Financial analysis of Reebok

th every demand of the customers. Targeted customers of companies in this industry are women who use walking shoes and also males between the ages of 16 and 25, and a children's line targeted to boys and girls between the ages of 5 and 12. Besides those customers companies which operate in the footwear industry are designed to meet the demands of specific consumer types: image and fashion conscious athletes, sports and fitness enthusiasts, and casual athletic shoe buyers. Students have also been a key purchasing group because they are at the age forming their opinions about things. In general, a significant portion of the spending will be done by people age 18 to 37. As a whole, footwear industry is a field which can serves all kinds of people. It makes the producers have a full range of customers and must have their own division of market segment. The potential customers of this industry are people between the age of 5-37 including children, women, men and professional athletes with many different tastes. However, the bargainning power of the customers is medium to low.It is because the purchase of the customers is not concenrated in large volumes and products have difference thanks to the difference among different brand name. Suppliers In this kind of industry, producers need many sources to produce their products, including material, machines, technique and services such as online marketing service, permisson-based mail marketing service....This input is dominated by relative few companies. Therefore, the bargaining power of suppliers is medium to high since the product is unique and the switching costs are high. Futhermore, it is possible for producers (especially in foreign manufacturing) to intergrate forwards into the industry’ s business (in overseas market ) and become an opponent to companies in the footwear industry. Competitors Competition in this industry is quite strong, mainly among the “large five” Nike, Reebok, Converse, LA Gear,Striderite and also among some branches like Polo, Timberland, Adidas ...Each company has its own strategy and customers but there is always a dispute among them. However, now, the most serious threat of competition is NAFTA (North America free trade area). This area allows all competitors compete equally and freely and it leads companies to reduce their labor and manufacturing costs to maintain company’s profitabilitty. Competitors in the footwear field include a number of sports and fitness footwear and apparel companies, such as Nike, Adidas, Fila, New Balance and Skechers. Apparel competitors include numerous brands such as Nike, Adidas, Rocawear, Ecko, Brand Jordan, FUBU, Mecca and ENYCE. Competition among men's casual sportswear, golf apparel and footwear makers includes Timberland, Clarks, Ecco, Mephisto, Bass, Bostonian, Merrell, Easy Spirit, Nine West and Gabor Cole Haan, Tommy Hilfiger, Prada and Gucci. Reebok and Nike are the principal players in the industry. Although Nike has also experienced some rough times, revenue fell 8% in fiscal 1999...but it has now moved back into a position where its gross margins are stronger than its competitors. Nike’s products also includes athletic footwear, apparel, swimsuit, leather goods and it is estimated that Nike capture 45% market share in the industry while Reebok ‘s part is 15%-18% of the pie only. All in all, Nike has more power to the market than others because they have righter strategy, faster long-term growth, stronger industry position, greater international exposure and better brand name management. Besides Nike, there are many current competitors which can be threat of any producer in this industry. We can mention to Timberland or Polo as examples.The Timberland Company headquartered in Stratham, New Hampshire, designs, engineers, markets and distributes premium quality footwear, apparel and accessories for men, women and children. Timberlandđ products are sold in the United States and internationally through independent retailers, better-grade department stores and athletic stores, in addition to the Company’s own retail locations.The most important product of Timberland is Timberland Footwear. Timberland has enjoyed significant expansion of its brand presence both domestically and abroad Timberland’s markets include Europe, United States, Asia and Asia- Pacific regions. Total market capture of Timberland up to Oct,2002 is 1.1B $. Polo Ralph Lauren Corp is a leader in the design marketing and distribution of premium lilfestyle product in 4 categories : apparel(which includes extensive collections for men’s, women’s, childen’s clothing), home (which offers coordinated products for the home, interior decor..), accessories ( which includes a broad range of products such as eyewear, jewelry, leather goods..) and frangrance(which includes skincare products). It