Adidas AG

XETRA:ADS

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to adidas Conference Call for the First Quarter 2019 results. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Sebastian Steffen. Please go ahead, sir.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thanks very much, Alice, and good afternoon, ladies and gentlemen. Welcome to our First Quarter Results Conference Call. Our presenters today are our CEO, Kasper Rorsted; as well as Harm Ohlmeyer, our CFO. First, Kasper and Harm will walk you through our Q1 numbers and the outlook for the remainder of the year. Afterwards, we will have time for your questions. As always, I would ask you to limit your questions to a maximum of 2 to give as many people as possible the chance to ask the question. Just one more comment before we start. Unless otherwise stated, all top line growth rates are currency-neutral and all numbers include the impact of the IFRS 16 accounting change. And with that, I would say, we kick it off enough for me, over to you, Kasper.

[Kasper Bo Rorsted, CEO & Member of Executive Board]

Thank you very much. And now I start with the business update. We are very happy that we've been able to sign Beyoncé as a creative partner for our company. And we believe that within our 3 strategic priorities, open source, we are taking our successful approach to the next level now. And with Beyoncé, with Kanye West, with Pharrell Williams, with Stella McCartney, we have an extremely strong off the pitch team and of course, on the pitch, we continue to invest in sports assets, but we are extremely happy with the signing of Beyoncé. We're focusing of co-creation of exciting performance and of lifestyle products and all products will be co-branded, including Ivy Park, which Beyoncé is going to lunch with adidas. But first, and very limited product will be released towards the end of 2019. And at the day of the announcement, we have more than 1 billion impressions I think, it shows the magnitude and the reach that Beyoncé have and we are confident that this will be a big asset for us moving forward, one that will have brand impact in 2019 and the years beyond, of course, also direct business impact. It was also a quarter where a number of product and activity we launched with a great success. Our UB19 came out to a great start. It hit all the sales number that we expected, and we did have high expectations. We have introduced 4 colors when we started and since then we've introduced several colorways. The Nite Jogger was also launched in limited-edition and also lived up to the product expectations that we had. And let me just pause there for a second because I think it important to reflect back and how the start last year went. This is how last year went with 2 launches that we were not happy with. This is in conscience to this year and that's also lying, which I'll speak about the end, while we have confidence that we'll hit the increased -- accelerated growth numbers by the end of the year. We spoke about [ here what's in ] the U.S. our Futurecraft.Loop, the first fully recyclable shoe, which is an extra extension of what we're doing with our Parley and Parley continues to be very successful. The fully recyclable shoe, is in the short term, more a brand play but as of '21 and beyond, it will have similar impact to what we have seen from Parley. We launched our Primeknit LUX 1, that gives into higher impart of the woman's market, we launched Instagram checkout, that means that consumers can buy our products within the Instagram. And Reebok was the talk of the show in Shanghai during the fashion week. So from a product standpoint and from an activity standpoint, it was a first quarter that was very much according to plan. When I look upon on the strengths and the weaknesses of the first quarter. Supply chain shortages did have an impact as we communicated in March on the growth rate, particularly in North America as you can see from the numbers. The European growth recovery is expected as communicated to take place in the latter part of the second half. We are making the progress that we need to make, but we will not see in the numbers before end of the year. Despite the fact that we made a lot of progress on Reebok profitability and announced a profitable Reebok for 2018, we still needs to drive growth back into Reebok. That is the ultimate target as we have set for 2020 and just to reiterate the target was to have a growing Reebok by 2020 and a profitable Reebok by 2020. Of course, we like to have a