7. Pro forma financial statements
7.1. Pro forma reformulated income statement
7.1.1 Revenue forecast
Important to realise, the future revenue growth of a company is one of the main indicators of market growth and successfulness to deliver products to the market. For the most part, as this thesis applies the sales-driven forecasting approach, which links the level of activities to expenses and investments of a company, it is especially important to incorporate all the identified drivers accurately in order to build the best estimated revenue forecast. Moreover, the top-down forecasting approach is used in which the focus is on market size, economic growth and changing consumer preferences. It is crucial to put great effort into estimating the future revenues as accurately as possible, because the errors will be carried throughout the articulated statements.
Table 10 graphs ECCO’s revenue development over the years by different segments and geographies.
Evidently, as the company has shown impressive growth in revenues over the years, the percentage share of shoes and accessories, and other products, have been fluctuating around the mean and median historical values. Therefore, due to large number of samples, the percentage share of other products and services will be assumed fixed as 10 year historical median value of 5,3% in the forecast period. Furthermore, the category of other products and services is not classified under any region’s revenues, but instead it is added to the aggregate values of forecasted revenues. The revenue by geography, on the other hand, will be a subject to change by the drivers and influential forces identified in the strategic analysis.
Table 1 0 - ECCO 's historic al revenue by segment and geography
DKK '000 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 Median
Net r ev en u e 3 3 9 3 6 9 3 3 8 3 0 5 4 6 4 4 7 0 4 0 3 5 2 1 9 5 2 5 5 3 7 4 1 4 2 5 0 4 1 2 0 0 6 1 1 1 1 4 8 7 0 8 8 8 2 6 8 0 6 1 2 3 6 8 4 3 6 0 9 6
% change 7,1% 12,9% 16,7% 16,8% 3,0% (6,2%) 21,2% 16,0% 13,7% 4,7% 13,3%
R ev en u e b y segm en t
Sh o es an d ac c esso r ies 3 1 3 2 0 0 4 3 5 2 7 3 3 4 4 2 0 0 7 8 9 4 9 5 2 9 3 7 5 1 2 9 1 1 3 4 8 4 6 3 5 2 5 7 8 0 6 4 4 6 7 5 4 7 1 2 7 6 3 6 1 1 1 7 7 8 8 1 8 8
% change 9,0% 12,6% 19,1% 17,9% 3,6% (5,5%) 19,3% 16,9% 13,0% 2,0% 12,8%
% share 92,3% 92,1% 94,0% 94,9% 95,4% 96,1% 94,6% 95,3% 94,7% 92,3% 9 4 , 7 %
Ot h er p r o d u c t s an d ser v ic es 2 6 1 6 8 9 3 0 3 2 1 2 2 6 9 6 1 4 2 6 6 5 8 8 2 4 5 0 2 9 1 9 4 8 4 8 3 3 0 5 0 4 3 3 4 1 1 4 4 2 5 1 2 5 6 4 7 9 0 8
% change (11,8%) 15,9% (11,1%) (1,1%) (8,1%) (20,5%) 69,6% 1,1% 27,2% 52,4% (0,0%)
% share 7,7% 7,9% 6,0% 5,1% 4,6% 3,9% 5,4% 4,7% 5,3% 7,7% 5 , 3 %
R ev en u e b y geo gr ap h y
EMEA 2 1 0 1 6 1 3 2 3 5 6 9 2 3 2 7 0 4 3 7 9 3 2 9 1 8 1 7 3 5 0 2 5 8 4 3 2 0 2 4 0 5 3 6 3 1 8 9 4 4 1 7 8 0 4 8 4 3 2 4 4 9 9 4 3 2 8 4 1 9
% change 8,8% 12,1% 14,7% 21,7% 6,4% (8,6%) 13,4% 15,0% 3,5% 0,1% 10,5%
No r t h Am er ic a 8 5 5 0 2 4 9 4 8 9 7 0 1 1 5 0 5 7 9 1 1 7 3 1 6 8 1 0 2 0 1 2 3 9 2 8 6 8 1 1 1 3 9 3 9 7 1 2 1 0 0 8 4 1 4 6 0 1 3 6 1 4 7 3 7 9 0
% change 7,5% 11,0% 21,2% 2,0% (13,0%) (9,0%) 22,7% 6,2% 20,7% 0,9% 6,8%
Asia-P ac ific 1 7 5 3 6 7 2 2 1 4 4 1 3 4 5 8 3 1 4 8 7 9 5 2 6 0 6 4 0 6 7 1 5 2 6 6 1 0 0 9 3 5 3 1 3 6 6 5 8 0 1 8 5 1 4 7 6 1 9 8 5 9 7 9
% change 21,2% 26,3% 56,2% 41,1% 24,3% 18,0% 41,1% 35,4% 35,5% 7,3% 30,8%
As ECCO divides its market into three categories: EMEA, North America and Asia-Pacific, these regions will be the basis of the company’s revenue forecast. Furthermore, the revenue forecast consists of two main components: base revenue forecast by four main economic and market drivers, and additional implications from strategic analysis. The four base components driving ECCO’s revenue growth are real GDP growth, change in real disposable income, footwear expenditure growth, and the market size growth of the footwear industry.
