfing demographic and charged with bringing its best selling hybrid golf club technology to the TMAG brand portfolio. 5) Rockport – a lifestyle-orientated brand (apparel and footwear) with advanced proprietary athletic footwear technologies built into footwear collections. 27 Sporting Goods 6) Reebok-CCM Hockey – comprising performance-related products designed to improve the playing experience for both professional and recreational players. In our view, the adidas group brand portfolio is well diversified across product categories and materially represented in key segments such as football (number 1 market share), basketball (number 2), running and athletic kit (number 2 and 1 respectively) and golf through the TMAG brand portfolio. While adidas’s Performance products tend to garner lower gross margins – we estimate c.35% to 45% compared with its Lifestyle products at c.55% to 65% (performance stores tend to take c.24 months to break even). We believe it is crucial for sporting goods companies to continue to invest in research and development and the marketing of performance products, thereby creating a credible brand platform from which to launch more profitable lifestyle brand collections. As an example, we track the historical relationship between adidas brand sales, gross margin and mix between its Performance and Lifestyle products. adidas brand sales (€m) and growth (%) – FY03-12 12,000 +15.9% 10,000 +13.3% +13.1% +7.3% 8,000 6,000 +13.2% +15.0% +10.0% -3.8% -3.0% +4.5% 4,000 2,000 0 FY03 FY04 FY05 FY06 FY07 adidas brand FY08 FY09 FY10 FY11 FY12 chg. Source: Company data, Berenberg estimates adidas brand sales (€m) and gross margin (%) – FY08-12 11,344 12,000 9,867 10,000 8,000 6,000 7,821 48.6% 7,520 47.1% 48.5% 48.0% 8,174 47.1% 47.2% 47.5% 47.0% 46.1% 46.5% 4,000 46.0% 45.5% 2,000 0 49.0% 45.0% FY08 FY09 FY10 adidas brand sales, €m FY11 FY12 44.5% gross margin Source: Company data, Berenberg estimates 28 Sporting Goods adidas brand split between Performance and Lifestyle – FY09-12 100% 80% 60% 40% 20% 0% 6% 15% 7% 16% 8% 16% 17% 16% 18% 19% 20% 63% 59% 57% 55% FY09 FY10 FY11 FY12 9% adidas Sport Performance wholesale adidas Sport Style wholesale adidas Sport Performance retail adidas Sport Style retail Source: Company data, Berenberg estimates Optically, the 610bp reduction of adidas Performance (wholesale and retail combined) to 71.8% (FY09 to FY12) may appear to have done little for the evolution of the adidas brand gross margin. However, we believe that the underlying evolution is much stronger as the gross margin factors multiple moving parts such as raw material/commodity/FOB costs, currency hedges, labour costs, price/mix and markdown. For example, we estimate that the 140bp reduction of adidas Performance products as a percentage of sales versus Lifestyle products in FY12 played a major role in driving up the adidas brand gross margin by 100bp yoy to 47.1% (+20bp to 47.7% at a group level). In our view, the price/mix improvement was a key driver and more than offset Group gross margin headwinds of 380bp in FY12 (raw material cost inflation, labour costs and currency). We assume that the bulk of these headwinds would have flowed through to the adidas brand (76% of FY12 group sales), hence above-group gross margin evolution by the adidas brand is impressive and part of the adidas strategy of improving the mix between its Performance and Lifestyle product assortments as a percentage of sales. We forecast the adidas brand as a percentage of group sales to increase by 130bp to FY15 (77.5%) with growth in the Performance retail category over Wholesale leading to further gross margin/mix improvements. 29 Sporting Goods adidas brand split between Performance and Lifestyle – FY09-12 and FY15E 100% 80% 60% 40% 20% 0% 6% 15% 7% 16% 8% 16% 9% 10% 17% 16% 20% 18% 19% 20% 18% 63% 59% 57% 55% 52% FY09 FY10 FY11 FY12 FY15E adidas Sport Performance wholesale adidas Sport Style wholesale adidas Sport Performance retail adidas Sport Style retail Source: Company data, Berenberg estimates adidas divisions, brands and target sporting goods markets Division adidas Sport Performance Key brands adidas Targeted markets Football, basketball, running, training, outdoor adidas Originals adidas Sport Style adidas Y-3, Porsche Design Sport, adidas SLVR Street-wear and lifestyle fashion Street-wear and lifestyle fashion via a multi-brand strategy Source: Company data By comparison, Puma Group’s brand portfolio is limited to three recognised brands; Puma, Cobra Golf and Tretorn. We estimate that Puma accounts for c.95% of Puma total sales, and at the group level, we understand that Performance accounts for 35% of total sales with Lifestyle at c.65%. Puma Perf. vs. Lifestyle (FY12E) Puma Perf. vs. Lifestyle (FY15E) Perf., 35% Performance Perf., 40% Lifestyle , 60% Lifestyle , 65% Lifestyle Performance Lifestyle Source: Berenberg Bank estimates According to Puma management, 2013 will be a “pioneering” year with an increased focus on Performance innovation, resulting in a c.500bp increase in Performance-related product to 40% by FY15 (compares with our estimated Performance versus Lifestyle FY15 adidas brand split of 71.8% to 28.2% (up from 22% as of FY09). Puma has in the past focused on its credentials as a sustainable and fashion orientated brand, so the increased focus on Performance will be interesting in terms of implied incremental costs associated with research, development, advertising and promotion. 30 Sporting Goods We dedicate a chapter to innovation later in the note where we compare the adidas group’s and Puma’s leading innovation and the impact we expect this leading innovation to have on both the top and bottom line. adidas channel mix (FY12) Wholesale, 64% Other Businesses, 13% Retail, 23% adidas channel mix (FY15E) Wholesale, 60% Other Businesses, 14% Retail, 26% Source: Company data, Berenberg Bank estimates In our view, the adidas group ought to exceed its 2015 EBIT margin target of 11%. Through combined initiatives such as increased retail sales penetration versus wholesale, improved price/mix, best-in-class innovation and strong working capital management on the back of sourcing, supply and distribution efficiencies, we see upside risk to both the gross margin (we forecast that the group gross margin will increase by 290bp by 2015 to 50.6% compared with the FY12 group gross margin of 47.7%) and EBIT margin targets. As a result, our FY15 group EBIT margin estimate of 11.9% is 90bp ahead of management’s internal target. Commodity cost pressure ought to abate in 2013 (adidas doesn’t hedge the raw material but the FOB/currency) as cotton, rubber and oil-based plastic prices continue to decline yoy. As a result we expect, COGS as a percentage of sales to fall 150bp to 50.8% in FY13. We expect Chinese labour cost pressure to structurally increase although adidas continues to look for alternate partners and may over time reduce its reliance on Chinese sourcing, though we appreciate that China remains adidas’s most important sourcing market (31% of all suppliers were located in China as of FY12). For example, in footwear, we note that the overall representation of China in adidas’s sourcing mix fell by 200bp in FY12 with an increased focus on regions such as Cambodia and Vietnam, where the cost of labour is lower relative to China. While we believe FY13 will remain a transitional year for adidas, we expect the group gross margin to improve above management’s guided range of 48.0% to 48.5%. We expect short-term opportunities (soft comparison base and lower raw material costs) to increase Reebok’s gross margin (following the India write-down of FY12), supported by ongoing benefits of a greater retail presence versus wholesale, improved sales and regional mix. As a result, we expect the FY13 adidas group gross margin to increase by 150bp yoy to 49.2%. 31 Sporting Goods adidas management FY13 guidance vs. Berenberg estimates (currency neutral) adidas group Wholesale Retail segment Other businesses Taylor-Made-adidas Golf Rockport Reebok-CCM hockey Outlook 2013 increase at mid-single-digit sales % increase at low single-digit sales % increase at high single-digit to low doubledigit % increase at mid-single-digit sales % increase at mid-single-digit sales % increase at mid- to high single-digit sales % increase at low double-digit sales % Gross margin Operating margin Average operating working capital (% sales) 48% to 48.5% approaching 9% moderate increase expected Capital expenditure Gross borrowings Net borrowings/EBITDA €500m-550m further reduction maintained below 2.0x EPS to increase by 12% to 16% (€4.25 to €4.40) Shareholder value further increase Berenberg FY13E 5.0% 3.0% 11.0% 4.4% 3.0% 3.0% 1.9% 49.2% 9.3% In line €525m net cash €864m -0.50x € 4.72 DPS +25% to €1.68 Source: Berenberg estimates, company We also expect Puma to benefit from an improved Retail mix – from 19.1% of group sales in FY12 to 23% by FY15. However, we acknowledge there are mitigating risks such as ongoing market share losses in footwear and apparel, increased costs related to new marketing campaigns coupled with up front investments in IT, sourcing, supply and distribution, which may weigh on shortterm profitability. Puma channel mix (FY12) Puma channel mix (FY15E) Retail, 23.0% Retail, 19% Wholesale, 81% Wholesale, 77.0% Source: Company data, Berenberg Bank estimates 32 Sporting Goods Puma – investment route to 2015: attack or defend? Puma launched its five-year “Back on the attack” strategy in October 2010. The initial aims were to: • achieve €4bn of turnover by 2015; • reclaim historical (higher) EBIT margins (14-15%); • sustainably improve shareholder value; and • achieve all these goals while respecting environmental and social issues such as Puma’s ambition to take leather out of its footwear offering and become the #1 brand in terms of sustainability recognition. In the table below, we highlight management’s estimated impact on the distribution mix from 2010 to 2015. Proposed impact on Puma’s business mix Sales PUMA brand Non-PUMA brands 2010 96% 4% 2015 target 92% 8% Accessories Apparel Footwear 14% 34% 52% 15% 35% 50% APAC Americas EMEA 23% 32% 45% 23% 27% 50% Top 6 Emerging Rest of World Top 6 Mature 14% 36% 50% 22% 40% 38% Regional categories Core categories 95% 5% 90% 10% Retail & E-commerce Wholesale 17% 83% 20% 80% Source: Berenberg estimates, Company data Former CEO Franz Koch, who left Puma in March 2013, previously outlined six core strategies for the business, which we believe will remain a key focus for Puma under new CEO Bjorn Gulden (whose appointment was announced on 18 April). Mr Gulden was previously CEO of mid-end jewellery business Pandora and prior to this role, he was managing director of Europe’s largest footwear retailer, Deichmann (2000 to 2011), where he also headed the US subsidiaries Rack Room Shoes and Off Broadway Shoes as CEO and president. Prior to his roles at Deichmann, Gulden held posts at sporting goods retailers Helly Hansen and at the adidas group.) We note that Kering Group owns 82.4% of Puma. To date, Kering has yet to exercise its option of taking full control of Puma’s balance sheet. In FY12, Puma recorded €249m of net cash and announced a 75% dividend cut to €0.50. The dividend cut reflected the decline in earnings (FY12: €4.69), including special items of €177.5m versus €15.36 FY11 earnings) on the back of additional costs associated with closing down stores and buying back licences in southern Europe (Spain). 33 Sporting Goods However, a pay-out ratio of 10.7% is low compared with adidas’s at 35.7% (10-year average: c.24%) and as a result, we can envisage a scenario whereby Kering acquires the minority free-float stake in order to take full control of Puma’s balance sheet without having to communicate with minority shareholders. Puma management maintains that the cash is required in order to fund its subsidiary operations in key overseas markets. We outline our three-year sales CAGR (FY12-15E) assumptions and five-year sales CAGR assumptions relative to management’s official target of reaching €4bn of turnover by 2015. Our analysis suggests that Puma will fall short of its FY15 target by €388m as we forecast FY15 revenues of €3,612m. Berenberg estimated sales to FY15 and implied three and five year CAGR rates Sales PUMA brand Non-PUMA brands FY10 2,706 2,598 FY11 3,009 FY12 3,271 FY15E 3,612 3,323 12-15E 3-year CAGR 3.4% 10-15E 5-year CAGR 5.9% 5.0% 108 289 21.7% Accessories Apparel Footwear 340 941 1,425 656 1,239 1,717 14.0% 5.6% 3.8% APAC Americas EMEA 629 856 1,222 1,017 1,209 1,387 10.1% 7.2% 2.6% Top 6 Emerging Rest of World Top 6 Mature 379 974 1,353 795 1,445 1,373 16.0% 8.2% 0.3% Regional categories Core categories 2,571 135 3,251 361 4.8% 21.7% Retail & Ecommerce Wholesale 460 2,246 722 2,890 9.4% 5.2% Source: Berenberg estimates, Company data We are more cautious compared with management’s 2015 official targets. Weakerthan-expected trading, as of Q3 2012 (reported sales growth of 6% to €892m (+0.5% on a currency neutral basis), EBIT decline of 17% to €99m and a gross margin miss of 180bp to 48.2%) resulted in a more cautious tone by management and the announcement of the transformation and cost reduction plan. Following a weaker-than-expected Q3 2012 trading update, which included special items (write-downs of €80m associated with the rationalisation of loss-making stores and the restructuring of the Greece, Cyprus and Bulgaria businesses), management outlined a more rational strategy in order to address short-term profit preservation over long-term targets. We note that Q3 2012 special items were followed by an incremental €98.2m of special items in Q4 2012 associated with ongoing restructuring in Europe and Spanish arbitration costs. The expenses (90% cash, 10% non-cash items) will be amortised over a period of two to three years while the pay-back of the costcutting programme is expected to take two to three years. 34 Sporting Goods In our view, management’s official sales targets are unrealistic and are likely to be revised lower in light of a net 50 store closure programme, a cut back in marketing and team sponsorship and our expectation of future market share losses (footwear and apparel) in 2013. We do not rule out the possibility of acquisitions to grow the company’s non-Puma brands top line, but at this stage we believe acquisitions are off the table. Puma management official sales targets and implied CAGR rates Sales PUMA brand Non-PUMA brands FY10 2,706 2,598 FY11 3,009 FY12 3,271 FY15E 4,000 3,680 12-15E 3-year CAGR 6.9% 10-15E 5-year CAGR 8.1% 7.2% 108 320 24.2% Accessories Apparel Footwear 340 941 1,425 600 1,400 2,000 12.0% 8.3% 7.0% APAC Americas EMEA 629 856 1,222 920 1,080 2,000 7.9% 4.8% 10.4% Top 6 Emerging Rest of World Top 6 Mature 379 974 1,353 880 1,600 1,520 18.4% 10.4% 2.4% Regional categories Core categories 2,571 135 3,600 400 7.0% 24.2% Retail & Ecommerce Wholesale 460 2,246 800 3,200 11.7% 7.3% Source: Berenberg estimates, Company data As a result of poor operational and trading performances last year, former CEO Franz Koch outlined a transformation and cost reduction programme aimed at driving up short-term profitability and returns for shareholders, to include the following. • The establishment of a new regional business model including the reduction of European organisational entities from 23 to seven in order to reduce the complexity of the business: Each area has a full management team and P&L responsibility, while each country will focus its activities on the commercial side of the business. The seven areas are the DACH region (Germany, Austria and Switzerland), Iberia (Spain and Portugal), UKIB (Belgium, Ireland, Luxembourg, the Netherlands and the UK), the Nordics (Denmark, Finland, Norway and Sweden), Eastern Europe (the Czech Republic, Estonia, Hungary, Lithuania, Poland and Slovakia), France and Italy; • The implementation of a warehouse rationalisation programme in Europe: This is currently under way and will lead to cost savings in FY13 and FY14; • The optimisation of the retail portfolio: This initiative will focus Puma’s attention on closing c.90 unprofitable stores in Europe and North America 35 Sporting Goods with a primary store opening strategy in emerging markets. By the end of 2013, management expects to operate out of 540 stores worldwide compared with 590 as of FY12; • The termination of collaboration and endorsement contracts: This is also designed to drive up short-term profitability as Puma divests “unprofitable” collaborations and endorsement contracts (the discontinuation of Rugby in the Northern Hemisphere (IFRU) and sailing, which is to be terminated in December 2013 with the discontinuation of the Volvo Ocean race); • The reduction of Puma’s product palette by 30% by the end of 2015: The bulk of the rationalisation is expected to come from streamlining regional and local ranges of which the first effects are expected to be visible by spring/summer 2013 and; • The future establishment of the international organisation around seven business units: 1) teamsport, 2) running, training, fitness) 3) golf, 4) fundamentals, 5) motorsport, 6) lifestyle (accessories) and 7) licensing. Product management, design, development and product specific marketing will be clustered under each business unit. Puma gross margin evolution (FY02-15E) 54% 52% 50% 48% 46% 51.9% 52.3% 44% 48.7% 50.6% 52.3% 51.8% 50.8% 49.7% 49.6% 42% 40% 38% 48.3% 48.2% 48.4% 48.6% 43.7% FY02 FY04 FY06 FY08 FY10 FY12 FY14E Source: Company data, Berenberg estimates According to our model, we forecast that the FY13 gross margin will decline by 10bp yoy to 48.2% in spite of lower raw material costs and a soft gross margin comparison base (-130bp in FY12 to 48.3% and -10bp in FY11 to 49.6%). We note that Puma is hedged at 1.28 (euro/dollar) in 2013 compared with 2012 at 1.36 (negative). 36 Sporting Goods Puma adjusted EBIT margin evolution (FY02-15E) 25% 20% 15% 20.7% 10% 5% 0% 23.5% 22.4% 15.5% 15.7% 13.7% FY02 FY04 FY06 13.9% FY08 12.2% 12.5% 11.1% FY10 8.9% 9.3% 10.0% 10.5% FY12 FY14E Source: Company data, Berenberg estimates On a currency-neutral basis, Puma’s group sales comparison base looks relatively soft, reflecting the past few years of market share losses and under-performance relative to competitors; adidas and Nike. Puma currency-neutral sales (FY02-12) Puma category (FX neutral) sales (FY02-12) 60% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 50% 40% 30% 20% 10% 0% -10% FY02 FY04 FY06 FY08 FY10 FY12 FY06 FY07 Footwear FY08 FY09 Apparel FY10 FY11 FY12 Accessories Source: Berenberg Bank estimates, company data However, we are not convinced that the short-term profitability focus, while positive for shareholder returns in 2013, will result in a step to building a stronger sales platform for the future. We view the transformation and cost reduction programme as a necessary step for a business which historically has not been adept at internal restructuring or the implementation of value-added IT, systems and logistics. Instead, in our view, Puma has relied upon historical relationships and an antiquated and inefficient order book operating model, now running to four seasons as opposed to two seasons, with the second and fourth quarters usually the heavier discount-driven quarters. Therefore, while Puma is taking the necessary steps to bring its operating structure into the 21st century, we expect the larger/dominant sporting goods players to take incremental market share. As a result, and as highlighted in our market share/growth model section, we expect Puma to underperform the market by up to 170bp in 2013. 37 Sporting Goods In our view, the core strategic elements to Puma’s future success are predicated around the sound execution of the following strategies: • the implementation of sound product innovation and realisation of product desirability; • successful distribution, inventory management, SKU analysis (sell-out and margin analysis); • increased brand marketing “heat”; • a strong management team and; • a fundamental understanding of what the key regional and demographic product focuses are over the mid- to long term. Innovation Management recognises that Puma needs higher levels of Performance-productrelated innovation in order to step up the “brand heat” among its main competitors. Internal expectations are for the first signs of additional investment to come through by spring/summer 2013. Puma’s consistent messaging around being the most sustainable sporting goods retailer and through its InCycle collection, which will be completely bio-degradable and recyclable, will come at a price. The time and the cost associated with manufacturing clothing which is fully biodegradable relative to the traditional manufacturing standards means that Puma either has to invest gross margin into ensuring its products can compete on price (we note that Puma’s collections will not have the same size and scale as adidas or Nike). Moreover, Puma’s target of ensuring that 50% of the Puma collection is to come from sustainable products compared with 10% today is likely to weigh on margins. Management believes that a 10-15% pricing premium versus peers may be feasible in terms of elasticity of demand but at the same time acknowledges there is a market share risk, cost/investment debate which is ongoing. Puma InCycle collection – biodegradable and recyclable Source: Company data 38 Sporting Goods Puma InCycle collection – biodegradable and recyclable Source: Company data We believe that Puma’s brand heat levelled out a few years ago. Five or six years ago, Puma was a much smaller brand and treated as more of an alternative niche player in the marketplace. As the popularity of certain sporting segments mushroomed (i.e. motorsport with Sparco footwear), so it has become harder for Puma to drive the mass market into Puma brands. We note that historical $10 input costs on a $140 motorsport shoe have increased by more than 60% over the past five years, adding further pressure on the gross margin. New apparel designs such as the Bio-web or running shoes such as the EVO Speed and PowerCat (expected to launch from Spring/Summer 2013 into autumn/winter season in 2013) will test the market appetite for new Puma products. In addition, the new Cell labelling system (including Visi Cell, Dry Cell and Move Cell) ought to make it easier for consumers to identify with Puma new collections and product innovation. Distribution, IT and logistics investment Management is in the process of implementing SAP, which was described by management as relatively “low scale” at the moment. In our view, it will take at least 18-24 months for Puma to understand and successfully implement SAP data to its advantage in terms of inventory management and SKU margin and product analysis. The implementation is in conjunction with the warehouse rationalisation programme (from 23 facilities down to seven over the next few years) and therefore is susceptible to execution risk during periods of restructuring. We note that from FY06-10, Puma was occupied with the regional restructuring of its BRIC businesses as well as focusing on its joint venture operations in Argentina, Brazil, Russia and China. However, during this period, IT systems, sourcing and supply chains were not vertically integrated. During FY11-12, we believe that Puma started to take a lot of front-end-loaded costs (SAP continues to be implemented across the key regions). We expect FY13 and FY14 will feature ongoing restructuring but at a reduced impact to the P&L. Management is currently working on SKU management, supply chain and IT systems upgrades, which is positive, yet we feel that the mindset within the organisation needs to shift more towards becoming a vertically integrated player. Step by step, vertical integration is starting to gain traction – Iberia is expected to be fully integrated into one European platform in 2013 and the number of 39 Sporting Goods warehouses will also be reduced from 23 to seven leading to job cuts, working capital improvement and efficiencies. The outgoing Klaus Bauer (ex-head of finance, legal, operations, logistics, IT and human resources) told us during a one-on-one meeting that he expected Puma sales to reach €6bn-8bn by 2020 – our FY17 sales estimate is €3.95bn, hence we are sceptical around 2020 revenue generation of €6bn-8bn and would expect the new management team to distance itself from any such kind of forecast, preferring instead to focus on both front and back of house operations. Target regions and demographics Nike and adidas have size and scale advantages. Puma is not representative in basketball due to the costly endorsements associated with the sport and is also marginalised in American football. The US is a key attack market for Puma along with Greater China and Russia – which are identical attack markets for adidas and for Nike. We are not confident at this point in time that Puma’s product and segmental offerings are material enough to arrest market share declines. We appreciate that new “Mobium” footwear (shoes which expand and contract with heat and movement), “active and recover” tape (taping built into sporting garments for additional muscular support) and new “Evo” and “Powercat” footwear designs may help drive consumer interest, footfall and demand. We forecast Puma Americas three-year sales CAGR of 2.4% compared with adidas at 4.3%. We expect both Puma and adidas to record stronger three-year sales CAGR rates in Greater China at 6.5% and 8.7% respectively. We believe that European market growth will remain more subdued for Puma (a +2.1% three-year sales CAGR) versus adidas’s Western European three-year sales CAGR estimate of 4.3% (eastern European markets at 7.0%). Puma’s Greater Chinese growth profile has disappointed historically, with FY09 and FY10 Asia-Pacific sales down by 7.7% and 2.6% respectively. Recently, trading has improved but we are mindful of the local landscape. Chinese sporting goods player Li Ning posted an FY12 net loss of CNY1.98bn ($318.8m) for the first time since its IPO in 2004. Li Ning cited wholesale operational weakness as the key underperforming factor. We note that large amounts of stock have been built up in the channel not only by Li Ning but also Anta Sports. Expectations are for local conditions to remain challenging. Nike reported Q3 2013 trading results on 22 March with Chinese sales down by 10% (FX-adjusted). By contrast, North American sales increased by 18% yoy, the eighth consecutive quarter of double-digit sales growth while group gross margin increased by 30bp to 44.2%, ahead of expectations. Nike stated that it expects the cleaning of excess inventory in China and subsequent product repositioning to take several quarters and, as a result, it expects to post relative sales weakness over the next few quarters, although we note Greater Chinese future orders increased by 3% on an adjusted currency basis. By contrast, adidas’s FY12 Greater China sales increased by 15% on a currencyneutral basis and we maintain that Nike and adidas will continue to take global market share due to a strong innovation pipeline, creative marketing and assisted by capacity withdrawal by local players in key regions such as China (for example, Li Ning and Peak Sports continue to cut back on their store numbers). We expect Puma to continue to focus on top wholesale accounts such as Intersport, Decathlon, Centarion, Dicks Sporting Goods, Nordstrom and 40 Sporting Goods Footlocker and avoid distribution through discount retailers such as K-Mart and Walmart in the US and Mexico. Nike 2015 strategy Nike expects to generate: • high single-digit revenue growth (average annual rate); • mid-teens earnings-per-share growth (average annual rate); • return on invested capital of 25% and; • an increase in dividends, within a target calendar year pay-out range of 25-35%. Nike reiterated its goal of reaching $28bn-30bn of sales by 2015 during its Q3 2013 earnings call in March. Assuming Nike reaches the mid-point at $29bn, this would imply a three-year sales CAGR (FY12-15E) of 6.3%, a higher growth rate compared with adidas at just over 5% and consistent with our market model assumptions, where we expect adidas and Nike to take the most incremental market share to FY15 (560bp and 960bp respectively). 