The Financial Performance of Nike and Adidas - Essay Example

Nike and Adidas in-depth analysis Section Introduction Nike and Adidas are two multinational apparel and sportswear organizations that are in two unique nations, however are confronted with comparable issues. The two organizations have numerous types of products all over the world. The two companies are very popular in the world and their reputations of being the leading companies in the sportswear industry keep on growing too. The demand for apparels and sportswear is on the rise due to because of expanding fans for both the sport-related organizations (Borowski, 49). However, the organizations are confronted by issues or problems which are on the rise also because of changes in purchasers tastes and inclination. The two companies have been impacted with the advancement in technology as well as globalization. Notwithstanding the problems faced, the two organizations are well known and preferred because of their higher admired feedback that they need to satisfy. As indicated by Global Market Shares, Adidas is sitting at 16 percent while Nike is approximated around 31 percent of footwear status (Mullin et al 150). The easy will try to develop and present in-depth analysis of Nike and Adidas so as to arrive at the best company that will offer higher financial rewards to their investors. Its product lines include Nike Air Max, Nike NYX, Nike SB shoes and Nike 6.0. About the companies Nike Nike, Inc., an American multinational corporation which was originally known as BRS (Blue Ribbon Sports in full). Nike designs, develops, manufactures, markets and sells apparel, footwear, accessories, equipment and services. It employees more than 44,000people because it is the global largest manufacturer of sports equipment and has its headquarter near Beaverton, Oregon, in the Portland metropolitan region. It has a strong financial performance (revenue of over US$27.7 billion as of financial year 2014 and a high brand value of $10.7 billion, as of 2010. Nike has been able to maintain this image. It has also achieved impressive and versatile product range. The primary market segment of the company is athletes; however its products have become a fashion brand and are, therefore, purchased by non-athletes (Nike website). Nike is faced with exchange rate fluctuations because it buys and sells in diverse currencies. The industry is also highly competitive, and high brand value is no longer satisfactory for sustainable competitive advantage (Nike website). Also, a potential threat to the company is price sensitivity of the consumers. The company has the opportunity of developing high-value products such as jewelry, sunglasses and sportswear which are associated with high profits. The company is also able to tap emerging markets like India and China, which have new richer generations of consumers. Such consumers have high disposable income which they are very willing to spend on high quality and value sports goods (Mullin et al 89). Adidas Adidas AG a German multinational company that deals with the development, design, manufacturing and marketing sports shoes, accessories and clothing. It is based in Herzogenaurach, Bavaria, Germany. On top of the sports footwear, Adidas also manufactures other products such as eyewear, watches, shirts, bags and other clothing and sport-related goods (Adidas AG website). It has acquired a highly recognized status due to its sponsorship programs, and it is the second world’s largest sportswear manufacturer after Nike. According to Adidas Group, its primary market segment is sports participants, including the ones who are at the highest level of their sport. They also target non-athletes who really love are inspired by sports (Borowski, 89). Being the largest sportswear in Europe, the company has a strong financial performance (revenue of over US$19.9 billion as of financial year 2013 and net revenue of €14.88 billion as of financial years 2013). It also manufactures European designs. Adidas has a highly recognized and world-wide known slogan of “Impossible is nothing “logo. Adidas faces a highly intense competition in the footwear and sports apparel market from direct competitors like Nike and Puma. Since the market is becoming increasingly fashionable, the company also faces intense competition from designers like Lacoste and Hugo Boss (Adidas AG website). The company has high innovativeness and creativity evidenced by its innovation team for the research and development which is divided into three focus groups, footwear, apparel, and hardware. The company also undertook a massive restructuring and reorganizations of its global operations by shifting from a vertically integrated brand structure to a structure that is function related (Borowski, 78). Section 2 Company specific focus Adidas Adidas is a very successful company in the sportswear industry due to its high innovativeness and creativity. It has an innovation team for the research and development which is divided