Financial Performance and Position of Adidas and Nike - Case Study Example

Financial performance and position of Adidas and Nike] of of Affiliation] [Finance and Accounting] Table of Contents Table of Contents 2 Introduction 3 Market Trend 3 Financial Performance and Financial position of Nike and Adidas 4 Liquidity 5 Profitability 5 Efficiency 5 Gearing 6 Analysis of the financial performance and position of the corporations 6 SWOT ANALYSIS 7 Strengths 7 Weaknesses 8 Opportunities 8 Threats 9 List of references 10 APPENDIXES 11 Financial Statements of Nike and Adidas 11 Liquidity 13 Profitability 13 Efficiency 13 Gearing 13 Investors 14 Introduction Sport is one of the fundamental parts of the modern society and it is always attributed to discipline, commitment and perfection. The participants in the sports; whether professionals or amateurs, need quality sports gear that is specific to their game. This is to enhance competitiveness. This kind of market has the two conglomerates Adidas and Nike, which form the foundation of this report. Adidas is a German multinational corporation based in Herzogenaurach. It was founded in 1949. On the other hand, Nike is an American multinational corporation based in Beaverton founded in 1964. This report seeks to explore the performance and financial position of the two companies. In addition, the report will dissect the strengths, weaknesses, opportunities and threats relative to these companies. As a point of departure, these companies began as footwear makers for the contemporary athletes and due to their ability in design, innovation and technology; they have diversified into various areas, which include apparel, equipment and accessories. The corporations are among the top global companies that are attributed to the world presence. Consider the following logos of the corporations Market Trend In the case of market trends, the demand for the footwear has been on the decreasing note due to the increase in demand of alternate footwear and saturation of the market. This has made the market to be competitive and for these players to survive there is need for change of tactic in terms of quality, branding and marketing to the untapped market potential such as China, Russia and Brazil (JAEGER, 2005). In essence, the industry is hypercompetitive with fierce rivalry among the top players. The following graph helps in creating a general picture on the state of affairs in the two multinational corporations Courtesy of LUSSIER, R. N., & KIMBALL, D. C. (2014). Applied sport management skills Financial Performance and Financial position of Nike and Adidas Both corporations have enjoyed relatively good performance, however, a clear picture on the financial performance and position will be determined by consideration of various indicators. In addition, various financial ratios will help determine the state of affair so the corporations. These ratios include liquidity, profitability, efficiency, gearing and investor ratios. In the case of Nike’s growth and financial performance, the corporation has been growing and performing well year in year out. For instance, the revenues grew from $25 billion in 2013 to $27 in 2014. In addition, the gross profit increased from $11 billion in 2013 to 12 billion in 2014. On the section of cost of goods sold, the corporation has been able to reduce the rate of sales committed to cost of goods sold from an average of 56% to 55%. This represents the foremost driver behind the growth increase (CZINKOTA & RONKAINEN, 2007). Liquidity In this case, the current ratio is considered. The following formula is used in the computation of this ratio Current Ratio = Current ratio/Current Liabilities Corporation 2013 2014 Nike 3.44 2.72 Adidas 1.45 1.68 The figures of the current ratios of both corporations indicate that they are able to meet their short-term financial obligations (PALMER, 2003). Profitability The net profit margin is considered in this case. It is calculated by the following formula Net profit margin = Net profit/Total revenue *100 Corporation 2013 2014 Nike 0.1 0.1 Adidas 5.43 3.37 As indicated in the table Adidas has a relatively higher rate of converting revenues into profits. This implies that Adidas is more profitable as compared to Nike. Efficiency In this case, the receivable turnover is considered. It is calculated as follows Accounts receivable turnover ratio = Net Credit Sales/ Average Accounts Receivable Corporation 2013 2014 Nike 8.24 8.4 Adidas 7.91 8.49 The ratio indicates the level of efficiency of an organization to collect its credit sales from clients (PALMER, 2003). In this case, Nike is more consistent in the collection of the debts as compared to Adidas. Gearing The debit ratio is considered in this case and is calculated as follows Debt Ratio = Total Debt/Total Assets Corporation Average for 5 years Nike 0.10 Adidas 0.335 The two corporations have more debts compared to the total assets. This is because the ratio is less than one. This ratio is of immense importance since; it helps the investors to gauge the level of risk before investing. Analysis of the financial performance and position of the corporations From the computations done the two corporations thrive well in the sport wear industry and as the ratios indicate, they are both profitable and efficient in utilizing their assets and liabilities. The corporations are liquid in the sense that, they are able to manage their short-term obligations. These indications combined help in explaining the financial position and performance of the two corporations, which can be concluded as positive r health. This is because the corporations are making profits and the revenues are on the upward trend. On a similar regard, the financial indications help in understanding that the corporations are expanding their market niche day in day out. This is evidenced by the increase of revenues. In essence, investors can invest both companies since they are viable (LEACH, 2010). SWOT ANALYSIS Strengths The two corporations realized early and invested huge amounts of capital in advertising during the 2008 Beijing Olympics and since then the market niche has been expanding. This is a critical aspect of strengths attributed to the two corporations. They have a well-structured research team, which helps in identifying the emerging markets such as China whose middle class has been on the rise since 2000. This strategy of marketing has helped the corporations sustain the existing market share and create new market niches (LUSSIER & KIMBALL, 2014). Consider the following chart that indicates the market share for the two top players and others. Source: http://tradeforecast.biz/en/component/content/article/3079-nike-inc