41 Sporting Goods Margin and costs metrics We compare adidas’s, Puma’s and Nike’s COGS as a percentage of sales, and operating expenses (excluding depreciation) as a percentage of sales, EBIT and gross profit historical profiles in order to highlight relative deltas and/or future cost-saving opportunities. adidas, Puma and Nike COGS as a percentage of sales (CY03-12) 65% 60% 55% 50% 45% 40% CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 Puma adidas Nike Source: Company data, Berenberg estimates, Bloomberg consensus adidas has historically a higher COGS base compared with Puma. As raw material (65% of COGS) prices fall, we expect COGS pressure to ease. We estimate that sporting goods companies could benefit by 50bp to 150bp on lower raw material costs in 2013 (for adidas, no single raw material accounts for more than 5% of COGS). The net impact to gross margin is likely to be lower assuming global consumption for sporting goods cools on weaker consumer confidence and increased cost of living. We forecast adidas COGS as a percentage of sales to decline by 150bp yoy to 50.8% versus flat COGS as a percentage of sales for Puma in FY13. As Puma continues to increase the percentage of products sold made out of sustainable raw materials (from c.10% to 50% by FY15), sourcing costs will continue to rise at a disproportionately higher rate. Both companies suffer from adverse FY13 hedging. Adidas’s, Puma’s and Nike’s opex as a percentage of sales (CY03-12E*) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 Puma adidas Nike Source: Company data, Berenberg estimates, *Bloomberg consensus (FY13 Nike) 42 Sporting Goods Operating expenses as a percentage of sales evolution for adidas and Puma versus Nike highlight a significant operating leverage opportunity for both European sporting goods companies. Within the sporting goods sector, we have noted inefficiencies linked with some of the largest companies as regards warehouse capacity management, order taking and distribution – part of this, we believe was due to the legacy “order book” model whereby sporting goods companies would look to fill almost an entirely wholesale order book by up to 70-80% in advance and work on the basis of releasing two global collections a year (in summer and winter). This rather simplified model resulted in an initial lack of sourcing and supply chain investment. Sporting goods manufacturers were regularly caught out with holding too much or too little stock as the more reactive wholesale market to global macroeconomic shocks/downturns and upturns would decrease and increase its order books accordingly. As a result, sporting goods manufacturers/retailers would suffer from volatile swings in cash flow and gross margin subject global demand trends. Furthermore, as sporting goods players such as adidas, Nike and Puma have expanded their brand footprint (for example in Asia), they have had to increase the number of collections launched per annum (to four) and contend with local sporting goods players such as Li-Ning and Anta, which are not only subject to intense/competitive pricing strategies but are susceptible to over-stocking the channel with out-of-date stock resulting in price/demand elasticity, weaker consumption, incremental markdown and, as a consequence, gross margin erosion. As part of the strategic investments adidas, Nike and Puma are taking to 2015, we believe that all three companies have varying opportunities to rationalise distribution capacity, reduce costs and improve working capital. Both adidas and Puma are currently running major distribution centre rationalisation projects, which at first hand increase execution risk and double running costs but ultimately ought to result in material cost savings and working capital improvements. Our model assumes that adidas operating expenses as a percentage sales (excluding depreciation) increases by 10bp in FY13 to 39.6% (+20bp to 41.5% including depreciation) as FY13 represents a transitional year, with ongoing warehouse investments in Germany and Russia, for example. We note that adidas management believes it is “half-way” there in terms of reaching its 2015 infrastructure targets – adidas shipped 244m pairs of shoes, 314m units of apparel and 51m units of hardware in FY12, so the distribution base is robust enough to deal with global demand. We expect a new NEO supply chain management system to be implemented in FY13 with a major SAP upgrade in Russia. e-commerce will also be consolidated on a global basis with one IT platform and one IT solution. As for Puma, we have taken a more radical approach to costs as management implements its transformation and cost reduction programme. As a result, we look for a 600bp improvement to 37.3% (excluding depreciation and 39.4% including depreciation), more in line with FY10 (36.6%) and FY11 (37.0%) levels as opposed to FY12 (43.3%). By comparison, Nike recorded CY11 operating expenses as a percentage of sales of 30.9% (adidas 39.9% and Puma 37.0%) highlighting Nike’s superior operating efficiency and future cost opportunities for both adidas group and Puma. 43 Sporting Goods adidas and Puma gross margin (CY03-15E) 54.0% 52.0% 50.0% 48.0% 46.0% 44.0% 42.0% 40.0% CY03 CY05 CY07 Puma CY09 CY11 CY13E CY15E adidas Source: Company data, Berenberg estimates We expect the adidas group’s FY13 EBIT margin to match Puma’s at 9.3%. adidas’s management has set a 2013 group EBIT margin target “approaching 9%”. We anticipate costs savings within distribution and sourcing – lower commodity costs (netted off by adverse currency hedges and a structural increase in Asian labour costs), improved price/mix within the adidas brand and increased retail versus wholesale: hence our FY13E adidas group gross margin of 49.2% compared with Puma at 48.2%. Moreover, we expect the leverage to be second-half-weighted - Reebok terminated the NFL contract in Q1 2012 and the sales comparison eases into the second half of the year (following the London Olympics). We expect Reebok to deliver an increase in gross margin in FY13 having been adversely affected by operating irregularities in India during 2012. adidas’s and Puma’s EBIT margin (CY03-15E) 25% 20% 15% 10% 5% 0% CY03 CY05 CY07 Puma CY09 CY11 CY13E CY15E adidas Source: Company data, Berenberg estimates Risks to our EBIT margin estimates include more-costly-than-expected investments in distribution, sourcing and IT, coupled with weaker-than-expected global sporting goods demand. 44 Sporting Goods Innovation is essential “skin in the game” We believe that the outcome of higher levels of R&D-related investment in innovation translates into incremental gross margin for global sporting goods companies. Successful new product innovations not only improve the product mix and engender higher levels of brand loyalty, they are also a critical function of the business model (inextricably linked to marketing spend), which is designed to increase market share and drive the top line. In our view, cost savings tend to be found through leveraging distribution and manufacturing size and scale. We conclude that those players which are able to allocate a higher level of investment in areas such as marketing and research and development ought to increase global sporting goods market shares relative to peers as the global demographic becomes more exposed to its product base and potentially more loyal/aligned with its sporting brand equity, which includes a heightened affiliation with respective sporting icons. The multi-million dollar key is to design category “killers”, new design and technology that make a difference to the way sportsmen and women perform, feel and look. adidas’s product development, design and innovation adidas takes a decentralised approach to research and design across its brands. However, whenever fundamental research and expertise competencies can be shared across the group, they are done so. Each brand runs its own research and development activities (category or technology focus) and roughly 2% of the workforce is employed in this area: 1) adidas focuses on performance footwear, apparel and hardware innovation; 2) Reebok focuses on footwear, apparel and hardware with a primary emphasis on fitness; 3) Rockport focuses on advanced proprietary athletic footwear technologies incorporated into its shoe/lifestyle collections; 4) TMAG focuses on different product categories in the golfing segment; and 5) Reebok-CCM Hockey focuses on the creation of hockey equipment designed to improve the experience for both professional and recreational players. Extensive virtual proto-type testing and engineering takes place in order to reduce physical material and resource requirements. Physical samples are tested by a broad range of users including top athletes. For example, top marathon runners recently tested the new BOOST shoe technology (designed and manufactured in partnership with BASF) during the Tokyo marathon – the top three finishers were wearing BOOST having tested it the day before and the winner set a new course record. We highlight below adidas group marketing and R&D costs as a percentage of sales. Typically, both R&D and marketing costs are front-end-loaded and ramp ahead of major sporting events such as the UEFA Euro 2004 football championships or the London Olympics and UEFA Euro 2012 football championships. 45 Sporting Goods adidas group marketing and R&D costs as a percentage of sales (FY01-FY12) 18.0% 1.6% 17.0% 1.4% 16.0% 1.2% 15.0% 1.0% 14.0% 0.8% 13.0% 0.6% 12.0% 0.4% 11.0% 0.2% 10.0% 0.0% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Marketing costs R&D costs Source: Company data, Berenberg estimates Our proprietary analysis compares each brand sales performance against the number of new “major” product innovations from FY07-12 on a group-wide basis and also by brand. Clearly the ramp up for adidas group major product launches occurred ahead of major sporting events in 2012 (the London Olympics and the UEFA Euro 2012 football championships), so while the number of major product launches declined in FY12, the adidas group was still able to capitalise in terms of top-line growth. adidas group avg. sales per major product launch Number of major product launches vs. sales 400.0 16,000 350.0 14,000 300.0 12,000 50 40 10,000 250.0 8,000 200.0 30 6,000 150.0 20 4,000 100.0 2,000 50.0 0 0.0 60 FY07 FY08 FY09 FY10 FY11 10 FY07 FY08 Sales FY12 FY09 FY10 FY11 FY12 0 Major product launches Source: Berenberg Bank estimates, Company data We highlight innovation across adidas group in terms of number of new major launches by brand and as percentage of total innovation. Innovation at adidas (major launches – absolute) 20 18 16 14 12 10 8 6 4 2 0 Adidas group brands % of total innovations 50% 45% adidas brand adidas brand 40% TMaG 35% TMaG 30% 25% Reebok Reebok 20% CCM-Hockey 15% CCM-Hockey 10% Rockport FY07 FY08 FY09 FY10 Rockport 5% FY11 FY12 0% FY07 FY08 FY09 FY10 FY11 FY12 Source: Berenberg Bank estimates, company data 46 Sporting Goods Our analysis compares brand trend lines as a percentage of total innovations. Reebok and TMAG total innovations appear to be more cyclical versus the adidas brand, which has to maintain a more constant level of innovation. In terms of the number of major product launches, both the adidas brand and TMAG invested heavily in 2010 and 2011 with record numbers of new major product launches. We acknowledge that it is not all about quantity of new product launches as additional time taken in order to innovate at a higher/category killer level is often, over the mid- to long term, more beneficial to both brand equity, sales and the bottom line. However, we also appreciate that sporting goods companies offer products which are aimed towards both the performance and lifestyle markets. adidas brand products weighted by shelf-life 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07 FY08 FY09 FY10 FY11 < 12 months old 1-3 year-old > 3 years-old Major product launches FY12 adidas brand sales vs. major product launches 20 18 16 14 12 10 8 6 4 2 0 20 18 16 14 12 10 8 6 4 2 0 12000 10000 8000 6000 4000 2000 FY07 FY08 FY09 FY10 Sales at adidas FY11 FY12 0 Major product launches Source: Berenberg Bank estimates, company data adidas brand average sales (€m) per major product launch 700 600 500 400 300 200 100 0 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company data, Berenberg estimates Reebok brand products weighted by shelf-life 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Reebok brand sales vs. major product launches 12 10 8 6 4 2 FY07 FY08 FY09 FY10 FY11 < 12 months old 1-3 year-old > 3 years-old Major product launches FY12 0 2500 12 2000 10 8 1500 6 1000 4 500 0 2 FY07 FY08 Sales FY09 FY10 FY11 FY12 0 Major product launches Source: Berenberg Bank estimates, company data 47 Sporting Goods Reebok had a much smaller number of products which were less than 12 months old compared with the adidas brand in FY12 (78% versus 67% respectively, according to our analysis). However, the five-year trend delta has been wider (FY07: Reebok 61% versus the adidas brand at 77%). As adidas group invests more into Reebok’s House of Fitness campaign and relaunches the brand in 2013, so we expect the delta to narrow between the two brands. In our view, the delta can only truly narrow when Reebok becomes more profitable, as the gross margin difference between the adidas brand and Reebok is substantial – according to our estimates, the adidas brand (Retail and Wholesale) recorded a gross margin that was 1,120bp higher (at just over 47%) compared with Reebok. Reebok brand average sales (€m) per major product launch 250 200 150 100 50 0 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company data, Berenberg estimates Due to the recent RocketBallz metal woods phase two launch and Rocketbladez irons, TMAG recorded its highest weighting of new products under 18 months old since FY08 (FY12: 84%; FY08: 92%). The innovation, testing and product cycle is typically longer for hardware and technical/Performance footwear compared with Lifestyle and non-performance apparel. TMAG brand(s) products weighted by shelf-life 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY07 FY08 FY09 FY10 FY11 < 18 months old 1.5-3 year-old > 3 years-old Major product launches FY12 TMAG brand(s) sales vs. major product launches 14 1600 14 12 1400 12 10 1200 1000 10 8 6 800 4 600 2 400 4 0 200 2 0 8 6 FY07 FY08 Sales FY09 FY10 FY11 FY12 0 Major product launches Source: Berenberg Bank estimates, company data 48 Sporting Goods However, average sales recorded by new major launches was materially ahead of FY08, which highlights a material shift in focus more towards a combination of category defining innovation coupled with higher average selling prices per new/major innovation. TMAG brand(s) average sales (€m) per major product launch 160 140 120 100 80 60 40 20 0 FY07 FY08 FY09 FY10 FY11 FY12 Source: Company data, Berenberg estimates Rockport brand products weighted by shelf-life Rockport brand sales vs. major product launches 70% 3.5 350 3.5 60% 3 300 3 50% 2.5 250 2.5 40% 2 200 2 30% 1.5 150 1.5 20% 1 100 1 10% 0.5 0% FY07 FY08 FY09 < 12 months old FY10 FY11 FY12 0 50 0 0.5 FY07 Major product launches FY08 Sales FY09 FY10 FY11 FY12 0 Major product launches Source: Berenberg Bank estimates, company data Reebok-CCM products weighted by shelf-life 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Reebok-CCM sales vs. major product launches 6 300 6 5 250 5 4 200 4 150 3 100 2 50 1 3 2 1 FY07 FY08 FY09 FY10 FY11 < 12 months old 1-3 year-old > 3 years-old Major product launches FY12 0 0 FY07 FY08 Sales FY09 FY10 FY11 FY12 0 Major product launches Source: Berenberg Bank estimates, company data We highlight selected innovations range across product category, brands and segments. 49 Sporting Goods adidas group major/new innovations 2012-2013 ytd (selected examples) Timing Features Segment Oct-12 Lightweight and Flight Control Technology increasing ball speed and distance. Multiple performance technologies. Optimum comibnation of speed, forgiveness, playability and feel. Equipment adipure Running shoe range Q2-12 First natural running shoe collection, consists of 3 shoes with varying heel gradient for different levels of advancement (adipure Motion, Gazelle, Adapt). Full support with a polyurethane overlay. Socklike fit and dual-layer midsoles. Footwear truWalkZero footwear Apr-12 Rockport's revolutionary footwear colelction. Natural full range of motion and stellar comfort. The lightest shoe Rockport ever made. Footwear Jul-12 Collaboration between adidas and major leadue soccer's 19 teams. Sport datatarcking technology permitting coaches and Equipment fans to track the athletes' hear rates, speed, field position, power and other performance metrics in real-time. DryDye technology (sustainable product range) Jul-12 The technology eliminates the need for water in the dyeing process. Step to create more environmentally benign products. A whole range of sustainable products. Apparel D Rose 3.5 Mar-13 Imrpoved performance - faster cuts and increased control. Designed to fit even closer to the foot. Footwear Mar-13 New cushioning material developed with cooperation with BASF. Highest energy return to the runner. Soft and reponsive cushioning. Footwear 2013 The largest scope of adjustability of any driver in brand's history. Seven face-angle positions, two movable shot-shape weights, twelve loft-sleeve setting positions. Equipment 2013 The most extreme foot speed. Player's power enhanced. New custom-support insoles, advanced SpeedCore composite quarter package, SpeedBlade +4.0 holder. Equipment Innovation 2012-2013 YTD Rocketbladez irons. miCoach Elite System Energy Boost R1 driver CCM RBZ skate Comments Growing popularity of natural/minimalist running. Sustainability. Normally takes 25 liters of water to colour a shirt, here the ened for water eliminated altogether. One of the most revolutionary innovations in footwear. Source: Berenberg Bank estimates, company data Puma product development, design and innovation Under Puma’s brand and product transformation plan, Puma intends to design and manufacture product with a clearer market positioning in Performance and Lifestyle than in previous years, thereby recognising the mistakes of the past (with so much product skewed towards Lifestyle, we estimate that Puma’s FY12 50 Sporting Goods Performance product was c.35% of the total mix compared with c.72% for the adidas group). For the future, Puma will focus on two distinct brand platforms: 1) the nature of Performance; and 2) Puma Social in the Lifestyle area. We understand that the former executive board departments of Product and Marketing will be combined into one executive department to ensure the close coordination of product and marketing across the group. We believe this step will provide a complementary organisational structure around the brand platforms. Moreover, the former product divisions of Footwear, Apparel and Accessories are to be integrated into the seven business units of team sports, running/training/fitness, golf, fundamentals, motorsport, lifestyle, and accessories and licences. We highlight Puma’s product development and design expense evolution below and assess how this has changed as a percentage of sales from FY06 to FY12. We carry out similar analysis for marketing/retail. Puma product development and design expenses and as a percentage of sales 90 80 70 60 50 40 30 20 10 0 2.6% 2.6% 2.4% 2.4% 2.3% 2.4% 2.2% 57 58 55 58 64 FY 06 FY 07 FY 08 FY 09 FY 10 85 77 FY 11 FY 12 2.7% 2.6% 2.5% 2.4% 2.3% 2.2% 2.1% 2.0% 1.9% Product development/design expenses (EUR m) Product development/design expenses as % of sales Source: Company data, Berenberg estimates Puma product development and design expenses and as a percentage of sales 20.9% 600 500 20.5% 18.5% 18.3% 18.6% 18.9% 440 448 529 501 501 551 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 400 300 200 100 0 21.5% 21.0% 20.5% 20.0% 19.5% 19.0% 18.5% 18.0% 17.5% 17.0% 16.5% Marketing/retail expenses (EUR m) Marketing/retail expenses as % of sales Source: Company data, Berenberg estimates 51 Sporting Goods Puma group major/new innovations 2011-2013 ytd (selected examples) Announcement Release Innovation 2011-2013 YTD Faasfoam Technology PowerCat 1.12 football boot May-11 Oct-11 Features Segment Category Products 2011 A/W One of the lightest and most resilient foam sole materials on the market, used in ultra-light running shoes for performance athletes. Footwear Sports performance: Running Faas 200, 250, 300, 350, 400, 500, 550, 800 and 900 Dec-11 Faeturing 3D DUO Power Shooting Technology, unique shooting technology applied to the kicking area on the inside of the boot. Made from an innovative thermoplastic material. Does not absorb energy upon ball impact but increases kicking power. Footwear Sports performance: Football PowerCat 1.12 football boot Sports Cross-category collection: "Light, flex and fit". performance: Lightweight materials, increased flexibility and an Football, Footwear & Apparel optimised fit. Enhanced speed, freedom of Motorsport, Golf, movement without compromising support. Running, Cricket, Indoor evoSPEED collection May-12 Jun-12 InCycle collection Oct-12 2013 S/S Biodegradable and recyclable, allowing consumers to return their products to stores for processing Footwear, Apparel & Accessories through PUMA's “Bring Me Back Programme” once they’ve reached the end of their line. Sportlifestyle evoSPEED 1 FG, evoSPEED MID, FAAS Trac evoSPEED, BOLT evoSPEED Runner, evoSPEED Cricket, evoSPEED Indoor 1 Recycable track jacket, Biodegradable InCycle Basket (sneaker), Biodegradable InCycle T-Shirt, Recycable InCycle Backpack, Source: Berenberg Bank estimates, company data Nike product development, design and innovation Nike’s product offerings are broken into seven key categories: 1) running; 2) basketball; 3) American football; 4) men’s training; 5) women’s training; 6) Nike sportswear; and 7) action sports. Nike’s brand portfolio consists of: 1) Nike; 2) NikeGolf; 3) Jordan – the premium brand of athletic footwear, apparel and accessories; 4) Converse Inc – under the converse, All Star, One Star, Chuck Taylor, Star Chevron and Jack Purcell trade marks; and 5) Hurley International – which designs a line of action sports and youth. Nike divested the Umbro football brand for $225m to Iconix (October 2012) and the Cole Haan design brands in November 2012 for $570m. Nike has its own internal R&D facilities where staff specialise in biomechanics, chemistry, exercise physiology, industrial design and other related fields. This approach to R&D, design and innovation is in our view, slightly more extensive than adidas’s, although adidas has similar investments in these categories. In addition, both adidas and Nike work in joint partnership with chemical and academic institutions in relation to new innovation and testing. In our view, Puma falls short of this level of investment, product development, design and innovation collaboration. 52 Sporting Goods Nike’s most recent major innovations and activities include: • the Nike fuelband – a digital device that tracks daily activities through a sport-tested accelerometer; • Flyknit technology – new footwear technology that uses advanced materials and proprietary manufacturing technology to produce a formfilling, lightweight and seamless upper; • Expand Nike + platform – enables tracking multiple activities with the ability to compared results over time; and • Uniforms – launch of new high performance uniforms for all 32 NFL teams including the “lightest and most sustainable kits”. Nike demand creation expenses growth 3,000.0 12.4% 2,500.0 2,000.0 12.3% 12.8% 12.4% 12.3% 11.7% 11.7% 11.2% 1,500.0 1,000.0 500.0 0.0 1,132 2,308 2,352 2,356 2,448 2,711 FY07 FY08 FY09 FY10 FY11 FY12 11.8% 11.3% 10.8% 10.3% Demand creation expenses (USDm) Demand creation expenses as % of sales Source: Company data, Berenberg estimates In the table, we compare adidas, Puma and Nike iconic brand/product pricing in sterling. Adidas and Nike pricing appears comparable to one another relative to Puma’s, which, based on our sample comparison, is considerably more expensive with its football offering. Moreover, we do not believe that Puma is currently able to compete with adidas and Nike in terms of innovation within the running department when we compare the Mobium product with the adidas brand’s BOOST shoe or Nike’s Flyknit Lunar 1+. 