into three focus groups, footwear, apparel, and hardware. This provides the company with a bright future within the industry; it is able to stay ahead of its competitors. Recently, the company undertook a massive restructuring and reorganizations of its global operations. It shifted from a vertically integrated brand structure to a structure that is function related which included brand functions and global sales (Mullin et al 120). This is responsible for strong brands of the company. It has adopted a more centralized structure by closing most of its regional headquarters (Adidas AG website). The company has a strong, youthful appeal which is most likely to contribute to its future success. This is portrayed in many of its marketing campaigns. This is specifically evidenced by their jump from settings and scenes such as football to nightclubs through celebrity endorsements implying that Adidas is relevant everywhere. The successful takeover of Reebok has increased the sales volume for the company because it allowed the company to release significant breakthrough in R&D through Reebok brand. The company’s market share increased; as a result, in the US market. The company engages in sponsorship programs of personalities and organizations, for instance, David Beckham and Reggie Bush and FIFA and UEFA respectively. This has allowed the corporations to raise its product and brand awareness globally thus raising its customer base. Adidas has a significant edge due to its strong brand recognition (Adidas AG website). Just like the popularity continues to rise due to increasing fans for both sport-related companies; the problems faced by Adidas continue to rise due to changes in consumers’ tastes and preferences. The company outsources a high percentage of its operations from Asia so as to reduce costs; however, this has caused problems for the company as the quality of products from Asia has been questioned (Adidas AG website). It faces intense competition from its direct rivals like Nike and Puma; however, the company has an innovative team and it, therefore, able to stay ahead of their competitors (Borowski, 49). Nike Nike is a highly competitive organization in the apparel and sportswear industry. Nike has gained this valuable coverage by sponsoring athletes (Nike website). Nike is a lean organization with strong research and development operations, as is shown by its innovative and evolving product range. The company produces high-quality products at the lowest price possible. It also outsources from such countries that produce products cheaply should price rise in other parts. Nike is the leading sports brand in the world, and its products are easily recognizable (Mullin et al 98). Nike has high product development which has offered it many opportunities. Even though the company targets athletes, many of its customers do not buy the apparels to take part in sports because Nike is a fashion brand. This has created the company its own opportunities because consumers need to replace old shoes before could become unfashionable. This has offered the company a strong financial performance, and the trend is likely to continue into the unforeseeable future. Nike is able to develop products like sunglasses, sportswear, and jewelry; such products are likely to increase the performance of the company because they are associated with high profits. The company is able to tap emerging markets like India and China, which have new richer generations of consumers. Such consumers have high disposable income which they are very willing to spend on high quality and value sports goods (Nike website). The future success and performance of the company is likely to be impacted by fluctuations in exchange rates, high competition in the market, price changes and overdependence on the footwear market (Nike website). However, the company has put many strategies in place to help address such issues. For instance, the company prefers to invoice in domestic currency, develop high-quality products that are not rivaled, and it plans to diversify to other areas such as sportswear, sunglasses, and jewelry (Borowski, 120). Section 3: Summary financial ratios NIKE Liquidity ratios 2014 2013 2012 Liquid ratio 13696/5027 =2.72 13630/3962 =3.44 11845/3882 =3.05 Quick ratio 13696-3947)/5027 =1.94 13630-3484)/3962 =2.56 11845-3222)/3882 =2.22 Profitability ratios 2014 2013 2012 Net profit ratio 2693/27799 =9.69% 2472/25313 =9.76% 2211/23331 =9.48% ROA 2693/18594 =14.48 2472/17545 =14.09 2211/15465 =14.30 Efficiency ratios 2014 2013 2012 Days sales outstanding (3434/27799)*365 =45.1days (3117/25313)*365 =44.9 (3132/23331)*365 =49.00 Inventory turnover 27779/3947 =7.04 25313/3484 =7.27 23331/3222 =7.24 Total asset turnover 27779/18594 =1.49 25313/17545 =1.44 23331/15465 =1.50 Debt ratios 2014 2013 2012 Debt to equity ratio 7770/10824 =0.72 6464/11081 =0.58 5084/10381 =0.48 Debt ratio 7770/18594 =0.42 6464/17545 =0.37 5084/15465 =0.33 ADIDAS Liquidity ratios 2013 2012 2011 Liquid ratio 