growing Reebok before 2020, but our target is by 2020. And we are seeing OpEx leverage being masked by investments for the DTC growth. As you see in the APAC, we had a very strong DTC growth. DTC growth was up at 18%, of course, that has had a significant impact on our operating overhead. So that is where you're going to see the impact from a business standpoint. However, there are many positive parts in the past quarter. We'll continue to make progress in our strategic growth areas, we saw double-digit growth in Greater China and e-commerce and our 3 strategic growth areas, North America, Europe, no -- North America, China and eCom grew adjusted 14%, so 14% higher than the rest of the company, for obvious reasons. So it has shown in the past and also in the future that having a high focus on a number of key areas does pay off. We saw a successful activation on our key launches I spoke about them, UB 19 and Nite Jogger they are performing according to expectations. We saw an ongoing gross margin strength supported by a favorable FX, and Harm will take us through the details of this, and we continue to see strong profitability improvements, a continuation of our double-digit bottom line growth also when you make adjustments for -- when marketing spend has taken place. Which brings me now to the numbers and highlight for the first quarter. Our revenue increase was 4% in core currency-neutral terms and 6% in nominal terms bringing our revenue to close to EUR 5.9 billion. Our gross margin was up 250 basis points to 53.6% supported by, as I said, favorable FX. Our operating margin was of 140 basis points to 14.9%, despite the higher investments. Our net income from continuing operations increased 16% to EUR 631 million. That means that on a nominal to nominal level, we are growing our income almost the factor of 3 that we're growing our top line. And our basic EPS from continued operations was up 19%, of course, the delta between 16% and 19% is coming from the reduced share count from our share buyback program. We are seeing strong progress in our strategic growth areas. North America grew 5% percent on top of a 23% increase in the previous year. Greater China, up 16% on top of a 26%, and e-commerce grew 40% on top of 27%. So as I said, the growth of these 3 combined when you adjust for the double counting, was 14%. So great progress on our strategic growth areas. Of course, we would like to see more in North America, but this is where the biggest part, almost all of our supplying constraints came into the numbers. The adidas brand grows in most market. We came in and grew 5%. The Sport Performance grows 3%, high single-digit growth in Training and Running, which is offset by tough comparables by Football. As you remember, we had a very strong Football event last year in Russia. We show Sport Inspired grows by 6% and this was in the first quarter supported by our strong Yeezy growth. And just to give you guidance for Yeezy growth for the year, we do not expect any significant growth from Yeezy year-over-year for the fiscal year 2019. This is what you see in the first quarter. It's simply a sequential view of it but we do not expect any significance -- any significant growth from Yeezy in this year. So what we've seen, we've seen a balanced growth mid-single-digit increases in both footwear and apparel. On Reebok, we continue to see further margin improvements, up 290 basis points, bringing us to 44.7%. It's still substantially below the level of adidas, but a big step in the right direction. Revenue decreased 6% due to declines in most markets, we saw growth in Classics driven by double-digit increase in apparel. So as I said, our target has been and will remain to bring Reebok back to growth by 2020 and remain the profitable situations that we've had, of course, aiming at improvement. We continue to see exceptional growth in our e-commerce, driving consumer engagement, up 40%. Driven by double-digit growth across all regions. We're driving traffic and engagement rates through exclusive releases such as the AlphaEDGE 4D and other releases. So the one-to-one engagement, which is a key part of creating the new strategy is really paying off in our digital world. The adidas app is now live in 27 countries, and we have more than 9 million downloads by the end of first quarter. So again, we are focused on digital and our dotcom, as the most important store in the world continues to pay off. I'll now like to hand over to Harm, who give you more details on the financial. Harm, please.