53 Sporting Goods Iconic product pricing comparison sample (GBP) adidas Men's adizero F50 TRX FG Boots GBP165 Puma Men's PowerCat 1 SL FG Football adidas Bayern München Home Jersey GBP65 Puma Men's BVB Replica Home Jersey adidas Men's Energy Boost Shoes GBP110 Puma Men's Mobium Elite Running Shoes GBP85 adidas Men's Superstar 2 GBP62 Puma Men's InCycle Basket Trainers GBP80 Puma Women's FormLite XT Sheen Trainers GBP210 GBP50 Nike Mercurial Vapor IX CR FG Nike Paris Saint-Germain Replica Short- GBP160 GBP60 GBP140 GBP62 GBP80 Puma -21.4% Nike +3.1% Puma +30.0% Nike +8.3% adidas vs. Puma +29.4% Nike -21.4% Puma -4.6% Nike +0.0% Puma +45.5% Nike +0.0% adidas +27.3% Nike +31.3% adidas -23.1% Nike -16.7% Puma vs. adidas -22.7% Nike -39.3% adidas +4.8% Nike +4.8% adidas -31.3% Nike -31.3% Nike Nike Flyknit Lunar 1+ GBP65 Reebok Women's CrossFit Nano 2.0 Nike Nike Cheyenne 2013 vintage GBP55 Nike Nike Free TR Fit 3 Breathe Source: Company websites, Berenberg estimates 54 Sporting Goods Commodity cost pressure or relief? Global sporting goods companies tend to hedge currency with limited hedging at the raw material level (adidas pays suppliers a fixed cost for raw materials and hedges the FOB/currency impact). We highlight commodity price movement in local currency and against the euro, which is relevant for adidas and Puma. We conclude that both adidas and Puma ought to see 50bp to 150bp of gross margin gains realised in 2013 on the basis of a general depreciation in commodity costs (in euro terms). We estimate that raw materials account for up to or slightly above 65% of COGS, although no single raw material accounts for more than 5% of COGS, which is why it is important to assess the average commodity price change. Commodity prices yoy changes in reported currencies (2005 to 2013 ytd) Crude oil Natural gas PET Pulp Aluminium Rubber Caustic Soda Soda Ash Cotton HDPE Ethylene Average Source: Datastream 2005 43.2% 51.3% 3.5% -0.8% 10.7% 11.7% 2006 19.8% -24.3% 6.9% 10.3% 35.1% 36.4% 2007 10.7% 3.1% 6.6% 17.7% 2.7% -1.5% 2008 34.2% 27.4% -0.1% 7.7% -2.4% 9.4% 2009 -36.7% -55.5% -18.3% -23.1% -35.1% -24.7% 2010 29.5% 10.8% 25.7% 41.6% 30.0% 94.8% 2011 39.6% -8.7% 32.5% 3.3% 10.4% 27.3% 2012 0.4% -31.0% -14.3% -15.3% -15.8% -23.5% 2013 -1.0% 31.5% 7.9% 1.4% -2.4% -11.6% 83.6% -10.0% 17.6% 37.5% 23.4% -4.0% 9.6% 2.6% 16.9% -6.5% 10.9% 8.7% 4.4% 9.2% 21.1% 2.9% 8.3% 75.0% 22.4% 9.6% 5.6% 13.1% 18.9% -41.8% 12.3% -9.4% -29.6% -44.2% -26.2% -18.8% -3.3% 67.2% 27.7% 66.6% 30.5% 46.8% 3.9% 50.7% 8.0% 24.8% 21.4% 3.2% -7.8% -43.8% 2.0% 1.9% -14.6% 9.5% -1.3% 6.9% 4.4% 9.7% 4.5% Commodity prices yoy changes in € (2005 to 2013 ytd) Crude oil Natural gas PET Pulp Aluminium Rubber Caustic Soda Soda Ash Cotton HDPE Ethylene Average Source: Datastream 2005 43.2% 51.2% 3.5% -0.8% 10.6% 11.7% 2006 18.7% -25.0% 5.8% 9.2% 33.8% 35.1% 2007 1.5% -5.5% -2.2% 7.9% -5.8% -9.7% 2008 25.5% 19.2% -6.6% 0.7% -8.7% 2.3% 2009 -33.4% -53.1% -14.0% -19.0% -31.7% -20.7% 2010 36.0% 16.4% 32.1% 48.7% 36.6% 104.6% 2011 32.9% -13.1% 26.2% -1.7% 5.1% 21.2% 2012 8.7% -25.4% -7.3% -8.3% -8.9% -17.2% YTD -3.3% 28.4% 5.3% -1.0% -4.7% -13.7% 83.6% -10.0% 17.6% 37.5% 23.4% -4.9% 8.6% 1.6% 15.8% -7.4% 9.9% -0.4% -4.3% 0.1% 11.0% -5.7% -0.7% 63.6% 14.4% 2.5% -1.2% 5.8% 11.2% -38.7% 18.3% -4.6% -25.9% -41.3% -22.3% -14.7% 1.5% 75.7% 34.1% 74.9% 37.1% 39.8% -1.1% 43.5% 2.9% 18.8% 15.6% 11.7% -0.2% -39.2% 10.4% 10.3% -7.6% 6.9% -3.7% 4.4% 1.9% 7.1% 2.0% The price movements in euro terms in 2012 on a collective basis read positively for sporting goods companies’ implied COGS/gross margin for 2013. We accept that structural headwinds such as Asian labour costs continue to increase and that for western European consumers, wage deflation continues to prevail, which results in more stringent household consumption behaviour. We expect adidas and Nike to be the main beneficiaries of more benign commodity prices compared with Puma. Puma continues to invest more heavily in more costly sustainable raw materials, while at the same time it needs to invest more in its Performance-related offering (Performance-related product offerings 55 Sporting Goods take longer to research, design and develop and are more costly – for example, a technical/performance football boot may comprise 80 to 90 components compared with a lifestyle/fashion footwear product, which typically consists of 10 to 15 components. Commodity costs in € (average prices) 2007 to 2013 Aluminium Crude oil HDPE Natural gas PET Pulp Average 2007 -5.8% 1.5% 11.0% -5.5% -2.2% 7.9% 1.1% 2008 -8.7% 25.5% -1.2% 19.2% -6.6% 0.7% 4.8% 2009 -31.7% -33.4% -25.9% -53.1% -14.0% -19.0% -29.5% 2010 36.6% 36.0% 34.1% 16.4% 32.1% 48.7% 34.0% 2011 5.1% 32.9% 2.9% -13.1% 26.2% -1.7% 8.7% 2012 -8.9% 8.7% 10.4% -25.4% -7.3% -8.3% -5.1% YTD -4.7% -3.3% 1.9% 28.4% 5.3% -1.0% 4.4% Q1 2013E -8.7% -5.3% 4.5% 40.8% 1.7% -1.9% 5.2% Caustic Soda* Rubber* Cotton* Soda Ash* Average 2* -0.4% -9.7% 0.1% -4.3% -3.6% 63.6% 2.3% 2.5% 14.4% 20.7% -38.7% -20.7% -4.6% 18.3% -11.5% -14.7% 104.6% 75.7% 1.5% 41.8% 39.8% 21.2% 43.5% -1.1% 25.9% 11.7% -17.2% -39.2% -0.2% -11.2% 6.9% -13.7% 4.4% -3.7% -1.5% 4.5% -19.8% -10.1% -5.7% -7.8% Total average -0.7% 11.2% -22.3% 37.1% 15.6% -7.6% 2.0% 0.0% Source: Datastream Relevant raw material price movements for sporting goods companies continue to depreciate in euro terms, which bode well so far for 2014 gross margin as well as 2013 margin opportunities. We highlight crude oil, aluminium (hardware), rubber and cotton as key raw material sources for sporting goods companies, all of which continue to depreciate in euro terms. adidas sourcing According to the adidas group’s FY12 annual report, adidas sourced 76% of its group products from Asia and took a 380bp negative gross margin impact on currency (Russian Rouble) and promotional activity. We highlight the sourcing regional splits below. adidas regional sourcing splits (FY12) Europe 8% Americas 16% Asia 76% Source: Company data, Berenberg estimates 56 Sporting Goods We note that 96% of adidas brand, Reebok and adidas golf footwear was sourced in Asia in FY12, 100bp less than in FY11. Furthermore, total Chinese footwear sourcing declined by c.200bp yoy as the adidas group continues to find more costeffective labour alternatives without compromising on product quality, which is subject to vigorous testing. Within Asia, the adidas group sourced 72% of its product from China, 17% from Vietnam, 8% from India and c.3% from Indonesia. We expect the Chinese sourcing representation to continue to fall as the adidas group works more with companies in other Asian supply destinations such as Cambodia and Bangladesh. Moreover, we expect adidas to source more apparel in Turkey in order to increase its proximity sourcing base, which will allow for increased flexibility when it comes to future orders, thereby reducing the risk of over-stocking, markdown and gross margin erosion. We forecast that the adidas group’s gross margin will increase by 150bp to 49.2%, ahead of adidas management’s official 2013 guided range of 48.0% to 48.5%. Puma sourcing World Cat Limited, Puma’s own procurement organisation with registered offices in Hong Kong, is responsible for buying products for the Puma’s Puma, Tretorn and Cobra Puma Golf brands. World Cat has local offices in key supply regions and the scope of its responsibility spans from selecting suppliers and production sites to negotiating prices and terms of delivery and payment, up and to and including order placement and processing. World Cat has also developed a “strategic supplier concept”, which periodically runs a dedicated performance analysis on the entire supplier portfolio. It will also test for quality and performance for regular and new suppliers alike. As sustainable sourcing is a key part of Puma’s product and brand messaging, World Cat works closely with social and environmental agencies and with International NGOs to ensure that its suppliers meet water and energy consumption, carbon dioxide emissions and waste management standards. Overall, World Cat procurement activities include collaboration with more than 150 suppliers in 32 countries with 89% of total purchasing volume from Asia, followed by EMEA with 6% and the Americas with 5%. Within Asia, China and Vietnam account for the bulk of product sourcing at 39% and 23% respectively. As with the adidas group, other Asian countries such as Cambodia (11%), Indonesia (11%) and Bangladesh (8%) are gaining in importance – Cambodia’s sourcing share increased by more than 300bp yoy to FY12 while China’s sourcing share declined by c.400bp (higher cost inflation). Given Puma’s reduced exposure to Performance product (apparel, footwear and hardware), technically in our view, it should be easier to switch suppliers at a faster rate and with less disruption. Performance product manufacturing is more complicated and timely as it involves more complex processes so when changing suppliers, there is often a lengthy training process involved before new regional pieces roll off the manufacturing line. 57 Sporting Goods Sporting goods events and share price performance In order to assess whether there is any discernible trading correlation between sporting goods companies before, during and after key sporting (football) events, we have charted the relative historical share price performance for adidas, Puma and Nike against the Eurofirst 300, Eurofirst 300 PG, MSCI Europe and S&P 500 Indices during previous UEFA Euro championships and FIFA World Cup tournaments below. Our analysis shows that sporting goods shares tend to outperform major indices one and three months before the start of key football tournaments and underperform three months from the start of the event – yet we acknowledge that past performance is not necessarily an indication for future performance. Sporting goods share price performance versus MSCI Ahead of major football events from 1996 to 2012, sporting goods company share prices tended to outperform against the MSCI European Index. Sporting goods share price performance (%) -3M 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 UEFA World UEFA World UEFA World UEFA World UEFA Cup Euro Cup Euro Cup Euro Cup Euro Euro 2004 2012 2010 2008 2006 2002 2000 1998 1996 Adidas PUMA Nike Sporting goods share price performance (%) -1M 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 UEFA World UEFA World UEFA World UEFA World UEFA Cup Euro Euro Cup Euro Cup Euro Cup Euro 2012 2010 2008 2006 2004 2002 2000 1998 1996 Adidas MSCI Europe PUMA Nike MSCI Europe Source: Bloomberg During and three months after major football events, sporting goods share prices tended to underperform the MSCI European Index. Sporting goods share performance (%) during 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 Sporting goods share performance (%) post +3M 15.0 5.0 -5.0 -15.0 -25.0 -35.0 -45.0 UEFA World UEFA World UEFA World UEFA World UEFA Euro Cup Euro Cup Euro Cup Euro Cup Euro 2012 2010 2008 2006 2004 2002 2000 1998 1996 Adidas PUMA Nike MSCI Europe UEFA World UEFA World UEFA World UEFA World UEFA Euro Cup Euro Cup Euro Cup Euro Cup Euro 2012 2010 2008 2006 2004 2002 2000 1998 1996 Adidas PUMA Nike MSCI Europe Source: Bloomberg Overleaf, we chart the relative out/underperformance of adidas, Puma and Nike against a broader range of indices. 58 Sporting Goods Relative share price performances one month before the event adidas -10.0 -15.0 -5.0 0.0 5.0 10.0 15.0 20.0 UEFA Euro 2012 1.8 -3.6 World Cup 2010 1.6 5.8 10.1 6.4 UEFA Euro 2008 10.1 6.7 -5.9 World Cup 2006 -2.5 -5.6 -9.6 -0.2 UEFA Euro 2004 2.2 -0.3 -0.3 20.0 World Cup 2002 20.3 16.9 23.3 -6.5 -6.8 -7.0 UEFA Euro 2000 -9.7 World Cup 1998 25.0 -0.1 -1.0 -0.1 -0.8 1.8 -10.8 2.3 -1.9 UEFA Euro 1996 0.3 -3.0 FTSEEUROFIRST 300 4.7 0.2 FTSEUROFIRST 300 PG MSCI Europe S&P 500 Source: Bloomberg Puma -15.0 -10.0 -5.0 5.0 0.0 10.0 15.0 20.0 -4.1 -4.9 -4.0 -4.7 UEFA Euro 2012 0.2 -5.2 World Cup 2010 0.0 4.2 12.3 8.6 UEFA Euro 2008 12.4 8.9 -8.7 World Cup 2006 -12.4 -8.5 -5.3 5.4 UEFA Euro 2004 5.4 5.3 4.7 World Cup 2002 1.6 UEFA Euro 2000 -9.3 4.9 7.8 7.9 -6.2 -6.5 -6.7 11.0 -1.6 World Cup 1998 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG 11.5 MSCI Europe 13.9 S&P 500 Source: Bloomberg 59 Sporting Goods Nike -20.0 -15.0 -5.0 -10.0 0.0 5.0 2.5 UEFA Euro 2012 2.7 -4.0 3.5 0.2 7.5 3.8 UEFA Euro 2008 7.5 4.1 7.9 World Cup 2006 8.2 4.2 1.2 UEFA Euro 2004 1.2 1.2 1.7 11.3 3.7 4.8 World Cup 2002 8.0 5.0 -3.8 -4.1 -4.3 UEFA Euro 2000 -7.0 World Cup 1998 15.0 -3.8 -9.2 World Cup 2010 10.0 3.4 -5.5 -18.1 -5.0 -2.5 8.3 UEFA Euro 1996 7.2 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG MSCI Europe 10.3 10.5 S&P 500 Source: Bloomberg Sporting goods share price performance (%) -1M 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 UEFA World UEFA World UEFA World UEFA World UEFA Euro Cup Euro Cup Euro Cup Euro Cup Euro 2012 2010 2008 2006 2004 2002 2000 1998 1996 Adidas PUMA Nike MSCI Europe S&P 500 Sporting goods share price performance (%) -3M 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 -10.0 -20.0 -30.0 UEFA World UEFA World UEFA World UEFA World UEFA Euro Cup Euro Cup Euro Cup Euro Cup Euro 2012 2010 2008 2006 2004 2002 2000 1998 1996 Adidas PUMA Nike MSCI Europe S&P 500 Source: Bloomberg 60 Sporting Goods Relative share price performances three months before the event adidas -10.0 -15.0 -5.0 0.0 5.0 10.0 6.1 UEFA Euro 2012 15.0 20.0 17.2 9.0 World Cup 2010 17.0 UEFA Euro 2008 12.2 7.8 -6.3 18.8 11.9 8.4 World Cup 2006 0.5 -2.7 7.1 5.1 UEFA Euro 2004 6.9 7.2 16.4 World Cup 2002 20.4 20.8 20.0 26.2 -3.1 UEFA Euro 2000 27.7 20.8 3.2 -9.2 World Cup 1998 30.0 9.1 3.5 -2.9 25.0 9.2 2.3 7.7 15.0 5.9 UEFA Euro 1996 11.9 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG MSCI Europe 14.9 S&P 500 Source: Bloomberg Puma -60.0 -40.0 -20.0 20.0 0.0 -1.0 UEFA Euro 2012 -3.6 3.6 UEFA Euro 2008 60.0 80.0 2.0 11.3 3.0 World Cup 2010 40.0 2.1 3.0 11.0 12.9 7.1 7.4 -3.5 -0.2 -3.3 World Cup 2006 -6.9 14.7 12.7 14.5 14.8 UEFA Euro 2004 56.2 World Cup 2002 UEFA Euro 2000 60.3 60.6 59.9 -18.4 -47.7 -23.8 -16.9 8.6 World Cup 1998 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG 21.0 20.2 25.6 MSCI Europe S&P 500 Source: Bloomberg 61 Sporting Goods Nike -40.0 -30.0 -20.0 0.0 -10.0 10.0 6.2 UEFA Euro 2012 3.6 12.0 0.0 UEFA Euro 2004 -6.2 -8.2 -6.4 -6.2 World Cup 2002 -8.7 50.0 60.0 0.3 15.5 15.8 3.4 -4.7 -4.3 -5.1 55.6 26.4 UEFA Euro 2000 57.1 50.2 World Cup 1998 -26.5 70.0 7.0 8.8 11.4 -3.4 40.0 9.2 UEFA Euro 2008 World Cup 2006 30.0 7.2 -1.1 World Cup 2010 20.0 9.3 -14.1 -14.9 -9.5 42.2 33.0 UEFA Euro 1996 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG MSCI Europe 42.1 39.1 S&P 500 Source: Bloomberg Relative share price performances during the event adidas -30.0 -25.0 -20.0 -15.0 -10.0 -5.0 -7.0 UEFA Euro 2012 -6.9 0.0 5.0 15.0 -5.7 -5.6 -4.9 -5.5 -4.0 World Cup 2010 -3.5 UEFA Euro 2008 -4.6 -3.3 -1.2 -1.4 -2.1 -1.6 World Cup 2006 -1.3 UEFA Euro 2004 0.7 1.7 1.5 1.2 4.2 -4.0 World Cup 2002 2.6 UEFA Euro 2000 10.0 -2.5 4.2 -7.0 -24.1 -9.1 -13.5 World Cup 1998 -16.2 -13.4 -6.6 -8.8 3.8 UEFA Euro 1996 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG MSCI Europe 8.1 7.8 9.2 S&P 500 Source: Bloomberg 62 Sporting Goods Puma -40.0 -30.0 -10.0 -20.0 -9.8 UEFA Euro 2012 0.0 10.0 20.0 30.0 -5.4 -9.7 -8.6 -9.3 -8.6 -9.2 -7.7 World Cup 2010 -5.4 UEFA Euro 2008 -5.2 -6.5 -3.1 6.3 5.6 6.1 World Cup 2006 0.9 UEFA Euro 2004 8.4 3.9 3.7 3.4 22.4 14.1 World Cup 2002 -10.6 -27.7 UEFA Euro 2000 22.4 20.7 -12.7 -16.8 World Cup 1998 -19.5 -16.6 FTSEEUROFIRST 300 -10.3 -12.0 FTSEUROFIRST 300 PG MSCI Europe S&P 500 Source: Bloomberg Nike -30.0 UEFA Euro 2012 -25.0 -20.0 -23.2 -23.1 -22.0 -15.0 -10.0 -5.0 0.0 5.0 10.0 20.0 -18.8 -3.3 -2.6 -3.2 -1.8 World Cup 2010 -4.0 UEFA Euro 2008 -5.1 -5.7 -6.3 -5.8 World Cup 2006 -1.8 -3.8 -3.6 4.2 UEFA Euro 2004 7.2 7.0 6.7 8.7 0.5 World Cup 2002 7.1 UEFA Euro 2000 15.0 8.7 -2.0 -19.0 -4.0 -1.6 11.3 World Cup 1998 8.7 -6.7 UEFA Euro 1996 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG 11.5 16.1 -2.3 -2.6 -1.3 MSCI Europe S&P 500 Source: Bloomberg 63 Sporting Goods Relative share price performances three months after the beginning adidas -30.0 -40.0 -20.0 -10.0 0.0 10.0 -0.7 -2.4 UEFA Euro 2012 30.0 -7.3 -2.9 -3.1 -7.9 UEFA Euro 2008 -3.1 -6.8 -10.0 World Cup 2006 1.6 -7.3 -11.1 World Cup 2010 -7.9 -7.8 -5.3 11.3 UEFA Euro 2004 19.0 11.3 10.9 2.1 -11.0 World Cup 2002 2.2 -2.5 -3.1 -3.8 -2.0 -2.5 UEFA Euro 2000 World Cup 1998 20.0 -2.6 -25.4 -34.7 -29.9 -26.1 4.4 UEFA Euro 1996 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG MSCI Europe 8.6 8.3 11.4 S&P 500 Source: Bloomberg Puma -35.0 -30.0 -25.0 -20.0 UEFA Euro 2012 -14.8 -17.9 World Cup 2010 -10.0 -15.0 -15.0 -5.0 0.0 5.0 15.0 -13.1 -10.8 -14.1 -14.2 -9.7 -1.5 -6.2 UEFA Euro 2008 -5.1 -11.3 World Cup 2006 -1.5 -9.2 -9.2 -6.6 4.7 UEFA Euro 2004 4.7 4.3 12.4 2.3 -10.7 World Cup 2002 2.4 -2.2 -15.0 -15.7 -13.9 -14.4 UEFA Euro 2000 World Cup 1998 10.0 -19.1 -28.4 -23.5 -19.8 -11.1 UEFA Euro 1996 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG -7.0 -7.2 -4.1 MSCI Europe S&P 500 Source: Bloomberg 64 Sporting Goods Nike -25.0 UEFA Euro 2012 -20.0 -21.3 -21.1 -10.0 -15.0 -5.0 0.0 5.0 10.0 20.0 -17.1 -4.1 -7.9 World Cup 2010 -4.2 0.3 -1.1 -5.8 UEFA Euro 2008 -1.1 -4.7 -7.3 World Cup 2006 -5.2 -5.1 -2.6 7.7 UEFA Euro 2004 7.7 7.3 15.4 -1.0 -14.0 World Cup 2002 -5.5 -0.9 -9.0 -9.7 UEFA Euro 2000 World Cup 1998 15.0 -19.3 -7.9 -8.4 -10.9 -20.2 -15.3 -11.6 0.7 UEFA Euro 1996 FTSEEUROFIRST 300 FTSEUROFIRST 300 PG MSCI Europe 4.9 4.7 7.8 S&P 500 Source: Bloomberg Post-event share price performance (+3 months) 20.0 10.0 0.0 -10.0 -20.0 -30.0 -40.0 -50.0 UEFA World UEFA World UEFA World UEFA World UEFA Euro Cup Euro Cup Euro Cup Euro Cup Euro 2012 2010 2008 2006 2004 2002 2000 1998 1996 Adidas PUMA Nike MSCI Europe S&P 500 Source: Bloomberg 65 Sporting Goods Currency We highlight currency exposure and the estimated impact from an appreciation/depreciation of the US dollar versus the euro. Exposure by company Sporting goods companies mainly source products from Asia, where transactions are US-dollar-denominated. As such, fluctuations in the dollar against other currencies could have a significant impact on their earnings. The table below summarises the impact of a fluctuation of the dollar against other currencies for the three major sporting goods companies. Dollar appreciation and impact vs. adidas, Puma and Nike – Translation adidas Positive Negative Appreciation of the USD vs. other currencies Depreciation of the USD vs. other currencies Puma Positive Negative Nike Negative Positive Source: Berenberg estimates, company data adidas group The bulk of adidas’s sourcing expenses are dollar-denominated while sales are denominated in other currencies, notably the euro. We highlight below the potential impact of +/-10% variation of the euro against the dollar, sterling and yen as well as a variation of the rouble against the dollar. In our view, the main currency risks, to which adidas is exposed are the euro/dollar and the rouble/dollar exchange rates. Any variation of the euro/dollar exchange rate of +/-10% could result in a net income impact of -€13m/+€12m. Any variation of the rouble/dollar exchange rate of +/-10% could result in a net income impact of -€10m/+€8m. adidas sensitivity analysis to currency fluctuations 31/12/2012 Equity Net income Equity Net income 31/12/2011 Equity Net income Equity Net income US$ EUR +10% (129) (13) EUR 10% 158 12 US$ EUR +10% (195) 5 EUR 10% 243 -6 RUB US$ +10% (10) US$ -10% 8 RUB US$ +10% (9) US$ -10% 7 GBP EUR +10% 20 0 EUR 10% -24 0 JPY EUR +10% 15 (1) EUR 10% -18 1 GBP EUR +10% 15 0 EUR 10% -19 0 JPY EUR +10% 11 (3) EUR 10% -13 4 Source: Berenberg estimates, Bloomberg, company data 66 Sporting Goods Puma Puma mainly sources in Asia, where most payments are dollar-denominated while its sales are denominated in other currencies, notably the euro. Moreover, Puma is exposed to FX risks arising from intra-group loans granted for financing purposes. Any variation of the dollar exchange rate of +/-10% against all other currencies could result in the hedging reserve in equity and the faire value of the hedges increasing/decreasing by €56.4m (+/-€57m in FY11). Nike Nike has several subsidiaries operating in currencies other than the dollar. Therefore, a weaker dollar is a positive to its earnings while a stronger dollar reduces earnings. Currencies to which Nike is the most exposed to are the euro, sterling and yen. 67 Sporting Goods Company KPIs We outline key KPIs for the adidas group, Puma and Nike in order to assess key management remuneration components. Company specific KPIs Company KPI adidas Operating cash flow as the most important driver to increase shareholders value Metrics Operating profit Change in operating working capital Net investments (capex - D&A) Puma By 2015: “Back on the Attack” metrics 2013: Successful implementation of the transformation and costreduction programme Sales, SG&A, operating margin, capex as a percentage of sales, FCF and ROCE Profitability over the shorter term Nike Operating profit Sales, EPS and share price performances Operating profit of individual segments WKR and PP&E are regularly reviewed by management Source: Berenberg estimates, company data adidas group According to adidas, its strategy aims at increasing shareholder value via the maximisation of operating cash flow. In order to achieve its targets, adidas focuses on continuously increasing the top and bottom line while optimising the use of invested capital (inventories and net investments). Both the management of operating segments and management at market levels have responsibility for improving profitability, optimising working capital and managing capex. adidas’s operating income (adjusted), working capital, capex-D&A 400 300 200 100 0 -100 -200 -300 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Operating income, adjusted Working capital check Capex - D&A Source: Company data, Berenberg estimates In addition, management is focused on long-term performance improvement where adidas has developed a modified economic value added (EVA) model called Contribution After Capital Charge (CACC), which is used as one of the main metrics to define management’s variable compensation. We highlight adidas’s post-tax ROIC forecasts to FY15E. According to our estimates, post-tax ROIC ought to increase from 6.5% in FY12 to 12.4% in FY15. 68 Sporting Goods adidas’s post-tax ROIC evolution (FY06-15E) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Post tax ROIC Source: Company data, Berenberg estimates Puma Puma’s 2015 “Back on the Attack” plan key KPIs consist of increasing net sales, achieving a stable gross margin, decreasing SG&A costs and an increasing EBIT margin. The plan includes non-P&L targets such as decreasing capital expenditure as a percentage of sales, increasing free cash flow and return on capital employed. Shorter-term, Puma’s key target consists of a return to more sustainable profitability via its transformation and cost reduction programme (including the closure of unprofitable stores (c.90 in Europe and North America) and the consolidation of its warehouse/DC structure from 23 to seven. We are cautious about the mid to long-term market share and top-line growth relative to the larger sporting goods players for Puma but are confident over a shorter timeframe that the transformation and cost reduction programme will deliver incremental returns, hence the forecast shape of Puma’s post-tax ROIC profile below. Puma’s post-tax ROIC evolution (FY06-15E) 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Post tax ROIC Source: Company data, Berenberg estimates 69 Sporting Goods Nike Operating profit is the key metric used by Nike to assess the performance of individual segments. Nike’s compensation programme consists of a base salary, a performance-based annual incentive bonus and long-term incentives (incentive plan and stock options). Annual bonuses are paid to executives under Nike’s Executive Performance Sharing Plan (PSP). The PSP for all executives in based on Nike’s overall performance each year, measured by the operating profit targets (adjusted for potential impacts of acquisitions, divestures or accounting changes). In addition to its stock option programme, Nike has also a longer-term incentive plan which is 50% based on cumulative revenues for the three-year performance period and 50% based on cumulative diluted EPS for the period, adjusted for acquisitions, divestures and accounting changes. Annual bonuses and long-term incentive plans are capped at certain levels. 