9449/6521 =1.45 9067/5767 =1.57 8215/5631 =1.46 Quick ratio (9449-3613)/6521 =0.89 (9067-3262)/5767 = 1.00 (8215-3292)/5631 =0.87 Profitability ratios 2013 2012 2011 Net profit ratio 1089/19969 =5.45% 691/19622 =3.52% 789/17294 =4.56% ROA 1089/15983 =6.81% 691/15361 =4.50% 789/14587 =5.41% Efficiency ratios 2013 2012 2011 Days sales outstanding (2481/19969)*365 =45.3days (2215/19622)*365 =41.20 (2099/17294)*365 =44.30 Inventory turnover 19969/3613 =5.53 19622/3262 =6.02 17294/3292 =5.25 Total asset turnover 19969/15983 =1.25 19622/15361 =1.28 17294/14587 =1.19 Debt ratios 2013 2012 2011 Debt to equity ratio 8430/7564 =1.11 8385/6993 =1.20 7930/6669 =1.19 Debt ratio 8430/15983 =0.53 8385/15361 =0.55 7930/14587 =0.54 Section 4 Nike Liquidity ratios Liquidity ratios outline the ability of the firm to meet its short-term obligations. It is the basic measure of the financial health of a company (Kieso et al 290). The current ratio and quick ratio of Nike has been fluctuating or changing for the past three years. The ratios increased in 2013 but decreased in 2014; this shows a fluctuation in its ability to meet short-term obligations. Adidas, on the other hand, has fluctuating liquidity ratios, the ratios increased in 2013 but decreased in 2014. However, Nike is more liquid than Adidas as evidenced by its higher current and quick ratios. Profitability ratios This category of ratios determines the company’s bottom line as well as the returns it offers to its investors (Kieso et al 295). They indicate the firm’s overall performance and efficiency. The net profit ratio of Nike decreased in 2013 but increased in 2014. However, the return on assets decreased in 2013 but increased in 2014. This implies fluctuation in the company’s efficiency. Adidas also has fluctuating profitability ratios; the ratios decreased in 2012 but increased in 2013. However, the two companies are still very profitable because the deviation is minimal. Nike is more profitable than Adidas because it has higher net profit margin and ROA. Efficiency ratios These ratios outline how well an organization is managing its liabilities. It also indicates how an organization is effectively utilizing its assets in generating revenues (Kieso et al 290). Nike’s collection of its receivables improved in 2013 but worsened in 2014; however, it was minimal. Its inventory and total asset turnover improved throughout the period. Just like Nike, Adidas experienced the same trend. Its efficiency ratios improved in 2013 but worsened in 2013; however the reduction is very minimal as it is still within the range. This implies that both Nike and Adidas are using fewer inventories and total assets in generating more revenue indicating that its efficiency is increasing. From, the ratios, Nike relatively more efficient than Adidas because it has a high inventory and total asset turnover. Debt ratios Debt ratios illustrate how leveraged the companies are. Debt ratios gauge the long-term solvency of the companies. The debt to equity ratio and debt ratio of Nike has been on a constant rise throughout the period. The company’s assets funded by debt has, therefore, been on the rise, however, the proportion of debt is lower than that of the equity. Adidas, on the other hand, has fluctuating debt ratios. It has a debt to equity ratio of more than one, meaning it uses more debt that equity, however; it uses more debt than Nike. Being highly leveraged, Adidas has more business risks (Kieso et al 292). Perceived strengths and weaknesses Nike The liquidity of the company is on the decline implying that it may not be able to meet its short-terms obligations should the trend persist. However, the company has strong marketing and advertising campaigns through sponsorship programs that help it to gain valuable coverage. The company has an increasing profitability as a result of its diversified range of sports products thus the company is likely to increase its performance in the coming years. The company’s margins will get squeezed because retailers normally pass on a portion of low price competition pressure onto the company (Nike website). Nike is not able to predict changes in the market; it is not able to predict seasonal preferences, demand and popularity with lots of ease. The revenues are heavily dependent on its footwear department; a decrease in this market share is likely to affect other product offerings. Nike is likely to be forced to lower its prices should competitors lower their prices because most of its income comes from retail stores (Nike SWOT analysis). Adidas The profitability of Adidas AG has been on the rise, this implies that the company’s performance has been increasing. From its efficiency ratios, it is crystal clear that its efficiency in using its assets is on the increase. The company is likely to increase its market share due to its increased appeal to the youth mainly through its marketing campaigns (Mullin et al 129). The company has jumped scenes to night clubs implying that it is suitable