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Thank you, Kasper. Good morning, good afternoon, ladies and gentlemen. Please allow me to give you some more updates on the financials. As always, I would like to start with some markets and as always, I will discuss North America, Asia Pacific and Europe in more detail. Subsequent slides. But let's briefly look at our 3 remaining markets, which have all proved their resilience among various challenges. Starting with Latin America. Revenues down 3% percent against the changing macro backdrop, but we were able to improve the regions gross margin by 2 percentage points to 46.4%, in particular, our profitability. Please also bear in mind that Latin America with the Federations that we have is, Argentina, Mexico, Colombia have been more pronounced towards the World Cup 2018 and this will have a different picture in the quarters to come. In Emerging Markets, revenues increased 10% despite headwinds from geopolitics in some countries and the segments operating margin expanded 2.1 percentage points, driven by both gross margin and OpEx leverage. And also there, we are back to growth after some years of consolidation there, so back to growth in Emerging Markets. And then to Russia, sales in Russia grew 22% despite the non-recurrence of the World Cup, it is actually a 21% comp in retail. And segment operating margin increased by 3.6 percentage points as the lower OpEx ratio more than offset the gross margin normalization following the World Cup. But also in Russia, bear in mind, these has been fantastic results in Q1, but in Q2 and to some degree in Q3, we got to comp the event-based sales during the World Cup. So don't look at Q1 as an indication for Q2 and Q3 in Russia. Now when it comes to North America, top line growth of 3% currency-neutral, the adidas brand revenues up 5% driven by growth in Sport Performance. The Reebok brand decreased by 12% despite growth in Classics. But overall the gross margin increases by 50 basis points to 38.3%, driven by our lower sourcing costs as well as better product and channel mix and overall, the operating margin increases by 1.3 percentage points to 10.8% on the back of the gross margin expansion and OpEx leverage. And again, as Kasper mentioned earlier, supply chain shortages negatively impacted North America, in particular, in Q1. Comes to Asia-Pacific, strong double-digit growth driven by Greater China. Overall 12% currency-neutral. Adidas brands sales increases 13% driven by double-digit growth in Sport Performance and Sport inspired, and Reebok brand revenues down 7% despite growth in Classics. Our gross margin who went up by 2.7 percentage points to 58.7% due to lower sourcing costs, positive FX and the better channel and product mix and of course China contributes to its mix as well as their gross, I think, a higher gross margin profitability overall. All of this leads to the operating margin increase of 2.6 percentage points mainly driven by the gross margin expansion and as we mentioned earlier, China contributed 60% to the overall growth in Asia-Pacific. When it comes to Europe, currency-neutral sales decrease by 3%, the adidas brand exactly down by 3% as well, despite growth in Training and Running. Specific there, we always talked about the challenge that we have in the lifestyle distribution, the segmentation it's also there, indications for the second half, good growth in Training and Running, Reebok brand sales decreased by 7% despite growth in Running. And the gross margin improved by a 6.1 percentage points to 51.7%, again a significant positive FX impact, but also here, some of the other markets lower sourcing costs and a better channel mix. And also here, and I will come to some more details over the developments of the gross margin later on and some more details. But overall, given the gross margin, the operating margin is up by 4.6 percentage points in Europe to now to 26.2%. On top of it, I want to mention the inventories in Europe at quarter end. There have been down by high single digits compared to a year ago. So minus 8%, again, reflecting that you are not pushing into the channel, we are discipline based on the sell-through that we have in the market and that's what you see, that's a high quality of growth or high quality of the management, so overall working capital also in Europe. When it comes to the P&L. I want to repeat again, it's a 6% nominal growth, which is a 4% currency-neutral growth. Again, the gross margin at a record high was 250 basis points above prior year and the operating expenses was 9% up. There I want to highlight, then the operating overhead expenses was 14% up. Again, our goal is to develop a truly scalable business model, and we keep investing into our major One adidas initiative. The One adidas initiatives are not just contributing to overhead reduction, they're also contributing to margin expansion, especially when it comes to sourcing and range reduction as part of One adidas, but we keep investing into global business services and nontrade procurement. We'll never be finished in digital, we keep investing overproportionate and also in the DTC network as well.We are recording the first benefits of those initiatives. However, as we continue to invest into scalability at the same time, those improvements don't fully drop through in the first quarter yet. In addition, and Kasper mentioned that already, overproportionate growth