70 Sporting Goods Valuation In order to value sporting goods companies we primarily take a fundamental/ bottom-up approach. We use P/E, EV/EBITDA and PEG as our main comparators, which are driven by earnings and cash flow forecasts. In addition, we believe that investors rightly evaluate each company on a brand premium/discount basis, factor a discounted probability as to whether company targets (all three major sporting goods companies have published their own investment strategy and performance targets to 2015) will be achieved as well as partly basing valuation around the sporting goods cycle (relative to major sporting goods events), as share price performance will fluctuate subject to the year ahead’s global sporting events calendar. We highlight below the major sporting goods scheduled events for 2013 to 2018: Major sporting events in 2013 Event Australian Open Start End Tennis 14/01/13 27/01/13 South Africa 19/01/13 10/02/13 American Football 03/02/13 03/02/13 2013 Africa Cup of Nations Super Bowl Sport Masters Golf 08/04/13 14/04/13 Football 25/05/13 25/05/13 French Open Tennis 21/05/13 09/06/13 NBA Finals Basketball 06/06/13 20/06/13 UEFA Champions League Final US Open Golf 13/06/13 16/06/13 Wimbledon Tennis 24/06/13 07/07/13 British Open Golf 18/07/13 21/07/13 IAAF World Championships in Athletics Russia 10/08/13 18/08/13 US Open Tennis 26/08/13 08/09/13 ATP World Tour Final Tennis Nov Nov Source: Relevant sporting events websites, Berenberg bank estimates Major sporting events in 2014 Event Sport Start End Tennis Jan Jan American Football 02/02/14 02/02/14 Multi 07/02/14 23/02/14 Golf 07/04/14 13/04/14 UEFA Champions League Final Football May May French Open Tennis May May NBA Finals Basketball Jun Jun Australian Open Super Bowl Winter Olympics Masters Golf 12/06/14 15/06/14 FIFA World Cup 2014 US Open Football 12/06/14 13/07/14 Wimbledon Tennis Jul Jul British Open Golf 17/07/14 20/07/14 US Open Tennis Aug Sep ATP World Tour Final Tennis Nov Nov Source: Relevant sporting events websites, Berenberg bank estimates 71 Sporting Goods Major sporting events in 2013-2018 Year Event Location Start End 2013 2013 Africa Cup of Nations 2013 IAAF World Championships in Athletics South Africa 19/01/13 10/02/13 Russia 10/08/13 18/08/13 2014 Winter Olympics Russia 07/02/14 23/02/14 2014 FIFA World Cup 2014 Brazil 12/06/14 13/07/14 2015 AFC Asian Cup Australia 04/01/15 26/01/15 2015 2015 Africa Cup of Nations Morocco TBC TBC 2015 IAAF World Championships in Athletics China 22/08/15 30/08/15 2016 UEFA Euro 2016 France Jun Jul 2016 Summer Olympics Brazil 05/08/16 21/08/16 2017 2017 Africa Cup of Nations Libya TBC TBC 2017 IAAF World Championships in Athletics United Kingdom 05/08/17 13/08/17 2018 Winter Olympics South Korea 09/02/18 25/02/18 2018 FIFA World Cup 2018 Russia Jun Jul Source: Relevant sporting events websites, Berenberg bank estimates We note that company sales and marketing and research and development budgets are geared towards such events which can result in some EBIT volatility predicated around investment timing for key sporting events. As such, we use DCF as a supportive measure for our P/E based price targets. adidas Bloomberg and Berenberg estimates vs. peers Sales growth EBITDA growth EBIT growth 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 1.4% 7.1% 6.3% 21.7% 20.6% -16.3% 10.0% 5.7% -9.4% 5.5% 7.9% 7.8% 20.5% 21.4% 3.4% 7.2% 5.0% 7.2% 4.8% 6.9% 9.2% 20.4% 21.5% 9.0% 4.6% 4.2% 12.3% 20.9% 10.9% 16.7% 24.3% 9.9% -15.9% 14.7% 35.9% n.m. 11.0% 12.1% 9.6% 23.9% 30.0% 3.8% 10.8% 11.0% 249.9% 10.0% 8.2% 12.8% 22.6% 21.4% 11.7% 3.0% 7.1% 45.1% 5.1% 12.1% 15.1% 26.6% 11.6% -15.3% 16.8% 50.5% n.m. 13.0% 11.9% 11.2% 25.4% 26.5% 2.7% 12.9% 14.0% n.m. 9.7% NA 9.4% NA 25.7% 12.5% NA 9.2% 145.5% Total sector weighted 8.4% 9.6% 9.4% 13.1% 15.1% 11.3% 13.4% 13.9% 6.0% Total sector median 6.3% 7.2% 9.0% 15.7% 11.0% 11.7% 13.6% 13.0% 11.1% 4.5% -45.8% 3.4% -58.9% 6.7% -30.9% 6.5% -32.4% 5.9% -36.8% 6.4% -31.6% 16.3% 24.3% 43.6% 233.4% 16.3% 7.8% 17.4% 14.7% 14.4% 27.3% 19.4% 71.0% 17.0% 27.2% 20.8% 55.7% 18.6% 33.9% 19.5% 40.8% 15.4% 157.0% 21.7% 262.5% Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg 72 Sporting Goods adidas Bloomberg and Berenberg estimates vs. peers Net debt/ EBITDA Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted Total sector median adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) EBIT margin EBITDA margin 2013E -1.2x -1.0x 0.4x -1.0x -12.1x -3.3x -0.3x 1.9x 3.0x -1.8x 2014E -1.5x -0.9x 0.1x -1.1x -13.2x -3.4x -0.6x 1.6x 0.5x -2.0x 2015E -1.7x NA 0.0x NA -15.9x -3.1x -0.6x 1.3x 0.2x -0.7x 2013E 11.3% 14.9% 16.8% 14.0% 28.0% 19.9% 10.3% 9.5% 2.1% 16.1% 2014E 11.9% 15.5% 17.0% 14.4% 29.9% 19.9% 10.6% 10.0% 6.7% 16.8% 2015E 12.5% 15.7% 17.6% 14.7% 29.9% 20.4% 10.5% 10.3% 8.7% 17.0% 2013E 9.2% 13.3% 14.6% 11.8% 25.5% 18.5% 8.4% 7.7% -3.3% 14.2% 2014E 9.9% 13.8% 15.0% 12.3% 26.5% 18.4% 8.8% 8.4% 2.6% 14.8% 2015E 10.3% NA 15.1% NA 27.5% 19.0% NA 8.8% 5.7% 9.5% -1.0x -0.9x -0.6x 14.0% 14.4% 14.7% 11.8% 12.3% 12.7% -0.4x -79.2% -0.5x -72.2% -0.6x -71.1% -0.7x -65.3% -0.6x -16.2% -0.9x 20.9% 10.9% -32.5% 11.1% -30.8% 11.9% -29.2% 12.3% -26.7% 12.8% -24.7% 13.8% -19.1% 8.9% -37.4% 9.3% -34.7% 9.9% -33.1% 10.4% -29.6% 10.8% 13.3% 11.9% 25.3% Source: Berenberg Bank estimates, Bloomberg In short, adidas looks attractive relative to peers. We appreciate that FY14 is the year where we expect to see “all-in” positive operating leverage start to materialise. adidas – market price multiples Bloomberg and Berenberg estimates vs. peers PE Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted Total sector median adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) EV/ EBITDA EV/ EBIT EV/ sales PEG 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2012-15E 16.6x 21.0x 15.7x 38.4x 34.7x 12.9x 21.9x 13.4x n.m. 21.8x 14.6x 18.2x 13.9x 30.4x 27.3x 12.7x 19.6x 11.5x 47.4x 18.9x 13.2x 16.1x 12.3x 23.9x 22.2x 11.5x 16.7x 10.5x 15.6x 16.1x 8.2x 12.8x 10.3x 18.0x 21.1x 6.6x 12.1x 9.1x 32.8x 13.1x 7.4x 11.4x 9.4x 14.6x 16.2x 6.4x 11.0x 8.2x 9.4x 11.3x 6.7x 10.5x 8.4x 11.9x 13.3x 5.7x 10.6x 7.6x 6.5x 10.1x 10.1x 14.3x 11.9x 21.3x 23.1x 7.1x 14.9x 11.1x -20.2x 14.5x 8.9x 12.7x 10.7x 17.0x 18.3x 6.9x 13.2x 9.8x 24.3x 12.9x 8.1x NA 9.8x NA 14.5x 6.2x NA 9.0x 9.9x 8.5x 0.9x 1.9x 1.7x 2.5x 5.9x 1.3x 1.2x 0.9x 0.7x 2.2x 0.9x 1.8x 1.6x 2.1x 4.8x 1.3x 1.2x 0.8x 0.6x 2.0x 0.8x 1.6x 1.5x 1.7x 4.0x 1.2x 1.1x 0.8x 0.6x 1.8x 1.7 1.5 1.2 1.6 1.8 -2.2 1.4 0.7 n.m. 1.4 18.8x 18.2x 15.6x 12.1x 9.4x 8.4x 11.9x 12.7x 9.4x 1.3x 1.3x 1.2x 1.5 17.1x -21.7% 16.1x -26.2% 14.2x -24.5% 13.2x -29.7% 12.2x -24.1% 10.7x -33.4% 9.2x -29.9% 9.0x -31.5% 7.9x -30.1% 7.7x -32.3% 6.9x -31.8% 6.4x -36.7% 11.2x -22.8% 10.8x -25.9% 9.5x -26.5% 9.0x -30.1% 8.2x -3.5% 7.4x -12.9% 1.0x -54.5% 1.0x -54.4% 0.9x -52.3% 0.9x -52.1% 0.9x -49.9% 0.9x -50.0% 0.5 -65.0% 0.4 -71.5% Source: Berenberg Bank estimates, Bloomberg adidas – target price multiples Bloomberg and Berenberg estimates vs. peers PE EV/ EBITDA EV/ EBIT EV/ sales Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted 2013E 17.2x 21.5x 16.3x 40.9x 37.4x 12.9x 20.2x 14.8x n.m. 22.6x 2014E 15.1x 18.7x 14.5x 32.3x 29.5x 12.7x 18.2x 12.7x 47.4x 19.5x 2015E 13.7x 16.5x 12.8x 25.4x 23.9x 11.5x 15.5x 11.6x 15.6x 16.7x 2013E 8.5x 13.1x 10.7x 19.2x 22.8x 5.7x 11.3x 9.8x 28.9x 13.6x 2014E 7.7x 11.7x 9.8x 15.5x 17.5x 5.5x 10.2x 8.8x 8.3x 11.7x 2015E 7.0x 10.8x 8.7x 12.6x 14.5x 4.9x 9.9x 8.3x 5.7x 10.5x 2013E 10.5x 14.7x 12.3x 22.7x 25.0x 6.1x 13.8x 12.0x n.m. 15.2x 2014E 9.3x 13.1x 11.1x 18.1x 19.8x 5.9x 12.2x 10.6x 21.5x 13.3x 2015E 8.4x NA 10.1x NA 15.7x 5.3x NA 9.7x 8.7x 8.8x 2013E 1.0x 2.0x 1.8x 2.7x 6.4x 1.1x 1.2x 0.9x 0.6x 2.3x 2014E 0.9x 1.8x 1.7x 2.2x 5.2x 1.1x 1.1x 0.9x 0.6x 2.0x 2015E 0.9x 1.7x 1.5x 1.9x 4.3x 1.0x 1.0x 0.8x 0.5x 1.8x Total sector median 18.7x 18.2x 15.5x 11.3x 9.8x 8.7x 13.0x 12.2x 9.2x 1.2x 1.1x 1.0x 18.5x -18.2% 20.1x -10.9% 15.4x -21.0% 16.6x -15.1% 13.3x -20.6% 13.4x -19.5% 10.0x -26.5% 11.2x -17.2% 8.6x -26.6% 9.6x -18.2% 7.5x -28.4% 8.0x -23.4% 12.2x -19.7% 13.5x -11.3% 10.3x -22.8% 11.3x -15.4% 8.9x 1.3% 9.3x 5.3% 1.1x -52.6% 1.3x -45.3% 1.0x -50.2% 1.2x -42.5% 1.0x -47.6% 1.1x -39.8% adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg 73 Sporting Goods Puma – Bloomberg and Berenberg estimates vs. peers Sales growth EBITDA growth EBIT growth 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 4.5% 7.1% 6.3% 21.7% 20.6% -16.3% 10.0% 5.7% -9.4% 6.7% 7.9% 7.8% 20.5% 21.4% 3.4% 7.2% 5.0% 7.2% 5.9% 6.9% 9.2% 20.4% 21.5% 9.0% 4.6% 4.2% 12.3% 16.3% 10.9% 16.7% 24.3% 9.9% -15.9% 14.7% 35.9% n.m. 16.3% 12.1% 9.6% 23.9% 30.0% 3.8% 10.8% 11.0% 249.9% 14.4% 8.2% 12.8% 22.6% 21.4% 11.7% 3.0% 7.1% 45.1% 17.0% 12.1% 15.1% 26.6% 11.6% -15.3% 16.8% 50.5% n.m. 18.6% 11.9% 11.2% 25.4% 26.5% 2.7% 12.9% 14.0% n.m. 15.4% NA 9.4% NA 25.7% 12.5% NA 9.2% 145.5% Total sector weighted 8.0% 9.3% 9.0% 13.4% 15.5% 12.0% 14.3% 14.7% 7.5% Total sector median 6.3% 7.2% 9.0% 15.5% 12.1% 12.8% 16.0% 13.5% 13.9% 1.4% -81.8% 0.2% -97.5% 5.5% -40.8% 5.2% -44.4% 4.8% -47.0% 4.8% -46.2% 20.9% 56.7% 106.1% 694.3% 11.0% -29.1% 11.3% -27.0% 10.0% -16.7% 9.2% -22.8% 5.1% -64.6% 5.3% -62.8% 13.0% -11.7% 12.7% -13.6% 9.7% 29.6% 10.2% 35.1% adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg Puma – Bloomberg and Berenberg estimates vs. peers Net debt/ EBITDA adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted Total sector median Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) EBITDA margin EBIT margin 2013E -0.4x -1.0x 0.4x -1.0x -12.1x -3.3x -0.3x 1.9x 3.0x -1.6x 2014E -0.6x -0.9x 0.1x -1.1x -13.2x -3.4x -0.6x 1.6x 0.5x -1.7x 2015E -0.6x NA 0.0x NA -15.9x -3.1x -0.6x 1.3x 0.2x -0.4x 2013E 10.9% 14.9% 16.8% 14.0% 28.0% 19.9% 10.3% 9.5% 2.1% 15.4% 2014E 11.9% 15.5% 17.0% 14.4% 29.9% 19.9% 10.6% 10.0% 6.7% 16.1% 2015E 12.8% 15.7% 17.6% 14.7% 29.9% 20.4% 10.5% 10.3% 8.7% 16.5% 2013E 8.9% 13.3% 14.6% 11.8% 25.5% 18.5% 8.4% 7.7% -3.3% 13.5% 2014E 9.9% 13.8% 15.0% 12.3% 26.5% 18.4% 8.8% 8.4% 2.6% 14.1% 2015E 10.8% NA 15.1% NA 27.5% 19.0% NA 8.8% 5.7% 10.5% -0.4x -0.6x -0.6x 14.0% 14.4% 14.7% 11.8% 12.3% 12.9% -1.2x -23.5% -1.2x -24.8% -1.5x -15.4% -1.5x -15.0% -1.7x 293.3% -1.8x 318.6% 11.3% -26.4% 11.5% -25.5% 11.9% -26.0% 12.1% -24.6% 12.5% -24.1% 12.6% -23.2% 9.2% -31.7% 9.3% -30.7% 9.9% -30.2% 10.0% -29.1% 10.3% -1.6% 10.5% 0.2% Source: Berenberg Bank estimates, Bloomberg Puma – market price multiples Bloomberg and Berenberg estimates vs. peers PE adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted Total sector median Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) 2013E 17.1x 21.0x 15.7x 38.4x 34.7x 12.9x 21.9x 13.4x n.m. 21.1x 2014E 14.2x 18.2x 13.9x 30.4x 27.3x 12.7x 19.6x 11.5x 47.4x 18.2x EV/ EBITDA 2015E 12.2x 16.1x 12.3x 23.9x 22.2x 11.5x 16.7x 10.5x 15.6x 15.5x 2013E 9.2x 12.8x 10.3x 18.0x 21.1x 6.6x 12.1x 9.1x 32.8x 12.6x 2014E 7.9x 11.4x 9.4x 14.6x 16.2x 6.4x 11.0x 8.2x 9.4x 10.9x EV/ EBIT 2015E 6.9x 10.5x 8.4x 11.9x 13.3x 5.7x 10.6x 7.6x 6.5x 9.7x 2013E 11.2x 14.3x 11.9x 21.3x 23.1x 7.1x 14.9x 11.1x n.m. 14.2x 2014E 9.5x 12.7x 10.7x 17.0x 18.3x 6.9x 13.2x 9.8x 24.3x 12.4x EV/ sales 2015E 8.2x NA 9.8x NA 14.5x 6.2x NA 9.0x 9.9x 4.6x 2013E 1.0x 1.9x 1.7x 2.5x 5.9x 1.3x 1.2x 0.9x 0.7x 2.0x 2014E 0.9x 1.8x 1.6x 2.1x 4.8x 1.3x 1.2x 0.8x 0.6x 1.8x PEG 2015E 0.9x 1.6x 1.5x 1.7x 4.0x 1.2x 1.1x 0.8x 0.6x 1.6x 2012-15F 0.5 1.5 1.2 1.6 1.8 -2.2 1.4 0.7 n.m. 1.2 19.0x 18.2x 15.6x 12.1x 9.4x 8.4x 13.1x 12.7x 9.4x 1.3x 1.3x 1.2x 1.3 16.6x -21.3% 16.8x -20.5% 14.6x -19.5% 14.7x -19.3% 13.2x -15.0% 13.2x -15.2% 8.2x -34.9% 8.0x -36.8% 7.4x -31.9% 7.2x -34.0% 6.7x -30.6% 6.6x -32.3% 10.1x -29.1% 9.8x -31.3% 8.9x -28.2% 8.7x -30.3% 8.1x 78.4% 7.9x 72.6% 0.9x -54.4% 1.0x -52.2% 0.9x -51.8% 0.9x -49.3% 0.8x -49.0% 0.9x -46.4% 1.7 43.9% 8.2 586.4% Source: Berenberg Bank estimates, Bloomberg 74 Sporting Goods Puma – target price multiples Bloomberg and Berenberg estimates vs. peers PE EV/ EBITDA EV/ sales EV/ EBIT adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted 2013E 18.5x 21.5x 16.3x 40.9x 37.4x 12.9x 20.2x 14.8x n.m. 22.1x 2014E 15.4x 18.7x 14.5x 32.3x 29.5x 12.7x 18.2x 12.7x 47.4x 19.0x 2015E 13.3x 16.5x 12.8x 25.4x 23.9x 11.5x 15.5x 11.6x 15.6x 16.2x 2013E 10.0x 13.1x 10.7x 19.2x 22.8x 5.7x 11.3x 9.8x 28.9x 13.1x 2014E 8.6x 11.7x 9.8x 15.5x 17.5x 5.5x 10.2x 8.8x 8.3x 11.3x 2015E 7.5x 10.8x 8.7x 12.6x 14.5x 4.9x 9.9x 8.3x 5.7x 10.1x 2013E 12.2x 14.7x 12.3x 22.7x 25.0x 6.1x 13.8x 12.0x n.m. 14.8x 2014E 10.3x 13.1x 11.1x 18.1x 19.8x 5.9x 12.2x 10.6x 21.5x 12.9x 2015E 8.9x NA 10.1x NA 15.7x 5.3x NA 9.7x 8.7x 9.0x 2013E 1.1x 2.0x 1.8x 2.7x 6.4x 1.1x 1.2x 0.9x 0.6x 2.1x 2014E 1.0x 1.8x 1.7x 2.2x 5.2x 1.1x 1.1x 0.9x 0.6x 1.9x 2015E 1.0x 1.7x 1.5x 1.9x 4.3x 1.0x 1.0x 0.8x 0.5x 1.7x Total sector median 19.4x 18.2x 15.5x 11.3x 9.8x 8.7x 13.0x 12.2x 9.3x 1.2x 1.1x 1.0x 17.2x -22.1% 14.8x -32.9% 15.1x -20.2% 17.8x -6.3% 13.7x -15.7% 15.5x -4.2% 8.5x -35.1% 17.5x 33.3% 7.7x -32.1% 8.5x -24.8% 7.0x -30.8% 7.6x -24.3% 10.5x -29.5% 11.0x -26.1% 9.3x -28.5% 10.4x -19.5% 8.4x -6.0% 9.2x 3.0% 1.0x -54.7% 1.0x -54.2% 0.9x -52.1% 1.0x -49.0% 0.9x -49.3% 0.9x -46.2% Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg How did sporting goods companies fare during QE1 and QE2? Sporting goods companies are not immune to recession as in times of financial stress, consumers will postpone/cancel discretionary purchases and/or reduce the wallet size of discretionary-related spend geared towards premium performance products. adidas underperformed peers during 2008-2009 primarily due to a material underperformance of the Reebok brand and overstocking in key regions. FY09 sales deteriorated by 4% on a reported basis and by 6% on a currency-neutral basis. Wholesale (69% of FY09 group sales) currency-neutral sales underperformed Retail at -9%. On a brand-by-brand basis, both Reebok and adidas sales declined by 7% and by 5% respectively on a currency-neutral basis. Due to the high sales volume directed through the wholesale channel, sporting goods companies have to stock the wholesale channel based on the future order book. Thus, when global economic shocks occur, sporting goods business models have historically not been flexible enough to deal with wholesale order book volatility, heavy mark-downs and rapid reaction rationalisation of the cost base. In adidas’s case, the FY09 group gross margin declined by 330bp to 45.4% (Wholesale fell by 210bp to 41.6% and Retail by 290bp to 58.6%) yet group EBIT declined by c.53% to just 4.9%, a startling reminder of significant operating de-leverage. In FY09, Puma’s top line fell by 3% to €2,447m and EBIT and EPS declined by 14% and 17% respectively (on an adjusted basis). Puma’s group gross margin declined by 490bp. In the table below, we highlight the adidas group’s and Puma’s share price performance six and three months before QE1 and QE2 and three and six months afterwards against the STOXX 600 Index and the E3PERC Index to compare sporting goods performance with household, personal and luxury goods stocks. adidas was a clear outperformer pre- and post-quantitative easing versus Puma. adidas’s and Puma’s QE1 and QE2 performance (pre- and post-) QE1 Stoxx 600 E3PERC Puma adidas -6M -33% -27% -41% 6% -3M -13% -11% -13% 0% QE2 +3M 20% 15% 32% 10% +6M 43% 45% 89% 11% Stoxx 600 E3PERC Puma adidas -6M 1% 11% 0% 5% -3M 3% 8% -6% -1% +3M 4% 19% 4% 22% +6M 13% 19% 0% 16% Source: Bloomberg, Berenberg estimates 75 adidas AG Sporting Goods On the ball • We initiate coverage of adidas AG with a Buy recommendation and a €95 price target, providing 25% upside from current share price levels. Buy (initiation) Rating system Absolute adidas ought to generate mid- to high single-digit sales and doubledigit EBIT, EPS and DPS growth on a three-year CAGR basis (FY1215E). Our three-year sales and EPS CAGR forecasts of 6% and 23% respectively reflect the strong operating leverage effect we expect to materialise through increased retail sales, distribution rationalisation, market share and price/mix gains. Our FY13E and FY14E earnings estimates are 5% and 7% ahead of Bloomberg consensus at €4.72 and €5.73 respectively. Current price Price target • We believe adidas is at a more advanced stage in terms of the planning, execution and delivery of its Route 2015 investment plan than its closest European peer, Puma, is with its own 2015 strategy. We expect adidas to increase its share of the global sporting goods market by 560bp over the next three years (FY12-15E), outperforming market growth of 1.5x global GDP (2.2x GDP for adidas) compared with a 10bp market share decline for Puma. Performance data • We view FY13 as a transitional year, with greater operating leverage expected in FY14 and FY15. According to our analysis, adidas ought to exceed its 2015 sales target of €17bn by c.3% to €17.5bn and outperform its FY15 internal EBIT target of 11% by 90bp. Our FY15E earnings estimates are c.13% ahead of Bloomberg consensus at €7.07 (Bloomberg consensus €6.26). • • adidas currently trades on FY13E and FY14E P/Es of 16.1x and 13.2x compared with its seven-year average P/E of c.17x. According to our analysis, adidas has the lowest PEG ratio at 0.5x versus our peer average (market capitalisation weighted) of 1.3x, Nike at 1.5x and Puma at 1.7x. Our €95 target price, based on our P/E analysis and driven by our earnings and cash flow, forecasts implies non-cashadjusted FY13E and FY14E P/Es of 20.1x and 16.6x and is supported by our DCF of €98 (9% WACC and 3% terminal growth). Y/E 31.12., EUR m Sales EBITDA EBIT Net profit Net debt (net cash) EPS (reported) EPS (recurring) CPS DPS Gross margin EBITDA margin EBIT margin Dividend yield NOPAT/IC (Post tax ROIC) EV/sales EV/EBITDA EV/EBIT P/E ROIC/WACC % spread Source: Company data, Berenberg Bank 2011 2012 2013E 2014E 2015E 13,322 1,199 953 613 91 2.9 2.9 1.2 1.0 47.5% 9.0% 7.2% 1.3% 8.1% 1.3 14.1 17.7 25.9 -0.9% 14,883 1,195 1,185 791 448 2.5 3.8 3.5 1.4 47.7% 8.0% 8.0% 1.8% 6.5% 1.1 14.1 14.3 20.1 -2.5% 15,395 1,716 1,432 988 864 4.7 4.7 3.3 1.7 49.2% 11.1% 9.3% 2.2% 10.7% 1.1 9.9 11.8 16.1 1.7% 16,399 2,014 1,712 1,199 1,366 5.7 5.7 4.1 2.0 49.9% 12.3% 10.4% 2.7% 11.5% 1.0 8.4 9.9 13.2 2.5% 17,455 2,405 2,083 1,479 2,061 7.1 7.1 5.4 2.5 50.6% 13.8% 11.9% 3.3% 12.4% 1.0 7.0 8.1 10.7 3.4% EUR 75.84 EUR 95.00 18/04/2013 XETRA Close Market cap EUR 15,880m Reuters ADSGn.DE Bloomberg ADS GY Share data Shares outstanding (m) Enterprise value (EUR m) Daily trading volume High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month 1.9 % 3 months 14.7 % 12 months 17.1 % 209 16,905 900,926 82 56 DAX 3.2 % 12.6 % 20.7 % Business activities: Sporting goods Non-institutional shareholders: adidas management 2% 25 April 2013 John Guy Analyst +44 20 3465 2674 john.guy@berenberg.com Bassel Choughari Analyst +44 20 3465 2675 bassel.choughari@berenberg.com Rupert Trotter Specialist Sales +44 20 3207 7815 rupert.trotter@berenberg.com 76 adidas AG Sporting Goods Catalysts for share price performance adidas has outperformed the DAX index and SXXP 600 by 18% and 26% on a relative basis over the past three months. The stock has re-rated by 13% over the same period, primarily due to earnings upgrades post-FY12 results, whereby the Q412 gross margin and earnings beat consensus forecasts. In addition, management took, in our view, the correct decision to write down losses and restate prior year accounts to fully reflect the impact of illegal trading and accounting practices at its Reebok Indian operations. We do not anticipate that the rate of Q412 gross margin improvement (+200bp yoy to 47.6%) will be repeated throughout 2013. However, we see upside risk to group gross margin through ongoing favourable product and regional sales mix, selected price increases supported by market leading innovation as well as an increased share in higher-margin retail sales. We forecast retail to account for c.24% of group sales by FY13, an increase of 120bp yoy compared with a 170bp yoy increase in FY12 to 22.7%. We appreciate offsetting factors such as less favourable hedging (the adidas euro/dollar hedge rate in 2012 was 1.32 compared with 1.37/8 in 2013), which implies a c.400bp FX headwind. Ongoing Japanese yen weakness/volatility and higher labour costs are also expected to mitigate FY13 gross margin evolution. We believe 2013 represents a transitional year for adidas. Our FY13E sales and earnings growth assumptions are lower relative to our FY14 and FY15 estimates as we factor a negative FX translational impact of c.2% and appreciate that the H113 comparison base is much tougher at 11% on a currency neutral basis compared with 3% for the second half of the year. Our assumptions for the first half of 2013 are conservative – at a reported level, we look for 2% yoy growth to €7.49bn (4% currency neutral sales) with estimated flat sales growth on a reported basis for Q1 2013 (c.1% on a currency neutral basis). We forecast the FY13 group gross margin will increase by 150bp yoy to 49.2% and expect part of the gross margin erosion experienced through the wholesale chain (with particular reference to Reebok India) to improve in 2013 supported by ongoing benefits of a greater retail presence versus wholesale, improved sales and regional mix. However, we are mindful of Asian labour cost inflation and FX risk which will mitigate FY13 gross margin gains. Next catalysts for adidas include Q113 trading, due 3 May 2013. Given the tough comparison base, we expect management’s 2013 guidance of mid-single-digit sales growth to be second-half-year-weighted and as a result, we view Q113E earnings with caution given our (diluted) earnings estimate of €1.39, which implies 0.5% earnings growth yoy (Bloomberg consensus at €1.42). Global stock levels were well managed in 2012, up 1% on a currency-neutral basis with perhaps the slight exception of the Russian retail channel. In our view, sporting goods retailers with too much old inventory are clearly at incremental markdown and gross margin risk especially within the backdrop of soft European consumer demand and increasing political tension in Asia. If one were to look for a Russian silver lining, adidas is well represented (c.65% today with a 70% target by 2015) within its retail (DOS) format, and therefore should be able to manage the markdown risk more carefully as opposed to having a high wholesale exposure where markdown rates are usually faster and higher versus retail. 77 adidas AG Sporting Goods Earnings momentum Within the past six months, adidas has outperformed the SXXP pan-European stocks 600 Index by 13.3% compared with Nike’s outperformance of the SXXP by 20.3% in US dollars (21.9% versus SXXP index in euros). adidas seven-year absolute share price performance versus peers (rebased) 400 350 300 250 200 150 100 50 adidas Jan 13 Apr 13 Jul 12 Oct 12 Jan 12 Apr 12 Jul 11 SXXP Oct 11 Jan 11 Apr 11 Jul 10 Li Ning Oct 10 Jan 10 Apr 10 Jul 09 Nike Oct 09 Jan 09 Puma Apr 09 Jul 08 Oct 08 Jan 08 Apr 08 Jul 07 Oct 07 Jan 07 Apr 07 Jul 06 Oct 06 Apr 06 0 Dax Source: DataStream adidas one-year absolute share price performance versus peers (rebased) 180 160 140 120 100 80 60 40 Mar 13 Feb 13 Jan 13 SXXP Dec 12 Nov 12 Li Ning Oct 12 Sep 12 Nike Aug 12 Jul 12 Puma Jun 12 May 12 Apr 12 Mar 12 Feb 12 Jan 12 Dec 11 adidas Dax Source: DataStream We assess the driving factors behind recent share price performance by assessing the impact that 12-month forward consensus earnings moves and market multiples/re-rating (on an absolute and relative level) have had on adidas and its immediate peer group. According to our analysis, adidas has had the strongest consensus forward EPS upgrade (+8.4%) compared with Nike and Puma (+7%) and Li Ning (-2%) followed by a +4.5% re-rating on more ambitions sales growth and margin targets to 2015. We expect a tougher first half sales and profit growth evolution for adidas given the tough comparison base (the London Olympic Games and the UEFA Euro 2012 football championships). 78 adidas AG Sporting Goods adidas 12-month forward consensus EPS moves and re-rating versus peers 50% 40% 30% 20% 10% 0% -10% -20% -30% 16% 16% 4% -5% adidas Nike Puma Li Ning 12m fwd. Consensus EPS Δ Market Multiple Δ Mkt. Relative Multiple Δ Share price movt Source: DataStream adidas vs. Puma (seven-year absolute performance) adidas vs. Nike (seven-year absolute performance) 250.0 300.0 200.0 250.0 200.0 150.0 150.0 100.0 100.0 50.0 - 50.0 - Apr 06 Apr 07 Apr 08 Apr 09 adidas Apr 10 Apr 11 Apr 12 Apr 13 Apr 06 Apr 07 Apr 08 Apr 09 adidas Puma Apr 10 Apr 11 Apr 12 Apr 13 Nike Source: DataStream adidas vs. Li Ning (seven-year absolute performance) 400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 - adidas vs. SXXP (seven-year absolute performance) 250.0 200.0 150.0 100.0 50.0 Apr 06 Apr 07 Apr 08 adidas Apr 09 Apr 10 Apr 11 Li Ning Apr 12 Apr 13 - Apr 06 Apr 07 Apr 08 Apr 09 adidas Apr 10 Apr 11 Apr 12 Apr 13 SXXP Source: DataStream 79 adidas AG Sporting Goods adidas vs. Puma (seven-year relative performance) adidas vs. Nike (seven-year relative performance) 300 120 250 100 200 80 150 60 100 40 50 20 0 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 0 Apr 06 Apr 07 Apr 08 adidas vs. Puma Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 adidas vs. Nike Source: DataStream adidas vs. Li Ning (seven-year relative performance) 400 350 300 250 200 150 100 50 0 adidas vs. SXXP (seven-year relative performance) 250 200 150 100 50 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 0 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 adidas vs. SXXP adidas vs. Li Ning Source: DataStream adidas vs. DAX (seven-year absolute performance) 250.0 200.0 150.0 100.0 50.0 - Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 adidas Dax Apr 11 Apr 12 Apr 13 adidas vs. DAX (seven-year relative performance) 160 140 120 100 80 60 40 20 0 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13 adidas vs. Dax Source: DataStream H ow we differ from consensus Our proprietary analysis, which highlights the importance of innovation driving Performance and Lifestyle market share and gross margin coupled with estimated cost savings on the back of warehouse/distribution rationalisation – a part of adidas’s strategy, which we believe will become a material earnings driver for FY14 – are key differentiating factors, hence our FY14 and FY15 EPS estimates of €5.7 and €7.1 respectively, c.6% and c.13% respectively ahead of Bloomberg consensus. 80 adidas AG Sporting Goods Berenberg adidas EPS vs. Bloomberg consensus 13% 14% Berenberg adidas EBIT margin vs. Bloomberg 12% 120 10% 100 8% 6% 5% 80 6% 60 4% 40 2% 20 0% FY13E FY14E 133 140 FY15E - 61 35 FY13E EPS (%) FY14E FY15E EBIT margin (bp) Source: Bloomberg, Berenberg Bank estimates Berenberg adidas sales vs. Bloomberg consensus 0% -1% -1% -2% -1% -1% -2% -3% FY13E FY14E Sales (%) -2% FY15E Berenberg adidas gross margin vs. Bloomberg 160 140 120 100 80 60 40 20 - 139 109 91 FY13E FY14E FY15E Gross margin (bp) Source: Bloomberg, Berenberg Bank estimates Short-term, we view 2013 as a transitional year and hence remain cautious about sales and earnings accretion over this period. We acknowledge that some of the weaker sales trends experienced in Q412 in Europe were in part due to the anniversary of the sell-in of high-margin event-related products for the London 2012 Olympic and Paralympic Games (27 July to 11 August and 29 August to 9 September respectively) and the UEFA Euro football 2012 championships. In addition, adidas group experienced negative impacts at Reebok (NFL licence termination, the finalisation of the clean-up of Reebok India. The NHL lockout, which extends into January 2013 ought to adversely affect Reebok-CCM Hockey, hence Q113 headwinds persist, notwithstanding tough bases for comparison for European emerging markets (Q1 2012: +15%), North America (+11%) and Greater China (+26%). Our FY13 group gross margin forecast of 49.2% is ahead of management’s indicative range of 48.0% to 48.5%. We believe new technology such as adidas Boost, a new foam cushioning material with a unique mid-sole cell structure (created in partnership with BASF over the past three years) could become a category killer for adidas within the running market over the next few years with obvious potential to leverage into other sporting and lifestyle categories. We expect other product innovations and core signature collection launches such as Team Messi (football) and D Rose (basketball)) to strengthen adidas innovation credibility and assist with the leverage of new Lifestyle product launches, which generate a richer margin/sales mix. 81 adidas AG Sporting Goods Furthermore, we expect part of the gross margin erosion experienced through the wholesale chain (with particular reference to Reebok India) to improve in 2013 supported by ongoing benefits of a greater retail presence versus wholesale, improved sales and regional mix. However, we are mindful of Asian labour cost inflation and FX risk which will mitigate FY13 gross margin gains. 