constitutes one of the world’s most widely recognised families of consumer brands. Its main markets are United States, Europe and Asia. In fiscal 2002, the company estimates to have 1,1 B$ of wholesale which includes 6,3% wholesale net sales comes from chirlren wear; 41,8% comes from menswear; 8,6% comes from home; 8,7% come from fragrances; 9,4% comes from accessaries and 25,4% comes from womenswear. As we said above this kind of market is dominated by “the big five” so it is difficult to penetrate the market and cope directly with these Bigs (Not to mention the high capital requirements due to advertising, research and development). Furthermore, the relationship between dealers and distributers is tied up by internal relationship between distributors and producers. So it is really a challengence to anybody who wants to join this field. In conclusion, the threat of new entrants into the industry is low so in this industry there are not many potential competitors. introduction of Reebok History of the company In the 1890s, Joseph William Foster - a famous English runner - made some of the first running shoes with spike in them and then Reebok’s United Kingdom-based ancestor company was founded. By 1895, Foster was in business making shoe by hand for top runners and with his sons, they developed an international clientele of distinguished athletic. In 1979, Paul Fireman, a partner in an outdoor sporting goods distributorship, spotted Reebok shoes at an international trade show. He negotiated for the North America distribution license and then introduced three running shoes in the US market as foundation of Reebok USA, Ltd. At that period, its original strategy was aimed at prestige and at high price. At $60, they were the most expensive running shoes in the market. In 1981, PLC a British wholesaler of footwear acquired 56%of the common stock in exchange for $77.500 in cash. Fireman and PLC agreed that neither party would sell its stock to third party. In 1985, Reebok USA purchase Reebok Britain to form a single company up to now. Since then, Reebok had many explosive steps to become a multinational firm. Its structure includes 4 groups: Reebok international, USA; Rockport company; Ralph Lauren Footwear and Greg Norman Collection. Products of Reebok are now available in over 140 countries including 3 main markets North America, Europe and Asia among them European market is the largest one with many subsidiaries ranging from Italy, Austria, German to Russia. Brandnames Reebok is now a global company engaged in the design and market of sport and fitness products, including footwear, apparel and accessories as well as the design and marketing of footwear and apparel for non-athletic, “casual” use. * The Reebok brand The Reebok brand designs, produces and markets sports, fitness and casual footwear, appareel and accessories that combine characteristiics of sport and style. Products of company also include footwear and apparel for children sold under the Reebok and Weebok brands. Nowadays, The way reebok chooses to expand is implementing strategic licensing program in which its technologies and/or trademark are licensed to third paties. *Rockport company. Rockport focuses on specially engineered comfort footwear for both men and women. Its product line includes performance, casual and dress shoes. In 2001, Rockport concentrated on strengthening its men’product by introduction of some new collections. Besides, it continues to use proprietary technology to enhance women’s walking product and siged a license agreement for the development of children’s footwear. *The Greg Norman Collection. Originally a golf product line, the Greg Norman Collection has grown its line of men’s sportswear to include products ranging from leather jackets and sweaters to activewear and swimwear. In addition, it offers belts, small leather goods and hosiery product. In 2001, the Greg Norman Collection introduced men’s golf apparel marketed under Reebok name, continuing to offer a line of moisture management golf shirts under the trademark PLAYDRY. *The Ralph Lauren Footwear Co., Inc. Its product line features traditional classic with Polo Sport and Polo Jeans brand names which is targeted to males between the ages of 16 and 25, and to children between the ages of 5 and 12. The Ralph Lauren also offers dress and casual silhouettes. Internationally, it has distributors in Japan, Canada, Central America and Europe and its products are sold through top-tier retailers. Strategies Fireman has applied some right strategies that led to the amazing performance of Reebok First one Fireman chose to apply is a concentrated growth strategy. At the beginning of the company, it used all resources to penetrate into fixed market. By utilizing excellent marketing techniques and effective promotion program, fireman introduced only 3 styles of running