everywhere. This is a key reason for its high profitability, a situation that is likely to increase in the next many years. Adidas has been able to release several significant breakthroughs in research and development particularly through the Reebok brand. The company is likely further to increase its brand or product awareness globally hence raising customer base due to its sponsorship of individual sports personalities (Adidas AG website). The company is likely to experience reduction in revenues due to many criticisms it has been subjected to. Some of its factories are accused of using child labor due to lack of labor laws particularly in Asia. Also, it outsources most of its global production from Asia due to reduced costs; however, the quality of products from Asia is questionable (Adidas SWOT analysis). Section 5 Conclusion The two companies are in one industry and produce almost the same products. Both the companies offer an immense range of products for their customers of either gender. They also provide a variety of footwear that takes care of important factors such as; casual, outdoors, exercise or indoors. They also have almost close financial performance, however, the best company to invest in, is Nike because of the following reasons. Firstly, Nike has a highly competitive advantage in the apparel and footwear industry. It engages in sponsorship of athletes, an action that has provided it with valuable coverage (Mullin et al 120). It is also a lean organization with strong research and development operations, as is shown by its innovative and evolving product range. The company produces high-quality products at the lowest price possible. It also outsources from such countries that produce products cheaply should price rise in other parts. Nike is the leading sports brand in the world, and its products are easily recognizable. Such conditions make the company have high financial performance hence being able to provide the highest financial rewards to the investors or shareholders. Secondly, Nike has lower debt ratios compared to Adidas; it uses more debts in financing its operations. Its cash flow in terms of interest payment is, therefore, limited hence the company is able to keep such costs to a minimum. The company, therefore, has low exposures to interest rate risk compared to Adidas. The company is, therefore, very attractive to investors because it is less risky than Adidas. The low-interest outgo leaves more cash at the discretion of the company. The surplus cash left in the hands of the company can be used as financial rewards to the investors in terms of dividends. In addition, it can be reinvested into the company to generate or create value for the shareholders of the company. In either way, the investors stand to benefit. Thirdly, the company has high product development due to high research and development. This has provided the company with opportunities which when utilized properly will lead to future economic growth. The company’s products are appealing to everybody, including non-athletes. In fact, its products have become a fashion brand. This has offered the company a strong financial performance, and the trend is likely to continue into the unforeseeable future. Nike is also able to develop products like sunglasses, sportswear, and jewelry; such products are likely to increase the performance of the company because they are associated with high profits. The company is able to tap emerging markets like India and China, which have new richer generations of consumers. Such consumers have high disposable income which they are very willing to spend on high quality and value sports goods. All these actions will increase the financial position of the company hence being able to offer the highest financial rewards in the form of capital appreciation and dividend. Finally, Nike is positioned to provide the highest financial rewards because it is more liquid, more profitable and more efficient in its operations than Adidas. In addition, it has strong brand recognition and loyalty. All these provide the company with an opportunity to obtain high revenues that they can offer to their investors (Mullin et al 120). Work cited Borowski, A. (2013). Adidas marketing strategy - an overview. S.l.: Grin Verlag. Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2011). Intermediate Accounting. 13th Ed. New York: Wiley. Mullin, Bernard J, Stephen Hardy, and William A. Sutton. Sport Marketing. Champaign, IL: Human Kinetics, 2007. Print. SWOT analysis of adidas, retrieved from: http://milesi92.wordpress.com/2013/02/13/swot-analysis-of-adidas/ SWOT analysis of Nike, retrieved from: http://milesi92.wordpress.com/2013/02/13/swot-analysis-of-adidas/ Nike website: retrieved from: http://www.nike.com/language_tunnel Adidas AG website: retrieved from: http://www.nike.com/language_tunnel Financial statements Adidas: retrieved from: http://www.gurufocus.com/financials/ADDYY Nike: reyrieved from: http://www.gurufocus.com/financials/NKE Read More