82 adidas AG Sporting Goods adidas key assumptions and sensitivities (1) Key financial and regional estimates In €m FY11 FY12 FY13E FY14E FY15E 13,322 +11.1% 14,883 +11.7% 15,395 +3.4% 16,399 +6.5% 17,455 +6.4% 5.5% 953 +6.6% 7.2% 1,185 +24.3% 8.0% 1,432 +20.8% 9.3% 1,712 +19.5% 10.4% 2,083 +21.7% 11.9% 20.7% 3,922 1,597 3,102 1,229 2,103 1,369 4,076 1,947 3,410 1,562 2,407 1,481 4,198 2,044 3,478 1,671 2,551 1,451 4,408 2,228 3,687 1,822 2,730 1,524 4,629 2,384 3,871 2,004 2,921 1,646 4.3% 7.0% 4.3% 8.7% 6.7% 3.6% 13,322 14,883 15,395 16,399 17,455 Western Europe +10.7% +3.9% +3.0% +5.0% +5.0% European Emerging Markets +15.3% +21.9% +5.0% +9.0% +7.0% North America +10.6% +9.9% +2.0% +6.0% +5.0% Greater China +22.9% +27.1% +7.0% +9.0% +10.0% +6.6% +14.5% +6.0% +7.0% +7.0% Group sales chg. Group adj. EBIT chg. margin Sales split by region Western Europe European Emerging Markets North America Greater China Other Asian Markets Latin America Total 12-15E CAGR Reported % Other Asian Markets Latin America +6.5% +8.2% -2.0% +5.0% +8.0% +11.1% +11.7% +3.4% +6.5% +6.4% Western Europe +10.3% +3.0% +3.0% +5.0% +5.0% European Emerging Markets +22.3% +15.0% +5.0% +9.0% +7.0% North America +15.3% +2.0% +4.0% +6.0% +5.0% Greater China +23.4% +15.0% +10.0% +9.0% +10.0% Other Asian Markets +5.1% +7.0% +9.0% +7.0% +7.0% Latin America +9.7% +8.0% +1.0% +5.0% +8.0% +13.0% +6.0% +5.0% +6.5% +6.4% EPS, diluted (€) DPS (€) 2.93 1.00 3.78 1.35 4.72 1.68 5.73 2.05 7.07 2.52 Working capital Stock turn Creditors days Debtor days 2,210 2.8x 51.7 43.7 2,384 3.1x 43.9 41.4 2,466 3.0x 43.9 41.4 2,627 3.0x 43.9 41.4 2,796 3.0x 43.9 41.4 91 448 864 1,366 2,061 Total chg. currency neutral (cn) Total Net cash/ (debt) 23.2% 23.2% Source: Berenberg Bank estimates, company data 83 adidas AG Sporting Goods adidas key assumptions and sensitivities (2) Divisional estimates In €m Sales by distribution channel Wholesale Retail Other Businesses Total chg. currency neutral (cn) Wholesale Retail Other Businesses Total FY11 FY12 FY13E FY14E FY15E 8,949 2,793 1,580 13,322 9,533 3,373 1,977 14,883 9,628 3,677 2,090 15,395 10,110 4,081 2,208 16,399 10,514 4,489 2,452 17,455 +11.0% +19.7% +12.7% +2.0% +14.0% +17.0% +3.0% +11.0% +4.4% +5.0% +11.0% +5.7% +4.0% +10.0% +11.0% 9,867 11,344 11,775 12,629 13,534 6.1% +13.0% +6.0% +5.0% +6.5% 12-15E CAGR 3.3% 10.0% 7.4% 5.5% +6.4% Sales by brand adidas Reebok 1,962 1,667 1,734 1,786 1,857 3.7% TaylorMade-adidas Golf 1,044 1,344 1,357 1,439 1,504 3.8% Rockport 261 285 288 302 311 3.0% Reebok-CCM Hockey 188 243 241 244 249 0.8% 13,322 14,883 15,395 16,399 17,455 5.5% +14.5% +9.9% +5.4% +7.3% +7.2% Total chg. currency neutral (cn) adidas Reebok TaylorMade-adidas Golf Rockport Reebok-CCM Hockey +5.8% -17.9% +5.0% +3.0% +4.0% +15.9% +19.5% +3.0% +6.0% +4.5% +6.3% +1.9% +3.0% +5.0% +3.0% +5.9% +8.9% +1.9% +1.1% +2.1% +13.0% +6.0% +5.0% +6.5% +6.4% 6,242 5,733 1,347 6,922 6,290 1,671 7,268 6,542 1,585 7,850 6,934 1,616 8,478 7,315 1,662 7.0% 5.2% -0.2% 13,322 14,883 15,395 16,399 17,455 5.5% Footwear +18.0% +6.0% +7.0% +8.0% +8.0% Apparel +8.0% +4.0% +5.0% +6.0% +5.5% +10.0% +17.0% -3.3% +1.9% +2.9% Total Sales by product category Footwear Apparel Hardware Total chg. currency neutral (cn) Hardware Total +13.0% +6.0% +5.0% +6.5% +6.4% Source: Berenberg Bank estimates, company data 84 adidas AG Sporting Goods Executive summary As the world’s second-largest global sporting goods player by revenue, we believe adidas is well placed to benefit from long-term trends such as: • • • • • • • • an ageing, health conscious demographic; brand equity strength through the ongoing support of key sporting icons; increased sporting investment by the media; company-specific opportunities such as increased retail versus wholesale; improved sales mix and incremental market share gains; best in-class innovation; benefits of global size and scale; and material cost savings through ongoing sourcing, supply and distribution efficiencies. We believe adidas is well positioned to capitalise from its Route 2015 investment strategy and that the group will its FY15E sales and EBIT margin targets of €17bn and 11% respectively. We forecast FY15E sales of €17.5bn, implying a 2010-15E CAGR of 7.8%. We note that our three-year sales CAGR forecast (12-15E) is more conservative at 5.5%. Short-term, we are cautious as to FY13 sales performance given a tough comparison base, negative FX and macro headwinds (Europe and South Korea). In our view, the adidas group ought to exceed its 2015 EBIT margin target of 11%. Through combined initiatives such as increased retail sales penetration versus wholesale, improved price/mix, best-in-class innovation and strong working capital management on the back of sourcing, supply and distribution efficiencies, we see upside risk to both gross margin (we forecast group gross margin to increase by 290bp by 2015 to 50.6% compared with FY12 group gross margin of 47.7%) and EBIT margin targets. As a result, our FY15 group gross margin estimate of 11.9% is 90bp ahead of management’s internal target. Commodity cost pressure ought to abate in 2013 (adidas doesn’t hedge the raw material but the FOB/currency) as cotton, rubber and oil-based plastic prices continue to decline yoy. As a result we expect, COGS as a percentage of sales to fall 150bp to 50.8% in FY13. We expect Chinese labour cost pressure to structurally increase although adidas continues to look for alternate partners and may over time reduce its reliance on Chinese sourcing, though we appreciate that China remains adidas’s most important sourcing market (31% of all suppliers were located in China as of FY12). For example, in footwear, we note that the overall representation of China in adidas’s sourcing mix fell by 200bp in FY12 with an increased focus on regions such as Cambodia and Vietnam, where the cost of labour is lower relative to China. Proven track record adidas’s nine-year sales, EBIT and diluted EPS CAGR rates (FY03-12) are solid within the context of having acquired Reebok in 2006 and the financial crisis 85 adidas AG Sporting Goods (2008-10) at 9.4%, 10.3% and 11.4% respectively. We note that adidas paid $3.6bn (€2.9bn assuming a dollar/euro FX rate of 0.8 or 1.5x sales) for Reebok in 2006 (completed on 31 January 2006). During its first year with the adidas group (February to December), Reebok generated turnover of c.€2bn compared with FY12 Reebok sales of €1.7bn. Over the past six years (FY06-12), the adidas and TaylorMade-adidas Golf (TMAG) brands have clearly outperformed relative to internal peers and while management has a revitalised plan to re-invigorate and reposition the Reebok brand under the House of Fitness branding, we are sceptical as to future Reebok sales and profit generation, which is reflected in our five-year sales CAGR (FY1015E) Reebok estimates of -0.6%. We believe FY12-15E growth ought to improve, especially after losses from the Indian operations in 2012, hence our three-year Reebok sales CAGR (FY12-15E) of 3.7%. adidas six-year CAGR performance (2006-2012) adidas group net sales, €m Gross margin % Adjusted EBIT, €m Operating margin (adj. €m) Diluted adj. EPS P/E at year end DPS FY06 10,084 44.6% 881 8.7% 2.25 16.8x 0.42 FY07 10,299 47.4% 949 9.2% 2.57 19.9x 0.50 FY08 10,799 48.7% 1,070 9.9% 3.07 8.8x 0.50 FY09 10,381 45.4% 508 4.9% 1.22 31.0x 0.35 FY10 11,990 47.8% 894 7.5% 2.71 18.0x 0.80 FY11 13,322 47.5% 953 7.2% 2.93 17.1x 1.00 FY12 14,883 47.7% 1,185 8.0% 3.78 17.8x 1.35 6-year CAGR 6.7% Net sales by brand adidas Reebok Taylor-Made-adidas Golf Rockport Reebok-CCM Hockey 6,626 1,979 856 293 202 7,113 1,831 804 291 210 7,821 1,717 812 243 188 7,520 1,603 831 232 177 8,714 1,913 909 252 200 9,867 1,940 1,044 261 210 11,344 1,667 1,344 285 243 9.4% -2.8% 7.8% -0.5% 3.1% 5.1% 9.0% Source: Company data We summarise our FY15E brand sales estimates and five-year CAGR evolution below, which highlights our expectation of stronger brands sales and market share evolution for adidas and TMAG brands versus Reebok. In our view, faster sales growth at adidas and TMAG ought to result in margin accretion given the structurally higher gross margins of both adidas and TMAG brands versus Reebok. For example, we note that adidas’s FY12 wholesale margin increased by 10bp yoy to 42.1% compared with the Reebok wholesale gross margin, which declined by 290bp to 26.2%. Within its retail division, the adidas gross margin declined by 150bp to 62.1% (driven by FOB/currency, promotional activity and the devaluation of the Russian Rouble) while the Reebok retail gross margin declined by 270bp to 55.1%. We note that the FY12 group gross margin increased by 20bp to 47.7% supported by structurally higher gross margins for both adidas and TMAG brands, supportive of our future group gross margin evolution to 50.6% by FY15E. 86 adidas AG Sporting Goods Berenberg FY10-15E brand sales estimates vs. adidas management FY10-15E brand sales guidance adidas Reebok TMAG & Other Total 2010 2015 (Berenberg) Berenberg FY10-15 CAGR adidas updated adidas implied CAGR 8,714 13,534 9.2% 12,800 8.0% 1,913 1,857 -0.6% 2,000 0.9% 1,363 2,064 8.7% 2,200 10.0% 11,990 17,455 7.8% 17,000 7.2% Source: Berenberg Bank estimates, company data Barriers to entry through R&D, innovation and brand recognition Unlike the luxury goods operating model, which is founded on pricing power, high barriers to entry and exclusive product ranges, the global sporting goods market has a broader demographic base, which relies more heavily on sporting events/icons to help promote awareness. In our view, the sporting goods industry has a greater degree of demand/elasticity as we note that in the US market, the core price point for trainers at $99.99 has not changed over the past 20 years, despite increased advertising, marketing, research and development and raw material costs. Both industries share similarities in that luxury goods companies have long since utilised “brand ambassadors” (successful sporting icons, actors, actresses and politicians) to promote brands. Sporting goods players work with sporting icons in order to develop leading-edge technology, adding value and brand credibility to performance-related products. Performance-related products tend to garner lower gross margins (performance stores tend to take c.24 months to break even) compared with lifestyle-related products, yet we believe it is crucial for sporting goods companies to continue to invest in research and development and the marketing of performance products, thereby creating a credible brand platform from which to launch more profitable lifestyle brand collections. Our proprietary innovation analysis highlights adidas as the best-in-class sporting goods researcher and innovator. According to our research, adidas brand major product launches as a percentage of adidas group sales were flat at c.40% (78% of adidas brand sales), yet sales per new/major innovation (12 months or less) increased by 64% to €632m at the brand level as of FY12. We appreciate that the adidas group launches thousands of innovations within the broader sense (new colour ways, small design changes); however, we believe it is important to track the relationship and correlation between major new launches and sales and margin growth. 87 adidas AG Sporting Goods adidas brand sales per major product launch (<12 months) €m 700 600 500 400 300 200 100 0 FY07 FY08 FY09 FY10 FY11 FY12 Source: Berenberg Bank estimates We highlight a few adidas brand major innovations in 2012-2013, ytd, which we believe will assist with higher brand gross margins. adidas brand examples of new/major product innovations <12 months adipure Running shoe range Timing Features Segment Q2-12 First natural running shoe collection, consists of 3 shoes with varying heel gradient for different levels of advancement (adipure Motion, Gazelle, Adapt). Full support with a polyurethane overlay. Socklike fit and dual-layer midsoles. Footwear miCoach Elite System Jul-12 DryDye technology (sustainable product range) Jul-12 D Rose 3.5 Mar-13 Energy Boost Mar-13 Collaboration between adidas and major leadue soccer's 19 teams. Sport datatarcking technology permitting coaches and Equipment fans to track the athletes' heart rates, speed, field position, power and other performance metrics in real-time. The technology eliminates the need for water in the dyeing process. Step to create Apparel more environmentally benign products. A whole range of sustainable products. Imrpoved performance - faster cuts and Footwear increased control. Designed to fit even closer to the foot. New cushioning material developed with cooperation with BASF. Highest energy return to the runner. Soft and reponsive cushioning. Footwear Source: Berenberg Bank estimates, company data 88 adidas AG Sporting Goods Market share winner We forecast that adidas group will increase its global market share by 560bp over the next three years within a sporting goods market which we estimate is worth c.€245bn as of FY12. We expect adidas to grow sales at 2.2x above global GDP from FY12-15E, ahead of the global sporting goods average of 1.5x GDP (Puma: 1.6x; Nike: 2.8x). Diversified product base and demographic adidas group’s sporting goods products (footwear, apparel and hardware) are well represented across a broad sporting goods and fashion base. As an example, we highlight below the product diversity across the adidas and Reebok brands and note that the example does not include TMAG where, in particular, through its TaylorMade brand, adidas has amassed strong US market shares in both metal woods (a market share of more than 40%) and irons (a market share of more than 30%) through the RocketBallz and Rockebladez respective brands. adidas group brands are represented across key regions with a focus on key “attack markets” such as Greater China, CIS/Russia and North America (adidas is underrepresented compared with Nike in the North American market). adidas and Reebok category focus Source: Company data, Berenberg Bank estimates We highlight the FY12 regional sales splits below and forecast Greater Chinese and other Asian markets growth rates above the group average to represent 11.5% and 16.7% of sales respectively by FY15E. We appreciate that local Chinese sporting goods players such as Li Ning and Anta Sports continue to be negatively affected by too much stock in the channel and have commented that it could take another 12 to 18 months to clean out excess/old stock. Downside risk to adidas sales and margin performance in Greater China would be related to aggressive discounting in order to clear the stock backlog. In our view, inventory issues associated with the Chinese sportswear market date back to the Beijing Olympics in 2008 (it took adidas c.18 months to clean its Chinese stock channel). We note that TPG Capital’s investment in Li Ning (January 2012) and its subsequent turnaround strategy is in part focused on cleaning up its working capital profile and implementing a more strategically sound stock management system. 89 adidas AG Sporting Goods Our model reflects a slower pace of Greater Chinese sales growth for adidas group in FY13 of 10% on a currency neutral basis versus 15% as of FY12. We expect new product ranges, an improved sales mix and increased retail space to positively affect growth allowing for a more conservative underlying volume assumption (low single-digit sales growth). adidas group regional mix (FY12) Western Europe, 27% European Emerging Markets, 13% Latin America, 10% Other Asian Markets, 16% North America, 23% adidas group regional mix (FY15E) Western Europe, 27% European Emerging Markets, 14% Latin America, 9% Other Asian Markets, 17% Greater China, 10% North America, 22% Greater China, 11% Source: Company data, Berenberg Bank estimates Supply chain optimisation and distribution focus We believe one the core future EBIT margin drivers will come from the adidas group’s accelerated focus on the rationalisation of legacy distribution centres, improved SAP functionality. We forecast central administration costs as a percentage of sales to fall 60bp to 7.0% (FY12-15E) and logistics related costs as a percentage of sales to decline by 10bp to 4.9% (FY12-15E) after a 20bp short-term ramp in costs in FY13 as key new central distribution centres (CDCs) in Western Europe such as Osnabrück in Germany are completed. By 2015, the CDC will be capable of storing 35m pieces during peak times and will handle a throughput of more than 100m pieces annually for the adidas, Reebok and Rockport brands across all channels. A second facility will also be completed in Russia during 2013. adidas group costs as a percentage of sales* – estimated decline of 110bp (FY12-15E) as a % of sales Sales working budget Marketing working budget Marketing overhead Sales force Logistics R&D Central & administration Total FY08 2.8% FY09 2.3% FY10 2.6% FY11 2.5% FY12 2.0% FY13E 2.0% FY14E 2.0% FY15E 2.0% 10.5% 3.5% 10.9% 5.2% 0.8% 9.9% 3.4% 12.5% 5.6% 0.8% 10.7% 3.2% 12.5% 5.1% 0.9% 10.2% 3.0% 12.6% 5.1% 0.9% 10.1% 3.0% 12.7% 5.0% 0.9% 10.1% 3.0% 12.6% 5.2% 0.9% 10.1% 3.0% 12.5% 5.1% 0.9% 10.0% 3.0% 12.4% 4.9% 1.0% 6.9% 40.5% 7.8% 42.3% 7.1% 42.1% 7.5% 41.8% 7.6% 41.3% 7.6% 41.5% 7.3% 41.1% 7.0% 40.2% Source: Berenberg Bank estimates, company data, *includes depreciation At the group level, we expect operating expenses as a percentage of sales to reduce by 110bp from FY12 to 40.2% in FY15 (includes depreciation). Coupled with improved price/mix, increased retail sales and new innovations, which tend to garner higher gross margins during the first 12 months, we look for an incremental €689m of EBITDA from FY13E to FY15E. 90 adidas AG Sporting Goods We summarise the key initiatives for adidas global operations below. adidas group five strategic priorities for global operations Strategic priorities Ensuring cost competitiveness Providing industry-leading availability Enabling later ordering Supporting the Group's growth projects Modernising the Group's infrastructure Specific goals Reduce product and supply chain costs Implemented through strategic initiatives -Optimise product creation through efficient material and colour selection -Increase the level of automation in the manufacturing processes -Pool supply chain activities at a central level Enhance existing logistics services to create -Offer tailored replenishment models to a flexible and cost-efficient supply chain customers, using improved planning processes and systems -Develop flexible planning and product models -Plan and build inventory buffers at different locations in the supply chain Allow customers to order products later, ie -Reduce production lead times for footwear closer to the time of sale and apparel to 60 days -Establish a regional source base Support the company's Route 2015 priorities -Build fast-fashion creation, sourcing and supply chain management capabilities -Further roll-out of processes and systems -Offer short lead time production models Build the required operational backbone to -Consolidate legacy systems and support the Group's growth plans distribution structures -Build state-of-the-art systems, processes and distribution facilities Source: Berenberg Bank estimates, company data Cash rich, market share winner and attractive valuation As the second-largest sporting goods company in the world, we expect adidas sales growth to continue above the market average (2.2x global GDP vs. 1.5x market average). In our view, adidas ought to improve its operational leverage via size and scale efficiencies in terms of production, increased retail penetration and improved mix. Distribution centre rationalisation and ongoing investments in research and development and innovation are also key drivers of margin growth to FY15. We forecast net cash to increase in FY13 to €864m compared with €448m in FY12 (FY11 €91m). We look for an improved sales mix, lower commodity/raw material cost pressure, partially offset by a negative impact on hedging and structurally higher Chinese labour costs to drive FY13E gross margin higher by 150bp yoy to 49.2%. Moreover, we remain cautious on the twelve month evolution of operating expenses as a percentage of sales (+20bp to 41.5% – includes depreciation) as new regional/centralised distribution centres are completed in Germany and Russia. Our FY13 capital expenditure estimate is within management’s guidance of €500m-550m at €525m. We remain conservative about our working capital outflow assumptions for FY13E and outer years. We expect inventory to build as the adidas group increases its exposure to directly owned stores (DOS) versus wholesale. We forecast retail as a percentage of sales to increase by 120bp to 23.9% in FY13, reaching 25.7% by FY15E, an implied increase of 300bp versus FY12 (22.7%). On a non-cash-adjusted basis, and at the current share price level of €75.9, adidas trades on FY13E and FY14E P/Es of 16.1x and 13.2x respectively compared with 91 adidas AG Sporting Goods its 10-year average P/E of more than 18x and seven-year historical average of c.17x following the Reebok acquisition in 2006). adidas seven-year historical average P/E (FY06-12) 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 10.0x 5.0x 0.0x Mar-13 Jul-12 Nov-12 Mar-12 Nov-11 Jul-11 Mar-11 Nov-10 Jul-10 Mar-10 Jul-09 Nov-09 Mar-09 Nov-08 Jul-08 Mar-08 Nov-07 Jul-07 Mar-07 Jul-06 Nov-06 Mar-06 16.9x adidas Source: DataStream, Berenberg Bank estimates On a cash-adjusted basis, our current and one-year forward estimated multiples fall to 15.2x and 12.1x respectively. We believe our €95 target price is conservative given our forecast of double-digit three-year EPS and DPS CAGR (FY12-15E) of c.23% respectively. Furthermore, we expect the adidas group’s post-tax ROIC to increase by 420bp to 10.7% in FY13E and to reach 12.4% by FY15E. Our price target, based on our P/E analysis and driven by earnings and cash flow forecasts, implies FY13E and FY14E P/Es of 20.1x and 16.6x respectively and is supported by our DCF (€98). On a cash-adjusted basis, adidas trades on FY13E and FY14E P/Es of 19.3x and 15.4x respectively. On a PEG basis, adidas trades at 0.5x versus Puma at 1.7x, Nike at 1.5x, Amer Sports at 0.7x and the weighted (by market capitalisation) average PEG of 1.3x. adidas Bloomberg and Berenberg estimates vs. peers Sales growth EBITDA growth EBIT growth 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 1.4% 7.1% 6.3% 21.7% 20.6% -16.3% 10.0% 5.7% -9.4% 5.5% 7.9% 7.8% 20.5% 21.4% 3.4% 7.2% 5.0% 7.2% 4.8% 6.9% 9.2% 20.4% 21.5% 9.0% 4.6% 4.2% 12.3% 20.9% 10.9% 16.7% 24.3% 9.9% -15.9% 14.7% 35.9% n.m. 11.0% 12.1% 9.6% 23.9% 30.0% 3.8% 10.8% 11.0% 249.9% 10.0% 8.2% 12.8% 22.6% 21.4% 11.7% 3.0% 7.1% 45.1% 5.1% 12.1% 15.1% 26.6% 11.6% -15.3% 16.8% 50.5% n.m. 13.0% 11.9% 11.2% 25.4% 26.5% 2.7% 12.9% 14.0% n.m. 9.7% NA 9.4% NA 25.7% 12.5% NA 9.2% 145.5% Total sector weighted 8.4% 9.6% 9.4% 13.1% 15.1% 11.3% 13.4% 13.9% 6.0% Total sector median 6.3% 7.2% 9.0% 15.7% 11.0% 11.7% 13.6% 13.0% 11.1% 4.5% -45.8% 3.4% -58.9% 6.7% -30.9% 6.5% -32.4% 5.9% -36.8% 6.4% -31.6% 16.3% 24.3% 43.6% 233.4% 16.3% 7.8% 17.4% 14.7% 14.4% 27.3% 19.4% 71.0% 17.0% 27.2% 20.8% 55.7% 18.6% 33.9% 19.5% 40.8% 15.4% 157.0% 21.7% 262.5% Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg 92 adidas AG Sporting Goods adidas Bloomberg and Berenberg estimates vs. peers Net debt/ EBITDA Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted Total sector median adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) EBIT margin EBITDA margin 2013E -1.2x -1.0x 0.4x -1.0x -12.1x -3.3x -0.3x 1.9x 3.0x -1.8x 2014E -1.5x -0.9x 0.1x -1.1x -13.2x -3.4x -0.6x 1.6x 0.5x -2.0x 2015E -1.7x NA 0.0x NA -15.9x -3.1x -0.6x 1.3x 0.2x -0.7x 2013E 11.3% 14.9% 16.8% 14.0% 28.0% 19.9% 10.3% 9.5% 2.1% 16.1% 2014E 11.9% 15.5% 17.0% 14.4% 29.9% 19.9% 10.6% 10.0% 6.7% 16.8% 2015E 12.5% 15.7% 17.6% 14.7% 29.9% 20.4% 10.5% 10.3% 8.7% 17.0% 2013E 9.2% 13.3% 14.6% 11.8% 25.5% 18.5% 8.4% 7.7% -3.3% 14.2% 2014E 9.9% 13.8% 15.0% 12.3% 26.5% 18.4% 8.8% 8.4% 2.6% 14.8% 2015E 10.3% NA 15.1% NA 27.5% 19.0% NA 8.8% 5.7% 9.5% -1.0x -0.9x -0.6x 14.0% 14.4% 14.7% 11.8% 12.3% 12.7% -0.4x -79.2% -0.5x -72.2% -0.6x -71.1% -0.7x -65.3% -0.6x -16.2% -0.9x 20.9% 10.9% -32.5% 11.1% -30.8% 11.9% -29.2% 12.3% -26.7% 12.8% -24.7% 13.8% -19.1% 8.9% -37.4% 9.3% -34.7% 9.9% -33.1% 10.4% -29.6% 10.8% 13.3% 11.9% 25.3% Source: Berenberg Bank estimates, Bloomberg adidas – market price multiples Bloomberg and Berenberg estimates vs. peers PE EV/ EBITDA EV/ EBIT EV/ sales 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted 16.6x 21.0x 15.7x 38.4x 34.7x 12.9x 21.9x 13.4x n.m. 21.8x 14.6x 18.2x 13.9x 30.4x 27.3x 12.7x 19.6x 11.5x 47.4x 18.9x 13.2x 16.1x 12.3x 23.9x 22.2x 11.5x 16.7x 10.5x 15.6x 16.1x 8.2x 12.8x 10.3x 18.0x 21.1x 6.6x 12.1x 9.1x 32.8x 13.1x 7.4x 11.4x 9.4x 14.6x 16.2x 6.4x 11.0x 8.2x 9.4x 11.3x 6.7x 10.5x 8.4x 11.9x 13.3x 5.7x 10.6x 7.6x 6.5x 10.1x 10.1x 14.3x 11.9x 21.3x 23.1x 7.1x 14.9x 11.1x -20.2x 14.5x 8.9x 12.7x 10.7x 17.0x 18.3x 6.9x 13.2x 9.8x 24.3x 12.9x 8.1x NA 9.8x NA 14.5x 6.2x NA 9.0x 9.9x 8.5x 0.9x 1.9x 1.7x 2.5x 5.9x 1.3x 1.2x 0.9x 0.7x 2.2x 0.9x 1.8x 1.6x 2.1x 4.8x 1.3x 1.2x 0.8x 0.6x 2.0x 0.8x 1.6x 1.5x 1.7x 4.0x 1.2x 1.1x 0.8x 0.6x 1.8x Total sector median 18.8x 18.2x 15.6x 12.1x 9.4x 8.4x 11.9x 12.7x 9.4x 1.3x 1.3x 1.2x 17.1x -21.7% 16.1x -26.2% 14.2x -24.5% 13.2x -29.7% 12.2x -24.1% 10.7x -33.4% 9.2x -29.9% 9.0x -31.5% 7.9x -30.1% 7.7x -32.3% 6.9x -31.8% 6.4x -36.7% 11.2x -22.8% 10.8x -25.9% 9.5x -26.5% 9.0x -30.1% 8.2x -3.5% 7.4x -12.9% 1.0x -54.5% 1.0x -54.4% 0.9x -52.3% 0.9x -52.1% 0.9x -49.9% 0.9x -50.0% adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg adidas – target price multiples Bloomberg and Berenberg estimates vs. peers PE EV/ EBITDA EV/ EBIT EV/ sales Puma Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted 2013E 17.2x 21.5x 16.3x 40.9x 37.4x 12.9x 20.2x 14.8x n.m. 22.6x 2014E 15.1x 18.7x 14.5x 32.3x 29.5x 12.7x 18.2x 12.7x 47.4x 19.5x 2015E 13.7x 16.5x 12.8x 25.4x 23.9x 11.5x 15.5x 11.6x 15.6x 16.7x 2013E 8.5x 13.1x 10.7x 19.2x 22.8x 5.7x 11.3x 9.8x 28.9x 13.6x 2014E 7.7x 11.7x 9.8x 15.5x 17.5x 5.5x 10.2x 8.8x 8.3x 11.7x 2015E 7.0x 10.8x 8.7x 12.6x 14.5x 4.9x 9.9x 8.3x 5.7x 10.5x 2013E 10.5x 14.7x 12.3x 22.7x 25.0x 6.1x 13.8x 12.0x n.m. 15.2x 2014E 9.3x 13.1x 11.1x 18.1x 19.8x 5.9x 12.2x 10.6x 21.5x 13.3x 2015E 8.4x NA 10.1x NA 15.7x 5.3x NA 9.7x 8.7x 8.8x 2013E 1.0x 2.0x 1.8x 2.7x 6.4x 1.1x 1.2x 0.9x 0.6x 2.3x 2014E 0.9x 1.8x 1.7x 2.2x 5.2x 1.1x 1.1x 0.9x 0.6x 2.0x 2015E 0.9x 1.7x 1.5x 1.9x 4.3x 1.0x 1.0x 0.8x 0.5x 1.8x Total sector median 18.7x 18.2x 15.5x 11.3x 9.8x 8.7x 13.0x 12.2x 9.2x 1.2x 1.1x 1.0x 18.5x -18.2% 20.1x -10.9% 15.4x -21.0% 16.6x -15.1% 13.3x -20.6% 13.4x -19.5% 10.0x -26.5% 11.2x -17.2% 8.6x -26.6% 9.6x -18.2% 7.5x -28.4% 8.0x -23.4% 12.2x -19.7% 13.5x -11.3% 10.3x -22.8% 11.3x -15.4% 8.9x 1.3% 9.3x 5.3% 1.1x -52.6% 1.3x -45.3% 1.0x -50.2% 1.2x -42.5% 1.0x -47.6% 1.1x -39.8% adidas adidas vs peers (premium/ discount) adidas Berenberg estimates adidas vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg 93 adidas AG Sporting Goods Treading carefully into 2013 We believe 2013 represents a transitional year for adidas. Our FY13E sales and earnings growth assumptions are lower relative to our FY14 and FY15 estimates as we factor a negative FX translational impact of c.2% and appreciate that the H113 comparison base is tougher at +11% on a currency neutral basis compared with +3% for the second half of the year. Our assumptions for the first half of 2013 are conservative. At a reported level, we look for 2% yoy growth to €7.47bn (c.3% currency-neutral sales growth) with estimated flat sales growth on a reported basis for Q113 (c.1% on a currencyneutral basis). We highlight adidas management’s FY13 guidance for sales, gross and EBIT margin, earnings, capital expenditure, store base and gross borrowings below. Management 2013 guidance vs. Berenberg estimates adidas group Wholesale Retail segment Other businesses TaylorMade-adidas Golf Rockport Reebok-CCM hockey Outlook 2013 increase at mid-single-digit sales % increase at low-single-digit sales % increase at high-single-digit to low d-d % increase at mid-single-digit sales % increase at mid-single-digit sales % increase at mid to high-single-digit sales % increase at low double-digit sales % Gross margin Operating margin Average operating working capital (% sales) 48% to 48.5% approaching 9% moderate increase expected Capital expenditure Gross borrowings Net borrowings/EBITDA €500m-550m further reduction maintained below 2.0x EPS to increase by 12% to 16% (€4.25 to €4.40) Shareholder value further increase Berenberg FY13E 5.0% 3.0% 11.0% 4.4% 3.0% 3.0% 1.9% 49.2% 9.3% Moderate increase expected €525m net cash €864m -0.50x € 4.72 DPS +25% to €1.68 Source: Berenberg estimates, company data We are cautious heading into Q113 trading (figures due on 3 May 2013). Given the tough comparison base, we expect management’s 2013 guidance of mid-singledigit sales growth to be second-half year weighted and as a result, we see downside risk to Q113 diluted earnings given our estimate of €1.39, which implies 0.5% earnings growth yoy and is below Bloomberg consensus of €1.42. We anticipate another tough quarter for the Reebok brand (-8% currency-neutral sales) against a tough quarter last year (having terminated the NFL contract) while Reebok-CCM Hockey is expected to be impacted by the timing of the NHL lockout, which normalises from Q213 onwards. 