shoe in only U.S market. Following this strategy, fireman started to apply a product development strategy. At that moment, company had built up its reputation so it only focused on some product line such as women’s aerobic shoe and tennis shoe – its traditional strong point and deliver them on so many market in order to pro-long product life cycle and attract satisfied customer to new products. For example, when there was a sign of reduction in sales in U.S market, the same product would be launched in South East Asia. The third strategy is market development one. With large diversification, fireman now concentrated growth on national and international expansion. Also, he started to attract other market segments. Finally, Fireman focused on horizontal integration. He set up acquisition of similar firms operating in the same market. This could eliminate potential competitors, provide access to new market, greatly expand operations as well as improve company’s diversification of its product line. For instant, in 1986, Rockport company – a manufacturer of high performance walking shoe was required or in 1987, Reebok purchased AVIA Group International – an Oregon based athletic shoe ... This one greatly attributed to Reebok’s success. Reebok was able to require distribution channel, technical knowledge, enhance profits and finally create a favorable brand image of existing goods. Besides, it launches many campaigns on advertising by having agreement with music and sport stars, with National Football League (NFL) and The National Basketball Association to remain its market share in comparison with Nike. SWOT analysis Strengths The internal strengs of Reebok are all of the following: Firstly, company has an extremely strong financial position. Its growth has been phenomenal. It has the highest growth rate from 1983 – 1987 and since that sales has continued to increase, from $ 12.8 m in 1983 to more than $ 1.8 b in 1989 and certainly, earning per share has increased. Furthermore, Reebok has a high level of liquidity and operated with minimal long-term debt, so it has financial resources available to invest into market niches. Secondly, thanks to successful strategic acquisition of reputation companies, it is able to market a wide array of show–wear and is more diversified than any competitors. For example, Rockport is the most dominant brand in the walking shoe and a clear market leader in the tennis shoe market. In addition, with the longest history, the latest technology and prestige, Reebok is considered good and fashionable brand. Finally, Reebok’s top management is highly marketing oriented. This is strength for company, especially this industry is market driven instead of product driven. Weaknesses The weaknesses of Reebok include all of the following: In the new reorganization, AVIA is no longer represented in group of four operating company. It was allowed to pursue its own strategies including aggressive competition with Reebok brand. This could cause internal tension within cooperation. On the other hand, due to managing style there is a conflict of interest in the top management between Fireman party and someone. It leaded to the resignation of Joseph Labonte - the former president and operating officer and Mark Goldston – the former chief marketing officer who had managerial experience in multibillion – dollar organization and in heavy marketing as well as in advertising of consumer brand name. As a result, Fireman took the position of chairman, president, and COF. That is an impossible task. The company is highly dependent on one single person who will not be able to effective handle all of the required. Moreover, Reebok’s main product-line weakness is in its apparel division. Opportunities The opportunities of Reebok are the following: It may continue market diversification and expansion into inter-market in order to meet the potential customer’s demand. Besides, it can pro-long the product life cycle by marketing the different products in different nations. Moreover, it is Reebok’ weakness of apparel division that opens opportunity. Reebok should focus on merging or purchasing well-know apparel manufacturer as horizontal acquisition it has been doing. Threats Although this is concentrated industry but the harsh competition from main competitors, especially Nike is significant. To remain the market share and penetrate the new market cost a lot of money ad put much pressure on marketing, research or development. Also, the short product life cycles play an important role in the return or investment in a particular product line. Furthermore, weakening markets may be a serious threat to Reebok. Are people willing to buy a pair of jogging at price of hundreds of dollars. In a weakening economy that is highly questionable. The m ost serious threat for Reebok is from NAFTA. High tariff and