In the following, these indicators will be explained and examined in respect to ECCO’s revenue development by geography in order to determine the base revenue forecast for the company.
7.1.1.1 Base revenue forecast by main economic and market drivers
In this section, ECCO’s historical revenue relation to the main economic and market drivers by region will be examined in order to estimate the base sales growth in the future. To do this, the growth in the company’s revenues is directly compared to the changes in the market. The base revenue growth by region is determined by the real GDP growth, the change in real disposable income, the change in expenditure in the footwear market, and the growth of the industry as a whole.
An important indicator used in the analysis is the growth factor, which is an elasticity measure calculated as a ratio of change in revenue to a percentage change in the driver. By examining the historical values of these growth factors, it is possible to determine their normalised relation to the company’s revenue development.
For example, a growth factor of 2 in real GDP growth indicates that 1 percent growth in GDP leads to a 2 percent increase in revenues. The four base drivers carry equal weight of 25 percent in their contribution towards ECCO’s future revenue computation. Moreover, 8 year median values are used in the historical analysis of the growth factor, because they are less influenced by outliers.
7.1.1.1.1 EMEA region
Appendix 90 points out the historical revenue development in relation to the main economic and market drivers of ECCO EMEA region. The historical median values of the base variables indicate that the real GDP growth is the main driver of the company’s revenue growth, whereas the change in real disposable income has the lowest impact.
In relation to ECCO EMEA future revenue growth, Table 11 effectively displays the main forecasted base drivers and their historical growth factor median values. In 2014F, the increase in revenues in EMEA region is expected to be only one percent due to the negative change in real disposable income. However, from 2015F onward, the economy and growth in the market are forecasted to normalise, resulting in a stable and healthy revenue growth. Due to data limitations in the footwear market size growth from 2019F and onward, the conservative forecasted growth is expected to be 4 percent in 2019F, and 3 percent in 2020F.
Table 1 1 - ECCO EMEA base revenue growth forec ast by main ec onomic and market drivers
DKK '000 2 0 1 4 F 2 0 1 5 F 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F
ECCO EMEA 4 3 7 0 9 3 8 4 6 6 9 9 0 0 4 9 6 7 5 3 1 5 2 9 0 9 8 7 5 6 3 4 9 3 3 5 9 9 9 7 0 4 6 3 7 5 9 2 9
% change 1,0% 6,8% 6,4% 6,5% 6,5% 6,5% 6,3%
Av er age r eal GD P gr o w t h 2 , 7 % 3 , 2 % 3 , 3 % 3 , 4 % 3 , 4 % 3 , 3 % 3 , 3 %
Growth factor 2,94 2,94 2,94 2,94 2,94 2,94 2,94
Av er age ∆ in r eal d isp o sab le in c o m e (5 , 7 % ) 0 , 7 % (0 , 1 % ) 0 , 1 % (0 , 1 % ) 0 , 3 % 0 , 5 %
Growth factor 1,30 1,30 1,30 1,30 1,30 1,30 1,30
Fo o t w ear ex p en d it u r e gr o w t h 0 , 5 % 5 , 4 % 4 , 8 % 4 , 8 % 4 , 9 % 5 , 1 % 5 , 3 %
Growth factor 1,90 1,90 1,90 1,90 1,90 1,90 1,90
Fo o t w ear m ar k et size gr o w t h 1 , 5 % 4 , 4 % 4 , 3 % 4 , 4 % 4 , 4 % 4 , 0 % 3 , 0 %
Growth factor 1,55 1,55 1,55 1,55 1,55 1,55 1,55
Source: ECCO’s annual reports 2004-2013, Independent analysis
7.1.1.1.2 North American region
Appendix 91 demonstrates that the revenue development in ECCO North America has been growing steadily despite the strong impact of the financial crisis in 2008-2009. Evidently, the revenue growth in the northern continent is highly dependent on the economic growth measured by real GDP growth, and less by other drivers.