94 adidas AG Sporting Goods Acquisitions and divestments In the table below, we list acquisitions and divestments made by adidas group from 2000 to 2012. The largest acquisition made by adidas group was Reebok in 2006 for $3.6bn. During 2012, CEO Herbert Hainer indicated that adidas may dispose of its Reebok CCM-Hockey division but after several offers were made by third parties, management has decided not to dispose of the business on the premise that a) the initial offers were too low and b) that it may be able to improve the fortunes of the division internally prior to reviewing the division for sale again. Reebok CCMHockey generated €243m of revenue in FY12. adidas acquisition and divestment history (2000 to 2012) 2012 2011 2009 2008 2007 2006 2005 2004 2002 2001 2000 FY Date Target Acquired/ Effective Description (divested) stake 09 Mar 00 adidas Portugal SA 49% 08 Feb 01 01 Jan 02 01 Jan 02 15 Jan 02 01 Jul 02 01 Dec 02 26 Mar 04 04 Jun 04 30 Jun 04 04 Oct 04 31 Dec 04 01 Jun 05 30 Sep 05 16 Jan 06 31 Jan 06 01 Jan 07 01 Jan 07 09 Nov 07 Cé SARL (Cliché S.A.S.) Sportgoods A/S (adidas Danmark A/S) adidas Italy SC IMPORT ApS (Salomon Danmark ApS), Arc’Teryx Equipment Inc. Bayern Munich** Maxfli Spor Malzemeleri Satis ve Pazarlama A.S. Valley Apparel Company Maersk Ewals Logistics B.V. adidas Malaysia Sdn. Bhd erima Sportbekleidungs GmbH Taylor Made Golf Salomon adidas India Marketing Private Ltd Reebok Int Ltd. Suomi OY, Helsinki adidas Hellas AE Mitchell & Ness 03 Jan 08 100% Portugese JV Price net of cash (€m) Price (€m) Total price in LC na na na 100% 100% Skatebording 1 1 €1m 100% 100% Danish distributor and licensee 19 19 €19m 50% 100% 100% 10% 100% 49% 100% 100% 40% -51% 21% -100% 8.6% 100% 50% 23% 100% 100% 100% 100% 10% 100% 100% 100% 100% 100% 0% 99.9% 0% 100% 100% 100% 72% 100% 70 2 18 77 na 10 5 5 3 -0.4 30 -497 2 2432 1.2 6 2 70 2 18 77 na 10 5 5 3 -0.4 30 -497 2 2971 1.2 6 2 €70m €2m €18m €77m na €10m €5m €5m €3m -€0.4m €30m -€497m €2m $3,600m €1.2m €6m €2m Saxon Athletic Manufacturing 100% 100% 2 2 CAD4.6m 10 Jan 08 11 Feb 08 adidas Hellas AE Maxfli 23% -100% 95% 0% 6 -13 6 -13 €6m -€13m 01 Apr 08 Reebok Productos Esportivos Brasil Ltda. 99.99% 99.99% 2 2 BRL 6m 01 Sep 08 Textronics Inc 100% 100% 25 25 $35m 20 Nov 08 01 Jan 09 Ashworth adidas Finance Spain SA 100% 25% 100% 25% Italian JV Danish distributor and licensee Outdoor Football club Golf Turkish subsidiary Licensee Warehouse service provider in NL Malaysian subsidiary Sportswear Golf Sports equipment Marketing company Sporting goods Finnish subsidiary Greek subsidiary Sportswear (vintage sports) Team uniforms for professional and amateur teams in N. America. Greek subsidiary Golf Marketing company for Reebok (Brazil) Development of sensors for fitness monitoring Golf Reebok subsidiary 21 12 23 12 $30m €12m 01 Jan 09 Life Sport Ltd 51% 51% adidas marekting company in Israel 5 5 ILS 25.6m 23 Jan 09 adidas Hellas AE 5% 100% 16 Feb 09 Bones in Motion 100% 100% Greek subsidiary Sports-related software development 03 Nov 11 Stone Age Equipment Inc (Five Ten) 100% 100% 30 Mar 12 GEV Grundstueckgesselschaft Herzogenaurach mbH & Co. KG 10% 05 Apr 01 01 Jun 12 31 Aug 12 30 Sep 12 Adams Golf adidas Budapest Kft Immobilieninvest und Betriebsgesselschaft Herzo-Base GmbH & Co. KG 1 1 €1m 4 4 $5m Outdoor action sprots 20 20 $38m 100% German subsidiary 7 7 €7m 100% 15% 100% 100% Golf Hungarian subsidiary 57 1 71 1 $89m €1m -90% 10% na -14 -14 -€14m Source: Company data 95 adidas AG Sporting Goods Company description adidas Group is a leading sporting goods company within the design and distribution (wholesale, retail & eCommerce) of footwear, apparel and accessories. adidas Group brands include adidas, Reebok, TaylorMade-adidas Golf, Rockport and Reebok-CCM Hockey. SWOT Strengths Strong global brands supported by an improving control over the distribution network, core competence in sport performance . Further opportunities to reduce the cost base, increase DOS and drive operating leverage. Significant cash flow generation Opportunities Further expansion of directly owned stores eCommerce expansion, particularly in Asia and North America. Gross margin uplifts via product mix, supply chain and distribution improvements. Leverange on FIFA World Cup in 2014. Expansion in Golf and Basketball, notably in North America Weaknesses Susceptible to mark down risk, commodity cost and Chinese labour cost pressure. Too high level of Performance weighted product at a lower gross margin vs. Lifestyle. Reebok brand sales and market share risk. Relatively small presence in key North American market vs. its main competitor Threats Exposure to weaker consumption trends and consumer confidence. General fashion trends and misjudgement of consumer needs and tastes are also risks. Increasing competition in the football segment Sales by division, FY12 Consensus estimates Apparel, 42.3% Hardware, 11.2% 30 25 20 15 10 5 0 BUY HOLD SELL Footwear, 46.5% Source: Company data Source: Bloomberg 96 adidas AG Sporting Goods Industry competitive position Average score: 3 3 Supplier power Raw materials account for c.65% of group COGS and adidas is exposed to prices of rubber, cotton, polyester and those which closely corelates with oil price. As adidas' ordering process and prices negotiations usualy take place aroung six months in advance of production, its sourcing function has visibility and reaction time to reflect sharp increases in input costs in its planning 3 Barriers to entry New designers/ companies enter the industry on a regular basis. However, significant investments in product innovation, marketing and distribution over a long period is necessary to establish a brand. 4 Customer power Relatively higher for chains vs. mom & pop shops. Howecer, customer power decreases as sporting goods brands increase their exposure to retail and eCommerce. 1 Substitute products Most of sporting goods products have subtitutes designed by competitors. There is a significant risk that counterfeit or copied products and parallel distribution could damage brand image. 2 Rivalry The marketplace is highly competitive. In the sporting goods sector, competition is on price, innovation, brand image, people and location. adidas historical PE 40.0x 35.0x 30.0x 25.0x 20.0x 15.0x 16.9x 10.0x Jul-12 Nov-12 Mar-13 Dec-12 Mar-13 Mar-12 Jun-12 Sep-12 Jul-11 Nov-11 Mar-11 Jul-10 Nov-10 Mar-10 Jul-09 Nov-09 Mar-09 Jul-08 Nov-08 Mar-08 Nov-07 Jul-07 Mar-07 Nov-06 Mar-06 0.0x Jul-06 5.0x adidas adidas and Index performance FY09-12 250 200 150 100 50 adidas Source: Company data, Berenberg estimates Mar-12 Sep-11 Dec-11 Jun-11 Dec-10 Mar-11 Sep-10 Jun-10 Mar-10 Dec-09 Jun-09 Sep-09 Mar-09 Dec-08 Sep-08 Jun-08 Mar-08 0 Dax Source: Bloomberg 97 adidas AG Sporting Goods adidas group 16,000 7.5% 10.7% 8.7% 12,000 10,084 8,000 9.2% 10,299 9.9% 10,799 4.9% 7.2% 11,990 8.0% 14,883 13,322 12.0% 10.0% 10,381 8.0% 6.0% 6,636 4.0% 4,000 2.0% 0 FY05 FY06 FY07 FY08 adidas Group net sales, €m Source: Company data adidas wholesale split by, FY12 Western Europe, 27% Source: Company data FY10 FY11 0.0% FY12 Operating margin (adj. €m) adidas retail split by category, FY12 11% European Emerging Markets, 13% Latin America, 10% Other Asian Markets, 16% FY09 47% 42% North America, 23% Greater China, 10% Footwear Apparel Hardware Source: Company data adidas sales evolution by distribution channel, FY08-12 Source: Company data 98 adidas AG Sporting Goods adidas (76% of FY12 revenues, €m) 12,000 49.0% 11,344 48.5% 9,867 10,000 7,821 8,000 48.0% 8,174 7,520 48.6% 6,000 47.5% 47.1% 47.0% 47.2% 47.1% 46.1% 46.5% 4,000 46.0% 45.5% 2,000 45.0% 0 FY08 FY09 FY10 FY11 adidas brand sales, €m gross margin Source: Company data, Berenberg estimates adidas wholesale split by category, FY12 adidas retail split by category, FY12 26% 74% adidas Sport Performance 34% 66% adidas Sport Performance adidas Sport Style Source: Company data 44.5% FY12 adidas Sport Style Source: Company data Key adidas brands Division adidas Sport Performance Key brands adidas adidas Originals adidas Targeted markets Football, basketball, running, training, outdoor Streetwear and lifestyle fashion adidas Sport Style Y-3, Porsche Design Sport, adidas SLVR Streetwear and lifestyle fashion via a multi-brand strategy Source: Company data 100% 80% Adidas sales split by category and distribution channel 6% 7% 15% 16% 16% 18% 60% 15% 16% 14% 10% 18% 19% 53% 55% 40% 63% 59% 20% 0% FY09 FY10 adidas Sport Performance wholesale adidas Sport Performance retail FY11 adidas Sport Style wholesale FY12 adidas Sport Style retail 99 adidas AG Sporting Goods Reebok brand (11% of FY12 revenues, €m) 2,500 36.4% 2,000 1,717 36.3% 35.9% 37.0% 36.0% 1,962 1,913 31.8% 35.9% 1,667 1,603 35.0% 34.0% 1,500 33.0% 1,000 32.0% 31.0% 500 30.0% 0 FY08 FY10 FY09 FY11 FY12 29.0% gross margin Reebok brand sales, €m Source: Company data Reebok sales split by distribution channel, FY12 Constant currency sales evolution, FY09-12 +23% +25% +14% +12% +15% 25% 75% +7% +18% +12% +3% +5% -5% -15% Reebok retail sales Source: Company data Reebok wholesale sales -10% FY09 FY10 Reebok wholesale sales FY11 FY12 Reebok retail sales Source: Company data Reebok brand strategy Source: Company data 100 adidas AG Sporting Goods Financials Profit and loss account adidas P&L FY10-15E In €m Sales chg. CoGS % of sales Gross profit margin Royalty and commission Other operating income Operating expenses % of sales EBITDA margin Depreciation Impairment losses % of sales Operating incom e margin Operating incom e, adjusted margin Financial income Financial expenses Financial result Earnings before taxes chg. Earnings before taxes adjusted Income taxes Tax rate Income taxes, adjusted Tax rat, adjusted Minority interest Net incom e Net incom e adjusted EPS EPS adjusted diluted chg. FY10 11,990 +15.5% (6,260) 52.2% 5,730 47.8% 100 110 (4,781) 39.9% 1,159 9.7% (265) FY11 13,322 +11.1% (6,993) 52.5% 6,329 47.5% 93 98 (5,321) 39.9% 1,199 9.0% (246) 1.8% 953 7.2% 953 7.2% 31 (115) (84) 869 +7.8% 869 (261) 30.0% (327) 37.6% 5 613 613 2.93 2.93 +8.1% FY12 14,883 +11.7% (7,780) 52.3% 7,103 47.7% 105 127 (5,875) 39.5% 1,195 8.0% (275) (265) 1.8% 920 6.2% 1,185 8.0% 36 (105) (69) 851 -2.1% 1,116 (327) 38.4% (327) 29.3% 2 526 791 2.52 3.78 +29.1% 2.2% 894 7.5% 894 7.5% 25 (113) (88) 806 +125.1% 806 (238) 29.5% (327) 40.6% (1) 567 567 2.71 2.71 +131.5% Weighted average shares outstanding (mn) Weighted average shares outstanding, diluted (mn) DPS DPS growth Pay out ratio FY13E 15,395 +3.4% (7,819) 50.8% 7,576 49.2% 109 132 (6,101) 39.6% 1,716 11.1% (284) FY14E 16,399 +6.5% (8,210) 50.1% 8,189 49.9% 117 137 (6,429) 39.2% 2,014 12.3% (303) FY15E 17,455 +6.4% (8,620) 49.4% 8,835 50.6% 124 143 (6,696) 38.4% 2,405 13.8% (322) 1.8% 1,432 9.3% 1,432 9.3% 1.8% 1,712 10.4% 1,712 10.4% 1.8% 2,083 11.9% 2,083 11.9% (54) 1,378 +61.9% 1,378 (393) 28.5% (393) 28.5% 2 988 988 4.72 4.72 +24.8% (38) 1,673 +21.4% 1,673 (477) 28.5% (477) 28.5% 2 1,199 1,199 5.73 5.73 +21.4% (18) 2,065 +23.4% 2,065 (589) 28.5% (589) 28.5% 2 1,479 1,479 7.07 7.07 +23.4% 209.216 209.216 209.216 209.216 209.216 209.216 209.216 209.216 209.216 209.216 209.216 209.216 0.80 135.3% 29.5% 1.00 25.0% 34.1% 1.35 35.0% 35.7% 1.68 24.8% 35.7% 2.05 21.4% 35.7% 2.52 23.4% 35.7% Source: Berenberg Bank estimates, company data 101 adidas AG Sporting Goods Balance sheet adidas balance sheet FY10-15E In €m Cash and cash equivalents Short-term financial assets Accounts receivable Other current financial assets Inventories Income tax receivables Other current assets Assets classified as held for sale Total current assets FY10 1,156 233 1,667 197 2,119 71 390 47 5,880 FY11 906 465 1,595 289 2,502 77 469 25 6,328 FY12 1,670 265 1,688 192 2,486 76 489 11 6,877 FY13E 2,086 265 1,746 192 2,572 79 506 11 7,456 FY14E 2,588 265 1,860 192 2,739 84 539 11 8,278 FY15E 3,283 265 1,980 192 2,916 89 574 11 9,309 PPE Goodw ill Trademarks Other intangibles Long-term financial assets Other non-current financial assets Deferred tax assets Other non-current assets Total non-current assets 855 1,539 1,447 142 93 54 508 100 4,738 963 1,553 1,503 160 97 42 484 107 4,909 1,095 1,281 1,484 167 112 21 528 86 4,774 1,336 1,281 1,484 167 112 21 528 86 5,015 1,584 1,281 1,484 167 112 21 528 86 5,263 1,841 1,281 1,484 167 112 21 528 86 5,520 10,618 11,237 11,651 12,471 13,541 14,828 Short-term borrow ings Accounts payable Other current financial liabilities Income taxes Other current provisions Current accrued liabilities Other current liabilities Liabilities classified as held for sale Total current liabilities 273 1,694 123 265 470 842 241 0 3,908 289 1,887 66 252 549 992 303 0 4,338 280 1,790 83 275 563 1,084 299 0 4,374 280 1,852 83 284 582 1,084 309 0 4,475 280 1,972 83 303 620 1,084 329 0 4,672 280 2,099 83 323 660 1,084 351 0 4,880 Long-term borrow ings Other non-current financial liabilities Pensions and similar obligations Deferred tax liabilities Other non-current provisions Non-current accrued liabilities Other non-current liabilities Total non-current liabilities Total liabilities 1,337 15 180 451 29 39 36 2,087 5,995 991 9 205 430 55 45 36 1,771 6,109 1,207 17 251 368 69 40 34 1,986 6,360 1,207 17 251 381 69 40 35 2,000 6,475 1,207 17 251 405 69 40 37 2,027 6,699 1,207 17 251 432 69 40 40 2,055 6,935 Share capital Reserves Retained earnings Shareholder's equity Non-controlling interests Total equity 209 563 3,844 4,616 7 4,623 209 791 4,137 5,137 -9 5,128 209 641 4,454 5,304 -13 5,291 209 641 5,161 6,011 -15 5,996 209 641 6,010 6,860 -17 6,842 209 641 7,063 7,913 -20 7,893 10,618 11,237 11,651 12,471 13,541 14,828 Total assets Total liabilities and equity Source: Berenberg Bank estimates, company data 102 adidas AG Sporting Goods Cash flow statement adidas cash flow statement FY10-15E In €m Operating cash flow PBT D&A Operating profit before w k Increase in receivables Increase in inventories Increase in payables Cash from operating activities Interest paid Income taxes paid Net cash from operating activities FY10 FY11 FY12 FY13E FY14E FY15E 806 270 1,144 (100) (561) 757 1,240 (111) (235) 894 869 253 1,179 (41) (353) 449 1,234 (113) (314) 807 851 536 1,430 (135) 23 94 1,412 (90) (380) 942 1,378 284 1,662 (58) (86) 62 1,614 1,673 303 1,976 (114) (168) 121 1,881 2,065 322 2,388 (120) (176) 127 2,287 (393) 1,221 (477) 1,404 (589) 1,699 Investing activities Purchase of intangibles Proceeds from intangibles Purchase of PPE Proceeds from sale of PPE purchase of short-term financial assets (Purchase)/ proceeds from Investments Interests received Net cash used in investing activities Free Cash flow (42) 17 (227) 1 (146) 44 23 (330) 564 (58) 0 (318) 2 (192) (10) 30 (566) 241 (58) 1 (376) 19 195 10 35 (217) 725 (525) (551) (579) (525) 696 (551) 853 (579) 1,120 33 0 (73) 0 (57) 0 (167) (3) (282) 2 (353) 2 (428) 2 (198) (238) (273) (500) (3) 496 (209) (3) (8) (231) 42 (280) (350) (426) 55 381 775 1,156 0 1,156 (1,610) 15 (244) 1,156 912 6 906 (1,280) (3) 764 912 1,676 6 1,670 (1,487) 416 1,676 2,092 6 2,086 (1,487) 503 2,092 2,595 6 2,588 (1,487) 694 2,595 3,289 6 3,283 (1,487) 966 6.7% 2.2% (92) (221) 1,034 8.0% 3.4% (80) 91 1,294 8.0% 3.4% (66) 448 1,884 8.0% 3.4% (54) 864 2,343 8.0% 3.4% (38) 1,366 2,942 8.0% 3.4% (18) 2,061 Financing activities (Repayments)/ proceeds from long-term borrow ings Proceeds from issue of a Eurobond/ share capital Dividend paid to shareholders Dividend paid to non-controlling interest Acquisition of non-controlling interests Cash repayments of long-term debt Net cash used in financing activities FX Change in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents at year-end Bank overdraft Cash & cash equivalents BS Debt from BS Interest calculation Average cash/ (debt) Interest rate (debit) Interest rate (credit) Interest (expense)/ income Net cash/(debt) Source: Berenberg Bank estimates, company data 103 Puma AG Sporting Goods The “special one” • • • • • • We initiate coverage of Puma AG with a Hold recommendation and a price target of €235, providing c.3% upside from current share price levels (€228). We view Puma as a special situation. Kering Group (formerly PPR), which owns 82.4% of Puma, has recently experienced footwear market share losses, management departures and weak operating performance. In our view, Puma’s earnings rehabilitation will be accelerated by Kering’s Jean-Francois Palus and a new management team under Bjorn Gulden, the recently appointed CEO (ex-Pandora). Should Kering acquire the outstanding 17.6% of Puma’s remaining shares in order to fully access Puma’s balance sheet (FY12 net cash €249m) and increase the 12-year average pay-out ratio of 13.8% more in line with peers (adidas FY12 pay-out ratio: 35.7%; 12-year average: c.24%), we would expect Kering to pay a premium. Questions remain about how Puma will arrest declining market share, attract senior quality management and find the right balance of Performance and Lifestyle product mix aimed at consumers without diluting its gross margin. According to our global sporting goods proprietary market model, we estimate that Puma will lose c.10bp of market share from FY12 to FY15 compared with adidas (+560bp) and Nike (+960bp). Puma’s “Back on the Attack” investment strategy, which was first launched in October 2010, highlighted a 2015 revenue target of €4bn. We do not believe this is achievable (FY15E revenue: €3.61bn). Since Q3 2012, management has acknowledged that revenues are under pressure and that in the short term the focus will be on restoring Puma’s profitability. Our €235 target price, based on our P/E analysis and driven by our earnings and cash flow forecasts, implies CY13E and CY14E P/Es of 17.0x and 14.9x, supported by our DCF (€237). Puma’s PEG is above the sector average at 1.7x (sector: 1.3x). We acknowledge EBIT margin upside risk in 2014 and do not rule out the possibility of Kering acquiring the outstanding free-float at a premium to current levels. Y/E 31.12., EUR m Sales EBITDA EBIT Net profit Net debt (net cash) EPS (reported) EPS (recurring) CPS DPS Gross margin EBITDA margin EBIT margin Dividend yield NOPAT/IC (Post tax ROIC) EV/sales EV/EBITDA EV/EBIT P/E ROIC/WACC % spread Source: Company data, Berenberg Bank 2011 2012 2013E 2014E 2015E 3,009 397 333 230 -357 15.4 15.4 1.1 2.0 49.6% 13.2% 11.1% 0.9% 11.1% 1.3 9.8 11.6 14.8 2.1% 3,271 182 291 248 -249 4.7 16.5 -0.5 0.5 48.3% 5.6% 8.9% 0.2% 11.2% 1.2 21.3 13.3 13.8 2.2% 3,277 375 306 206 -446 13.8 13.8 14.3 1.9 48.2% 11.5% 9.3% 0.8% 8.8% 1.2 10.3 12.7 16.5 -0.2% 3,446 418 345 236 -613 15.8 15.8 13.7 2.2 48.4% 12.1% 10.0% 1.0% 8.9% 1.1 9.3 11.2 14.4 -0.1% 3,612 456 380 263 -808 17.6 17.6 15.8 2.4 48.6% 12.6% 10.5% 1.1% 8.9% 1.1 8.5 10.2 13.0 -0.1% Hold (initiation) Rating system Absolute Current price Price target EUR 226.65 EUR 235.00 18/04/2013 XETRA Close Market cap EUR - m Reuters PUMG.DE Bloomberg PUM GY Share data Shares outstanding (m) Enterprise value (EUR m) Daily trading volume Performance data High 52 weeks (EUR) Low 52 weeks (EUR) Relative performance to SXXP 1 month -1.7 % 3 months 1.6 % 12 months -25.8 % 15 3,874 5,229 269 210 DAX -0.4 % -0.5 % -22.2 % Business activities: Sports lifestyle brand Non-institutional shareholders: Sapardis SA (Kering) 82.4% 25 April 2013 John Guy Analyst +44 20 3465 2674 john.guy@berenberg.com Bassel Choughari Analyst +44 20 3465 2675 bassel.choughari@berenberg.com Rupert Trotter Specialist Sales +44 20 3207 7815 rupert.trotter@berenberg.com 104 Puma AG Sporting Goods Catalysts for share price performance Puma has underperformed the DAX index and SXXP 600 by 17% and 12% on a relative basis over the past three months. Puma has underperformed adidas and Nike by 30% and 16% respectively over the same period. Puma is due to report its Q1 2013 trading/earnings update on 14 May. We forecast Q1 2013 earnings of €4.34, a yoy decline of 12% driven by incremental markdown and margin weakness within Footwear and Europe coupled with tough trading comparison bases for the Americas (+8.5% constant currency sales growth) and Asia-Pacific (+10.2% constant currency sales growth). Our Q1 2013 earnings estimate is 9% below Bloomberg consensus at €4.79. We are cautious about sales and market share momentum for the Puma brand (c.95% of group sales). We expect Puma to grow at a slower rate versus global GDP than peers over the next three years to 2015E, at 1.6x versus adidas at 2.2x and Nike at 2.8x. Moreover, we expect FY13 will mark a sales trough for the brand – we forecast Puma brand growth of 0.9x versus GDP. Management continues to implement its profit-focused transformation and cost reduction programme (rationalising c.90 unprofitable stores primarily in Western Europe and consolidating its distribution and logistics operations). As a result, we expect Puma to underperform the market by 170bp in 2013. As a result of weaker-than-expected trading and profitability in 2012, Puma announced its transformation and cost reduction programme aimed at driving up short-term profitability and returns for shareholders. The main aims include: • the establishment of a new business model and the reduction of organisational entities from 23 in Europe to seven; • the implementation of a warehouse rationalisation programme in Europe, which is currently under way and ought to result in savings in 2013; • a retail portfolio rationalisation of c.90 European and North American stores; • the termination of collaboration and endorsement contracts; • The reduction of Puma’s product palette by 30% (by December 2015); and • the future establishment of its international organisations around seven business units. The principal aims behind these actions are to streamline current operations across regions, improve sourcing, supply and distribution, and generate material cost savings in the process. We believe that 2013 will be another year of transition for Puma and maintain that Puma’s 2015 sales target first outlined in October 2010 (in former CEO Jochen Zeitz’s “Back on the Attack” presentation) appears unachievable (Berenberg estimate: €3,612m; Bloomberg consensus: €3,666m). We await further management updates after the announcement of the appointment of new CEO Bjorn Gulden on 18 April. 105 Puma AG Sporting Goods Finally, we do not rule out the possibility that Kering will acquire the minority 17.6% of outstanding shares it does not own in order to a) own the business outright, and b) take control of Puma’s balance sheet and increase its pay-out ratio more in line with peers. Earnings momentum Within the past three months, Puma has underperformed the SXXP PanEuropean Stocks 600 Index by 12%. Puma has re-rated slightly over the past three months on the back of anticipated cost savings into FY14, the announcement of a new CEO, Bjorn Gulden, on 18 April, and increased market speculation as to whether Kering will acquire the outstanding 17.6% of Puma shares. Puma seven-year absolute share price performance vs. peers (rebased) 400 350 300 250 200 150 100 50 adidas Jan 13 Apr 13 Jul 12 Oct 12 Jan 12 Apr 12 Jul 11 SXXP Oct 11 Jan 11 Apr 11 Jul 10 Li Ning Oct 10 Jan 10 Apr 10 Jul 09 Nike Oct 09 Jan 09 Puma Apr 09 Jul 08 Oct 08 Jan 08 Apr 08 Jul 07 Oct 07 Jan 07 Apr 07 Jul 06 Oct 06 Apr 06 0 Dax Source: DataStream Puma one-year absolute share price performance vs. peers (rebased) 180 160 140 120 100 80 60 40 Mar 13 Feb 13 Jan 13 SXXP Dec 12 Nov 12 Li Ning Oct 12 Sep 12 Nike Aug 12 Jul 12 Puma Jun 12 May 12 Apr 12 Mar 12 Feb 12 Jan 12 Dec 11 adidas Dax Source: DataStream We assess the driving factors behind recent share price performance by calculating the impact that 12-month forward consensus earnings moves and market multiples/re-rating (on an absolute and relative level) have had on Puma and its immediate peer group. According to our analysis, Puma consensus forward EPS upgrade of c.7% is in line with Nike, followed by a +10% de-rating on more cautious sales growth targets to 2015. 