other non tariff regulations may be imposed on the company foreign manufactured goods while most of Reebok’s product is manufactured in South East Asia. Also, manufacturing and labor costs will increase in South East Asia and Reebok will confront higher costs of goods sold accounts which will directly impact on the net income. Chapter 2 : Finance reports and stock analysis Finance reports Balance sheet Annual Balance Sheet In millions of USD 2001 2000 1999 assets Total current assets 1,294.7 1,225.2 1,243.1 Cash and short term Inv 413.3 268.7 281.7 Total receivable 383.4 423.8 417.4 Total inventory 362.9 393.6 414.6 Prepaid Expenses 30.8 37.4 41.2 Other current assets 104.3 101.7 88.1 Total long term assets 248.5 237.8 321 Tangible Fixed assets(PPE) 134.0 141.8 178.1 Total cost 349.5 356.0 421.7 Accum. Depre. (215.5) (214.1) (243.6) Intangible fixed assets & Goodwill 76.7 64.3 68.9 Other long term assets & Long term Investment 37.8 31.7 74.0 Total assets 1,543.2 1,463.0 1,564.1 liabilities and equity Total Liabilities(1)=(2)+(3)+(4)+(5)+(6) 823.2 855.2 1,035.3 Total Current Liability(2) 449.4 488.1 616.4 Accounts Payable 127.3 172.0 154.0 Accrued Expenses 269.7 272.1 241.3 Notes Payable/Short Term Debt(3) 11.8 8.9 27.6 Cur. Port. LT Debt/Capital Lease(4) 0.1 13.8 185.2 Other Current liabilities, Total 40.5 21.3 8.3 Long Term Debt(5) 351.2 345.0 370.3 Minority Interest(6) 22.6 22.0 48.6 Total Equity(7) 719.9 607.9 528.8 Comon Stock Treasury Stock Comon ($ Amount) 1.0 1.0 0.9 (660.4) (653.4) (617.6) Retained Earnings/Accum. Deficit 1,453.3 1,301.3 1,170.9 Other Equity, Total (74.0) (41.0) (25.4) Total Liability & Shareholder's Equity=(1)+(7) 1,543.1 1,463.1 1,564.1 Index (%) Company 2001 2000 1999 Total current assets to Total assets 83.90 83.46 79.50 Total fixed assets to Total assets 16.10 16.54 20.50 Total Liability to Total Liability & Shareholder's Equity 53.34 58.45 66.20 Total Equity to Total Liability & Shareholder's Equity 46.66 41.55 33.80 Income after Tax to Total Revenue 3.59 3.03 0.62 Income after Tax to Total Assets 6.97 5.93 1.14 Nike Reebok ROE 17.03 14.28 ROA 9.37 5.67 ROI 11.43 9.19 Current ratio 1.9 2.51 Quick ratio 0.99 1.42 Days receivable outstanding 63.14 62.07 Days Inventory Outstanding 91.47 80.57 Remark These ratios tell us how well Reebok is doing relative to its biggest competitor Nike. The ROE and ROA numbers of Nike are larger than Reebok because the intangible assets of Nike are not recognized on its balance sheet and therefore are not recorded in th total Assets. As a result those members are overstarting the true value of Nike’s ROE and ROA. The days receivable number of approximately 62 days tell us that Reebok is taking about 2 months to collect payments from its customers. Compared to Nike, Reebok is okay but it should try to decrease this number in the future. In terms of inventory, Reebok takes about 80 days to sell its inventory while Nike takes 91 days. However, Reebok is getting lower return on its investment than Nike. Both current Ratio and Quick Ratio are higher than Nike’s ones which indicate high liquidity. Financial Strength Company Industry S&P 500 Quick Ratio 1.69 1.61 1.10 Current Ratio 2.71 2.83 1.64 Total Debt to Equity 0.46 0.25 0.97 Income statement Annual income statement In millions of USD 2001 2000 1999 Revenue(1) 2,992.9 2,865.2 2,899.9 Total Revenue 2,992.9 2,865.2 2,899.9 Cost of revenue(2) 1,894.5 1,779.7 1,783.9 Gross profit(3)=(1)- (2) 1,098.4 1,085.6 1,116.0 Selling/General/Adm Expenses 913.9 915.4 971.9 Other operating Expenses (R&D;Depre/Amortization) 28.6 34.3 115.9 Income Before Tax 155.8 135.8 28.0 Income Tax- Total 48.3 49.0 10.1 Income After Tax 107.5 86.8 17.9 Minority Interest (4.8) (5.9) (6.9) Net Income 102.7 80.9 11.0 Cashflow statement Annual cashflow statement (Indirect method) In millions of USD 2001 2000 1999 Total Operating Activities 176.2 183.1 263.7 Net Income 102.7 80.9 11.0 Depreciation/Depletion 36.6 46.2 48.6 Changes income Working Capital 42.5 33.4 162.8 Deferred Taxes (0.5) 12.2 (9.4) Non-cash Iterms (5.0) 10.5 50.6 Total Investing Activities (27.3) 10.8 (51.2) Capital Expenditures (27.4) (29.2) (51.2) Other Investing Cash Flow Iterms 0.1 40.0 - Total Financing Activity (0.6) (202.8) (120.9) Isuance/Retirement of Stock 17.8 10.7 (13.6) Isuance/Retirement of Debt (18.4) (213.4) (107.3) Foreign Exchange Effects (3.7) (4.2) 10.1 Net Change in Cash 144.6 (13.1) 101.7 Stock analysis of 3 latest years Stock price of Reebok Performing of RBK  Stock: Reebok International     Industry:   Shoes  Index: S&P 500 Look at the chart above, we can see the fluctuation of the three: the price of RBK, the Standard and Poor 500 Index and the price index of shoes industry. (Standard & Poor's 500 index (S&P 500): A well-known, value-rated index of 500 major US companies: 400 industrial firms, 20 transportation firms, 40 utilities