Similarly to ECCO EMEA, as Table 12 indicates, the decline in real disposable income drives down the revenue growth in North America in 2014F. Although the company’s revenue in the forecast period is expected to increase relatively less than in EMEA region, it is still showing a solid growth. Due to data limitations in the footwear market size growth from 2019F and onward, the conservative forecasted growth is expected to be 2 percent in 2019F, and 1 percent in 2020F.
7.1.1.1.3 Asia-Pacific region
As Appendix 92 indicates, ECCO Asia-Pacific has shown the most impressive growth in the company’s revenues over the years. This growth is a direct result of the exceptional expansion of the Asian economies and the high growth level of footwear expenditure, which in turn leads to a significant growth in the footwear market size in general. Moreover, as the median values indicate, all four base drivers seem to have a strong influence on ECCO’s future revenue growth in Asia-Pacific.
With attention to the future revenues from Asia-Pacific region, Table 13 shows the impressive growth of economic and market drivers, which also have a significant effect on ECCO’s forecasted revenues. Additionally, the base forecast indicates that by 2020F, Asia-Pacific will be the company’s largest market. Due to data limitations in the footwear market size growth from 2019F and onward, the conservative forecasted growth is expected to be 6 percent in 2019F, and 5 percent in 2020F.
Table 1 2 - ECCO North Americ a base revenue growth forec ast by main ec onomic and market drivers
DKK '000 2 0 1 4 F 2 0 1 5 F 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F
ECCO No r t h Am er ic a 1 5 2 1 3 4 9 1 6 1 3 6 4 3 1 7 0 0 4 4 2 1 7 8 4 5 7 3 1 8 7 5 3 5 3 1 9 6 2 8 5 6 2 0 5 6 1 9 4
% change 3,2% 6,1% 5,4% 4,9% 5,1% 4,7% 4,8%
R eal GD P gr o w t h 2 , 6 % 2 , 8 % 2 , 8 % 2 , 6 % 2 , 5 % 2 , 4 % 2 , 4 %
Growth factor 5,46 5,46 5,46 5,46 5,46 5,46 5,46
∆ in r eal d isp o sab le in c o m e (2 , 1 % ) 1 , 8 % 0 , 8 % 0 , 7 % 0 , 6 % 0 , 7 % 0 , 9 %
Growth factor 0,86 0,86 0,86 0,86 0,86 0,86 0,86
Fo o t w ear ex p en d it u r e gr o w t h (0 , 7 % ) 4 , 4 % 3 , 2 % 3 , 3 % 3 , 3 % 3 , 4 % 3 , 7 %
Growth factor 0,55 0,55 0,55 0,55 0,55 0,55 0,55
Fo o t w ear m ar k et size gr o w t h 0 , 6 % 3 , 2 % 2 , 5 % 2 , 0 % 2 , 8 % 2 , 0 % 1 , 0 %
Growth factor 1,55 1,55 1,55 1,55 1,55 1,55 1,55
Table 1 3 - ECCO Asia-P ac ific base revenue growth forec ast by main ec onomic and market drivers
DKK '000 2 0 1 4 F 2 0 1 5 F 2 0 1 6 F 2 0 1 7 F 2 0 1 8 F 2 0 1 9 F 2 0 2 0 F
ECCO Asia-P ac ific 2 2 7 3 9 3 1 2 8 3 2 8 2 8 3 4 1 5 3 7 8 4 0 9 5 5 6 6 4 8 9 0 1 5 5 5 8 1 6 9 0 4 6 8 7 1 5 6 4
% change 14,5% 24,6% 20,6% 19,9% 19,4% 19,0% 18,1%
R eal GD P gr o w t h 5 , 5 % 5 , 7 % 5 , 7 % 5 , 5 % 5 , 4 % 5 , 4 % 5 , 4 %
Growth factor 4,79 4,79 4,79 4,79 4,79 4,79 4,79
∆ in r eal d isp o sab le in c o m e (2 , 0 % ) 2 , 8 % 1 , 6 % 1 , 5 % 1 , 6 % 1 , 8 % 2 , 0 %
Growth factor 2,62 2,62 2,62 2,62 2,62 2,62 2,62
Fo o t w ear ex p en d it u r e gr o w t h 6 , 2 % 1 1 , 0 % 9 , 1 % 8 , 7 % 8 , 3 % 8 , 4 % 8 , 6 %
Growth factor 2,40 2,40 2,40 2,40 2,40 2,40 2,40
Fo o t w ear m ar k et size gr o w t h 5 , 3 % 8 , 9 % 6 , 9 % 6 , 8 % 6 , 6 % 6 , 0 % 5 , 0 %
Growth factor 4,19 4,19 4,19 4,19 4,19 4,19 4,19