106 Puma AG Sporting Goods Puma 12-month forward consensus EPS moves and re-rating vs. peers 50% 40% 30% 20% 10% 0% -10% -20% -30% 16% 16% 4% -5% adidas Nike Puma Li Ning 12m fwd. Consensus EPS Δ Market Multiple Δ Mkt. Relative Multiple Δ Share price movt Source: DataStream We highlight below Puma’s absolute and relative share price performance versus adidas and peers Nike and Li-Ning and key benchmark indices. Puma remains an under-performer. In addition, we note the underperformance spread versus adidas from 2012 to year to date is at its widest. Puma vs. adidas (seven-year absolute performance) Puma vs. Nike (seven-year absolute performance) 250.0 300.0 200.0 250.0 200.0 150.0 150.0 100.0 Jul 12 Dec 12 Feb 12 Sep 11 Apr 11 Jan 10 Jun 10 Nike Nov 10 Puma Aug 09 Oct 08 Mar 09 May 08 Jul 07 Dec 07 Feb 07 Apr 06 Jul 12 Dec 12 Feb 12 Sep 11 Apr 11 Jan 10 Jun 10 Puma Nov 10 adidas Aug 09 Oct 08 Mar 09 May 08 Jul 07 Dec 07 Feb 07 Sep 06 - Apr 06 50.0 - Sep 06 100.0 50.0 Source: DataStream Puma vs. Li Ning (seven-year absolute performance) Puma vs. SXXP (seven-year absolute performance) 400.0 140.0 350.0 120.0 300.0 100.0 250.0 80.0 200.0 Dec 12 Jul 12 Feb 12 Sep 11 Apr 11 Jun 10 Jan 10 SXXP Nov 10 Puma Aug 09 Mar 09 Oct 08 May 08 Dec 07 Jul 07 Feb 07 Sep 06 Dec 12 Jul 12 Feb 12 Sep 11 Apr 11 Jun 10 Jan 10 Li Ning Nov 10 Puma Aug 09 Mar 09 Oct 08 May 08 Dec 07 Jul 07 - Feb 07 20.0 - Sep 06 40.0 50.0 Apr 06 100.0 Apr 06 60.0 150.0 Source: DataStream 107 Puma AG Sporting Goods Dec 12 Apr 13 Aug 12 Dec 11 Apr 12 Aug 11 Dec 10 Apr 11 Puma vs. Nike Aug 10 Dec 09 Apr 10 Aug 09 Dec 08 Apr 09 Aug 08 Dec 07 Apr 08 Aug 07 Dec 06 Apr 06 Dec 12 Apr 13 Aug 12 Dec 11 Apr 12 Aug 11 Dec 10 Apr 11 Puma vs. adidas Aug 10 Dec 09 Apr 10 Aug 09 Dec 08 Apr 09 Aug 08 0 Dec 07 20 0 Apr 08 40 20 Aug 07 60 40 Dec 06 80 60 Apr 07 100 80 Apr 06 120 100 Aug 06 120 Apr 07 Puma vs. Nike (seven-year relative performance) Aug 06 Puma vs. adidas (seven-year relative performance) Source: DataStream Puma vs. Li Ning (seven-year relative performance) 180 160 140 120 100 80 60 40 20 0 Puma vs. SXXP (seven-year relative performance) 130 120 110 100 90 80 Apr 13 Dec 12 Aug 12 Apr 12 Dec 11 Aug 11 Dec 10 Apr 11 Puma vs. SXXP Aug 10 Apr 10 Dec 09 Aug 09 Apr 09 Dec 08 Aug 08 Apr 08 Dec 07 Aug 07 Dec 06 Apr 07 Apr 06 60 Aug 06 Apr 13 Dec 12 Aug 12 Apr 12 Dec 11 Aug 11 Puma vs. Li Ning Apr 11 Dec 10 Aug 10 Apr 10 Dec 09 Aug 09 Apr 09 Dec 08 Aug 08 Apr 08 Dec 07 Aug 07 Dec 06 Apr 07 Apr 06 Aug 06 70 Source: DataStream Puma vs. DAX (seven-year absolute performance) Puma vs. DAX (seven-year relative performance) 160.0 110 140.0 100 120.0 90 100.0 80 80.0 Apr 13 Dec 12 Aug 12 Apr 12 Dec 11 Aug 11 Dec 10 Apr 11 Puma vs. Dax Aug 10 Apr 10 Dec 09 Aug 09 Apr 09 Dec 08 Aug 08 Apr 08 Dec 07 Aug 07 Dec 06 Apr 07 Apr 06 Jul 12 Dec 12 Feb 12 Sep 11 Apr 11 Jun 10 Jan 10 Dax Nov 10 Puma Aug 09 Mar 09 Oct 08 May 08 Dec 07 Jul 07 40 Feb 07 50 - Sep 06 60 20.0 Apr 06 40.0 Aug 06 70 60.0 Source: DataStream Puma vs. adidas (2012 to ytd – absolute) 170.0 160.0 150.0 140.0 130.0 120.0 110.0 100.0 90.0 80.0 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 11 12 12 12 12 12 12 12 12 12 12 12 12 13 13 13 adidas Puma Puma vs. DAX (2012 to ytd – relative) 120 115 110 105 100 95 90 85 80 75 70 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 11 12 12 12 12 12 12 12 12 12 12 12 12 13 13 13 Puma vs. Dax Source: DataStream 108 Puma AG Sporting Goods H ow we differ from consensus Our FY13 to FY15 earnings estimates are not materially distinct when compared with consensus. FY13E earnings of €13.79 are 0.5% ahead of consensus and FY14E earnings of €15.78 are 1.2% of Bloomberg consensus. We expect operating cost savings to materialise from the second-half of 2013. Our proprietary market share model underperformance versus peers in 2013. implies c.170bp market share We expect a negative 10bp gross margin impact to 48.2% due to above-average sourcing costs for sustainable raw materials, and an increase in the Performance product offering as a percentage of total sales (a steady increase of 500bp expected to 2015 to c.40%) at a lower gross margin versus Lifestyle. Berenberg Puma EPS vs. Bloomberg consensus 2% 1% 1% 1% 1% 1% 0% 0% 0% 1% 1% 0% FY13E FY14E FY15E Berenberg Puma EBIT margin vs. Bloomberg 40 35 30 25 20 15 10 5 0 38 37 FY14E FY15E 23 FY13E EBIT margin (bp) EPS (%) Source: Bloomberg, Berenberg Bank estimates Berenberg Puma sales vs. Bloomberg consensus 0 0% -20 -1% -40 -2% -13 -60 -1% -2% Berenberg Puma gross margin vs. Bloomberg -1% -2% FY13E FY14E Sales (%) -1% FY15E -60 -80 -100 -120 -99 FY13E FY14E FY15E Gross margin (bp) Source: Bloomberg, Berenberg Bank estimates Puma’s Q4 2012 trading update was mixed but on balance, broadly reassuring. Sales of €805m increased by 8.7% on a constant currency basis and were ahead of consensus expectations of €755m. EMEA positively surprised at the top line, with 5% constant currency sales growth. However, incremental sales came at the expense of gross margin as stock was cleared aggressively, especially in western European regions ahead of Puma’s retail rationalisation initiative. We note that the group Q4 2012 gross margin declined by just over 200bp yoy to 44.6%, below expectations. By category, Footwear Q4 2012 sales increased by 6% on a constant currency basis, recording the first quarterly gain during 2012. We believe that sales spike 109 Puma AG Sporting Goods relative to a lacklustre nine-month performance was principally due to discounting, hence the impact to gross margin – the Footwear gross margin declined by 470bp yoy to 41.9%, well below the total margin decline for the quarter at -209bp. We are cautious optimists as regards our FY13 Footwear constant currency growth expectations of 3.0% (Q1 2013E +3.5%), although we believe that sales growth will continue to be at the expense of gross margin (Q1 2013E gross margin of 51% – an implied decline of 130bp yoy) as Puma rationalises its European and North American store base in line with its transformation and cost reduction programme. Upside risk to margin may appear through Puma’s improved management of its inventory, as we note that stock levels were up by 3% as of December 2012 compared with the first nine months of the year at +20% on a constant currency basis, hence there is a reduced risk to incremental markdown on weaker demand. Notwithstanding incremental markdown and sales weakness, downside risk to the 2013 gross margin is related to currency hedging – Puma management indicated that euro/dollar hedging rates for 2013 are expected at 1.28 compared with 1.36 for 2012, an implied 580bp annual currency-related impact. We are below consensus for sales, EBIT and earnings for Q1 2013E. We look for sales of €814m versus Bloomberg consensus at €830m, EBIT at €96m versus consensus at €101m and earnings of €4.34 versus consensus of €4.79 on a fully adjusted diluted basis. 110 Puma AG Sporting Goods Puma key assumptions and sensitivities (1) Regional splits In €m Consolidated sales % reported growth % constant-FX growth % FX & acquisitions effect FY12-15E 3yr CAGR 3.4% FY10-15E 5yr CAGR 5.9% FY10 2,706 10.6% 3.6% 7.0% FY11 3,009 11.2% 12.1% -0.9% FY12 3,271 8.7% 4.6% 4.1% FY13E 3,277 0.2% 2.2% -2.0% FY14E 3,446 5.2% 5.2% 0.0% FY15E 3,612 4.8% 4.8% 0.0% Adjusted EBIT 338 12% 13% 333 11% -1% 291 9% -13% 306 9% 5% 345 10% 13% 380 11% 10% 9.4% 2.4% Adjusted diluted EPS Growth 15.42 0% 15.36 0% 16.55 8% 13.79 -17% 15.78 14% 17.58 11% 2.0% 2.7% Sales by region EMEA % reported growth % constant-FX growth % FX & acquisitions effect Americas % reported growth % constant-FX growth % FX & acquisitions effect Asia/Pacific % reported growth % constant-FX growth % FX & acquisitions effect 1,222 1.5% -2.5% 4.0% 856 28.7% 20.2% 8.5% 629 8.8% -2.6% 11.4% 1,312 7.4% 7.7% -0.3% 967 13.0% 17.7% -4.7% 730 16.1% 13.3% 2.8% 1,302 -0.8% 1.6% -2.4% 1,127 16.6% 10.6% 6.0% 842 15.3% 7.4% 7.9% 1,282 -1.5% -1.0% -0.5% 1,107 -1.8% 1.2% -3.0% 888 5.5% 8.5% -3.0% 1,333 4.0% 4.0% 0.0% 1,162 5.0% 5.0% 0.0% 950 7.0% 7.0% 0.0% 1,387 4.0% 4.0% 0.0% 1,209 4.0% 4.0% 0.0% 1,017 7.0% 7.0% 0.0% 2.1% 2.6% 2.4% 7.1% 6.5% 10.1% EBIT margin Growth Source: Company data 111 Puma AG Sporting Goods Puma key assumptions and sensitivities (2) Segmental breakdown In €m Footwear % reported growth % constant-FX growth % FX & acquisitions effect Apparel % reported growth % constant-FX growth % FX & acquisitions effect Accessories % reported growth % constant-FX growth % FX & acquisitions effect Total % reported growth % constant-FX growth % FX & acquisitions effect FY10 1,425 7.8% 1.1% 6.7% 941 11.2% 3.8% 7.4% 340 21.8% 14.9% 6.9% 2,706 10.6% 3.6% 7.0% FY11 1,540 8.1% 9.9% -1.8% 1,036 10.0% 9.9% 0.1% 434 27.5% 27.3% 0.2% 3,009 11.2% 12.1% -0.9% FY12 1,595 3.6% -0.1% 3.7% 1,152 11.2% 6.6% 4.6% 524 20.7% 16.6% 4.1% 3,271 8.7% 4.6% 4.1% FY13E 1,595 0.0% 3.0% -3.0% 1,129 -2.0% 1.0% -3.0% 553 5.6% 2.4% 3.2% 3,277 0.2% 2.2% -2.0% FY14E 1,659 4.0% 4.0% 0.0% 1,185 5.0% 5.0% 0.0% 602 8.8% 8.8% 0.0% 3,446 5.2% 5.2% 0.0% FY15E 1,717 3.5% 3.5% 0.0% 1,239 4.5% 4.5% 0.0% 656 9.1% 9.1% 0.0% 3,612 4.8% 4.8% 0.0% Gross profit breakdown €m Footwear Margin Growth Apparel Margin Growth Accessories Margin Growth Total Margin Growth Change (bps) 697 48.9% 5.9% 476 50.6% 9.7% 172 50.6% 13.9% 1,345 49.7% 8.2% -110.5 756 49.1% 8.5% 514 49.6% 7.8% 224 51.6% 30.0% 1,493 49.6% 11.0% -7.2 742 47% -1.9% 574 50% 11.7% 264 50.5% 17.7% 1,579 48.3% 5.7% -135.5 740 46% -0.2% 561 50% -2.2% 279 50.5% 5.9% 1,580 48.2% 0.1% -5.4 770 46% 4.0% 588 50% 4.8% 310 51.5% 11.1% 1,668 48.4% 5.5% 17.3 797 46% 3.5% 614 50% 127.7% 343 52.2% 151.9% 1,754 48.6% 122.0% 16.1 Working capital movement (€m) Stock turn (x) Debtor days Creditor days 116 0.32x 60 46 96 0.35x 65 52 45 0.33x 57 42 1 0.33x 57 42 35 0.33x 57 42 35 0.33x 57 42 -55 371 -71 356 -81 249 -70 446 -70 613 -70 807 Capex (€m) Net cash/ (debt) (€m) 3yr CAGR 2.5% 5yr CAGR 3.8% 2.4% 5.6% 7.8% 14.0% 3.4% 5.9% 2.4% 2.7% 2.3% 5.2% 9.2% 14.8% 3.6% 5.4% Source: Berenberg estimates, company data 112 Puma AG Sporting Goods Executive summary Puma is the third-largest sporting goods player by revenue and ought to benefit from long-term trends such as: • an ageing, health conscious demographic; • increased sporting investment by the media; and • material cost savings through ongoing sourcing, supply and distribution efficiencies. In the short term (FY13), Puma management and Kering, Puma’s majority shareholder with an 82.4% holding, have implemented a profit plan focused on cost savings and store rationalisation called the transformation and cost reduction programme. The plan was announced during Q3 2012, and while Puma’s last set of quarterly results surprised on the upside in terms of sales, profit and gross margin were below consensus as stock was marked down ahead of European and North American store closures, which materially affected Footwear profitability (the Q4 2012 gross margin declined by 470bp yoy to 41.9%, well below the total margin decline for the quarter at -209bp). We are cautious optimists as regards our FY13 Footwear constant currency growth expectations of 3.0% (Q1 2013E +3.5%), al though we believe that sales growth will continue to be at the expense of gross margin (Q1 2013E gross margin of 51%, an implied decline of 130bp yoy). Puma’s pertinent questions We outline the key questions that we and the market are asking about Puma’s future sales and profit viability. Will Puma grow market share in 2013? We believe Puma market share growth in 2013 is unlikely. Puma is expected to close a net 50 stores in FY13 (with a western European regional focus) in an effort to rationalise its loss-making store base. We expect Puma to lose up to 170bp of market share in 2013 with the adidas group and Nike being the main beneficiaries. Berenberg estimated market growth vs. adidas, Nike and Puma (local FX) 15.0 10.0 5.0 0.0 -5.0 -10.0 2007 2008 adidas 2009 2010 Puma 2011 2012 Nike 2013E 2014E 2015E Market Source: Berenberg Bank estimates, company data, Euromonitor, Bloomberg estimates (Nike) 113 Puma AG Sporting Goods While the rationalisation programme is positive for short-term profit restoration, margin risk remains as old stock is cleared, although we appreciate that as of December 2012, Puma’s inventory position materially improved at +3% yoy compared with more than 20% yoy during the first nine months of 2012. Forecast out/underperformance vs. global sporting goods (bp) 2007-15E 500 400 300 200 100 0 -100 -200 -300 -400 2007 2008 2009 2010 adidas 2011 Puma 2012 2013E 2014E 2015E Nike Source: Berenberg Bank estimates, Euromonitor Are Puma’s “Back on the Attack” targets achievable? Puma launched its five-year “Back on the Attack” strategy in October 2010. Former CEO Franz Koch, who left the business in March 2013, outlined core strategies for the business, which we believe will remain a key focus for Puma under new CEO Bjorn Gulden (whose appointment was announced on 18 April). We are more cautious compared with management’s 2015 official targets. We appreciate that after a weaker-than-expected trading and margin performance in Q3 2012 – including a reported sales growth of 6% to €892m (+0.5% on a currency neutral basis), an EBIT decline of 17% to €99m and a gross margin miss of 180bp to 48.2%) due to weaker-than-expected European trading, lost footwear market share, higher markdown and sustained input cost pressure – management and the market (Bloomberg FY15E consensus sales €3.7bn) have subsequently become more cautious when communicating within the context of official targets. The initial “Back on the Attack” aims were to: • achieve €4bn of turnover by 2015; • reclaim historical (high) EBIT margins (14-15%); • sustainably improve shareholder value; and • achieve all these goals while respecting environment and social issues such as Puma’s ambition to take leather out of its footwear offering and become the #1 brand in terms of sustainability recognition. We highlight management’s estimated impact on the distribution mix from 2010 to 2015. 114 Puma AG Sporting Goods Proposed impact on Puma’s business mix Sales PUMA brand Non-PUMA brands 2010 96% 4% 2015 target 92% 8% Accessories Apparel Footwear 14% 34% 52% 15% 35% 50% APAC Americas EMEA 23% 32% 45% 23% 27% 50% Top 6 Emerging Rest of World Top 6 Mature 14% 36% 50% 22% 40% 38% Regional categories Core categories 95% 5% 90% 10% Retail & E-commerce Wholesale 17% 83% 20% 80% Source: Berenberg estimates, company data We outline our three-year sales CAGR (FY12-15E) assumptions and five-year sales CAGR assumptions relative to management’s official target of reaching €4bn of turnover by 2015. Our analysis suggests that Puma will fall short of its FY15 target by €388m as we forecast FY15 revenues of €3,612m. Berenberg estimated sales to FY15 and implied three and five year CAGR rates Sales PUMA brand Non-PUMA brands FY10 2,706 2,598 FY11 3,009 FY12 3,271 FY15E 3,612 3,323 12-15E 3-year CAGR 3.4% 10-15E 5-year CAGR 5.9% 5.0% 108 289 21.7% Accessories Apparel Footwear 340 941 1,425 656 1,239 1,717 14.0% 5.6% 3.8% APAC Americas EMEA 629 856 1,222 1,017 1,209 1,387 10.1% 7.2% 2.6% Top 6 Emerging Rest of World Top 6 Mature 379 974 1,353 795 1,445 1,373 16.0% 8.2% 0.3% Regional categories Core categories 2,571 135 3,251 361 4.8% 21.7% Retail & Ecommerce Wholesale 460 2,246 722 2,890 9.4% 5.2% Source: Berenberg estimates, company data 115 Puma AG Sporting Goods As a result of poor operational and trading performances last year, former CEO Franz Koch outlined a transformation and cost reduction programme aimed at driving up short-term profitability and returns for shareholders via the following. • The establishment of a new regional business model including the reduction of European organisational entities from 23 to seven in order to reduce the complexity of the business: Each area will have full management team and P&L responsibility, with each country focusing its activities on the commercial side of the business. The seven areas are the DACH region (Germany, Austria and Switzerland), Iberia (Spain and Portugal), UKIB (Belgium, Ireland, Luxembourg, the Netherlands and the UK), the Nordics (Denmark, Finland, Norway and Sweden), Eastern Europe (the Czech Republic, Estonia, Hungary, Lithuania, Poland and Slovakia), France and Italy; • The implementation of a warehouse rationalisation program in Europe and North America: This is currently under way and will lead to cost savings in FY13 and FY14; • The optimisation of the retail portfolio: This will focus Puma’s attention on closing c.90 unprofitable stores in Europe and North America with a primary store opening strategy in emerging markets. By the end of 2013, management expects to operate out of 540 stores worldwide compared with 590 as of FY12; • The termination of collaboration and endorsement contracts: This is designed to drive up short-term profitability as Puma divests “unprofitable” collaborations and endorsement contracts (the discontinuation of Rugby in the Northern Hemisphere (IFRU) and sailing, which is to be terminated in December 2013 with the discontinuation of the Volvo Ocean race); • The reduction of Puma’s product palette by 30% by the end of 2015: The bulk of the rationalisation is expected to come from streamlining regional and local ranges, the first effects of which are expected to be visible by spring/summer 2013 and; • The establishment of the international organisation around seven business units: 1) teamsport; 2) running, training, fitness; 3) golf, 4) fundamentals; 5) motorsport; 6) lifestyle (accessories); and 7) licensing. Product management, design, development and product specific marketing will be clustered under each business unit. According to our model, we forecast that the FY13 gross margin will decline by 10bp yoy to 48.2% in spite of lower raw material costs and a soft gross margin comparison base (-130bp in FY12 to 48.3% and -10bp in FY11 to 49.6%). We note that Puma is hedged at 1.28 (euro/dollar) in 2013 compared with 2012 at 1.36 (negative). In our view, the core strategic elements to Puma’s future success are predicated around the sound execution of the following strategies: • the implementation of sound product innovation and realisation of product desirability; • successful distribution, inventory management, SKU analysis (sell-out and margin analysis); • increased brand marketing “heat”; 116 Puma AG Sporting Goods • a strong management team; and • a fundamental understanding of what the key regional and demographic product focuses are over the mid- to long term. What will an increase in Performance product have on gross margins? Puma Group’s brand portfolio is limited to three recognised brands: Puma, Cobra Golf and Tretorn. We estimate that Puma accounts for c.95% of Puma total sales, and at the group level, we understand that Performance accounts for 35% of total sales with Lifestyle at 65%. Puma Perf. vs. Lifestyle (FY12E) Puma Perf. vs. Lifestyle (FY15E) Performance, 35% Lifestyle , 65% Lifestyle , 60% Performance, 40% Source: Berenberg Bank estimates According to Puma management, 2013 will be a “pioneering” year, with an increased focus on Performance innovation, resulting in a c.500bp increase in Performance-related product to 40% by FY15 (compares with our estimated Performance vs. Lifestyle FY15 adidas brand split of 72% to 28% (up from 22% as of FY09). Puma has in the past focused on its credentials as a sustainable and fashionorientated brand so the increased focus on Performance will be interesting in terms of implied incremental costs associated with research, development, advertising and promotion. We are conscious of the mix effect as according to our estimates, Performance-related product gross margins range from 40% to 50% compared with the Lifestyle product gross margin range of 50% to 65%, hence the implied mix effect ought to be negative for Puma. In addition, we note that Puma’s internal targets are to ensure that at least 50% of its product will come from sustainable raw materials (up from just over 10% today). While 2012 raw material prices for key commodities declined for sporting goods (crude oil: +8.7%; rubber: -17.2%; cotton: -39.2% yoy), which is positive for the 2013 gross margin, sustainable and bio-degradable product is more costly to source and manufacture. We expect the aggregate effect of currency hedging pressure, more benign raw material pricing, Chinese labour cost inflation coupled with markdown risk on store closures to result in a 10bp decline to Puma’s FY13E gross margin (48.2%). When will the bulk of Puma cost savings come through? Within the sporting goods sector, we have noted inefficiencies linked with some of the largest companies as regards to warehouse capacity management, order-taking and distribution – part of this, we believe was due to the legacy “order book” model, whereby sporting goods companies would look to fill almost an entire wholesale order book by up to 70-80% in advance and work on the basis of releasing two global collections a year (summer and winter). 117 Puma AG Sporting Goods This rather simplified model resulted in an initial lack of sourcing and supply chain investment. Sporting goods manufacturers were regularly caught out with holding too much or too little stock when wholesalers reacted abruptly to global macroeconomic shocks/downturns and upturns. As a result, sporting goods manufacturers/retailers would suffer from volatile swings in cash flow and gross margin, subject to global demand trends. As part of the strategic investments Puma is taking to 2015, we believe there are opportunities to rationalise distribution capacity, reduce costs and improve working capital. We look for a 600bp improvement to 37.3% (excluding depreciation and 39.4% including depreciation), more in line with FY10 (36.6%) and FY11 (37.0%) levels as opposed to FY12 (43.3%) in FY13, falling to a run rate of 36.5% (excluding depreciation) by FY15E. By comparison, Nike recorded CY11 operating expenses as a percentage of sales of 30.9% (Puma 37.0% in 2011), highlighting Nike’s superior operating efficiency and future cost opportunities for Puma. Will Kering acquire the 17.6% outstanding free-float? Kering owns 82.4% of Puma. To date, Kering has yet to exercise its option to take full control of Puma’s balance sheet. In 2012, Puma recorded €249m of net cash and announced a 75% dividend cut to €0.50 implying a pay-out ratio of 10.7% In our view, a pay-out ratio of 10.7% is low compared with adidas’s at 35.7% (10year average: c.24%) and as a result, we can envisage a scenario whereby Kering acquires the minority free-float stake in order to take full control of Puma’s balance sheet without having to communicate with minority shareholders. Puma management maintains that the cash is required in order to fund its subsidiary operations in key overseas markets. The history of Kering’s stakebuilding is as follows. On 10 April 2007, Kering announced it had reached an agreement with Mayfair Beteiligungsfondsegesellschaft I mbH to acquire its 27.1% stake in Puma for €330 per share, excluding the FY06 dividend of €2.5. At the same time, Kering declared its intention to acquire outstanding Puma shares on the same financial terms – i.e. a 24% premium to Puma’s undisturbed onemonth weighted average share price (as of 3 March 2007). Assuming a 100% acceptance, implied total consideration equalled €5.3bn and implied EV equated to €4.9bn (12.2x and 13.4x FY06 EBITDA and EBIT respectively). As of FY12, Kering’s stake in Puma has increased to 82.4%, driven by purchases on the open market and by Puma buying back shares – we note that Puma bought back shares in 2008 and 2011. In the two figures below, we chart the most recent shareholding structure and also highlight Kering’s share purchases timeline since 2007. 118 Puma AG Sporting Goods Puma – top five shareholders by size Kering, 82.40% Lombard Odier Darier Hentsch, 0.46% IG Investment Management Ltd, 0.49% Amundi, 0.52% Puma AG Rudolf Dassler Sport, 0.96% Source: Bloomberg, Berenberg Bank estimates Kering and Puma acquisition timeline Start period na na End period Announcement date 09/04/2007 09/04/2007 17/07/2007 17/07/2007 Puma report Stake (%) Change Avg. no. of shares Avg/Price paid (EUR) Consideration 27.14% 27.14% 330 1,424,621,538 1,849,036,277 16,027,964 62.10% 34.96% 16,027,289 330 19/07/2007 31/12/2007 FY 2007 63.55% 1.45% 16,018,027 290 67,383,675 01/01/2008 31/03/2008 Q1 2008 66.80% 3.25% 15,641,468 240 121,840,779 01/04/2008 30/06/2008 Q2 2008 68.20% 1.40% 15,529,248 238 51,658,882 01/07/2008 30/09/2008 Q3 2008 68.90% 0.70% 15,437,399 227 24,494,367 204 14,408,172 01/10/2008 31/12/2008 FY 2008 69.36% 0.46% 15,360,000 01/01/2009 31/12/2009 FY 2009 69.36% 0.00% na 01/01/2010 31/03/2010 Q1 2010 69.38% 0.02% 15,082,464 223 672,376 01/04/2010 30/06/2010 Q2 2010 71.00% 1.62% 15,076,987 239 58,401,945 01/07/2010 30/09/2010 Q3 2010 71.60% 0.60% 15,082,464 225 20,344,132 01/10/2010 31/03/2011 Q1 2011 73.10% 1.50% 15,018,123 232 52,337,408 01/04/2011 30/06/2011 01/07/2011 08/08/2011 08/08/2011 31/12/2011 31/12/2011 19/11/2012 19/11/2012 24/03/2013 Q2 2011 08/08/2011 19/11/2012 73.50% 0.40% 15,000,472 213 12,808,603 75.10% 1.60% 14,981,387 217 52,010,582 239 261,058,392 FY 2011 75.10% 0.00% 14,981,387 9M 2011 82.40% 7.30% 14,969,202 FY 2012 82.40% 0.00% na Source: Berenberg Bank estimates, Bloomberg, company data We believe that Kering would have two main options if it was to conclude that Puma’s cash utilisation was sub-optimal. 1) It could acquire more shares on the open market to reach a 95% stake and then delist Puma after having squeezed out the minority 5% holding – assuming no premium, the minimum price Kering would have to pay would be €235 per share based on the three-month volume weighted average. 2) As Kering owns more than 75% of Puma, it has the option to enter into a domination agreement, which provides the right to give binding instructions to Puma’s management (to increase the dividend pay-out, for 119 Puma AG Sporting Goods example). Our understanding is that so far, Kering has no intention of entering into such an agreement. While Kering’s management will be proactive in its dialogue with new CEO Bjorn Gulden, we expect Kering to allow Gulden to execute on the current transformation and cost reduction programme. Puma’s historical pay-out ratio (2001 to 2012) 34.2% 15.1% 16.2% 11.5% 10.2% 11.2% 18.1% 15.8% 13.0% 10.7% 6.2% 6.2% FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Pay out ratio Source: Company data We do not rule out Kering acquiring the 17.6% outstanding free-float. Assuming no premium to the three-month volume weighted average share price (€235), Kering would have to pay just over €618m. A 20% premium would imply a cost of just over €740m. At a time when Kering has stated its intention to acquire a brand which bridges the luxury and sporting goods gap, in our view an outright bid, although not out of the question, is unlikely. We believe that Kering may be interested in acquiring a non-public brand such as Lacoste, although we acknowledge that a minimum transaction value per share at €235 ought to underpin Puma’s share price. 