in DTC in Q1 was 18% contributed significantly to the operating overhead increase, which is largely compensated for the higher gross margins. This, and I will come to that structure of the change slightly indifferent in the future quarters. Net income, 16% up, means we grow the bottom line at more than twice the pace of reported sales of 6% and excluding the negative impact of IFRS, the growth have been transparent about as the net income growth would have been even 18% and the earnings per share growth is growing by 19%, as you see the difference through net income given the share buyback that we continue to do in 2019. Let me talk a little bit about the quarterly gross margin and this is definitely a question that I'm expecting later on in the call as well. So when it comes to the gross margin, at the expansion of 250 basis point. I, first and foremost, want to say that, this is an indication of the quality of the growth also top line and also on DTC, it's an indication that the sell-through also on our own channels is of high quality. Otherwise, we couldn't show these margin improvements. In Q1, gross margin was additionally supported by FX developments. As I mentioned earlier, lower sourcing cost, positive channel mix and an overproportionate growth of DTC. However, from here on, we expect gross margin to be more muted due to varied underlying drivers reversing and strategic decisions taking effect. First and foremost, we are going to reasonably increase the use of airfreight from Q2 as part of the mitigating impact of supply chain shortages in Q1. Please bear in mind, it has been too short of a notice to have significant impact on flying in products for Q1. It will be more significant in Q2 and to some degree in Q3 and as Kasper mentioned, supply chain challenges will be fixed by the end of the year. But that's something you should see in the gross margin. We expected more balanced growth across the channels in the second quarter as wholesale will respond to the new products that are working already well in our own channels, whether it's e-commerce or in physical retail. We keep investing selectivity into price points, particularly, in Europe that are funded out of the gross margin and please bear in mind, our new management team just started in summer 2018. Spring/Summer around and that's been largely cooked from a pricing point of view, so you will see it more significant and fall/winter '19 to also drives the top line in fall/winter '19 specifically in Europe. And also the hedges on the sourcing side will be less favorable in the second half, still favorable compared to prior year, but less favorable compared to the first half that you are going to see. And -- chart also indicates the prior year comparisons, we will be getting tougher in the second half on the future quarters then it was in the first quarter. So as a result of all of these measures, gross margin should not be expected to keep expanding at the pace seen in Q1. And we also confirm our full year guidance of around 52%, which might, however, reflect a certain level of conservatism. But as in previous years, if we convince slightly better than we originally have guided, we will be tactical and say keep investing into the brand because we are here for the long run. So please bear that in mind. If we are slightly better, we will be opportunistic into the marketing spend as well and this is what you will see in future quarters. When it comes to the average operating working capital. Another highlight, inventories, as I mentioned, are under strict control, there's 2% currency-neutral up. Receivables are in line of our business development with 6% and you see the continuation of, not just of our nontrade but procurement initiatives, but also some of the sourcing in moving outside of China going back into China as payables are up by 28%. This is more onetime effect that we see once partly in 2018 and partly in 2019 that leads to an operating working capital of over net sales of 18.6%. I always indicated we are happy to below 20%, we always had a dream to get to 19%, so the 18.6% is definitely something that we should be all proud of. But it's also not indication that this should continue to improve over the next quarters. I would be very happy if we are in the corridor between 19% to 20%. That's what we are striving for. And -- when it comes to the net cash and equity position. Again, we have a net cash position of EUR 908 million at quarter end. Shareholders equity was up more than EUR 500 million compared to prior year. And when you look at the drop in the equity ratio, it is mainly due to the balance sheet extension in context of IFRS 16 as these obligations have been capitalized on the balance sheet. [ Pretty quick ] to the shareholder return and the share buyback update, as you know, we are committed to our EUR 3 billion share buyback until May 2021. After the EUR 1 billion 2018, we give an indication of roughly EUR 800 million in 2019. And so far coming in the first quarter, we have repurchased 5.8 million shares in the value of EUR 152 million. And we are mainly permitted to the plan that originally indicated of roughly EUR 800 million for the full year of 2019, that was there. And we also confirming that we going to execute the EUR 3 billion for the period that has been agreed to, that's May 2021. With that, I would like to hand over to Kasper, again, to talk a little bit about the outlook.