firms, and 40 financial firms) As we can see in the chart above, at the end of 1999 and the beginning of 2000, RBK’s price sharply decreased since the deflation of USA economy. Fiscal year 2000 was a disastrous one for the stocks and the stock market. However one company did not feel the ill effects of the downturn, in fact profited. Reebok International experienced a 270.96% increase in its stock price between January 31, 2000 and December 31, 2000. The stock price went from $7.37 in January to $27.34 in December. In 2001 and 2002, due to creative marketing campaign, and other appropriate strategy, net income of the company increased continuously and affected positively the price of stock. (We have mentioned in other parts). In 2001, price of RBK only increased 20 cents per share as investors undervalued it and the market for shoes are shrinking. But we see the brighter future of RBK in 2002, the price of RBK at this moment, are increasing as net income soared. Earnings per share(EPS) This chart shows earnings per share index through ten year. This chart explains the first chart. (Earnings per share: Earnings found by dividing the net income of the company by the number of shares of common outstanding stock) We can see the connection between net income and share price. Increase in net income leads to the increase in share price. Then the increase in net in come depends on the management of the board and the favourableness of environment. Earnings per share Unit : USD Quaters 1999 2000 2001 2002 Mar 0.320 0.560 0.640 0.578 Jun 0.080 0.190 0.235 0.390 Sep 0.060 0.560 0.660 0.810 Dec -0.260 0.106 0.090 Totals 0.200 1.416 1.625 1.778 According to analysts EPS should reach in this quarter, in next quarter, in this year and next year as the table below: Consensus Estimates Earnings Estimates This Qtr. (Dec 02) Next Qtr. (Mar 03) This Year (Dec 02) Next Year (Dec 03) Avg Estimate numbers of Analysts Low Estimate High Estimate Year Ago EPS 0.24 9 0.22 0.27 0.09 0.64 1 0.64 0.64 0.58 1.99 11 1.95 2.03 1.66 2.22 11 2.15 2.35 1.99 Look at the table we can predict that the price of RBK will rise. Actually price of RBK is rising and it may continue to rise much more higher in next year with the average estimate is $2.22 per share. However, the politic and economic environment of the USA still has some factors, which may worry us. A war against Iraq and an economic recession are threatening the future of the company. So the price of RBK may not go up as high as we estimate. Some remarkable information Average of competitors Current price (USD) Earning (2002) Forward P/E Book value Nike(NKE) 40.47 2.49 16.25 12.43 Fila(FLH) 4.99 0.61 8.18 4.47 Vans(VANS) 21.69 1.23 17.633 8.68 K-Swiss(KSWS) 26.19 2.28 11.486 12.05 Saucony(SCNYA) 6.88 1.58 4.351 10.46 Average 11.58 Reebok(RBK) 23.70 1.92 12.344 10.48 Below is some share information: Share information Market cap (mil) Share outstanding (000’s) Number of Institutional Shareholders Shares Held by Institutionas (000's) % held by instutions RBK $1,684.10 59,720 647 51,450 86.1% Price and Valuation Current Price 52-week Range 60-month Beta 50-day Avg Price 200-day Avg Price RBK 28.20 19.05-30.25 .64 25.33 26.78 EPS Price/Earnings PEG Ratio Price/Sales Price/Boks RBK $1.66 14.70 1.0 (12/2001) .52 (12/2001) 2.13 Industry* N/A* 21.7 NC 1.16 N/A* RBK does not pay dividends. So RBK is not a desirable stock to invest in if we like to receive dividends. With the trend today, people will increasingly pay attention to dividend. A good part of a stock's underlying value is in the dividends. RBK is trading at 2.14 times book value. If investors have already recognized a stock's blue-chip quality, that can make a great stock a bad buy. We look for a stock trading at less than 1.5 times book value, but this test can sometimes be broken if the company has proven, superior, long-term growth characteristics. Such companies are often priced at many times book value, especially in a bull market. 1647 institutional investors own 86.1% of RBK’s shares outstanding. A high number of institutional owners (80 or more) holding at least 50% of the shares outstanding tells us that a stock is a blue-chip company. RBK has 59.7 million shares outstanding. This shows that RBK has sufficient liquidity. Stock Price Prediction of RBK Calculate Intrinsic Value Initial Earnings: 120,300,000 Earnings growth rate: 13.29 % ( Analysts’avg 5 year) Discount rate: 15% Total shares outstanding: 59.720milion Intrinsic value/shr ($)= 120,300,000*(1+13,29%)5(1+15%)/59.720= $43.31 Current price (15/10/2002):$ 28.02 We can see that RBK is undervalued In short term. Price of RBK is increasing. Because: Almost of analysts think that RBK is undervalued. RBK is a fairly blue-chip stock. The company has a bright performing in the 3rd quarter. The company has a good prospect: become exclusive supplier for NBA ...for 10