120 Puma AG Sporting Goods Valuation We forecast that Puma’s net cash will increase from €249m in FY12 to €446m in FY13. Stock levels are well managed and while we see some markdown risk related to European and North American store closures, we are confident that Puma can manage inventory levels in 2013 notwithstanding a material global/financial shock. Raw material cost pressures ought to ease in 2013 and potentially in 2014 (Q1 2013 commodity cost movements are positive). Yet we expect sourcing gains to be offset by higher Chinese labour costs, negative hedging and a weaker gross margin mix as Puma steadily increases its Performance product mix from c.35% to c.40% to FY15. We expect 2013 to remain a transition year and remain sceptical at this stage about Puma’s €4bn revenue target by FY15 (Berenberg FY15E €3,612m). Management’s 2013 guidance includes: • flat sales and mid-single-digit EBIT growth; • gross margin volatility on the back of negative hedging, positive raw material costs and higher Chinese labour costs; • savings to come from lower operating expenses as a percentage of sales; and • capital expenditure in the region of €55m to €70m (although closer to €70m). In 2010, Puma management believed that it could achieve a 15% EBIT margin. Puma’s EBIT margin peaked at 23.5% in FY04 but has since fallen back to 8.9% on an adjusted basis. Now management is more conservative about future EBIT margins and we believe would be satisfied with achieving 10-12% in the short term. We look for a 40bp EBIT margin increase in 2013 to 9.3% driven by a reduction in operating expenses as a percentage of sales (in line with management guidance). On a non-cash-adjusted basis, and at the current share price level of €228, Puma trades on FY13E and FY14E P/Es of 16.5x and 14.4x respectively compared with its seven-year average of 17.9x. Our datastream chart has been affected by 2012 write-downs of €177.5m associated with restructuring the distribution set-up and the closure of subsidiaries in Greece, Cyprus and Bulgaria. Included in the €177.5m write-downs were €42m of costs associated with the acquisition of Spanish trademarks. Stripping out the reported earnings volatility in 2012, Puma’s average P/E is c.17x. On a cash-adjusted basis, our current and one-year forward estimated multiples fall to 14.4x and 11.9x. We believe that our €235 target price would prove conservative should Kering acquire the outstanding 17.6% of Puma shares, as there is no implied premium to the three-month volume weighted average share price of €235. Our €235 share price target implies FY13E and FY14E P/Es of 17.0x and 14.9x on a non-cash-adjusted basis and 14.9x and 12.3x on a cash-adjusted basis and is supported by our DCF (€237). 121 Puma AG Sporting Goods Puma seven-year historical average P/E 60.0x 50.0x 40.0x 30.0x 20.0x 17.9x 10.0x Apr-13 Dec-12 Aug-12 Dec-11 Apr-12 Aug-11 Dec-10 Apr-11 Apr-10 Aug-10 Dec-09 Aug-09 Dec-08 Apr-09 Aug-08 Dec-07 Apr-08 Apr-07 Aug-07 Dec-06 Aug-06 Apr-06 0.0x Puma Source: DataStream However, we expect post-tax ROIC to decline over the coming few years, placing pressure on management to cut costs and accelerate profit growth and earnings. Moreover, we acknowledge the arrival of new CEO Bjorn Gulden on 18 April. We understand that Gulden and Kering are looking for a new COO and it will take time for the new management team to bed down (Reiner Seiz of procurement recently left the business, as has the head of marketing Antonio Bertone and head of finance, legal, operations, logistics IT and HR, Klaus Bauer). Puma post-tax ROIC evolution 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E Post tax ROIC Source: Berenberg estimates 122 Puma AG Sporting Goods Puma valuation metrics Puma – Bloomberg and Berenberg estimates vs. peers EBITDA growth Sales growth EBIT growth 2013E 2014E 2015E 2013E 2014E 2015E 2013E 2014E 2015E 4.5% 7.1% 6.3% 21.7% 20.6% -16.3% 10.0% 5.7% -9.4% 6.7% 7.9% 7.8% 20.5% 21.4% 3.4% 7.2% 5.0% 7.2% 5.9% 6.9% 9.2% 20.4% 21.5% 9.0% 4.6% 4.2% 12.3% 16.3% 10.9% 16.7% 24.3% 9.9% -15.9% 14.7% 35.9% n.m. 16.3% 12.1% 9.6% 23.9% 30.0% 3.8% 10.8% 11.0% 249.9% 14.4% 8.2% 12.8% 22.6% 21.4% 11.7% 3.0% 7.1% 45.1% 17.0% 12.1% 15.1% 26.6% 11.6% -15.3% 16.8% 50.5% n.m. 18.6% 11.9% 11.2% 25.4% 26.5% 2.7% 12.9% 14.0% n.m. 15.4% NA 9.4% NA 25.7% 12.5% NA 9.2% 145.5% Total sector weighted 8.0% 9.3% 9.0% 13.4% 15.5% 12.0% 14.3% 14.7% 7.5% Total sector median 6.3% 7.2% 9.0% 15.5% 12.1% 12.8% 16.0% 13.5% 13.9% 1.4% -81.8% 0.2% -97.5% 5.5% -40.8% 5.2% -44.4% 4.8% -47.0% 4.8% -46.2% 20.9% 56.7% 106.1% 694.3% 11.0% -29.1% 11.3% -27.0% 10.0% -16.7% 9.2% -22.8% 5.1% -64.6% 5.3% -62.8% 13.0% -11.7% 12.7% -13.6% 9.7% 29.6% 10.2% 35.1% adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg Puma – Bloomberg and Berenberg estimates vs. peers Net debt/ EBITDA adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted Total sector median Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) EBITDA margin EBIT margin 2013E -0.4x -1.0x 0.4x -1.0x -12.1x -3.3x -0.3x 1.9x 3.0x -1.6x 2014E -0.6x -0.9x 0.1x -1.1x -13.2x -3.4x -0.6x 1.6x 0.5x -1.7x 2015E -0.6x NA 0.0x NA -15.9x -3.1x -0.6x 1.3x 0.2x -0.4x 2013E 10.9% 14.9% 16.8% 14.0% 28.0% 19.9% 10.3% 9.5% 2.1% 15.4% 2014E 11.9% 15.5% 17.0% 14.4% 29.9% 19.9% 10.6% 10.0% 6.7% 16.1% 2015E 12.8% 15.7% 17.6% 14.7% 29.9% 20.4% 10.5% 10.3% 8.7% 16.5% 2013E 8.9% 13.3% 14.6% 11.8% 25.5% 18.5% 8.4% 7.7% -3.3% 13.5% 2014E 9.9% 13.8% 15.0% 12.3% 26.5% 18.4% 8.8% 8.4% 2.6% 14.1% 2015E 10.8% NA 15.1% NA 27.5% 19.0% NA 8.8% 5.7% 10.5% -0.4x -0.6x -0.6x 14.0% 14.4% 14.7% 11.8% 12.3% 12.9% -1.2x -23.5% -1.2x -24.8% -1.5x -15.4% -1.5x -15.0% -1.7x 293.3% -1.8x 318.6% 11.3% -26.4% 11.5% -25.5% 11.9% -26.0% 12.1% -24.6% 12.5% -24.1% 12.6% -23.2% 9.2% -31.7% 9.3% -30.7% 9.9% -30.2% 10.0% -29.1% 10.3% -1.6% 10.5% 0.2% Source: Berenberg Bank estimates, Bloomberg Puma – market price multiples Bloomberg and Berenberg estimates vs. peers PE EV/ EBITDA EV/ EBIT EV/ sales adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted 2013E 17.1x 21.0x 15.7x 38.4x 34.7x 12.9x 21.9x 13.4x n.m. 21.1x 2014E 14.2x 18.2x 13.9x 30.4x 27.3x 12.7x 19.6x 11.5x 47.4x 18.2x 2015E 12.2x 16.1x 12.3x 23.9x 22.2x 11.5x 16.7x 10.5x 15.6x 15.5x 2013E 9.2x 12.8x 10.3x 18.0x 21.1x 6.6x 12.1x 9.1x 32.8x 12.6x 2014E 7.9x 11.4x 9.4x 14.6x 16.2x 6.4x 11.0x 8.2x 9.4x 10.9x 2015E 6.9x 10.5x 8.4x 11.9x 13.3x 5.7x 10.6x 7.6x 6.5x 9.7x 2013E 11.2x 14.3x 11.9x 21.3x 23.1x 7.1x 14.9x 11.1x n.m. 14.2x 2014E 9.5x 12.7x 10.7x 17.0x 18.3x 6.9x 13.2x 9.8x 24.3x 12.4x 2015E 8.2x NA 9.8x NA 14.5x 6.2x NA 9.0x 9.9x 4.6x 2013E 1.0x 1.9x 1.7x 2.5x 5.9x 1.3x 1.2x 0.9x 0.7x 2.0x 2014E 0.9x 1.8x 1.6x 2.1x 4.8x 1.3x 1.2x 0.8x 0.6x 1.8x 2015E 0.9x 1.6x 1.5x 1.7x 4.0x 1.2x 1.1x 0.8x 0.6x 1.6x Total sector median 19.0x 18.2x 15.6x 12.1x 9.4x 8.4x 13.1x 12.7x 9.4x 1.3x 1.3x 1.2x 16.6x -21.3% 16.8x -20.5% 14.6x -19.5% 14.7x -19.3% 13.2x -15.0% 13.2x -15.2% 8.2x -34.9% 8.0x -36.8% 7.4x -31.9% 7.2x -34.0% 6.7x -30.6% 6.6x -32.3% 10.1x -29.1% 9.8x -31.3% 8.9x -28.2% 8.7x -30.3% 8.1x 78.4% 7.9x 72.6% 0.9x -54.4% 1.0x -52.2% 0.9x -51.8% 0.9x -49.3% 0.8x -49.0% 0.9x -46.4% Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg 123 Puma AG Sporting Goods Puma – target price multiples Bloomberg and Berenberg estimates vs. peers PE EV/ EBITDA EV/ sales EV/ EBIT adidas Nike VF Corp Under Armour Lulu Lemon Anta Spots Asics Amer Sports Li Ning Total sector weighted 2013E 18.5x 21.5x 16.3x 40.9x 37.4x 12.9x 20.2x 14.8x n.m. 22.1x 2014E 15.4x 18.7x 14.5x 32.3x 29.5x 12.7x 18.2x 12.7x 47.4x 19.0x 2015E 13.3x 16.5x 12.8x 25.4x 23.9x 11.5x 15.5x 11.6x 15.6x 16.2x 2013E 10.0x 13.1x 10.7x 19.2x 22.8x 5.7x 11.3x 9.8x 28.9x 13.1x 2014E 8.6x 11.7x 9.8x 15.5x 17.5x 5.5x 10.2x 8.8x 8.3x 11.3x 2015E 7.5x 10.8x 8.7x 12.6x 14.5x 4.9x 9.9x 8.3x 5.7x 10.1x 2013E 12.2x 14.7x 12.3x 22.7x 25.0x 6.1x 13.8x 12.0x n.m. 14.8x 2014E 10.3x 13.1x 11.1x 18.1x 19.8x 5.9x 12.2x 10.6x 21.5x 12.9x 2015E 8.9x NA 10.1x NA 15.7x 5.3x NA 9.7x 8.7x 9.0x 2013E 1.1x 2.0x 1.8x 2.7x 6.4x 1.1x 1.2x 0.9x 0.6x 2.1x 2014E 1.0x 1.8x 1.7x 2.2x 5.2x 1.1x 1.1x 0.9x 0.6x 1.9x 2015E 1.0x 1.7x 1.5x 1.9x 4.3x 1.0x 1.0x 0.8x 0.5x 1.7x Total sector median 19.4x 18.2x 15.5x 11.3x 9.8x 8.7x 13.0x 12.2x 9.3x 1.2x 1.1x 1.0x 17.2x -22.1% 14.8x -32.9% 15.1x -20.2% 17.8x -6.3% 13.7x -15.7% 15.5x -4.2% 8.5x -35.1% 17.5x 33.3% 7.7x -32.1% 8.5x -24.8% 7.0x -30.8% 7.6x -24.3% 10.5x -29.5% 11.0x -26.1% 9.3x -28.5% 10.4x -19.5% 8.4x -6.0% 9.2x 3.0% 1.0x -54.7% 1.0x -54.2% 0.9x -52.1% 1.0x -49.0% 0.9x -49.3% 0.9x -46.2% Puma Puma vs peers (premium/ discount) Puma Berenberg estimates Puma vs peers (premium/ discount) Source: Berenberg Bank estimates, Bloomberg 124 Puma AG Sporting Goods Company description Puma is a leading sporting goods company within the design and distribution (wholesale, retail & eCommerce) of footwear, apparel and accessories. adidas Group brands include PUMA, Cobrda Golf and Tretorn. PPR is Puma's major shareholder with an equity stake of 82.4%. SWOT Strengths Strong global brand name supported by an improving control over the distribution network, core competence in sport performance . Further opportunities to reduce the cost base, increase DOS and optimise its distribution network. Weaknesses Puma brand has been loosing momentum for several years. Dividend pay-out ratio is relatively low vs. sporting goods peers. Relatively low exposure to football sporting events. Market share risk continues short term as Puma rationalises the store base in Europe and North America Opportunities Threats Further expansion of directly owned stores Exposure to weaker consumption trends and eCommerce expansion, particularly in Asia consumer confidence. General fashion trends and North America. Gross margin uplifts via and misjudgement of consumer needs and product mix, supply chain and distribution tastes are also risks. Increasing competition in improvements. Become the leading sustainable the sporting goods and fahsion apparel sporting goods company and benfiting from its segments transfromation and cost reduction plan Sales by division, FY12 Consensus estimates Apparel, 35.2% Hardware, 16.0% 20 15 10 5 0 BUY HOLD SELL Footwear, 48.8% Source: Company data Source: Bloomberg 125 Puma AG Sporting Goods Industry competitive position Average score: 3 3 Supplier power Raw materials account for c.65% of group COGS and Puma is exposed to prices of rubber, cotton, polyester and those which closely corelates with oil price. 3 Barriers to entry New designers/ companies enter the industry on a regular basis. However, significant investments in product innovation, marketing and distribution over a long period is necessary to establish a brand. 4 Customer power Relatively higher for chains vs. mom & pop shops. Howecer, customer power decreases as sporting goods brands increase their exposure to retail and eCommerce. 1 Substitute products Most of sporting goods products have subtitutes designed by competitors. There is a significant risk that counterfeit or copied products and parallel distribution could damage brand image. 2 Rivalry The marketplace is highly competitive. In the sporting goods sector, competition is on price, innovation, brand image, people and location. Puma historical PE 60.0x 50.0x 40.0x 30.0x 20.0x 17.9x 10.0x Dec-12 Apr-13 Aug-12 Dec-11 Apr-12 Aug-11 Dec-10 Apr-11 Aug-10 Dec-09 Apr-10 Aug-09 Dec-08 Apr-09 Aug-08 Dec-07 Apr-08 Aug-07 Dec-06 Apr-07 Apr-06 Aug-06 0.0x Puma Puma and Index performance FY09-12 140.0 120.0 100.0 80.0 60.0 40.0 Puma Source: Company data, Berenberg estimates Apr-13 Jan-13 Oct-12 Jul-12 Jan-12 Apr-12 Jul-11 Oct-11 Apr-11 Jan-11 Oct-10 Jul-10 Jan-10 Apr-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Apr-08 0.0 Jul-08 20.0 Dax Source: Bloomberg 126 Puma AG Sporting Goods Financials Profit and loss account Puma P&L FY10-15E In €m Sales chg. CoGS % of sales Gross profit margin Royalty and commission % of sales Operating expenses % of sales EBITDA margin Depreciation % of sales Operating incom e margin Special items % of sales Operating incom e adjusted margin Income from associates Financial income Financial expenses Financial result Earnings before taxes Earnings before taxes adjusted Taxes on income Tax rate Taxes on income adjusted Tax rateadjusted Minority interest Net incom e chg. Net incom e adjusted chg. FY10 2,706 +10.6% (1,362) 50.3% 1,345 49.7% 19 0.7% (991) 36.6% 373 13.8% (66) 2.4% 307 11.3% (31.0) -1.1% 338 12.5% 1.8 4 (12) (7) 301 332 (99) 32.9% (99) 29.9% 0.0 202 +155.0% 233 +0.3% FY11 3,009 +11.2% (1,516) 50.4% 1,493 49.6% 18 0.6% (1,114) 37.0% 397 13.2% (63) 2.1% 333 11.1% 0.0 0.0% 333 11.1% 1.1 5 (19) (14) 320 320 (90) 28.1% (90) 28.1% (0.3) 230 +13.8% 230 -1.3% FY12 3,271 +8.7% (1,692) 51.7% 1,579 48.3% 19 0.6% (1,416) 43.3% 182 5.6% (69) 2.1% 113 3.5% (177.5) -5.4% 291 8.9% 0.6 7 (8) (2) 112 290 (33) 28.9% (33) 11.2% (9.6) 70 -69.5% 248 +7.6% FY13E 3,277 +0.2% (1,697) 51.8% 1,580 48.2% 17 0.5% (1,222) 37.3% 375 11.5% (69) 2.1% 306 9.3% 0.0 0.0% 306 9.3% 0.6 FY14E 3,446 +5.2% (1,778) 51.6% 1,668 48.4% 22 0.6% (1,271) 36.9% 418 12.1% (73) 2.1% 345 10.0% 0.0 0.0% 345 10.0% 0.6 FY15E 3,612 +4.8% (1,858) 51.4% 1,754 48.6% 21 0.6% (1,318) 36.5% 456 12.6% (76) 2.1% 380 10.5% 0.0 0.0% 380 10.5% 0.6 (2) 304 304 (88) 29.0% (88) 29.0% (9.6) 206 +194.1% 206 -16.6% 0 346 346 (100) 29.0% (100) 29.0% (9.6) 236 +14.4% 236 +14.4% 3 384 384 (111) 29.0% (111) 29.0% (9.6) 263 +11.4% 263 +11.4% EPS chg. EPS adjusted , diluted chg. 13.45 +154.5% 15.42 +0.1% 15.36 +14.8% 15.36 -0.4% 4.69 -69.5% 16.55 +7.8% 13.80 +194.1% 13.79 -16.6% 15.78 +14.4% 15.78 +14.4% 17.58 +11.4% 17.58 +11.4% Weighted average shares outstanding (mn) Weighted average shares outstanding, diluted (mn) 15.031 15.123 14.981 14.985 14.967 14.968 14.967 14.968 14.967 14.968 14.967 14.968 DPS Pay out ratio 1.80 13.4% 2.00 13.0% 0.50 10.7% 1.90 13.8% 2.18 13.8% 2.43 13.8% Source: Berenberg Bank estimates, Company data 127 Puma AG Sporting Goods Balance sheet Puma balance sheet FY10-15E In €m Cash & cash equivalents Inventories Trade receivables Income tax receivables Other current financial assets Other current assets Current assets FY10 480 440 447 81 26 74 1,547 FY11 448 537 533 73 45 79 1,715 FY12 407 553 507 58 33 85 1,643 FY13E 604 554 508 58 33 85 1,842 FY14E 771 582 534 61 33 89 2,071 FY15E 966 610 560 64 33 94 2,327 97 237 423 24 18 21 819 109 235 452 25 19 27 867 152 227 463 24 17 5 888 152 228 463 24 17 5 889 152 225 463 24 17 5 886 152 219 463 24 17 5 880 2,367 2,582 2,530 2,730 2,957 3,207 Current bank liabilities Trade payables Income taxes Other current provisions (incl. Tax provisions) Other current provisions Liabilities from acquisitons Other current financial liabilities Other current liabilities Current liabilities 43 344 18 107 72 56 59 101 799 35 431 12 70 44 94 56 96 839 44 376 44 396 44 415 55 118 3 114 94 804 44 377 0 55 118 3 114 94 804 55 118 3 114 94 824 55 118 3 114 94 843 Deferred taxes Pension provisions Other non-current provisions Liabilities from acquisitions Other non-current financial liabilities Other non-current liabilities Non-current liabilities 51 26 12 82 7 4 181 64 30 26 7 0 11 138 54 31 38 3 0 3 130 54 31 38 3 0 3 130 54 31 38 3 0 3 130 54 31 38 3 0 3 130 Total liabilities 980 977 933 934 953 972 Subscribed capital Group reserves Retained earnings Treasury stock Group shareholder's equity Non-controlling interest Shareholders' equity 39 257 1,114 (23) 1,386 0 1,386 39 281 1,317 (33) 1,605 1 1,605 39 224 1,358 (32) 1,588 9 1,597 39 224 1,557 (32) 1,787 9 1,796 39 224 1,764 (32) 1,995 9 2,004 39 224 1,995 (32) 2,226 9 2,235 Total liabilities and shareholders' equity 2,367 2,582 2,530 2,730 2,957 3,207 Deferred taxes PPE Intangible assets Investment in associates Other non-current financial assets Other non-current assets Non-current assets Total assets Source: Berenberg Bank estimates, Company data 128 Puma AG Sporting Goods Cash flow statement Puma cash flow FY10-15E In €m Earnings before taxes (EBT) Adjustments for: Depreciation Financial result Gross cash flow Changes in receivables and other current assets Changes in inventories Changes in trade payables and other current liabili Cash inflow from operating activities Interest paid Income taxes paid One-time expenses paid Net cash from operating activities FY10 301 FY11 320 FY12 112 FY13E 304 FY14E 346 FY15E 384 66 7 358 (111) (53) 67 261 (6) (86) 63 14 382 (97) (97) 88 276 (7) (142) 76 4 328 (6) (24) (62) 236 (6) (73) 69 73 76 373 (1) (1) 1 372 419 (34) (29) 19 376 460 (33) (28) 19 418 (88) (100) (111) 169 127 157 284 276 307 Investing activities Payment for acquisitions Purchase of property and equipment Proceeds from sales of property and equipment Changes in other non-current assets Interest received Net cash used in investing activities (108) (55) 9 (2) 4 (152) (44) (71) 3 (3) 5 (110) (92) (81) 4 (1) 5 (165) (70) (70) (70) (0) (0) (0) (70) (70) (70) Free cash flow Free cash flow (before acquisition) in % of consolidated sales 17 126 4.6% 17 61 2.0% (8) 84 2.6% 214 214 6.5% 205 205 6.0% 237 237 6.6% (54) 31 (6) 486 480 (0) 480 (108) (59) 11 (31) 480 449 0 448 (92) (21) (12) (41) 449 408 0 407 (158) (17) (38) (42) 197 408 604 0 604 (158) 167 604 772 0 771 (158) 194 772 966 0 966 (158) 482 10.2% 0.9% -7.1 371 464 19.1% 1.1% -13.9 357 428 6.7% 1.6% -1.5 249 506 7% 2% -2.5 446 688 7% 2% 0.5 613 869 7% 2% 3.4 808 Financing activities Net cash used in financing activities FX impact Change in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents at year-end Bank overdraft Cash & cash equivalents BS Debt from BS Interest calculation Average cash/ (debt) Interest rate (debit) Interest rate (credit) Interest (expense)/ income Net cash Source: Berenberg Bank estimates, Company data 129 Sporting Goods Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investment-related disclosures” and the “Legal disclaimer” at the end of this document. For analyst certification and remarks regarding foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document. Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) Company adidas AG Puma AG (1) (2) (3) (4) (5) (6) Disclosures 5 no disclosures Berenberg Bank or its affiliate(s) was Lead Manager or Co-Lead Manager over the previous 12 months of a public offering of this company. Berenberg Bank acts as Designated Sponsor for this company. Over the previous 12 months, Berenberg Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. Berenberg Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. Berenberg Bank holds a trading position in shares of this company. Berenberg Bank and/or its affiliate(s) holds a net short position of 1% or more of the share capital of this company, calculated by methods required by German law as of the last trading day of the past month. Historical price target and rating changes for adidas AG in the last 12 months (full coverage) Date 25 April 13 Price target - EUR 95.00 Rating Buy Initiation of coverage 25 April 13 Historical price target and rating changes for Puma AG in the last 12 months (full coverage) Date 25 April 13 Price target - EUR 235.00 Rating Hold Initiation of coverage 25 April 13 Berenberg distribution of ratings and in proportion to investment banking services Buy Sell Hold 44.02 % 17.93 % 38.05 % 62.50 % 9.38 % 28.13 % Valuation basis/rating key The recommendations for companies analysed by Berenberg Bank’s equity research department are either made on an absolute basis (“absolute rating system”) or relative to the sector (“relative rating system“), which is clearly stated in the financial analysis. For both absolute and relative rating system, the three-step rating key “Buy”, “Hold” and “Sell” is applied. For a detailed explanation of our rating system, please refer to our website at http://www.berenberg.de/research.html?&L=1 NB: During periods of high market, sector or stock volatility, or in special situations, the rating system criteria as described on our website may be breached temporarily. Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Straße 108, 53117 Bonn and Lurgiallee 12, 60439 Frankfurt am Main 130 Sporting Goods General investment-related disclosures Joh. Berenberg, Gossler & Co. KG (“Berenberg Bank”) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by Berenberg Bank are divided into two groups: those under “full coverage” (regular updates provided); and those under “screening coverage” (updates provided as and when required at irregular intervals). The functional job title of the person/s responsible for the recommendations contained in this report is “Equity Research Analyst” unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1 Legal disclaimer This document has been prepared by Berenberg Bank. This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. Berenberg Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. Berenberg Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. Berenberg Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services. Analyst certification I, John Guy, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates. I, Bassel Choughari, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by Berenberg Bank or its affiliates. 131 Sporting Goods Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. United States of America This document has been prepared exclusively by Berenberg Bank. Although Berenberg Capital Markets LLC, an affiliate of Berenberg Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617.292.8200), if you require additional information. Third-party research disclosures Company Disclosures adidas AG Puma AG no disclosures no disclosures (1) (2) (3) (4) (5) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report. * For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above. Copyright Berenberg Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without Berenberg Bank’s prior written consent. © June 2012 Berenberg Bank 132 Sporting Goods Contacts: Investment Banking E-mail: firstname.lastname@berenberg.com; Internet www.berenberg.de Equity Research BANKS Nick Anderson James Chappell Andrew Lowe Eoin Mullany Eleni Papoula BEVERAGES Philip Morrisey Josh Puddle +44 (0) 20 3207 7838 +44 (0) 20 3207 7844 +44 (0) 20 3465 2743 +44 (0) 20 3207 7854 +44 (0) 20 3465 2741 +44 (0) 20 3207 7892 +44 (0) 20 3207 7881 BUSINESS SERVICES William Foggon Simon Mezzanotte Arash Roshan Zamir Konrad Zomer +44 (0) 20 3207 7882 +44 (0) 20 3207 7917 +44 (0) 20 3465 2636 +44 (0) 20 3207 7920 CAPITAL GOODS Frederik Bitter Benjamin Glaeser William Mackie Margaret Paxton Alexander Virgo Felix Wienen +44 (0) 20 3207 7916 +44 (0) 20 3207 7918 +44 (0) 20 3207 7837 +44 (0) 20 3207 7934 +44 (0) 20 3207 7856 +44 (0) 20 3207 7915 CHEMICALS Asad Farid John Philipp Klein Jaideep Pandya +44 (0) 20 3207 7932 +44 (0) 20 3207 7930 +44 (0) 20 3207 7890 CONSTRUCTION Chris Moore Robert Muir Michael Watts +44 (0) 20 3465 2737 +44 (0) 20 3207 7860 +44 (0) 20 3207 7928 DIVERSIFIED FINANCIALS Pras Jeyanandhan +44 (0) 20 3207 7899 Sales Specialist Sales BANKS Iro Papadopoulou +44 (0) 20 3207 7924 CONSUMER Rupert Trotter +44 (0) 20 3207 7815 INSURANCE Trevor Moss +44 (0) 20 3207 7893 HEALTHCARE Frazer Hall +44 (0) 20 3207 7875 TECHNOLOGY Jean Beaubois +44 (0) 20 3207 7835 UTILITIES Benita Barretto +44 (0) 20 3207 7829 INDUSTRIALS Chris Armstrong Kaj Alftan +44 (0) 20 3207 7809 +44 (0) 20 3207 7879 CRM LONDON Greg Swallow Laura Cooper +44 (0) 20 3207 7833 +44 (0) 20 3207 7806 CORPORATE ACCESS LONDON Patricia Nehring +44 (0) 20 3207 7811 EVENTS LONDON Natalie Meech Charlotte Kilby Charlotte Reeves Hannah Whitehead +44 (0) 20 3207 7831 +44 (0) 20 3207 7832 +44 (0) 20 3465 2671 +44 (0) 20 3207 7922 ECONOMICS Dr. Holger Schmieding Dr. Christian Schulz Robert Wood +44 (0) 20 3207 7889 +44 (0) 20 3207 7878 +44 (0) 20 3207 7822 FOOD MANUFACTURING Fintan Ryan Andrew Steele James Targett +44 (0) 20 3465 2748 +44 (0) 20 3207 7926 +44 (0) 20 3207 7873 GENERAL RETAIL & LUXURY GOODS Bassel Choughari +44 (0) 20 3465 2675 +44 (0) 20 3465 2674 John Guy HEALTHCARE Scott Bardo Alistair Campbell Charles Cooper Louise Hinds Adrian Howd Tom Jones +44 (0) 20 3207 7869 +44 (0) 20 3207 7876 +44 (0) 20 3465 2637 +44 (0) 20 3465 2747 +44 (0) 20 3207 7874 +44 (0) 20 3207 7877 HOUSEHOLD & PERSONAL CARE +44 (0) 20 3207 7937 Jade Barkett Seth Peterson +44 (0) 20 3207 7891 INSURANCE Tom Carstairs Peter Eliot Kai Mueller Matthew Preston Sami Taipalus +44 (0) 20 3207 7823 +44 (0) 20 3207 7880 +44 (0) 20 3465 2681 +44 (0) 20 3207 7913 +44 (0) 20 3207 7866 MEDIA Robert Berg Emma Coulby Laura Janssens Sarah Simon +44 (0) 20 3465 2680 +44 (0) 20 3207 7821 +44 (0) 20 3465 2639 +44 (0) 20 3207 7830 Sales LONDON John von Berenberg-Consbruch Matt Chawner Toby Flaux Sean Heath David Hogg Zubin Hubner Ben Hutton James Matthews David Mortlock Peter Nichols Richard Payman George Smibert Paul Walker +44 (0) 20 3207 7805 +44 (0) 20 3207 7847 +44 (0) 20 3465 2745 +44 (0) 20 3465 2742 +44 (0) 20 3465 2628 +44 (0) 20 3207 7885 +44 (0) 20 3207 7804 +44 (0) 20 3207 7807 +44 (0) 20 3207 7850 +44 (0) 20 3207 7810 +44 (0) 20 3207 7825 +44 (0) 20 3207 7911 +44 (0) 20 3465 2632 FRANKFURT Michael Brauburger Nina Buechs André Grosskurth Boris Koegel Joachim Kopp Joerg Wenzel PARIS Christophe Choquart Dalila Farigoule Clémence La Clavière-Peyraud Olivier Thibert ZURICH Stephan Hofer Carsten Kinder Gianni Lavigna Benjamin Stillfried +44 (0) 20 3207 7894 +44 (0) 20 3207 7845 +44 (0) 20 3207 7863 +44 (0) 20 3207 7896 +44 (0) 20 3207 2631 REAL ESTATE Kai Klose Estelle Weingrod +44 (0) 20 3207 7888 +44 (0) 20 3207 7931 TECHNOLOGY Adnaan Ahmad Sebastian Grabert Daud Khan Ali Khwaja Tammy Qiu +44 (0) 20 3207 7851 +44 (0) 20 3207 7834 +44 (0) 20 3465 2638 +44 (0) 20 3207 7852 +44 (0) 20 3465 2673 TELECOMMUNICATIONS Wassil El Hebil Usman Ghazi Stuart Gordon Laura Janssens Paul Marsch Barry Zeitoune +44 (0) 20 3207 7862 +44 (0) 20 3207 7824 +44 (0) 20 3207 7858 +44 (0) 20 3465 2639 +44 (0) 20 3207 7857 +44 (0) 20 3207 7859 TOBACCO Erik Bloomquist Kate Kalashnikova +44 (0) 20 3207 7870 +44 (0) 20 3465 2665 UTILITIES Robert Chantry Andrew Fisher Oliver Salvesen Lawson Steele +44 (0) 20 3207 7861 +44 (0) 20 3207 7937 +44 (0) 20 3207 7818 +44 (0) 20 3207 7887 E-mail: firstname.lastname@berenberg.com; 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