[Kasper Bo Rorsted, CEO & Member of Executive Board]

Thank you very much, Harm. For 2019, let me just reiterate the focus areas that we spoke to all of you about in March. We'll continue to leverage multiple dimensions of innovation, whether it's within our product area, through our creators or through social media and digital, it will continue to drive high quality of growth into our business. High quality of growth with the single aim of growing market share and growing margins. We'll continue to invest with impact, that means intro brand desire, so keep a very high brand investment and into a scalable business model. And I think, you can see that when you look upon the operating overhead, at the same time, there were no increase in our headcount. So we are investing into the business that will have a long-term impact while having a very, very strong focus on the key revenue, no, our cost drivers which are headcount. Our aim is to deliver overproportionate net income growth according to our guidance, we are committed to that on the back of a sustainable operating margin expansion. As I said, the essence of Creating the New, as market share expansion and margin expansion. And when challenges arise that we are tackling them decisively. First and in a very pragmatic, but also, way that sets the tone for the culture we have in our company, which is a performance-based culture. Let me just give you a short update to the supply chain shortages. Overall, the impact is, as communicated, roughly between EUR 200 million and EUR 400 million from a revenue standpoint, mainly in North American and particularly in the second and partially in the third quarter. All required decisions have been taken by now tactical and strategic. Let me just mention what we've done tactically. We've gone through all of our suppliers and understood where we can get additional capacity. So expanded within our current suppliers within the scope they had from utilization standpoint. We move to overtime with those where it makes sense, and we've also brought new capacity. We should know that this is helping us, but it's helping us to mitigate we set to win the range we indicated. That's why that we have taken all the steps necessary that we can take to mitigate. The one part that you are not seeing in the numbers yet and Harm was very clear about that it's the upcoming airfreight cost, which will be substantial for the following 2 quarters to come. For the midterm, that means as of 2020, we have contracts in place that ensures us that we will have no supply constraint as of 2020. That means what we are speaking about right now, is a temporary setup -- setback, but it's hitting the first 3 quarters, predominantly first 3 quarters of this year and to the tune that we've indicated previous to you.All decisions have been taken to mitigate what we can mitigate, all decisions have been taken to ensure that we will not have a problem by 2020 and beyond. How do we believe that we're going to have a top line acceleration in the second half, which is the assumption for how we're guiding. We have been guiding, let me just reiterate that, it's 3% to 4% growth for the first half, that remains unchanged. And a 5% to 8% growth rate for the full year. The reason why we are confident that we're going to see an acceleration as, one , the product engine will continue to contribute, we're scaling the recent launches which in contracts with last year, this year has been successful. We expect Europe to return to growth by the end of the second half. We see the EURO 2020 coming in and having impact on the fourth quarter. We're seeing the impact of the supply chain shortages to eventually fade, particularly in the fourth quarter, and we're seeing a lower prior year comparisons to ease. Last year, we saw 10% growth in the first half and 6% growth in the second half. So of course, on a like-for-like basis, we are comparing ourselves with the growth rate which is 4 percentage points lower than the previous year. And that brings me to the outlook that we are confirming that's an increase of revenue of 5% to 8%, an increase in the gross margin to 52% and increase in the operating margin between 50 and 70 basis points to 11.3% to 11.5%. And that means an increase of 8 to 12 percentage points from net income. And the net income will then be between EUR 1,845 million and EUR 1,915 million. And this is including the IFRS guidance. How much is it? That is a onetime impact that we'll have, it does not change anything in the underlying business. So it's on a like-for-like. So in the summary, we've had a successful start in 2019, according to the plan and the assumptions that we gave you in March. We see a continuation of the double-digit bottom line growth in Q1. We have the building blocks in place to accelerate our growth in the second half. And 2019 will be another year of high-quality top and bottom line growth and the entire focus is on executing Creating the New in the second last year, our strategy pillar to ensure to fulfill our long-term guidance that we've given you approximately 2 years ago for our Creating the New strategy. With this, I'd like to thank you for your attention so far. And Harm and I would now be happy to take your questions. And for that, I will hand over to Sebastian Steffen.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thanks very much, Kasper. Thanks very much, Harm. Alison, we are now ready to take questions.