As indicated in the chart, Nike leads with 31% and Adidas comes second with 16%. These figures indicate the stiff completion between the two corporations and this is attributed to the well-structured strategies as mentioned earlier. On a similar regard, the corporations enjoys long-term stay in the market due to high quality products, and this has made their brands known and easily identified (FRIDSON & ALVAREZ, 2011). The other strength involves brand identification and target appeal with sport stars. For instance, Nike brands have been associated with sport stars Lebron James and Tiger Woods among others (MULLIN, et al, 2014). On the other hand, the Adidas brands have been associated with sport stars such as David Beckham and primary organizations such as FIFA and UEFA. Further, the corporations have excelled in selecting the target groups. Both Adidas and Nike have focus on the males and females aged 18-35years.These strategies have seen the corporations increase their royalty with the consumers and increased their competitive market (BOROWSKI, 2013). The two corporations have dominated the international market due to these strategies. Weaknesses In the case of Nike, the retailers due to the sensitivity of the market create the foremost weakness. This makes the large share of the revenue to come from products sales to retailers. In this case, the retailers tend to squeeze the profit margins due to the low price competition on the products. This affects the overall financial performance of the corporation (MULLIN, et al, 2014). On the other hand, the Adidas faces the challenge attributed to its 97% outsourcing of its international production to third party producers who are primarily based in Asia with China having 35%. This trend is attributed to the laidback labor laws (BOROWSKI, 2013). This has raised concerns on the quality of the products manufactured in India. Opportunities Nike has the ability to embrace the ever-changing technology in the sporting world. This has enabled it produce high technologically supported equipment, footwear and sunglasses among others (FRISCH, 2009). In addition, Nike is advantaged on the large extent of its global market and the general acceptance of its products across the international market. This enhances its market niche (MULLIN, et al, 2014). On the other hand, Adidas enjoys the benefits of its newly adopted structure relative to the global operations. The corporation moved from the traditional vertically integrated brand system to a function oriented structure. The new structure involves various functions relative to the global sales and brands. This structure has paved in a more centralized system, which is less costly and more effective (LUSSIER & KIMBALL, 2014). In addition, the corporation’s endeavor in sponsoring various global events such as NBA has largely enhanced its global brand image. Threats In the case of Nike, the retailer sector has become more price-competitive and this has created the consumer trend of moving from one store in search of better pricing. This trend has created the element of consumer control over manufacturer. This trend has incredibly reduced the overall sales. On the other hand, the Adidas faces stiff competition from its rivals such as Nike and Puma (HOLLISTER, 2008). This competition is attributed to the designers such as Hugo Boss and Lacoste since the overall apparel and footwear market has embraced the design orientation. List of references BOROWSKI, A. (2013). Adidas marketing strategy - an overview. [S.l.], Grin Verlag. CZINKOTA, M. R., & A. RONKAINEN, I. (2007). International marketing. United States, Thompson. FRIDSON, M. S., & ALVAREZ, F. (2011). Financial statement analysis a practitioners guide, fourth edition. Hoboken, N.J., John Wiley & Sons. http://www.123library.org/book_details/?id=50992. FRISCH, A. (2009). The story of Nike. Mankato, Minn, Creative Education. HOLLISTER, G. (2008). Out of nowhere: the inside story of how Nike marketed the culture of running. Maidenhead (Eng.), Meyer & Meyer Sports. JAEGER, F. (2005). Adidas Factory Outlet: Architektur und Design. Ludwigsburg, avedition. LEACH, R. (2010). Ratios made simple a beginners guide to the key financial ratios. Petersfield, Hampshire, Harriman House. http://www.contentreserve.com/TitleInfo.asp?ID={13D5DE09-D468-4A32-9C5E-6A25835FC151}&Format=410. LUSSIER, R. N., & KIMBALL, D. C. (2014). Applied sport management skills. MULLIN, B. J., HARDY, S., & SUTTON, W. A. (2014). Sport marketing. PALMER, J. E. (2003). Financial ratio analysis. New York, N.Y., American Institute of Certified Public Accountants. APPENDIXES Financial Statements of Nike and Adidas Snapshot of a section Income statement of Nike Source: http://www.bloomberg.com/research/stocks/financials/financials.asp? Snapshot of a section of the balance sheet of Nike Source: http://www.bloomberg.com/research/stocks/financials/financials.asp? Snapshot of a section of the Income Statement of Adidas Snapshot of a section of the balance sheet of Adidas B. Formulae of financial ratios Liquidity Current Ratio The current ratio helps in determining the present working capital position of an organization. The proportion of the current assets derives it over the current liabilities. This ratio is fundamental in establishing whether the corporation is able to meet its short-term financial obligations. The following formula is used in the computation of this ratio Current Ratio = Current ratio/Current Liabilities Profitability Net Profit The ratios attributed to profitability measure the corporation’s ability to create profits in relation to sales, assets and capital. It is calculated by the following formula Net profit margin = Net profit/Total revenue *100 Efficiency Account Receivables turnover ratio These ratios are used to evaluate how well an organization uses its assets and liabilities. It is calculated as follows Accounts receivable turnover ratio = Net Credit Sales/ Average Accounts Receivable Gearing Debit Ratio The ratios attributed to gearing are used to compare a form of owner’s equity to borrowed capital. It helps in measuring the financial leverage of an organization. The ratios help in establishing the level to which an organization’s operations are funded by the owner’s capital compared to the creditor’s funds. It is calculated as follows Debt Ratio = Total Debt/Total Assets Investors All the financial ratios help an investor in one way or another when making an investment decision. The ratios ranging from liquidity, profitability, gearing and efficiency help an investor in making sound decisions since they offer the finical position of the organization Read More