Source: ECCO’s annual reports 2004-2013, Independent analysis
7.1.1.2 Other strategic implications
In the light of ECCO’s base revenue forecast estimated in the previous section, there are also other strategic factors that influence the company’s revenue development in the future. These implications were identified in the macroeconomic, industry-specific and company-specific parts of analysis.
7.1.1.2.1 Geopolitical risks
As identified in crisis and conflicts section in PESTEL analysis earlier, there are high geopolitical risks associated with Russian, Ukrainian, Thai and Egyptian markets.
Firstly, the effects of Russian-Ukrainian conflict, which also has impact on other markets in the Europe, are expected to peak in 2015F. Therefore, ECCO EMEA revenue growth is affected negatively by 50 basis points in 2014F, by 150 basis points in 2015F, by 100 basis points in 2016F, and by 50 basis points in 2017F.
Secondly, the tensions in Thailand and Egypt are expected to have marginal impact on ECCO Asia-Pacific revenues. As a result, the region’s revenue growth is adjusted downwards by 25 basis points in 2014F, and by 10 basis points in 2015F.
7.1.1.2.2 Social classes
The social classes and lifestyle analysis in PESTEL framework revealed important information concerning the classification of social classes by income in ECCO’s main regions of operations. As the company’s main customer target group lies within classes A, B and C in the social classes ABCDE model, there will be some implications to its revenues due to the changes in equality of earnings.
Firstly, EMEA region is forecasted to have stable and fixed proportions in the social classes, which in turn implies that there will be no significant changes to revenues in this region.
Secondly, the inequality in North America and Asia-Pacific region is expected to increase, and affect ECCO’s revenue negatively starting from 2015F. Although the changes in the social classes are not that severe, they are still forecasted to have 25 and 50 basis point impact during the whole forecast period, in North America and Asia-Pacific respectively.
7.1.1.2.3 Six forces framework
To begin with, the six forces analysis yielded that the threat of entry and competitive rivalry in footwear industry is rather strong, whereas the other forces have lesser impact on industry profitability and incumbents’
competitive position. Therefore, the overall threat level in the industry is expected to have a negative effect of 100 basis points on overall revenues of ECCO during the whole forecast period.
7.1.1.2.4 VRIO analysis
As ECCO has several resources that satisfy the VRIO criteria, the company enjoys temporary competitive advantage and above normal profits. However, as a conservative measure, these implications are expected to consolidate the company’s current position, and have no positive or negative implications on ECCO’s future revenues.
7.1.1.3 Summary
Table 14 summarises ECCO’s revenue forecast by regions and segments. More specifically, the revenue from shoes and accessories is the sum of all geographical revenues, which are also adjusted for strategic implications. The revenue from other products and services is derived from the historical median values of ECCO’s segment share proportions determined earlier.