[Operator]

[Operator Instructions] We'll take the first question from John Guy from MainFirst.

[John William George Guy, Managing Director]

Two questions, please. First question on woman's wear and the exciting announcement and the collaboration with Beyoncé. Obviously, besides a very, very strong Instagram account and very high global impression that you've already seen, can you maybe just elaborate a little bit more in terms of how you think about the woman's wear business? I mean it's a bigger opportunity than the men's wear and still represents under 30% or close to 25% of your sales. I'd be interested to hear a little bit about that. And my second question is around future growth loop, I mean that's a really interesting concept. And I think, really enhances, even more, your ESG credentials given Parley as well. With the recyclable nature of performance running and footwear in general, how far away do you think we are from a subscription-based footwear replacement model for consumers? And what you think, that could mean for your business going forward?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

I'll answer the questions in a reversible sequence. We believe Futurecraft is an excellent step from our Parley business. Our Parley business has been flourishing over the last number of years. We sold 5 million pairs of shoe last year, 11 million pairs this year. And this is really Phase 2 of Parley. And that's why it's at top of the pyramid. The Futurecraft shoe that was introduced will be brought to market by '21. So it's going to -- has no impact [ of commercial as ] that will continue to expand our franchise around Parley and the entire push of our sustainable product sale. So -- but a very excellent step in that direction. In a more concrete to your proposal, we still think there's going to be a long way away still from having a subscription-based service for running product. Also because the acquisition costs is still fairly low. And if you have a subscription-based, normally you would have to be able to recycle it. And then we come back to our shoe we're not going to have any volume shoe in this category, probably between '22 to '24 time range. So we don't think it will have an impact in the imminent future. When it comes to Beyoncé, we -- with the creation of our strategy Creating the New, we did call out women, it's particularly a strong opportunity for us because it is an underrepresented part of our business. And while we, in most years, have had a accretive growth of women's business compared to company business, we're still by no means where we need to be. There's no doubt that Beyoncé will help us in this area. Stella McCartney has been a great first step and still is with Stella, but Beyoncé has a reach which is unique to almost any other, I would say, female person in the world. And we think that with the cooperation of her, we can dramatically accelerate that. That will not have a substantial revenue impact in this strategy period. I just want to set the expectation right. We've seen with Kanye, we have a very, very successful relationship. In order to build that, we're speaking about a 3 to 5 to 7-year range. And while we bring the first products out by the end of this year. With Beyoncé, this product will not have a substantial impact. But from a brand standpoint, it will strengthen our position within the female consumer.

[Operator]

The next question comes from Jurgen Kolb from Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

On Yeezy, I think you mentioned, that you have the plan to not have a material upgrade or launch calendar for Yeezys in this year. I was wondering what triggered that decision, given the strong success, especially, in Q4 last year. So maybe some additional words on that one. And lastly, or secondly, on Reebok, obviously, 2020 is the target. What is still to be done in order to make that franchise a more profitable one? Or in terms of growth, when do you think we can really see the first move towards a more sustainable development here?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

So as it relates to Yeezy, we need to separate the total financial impact and the launch calendar. What you'll see is, you'll see a dramatic increase in the number of launches that we'll be doing this year. But you're not going to see an increase or significant increase in the number of product -- number of products it would land. So you're going to see many more different products, but not actual increase in the number and this is to make sure that we continue to keep the Yeezy product range at very, I would say, hyped product range that we'll see many more products in the market. But many of the launches will make with very, very few volume. So it has now reach a business side, so we feel very comfortable with. We might also grow it over time. Right now, the commercial plan for this year is not to grow the volume of any significance from a marketing standpoint. The plan is to have significantly more launches then the past year. So we can start building the next set of volume launches that could come maybe in '20, '21 or '22. On the Reebok side, we've said all along that we need to revitalize the brand, and we need to get more attractive products out and when we took you through the annual numbers, a couple of months ago, we -- I believe, we indicated that our margin spend for the Reebok brand was higher relative then the one for adidas, it will be the same this year. So we'll continue to invest into the brand to ensure that we make the brand relevant with the consumer. We have resisted the temptation of being very aggressive from a push standpoint and drive commercial deals or promotional deals for the sake of getting top line but there is no doubt the 2 things that we need to do, better products and more relevance with the consumer from a brand standpoint.

[Operator]

The next question comes from Antoine Belge from HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

Yes, can you hear me?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

Yes, we can hear you. Loud and clear.

[Antoine Belge, Global of Consumer and Retail Research]

It's Antoine Belge, HSBC. Two questions. First of all, with regards to Greater China, you achieved a 16% growth. But I think now the growth is less driven by store expansion and more by like-for-like on online, so can you maybe elaborate on market trends and how you arriving those like-for-like? And my second question relates more to your top line guidance. I think Harm, agreed that in terms of gross margin, there was a clearly more visibility than maybe a few months ago. In terms of top line, would you say that you're more confident compared at the beginning of March and especially on those 2 areas, Europe, where you expect to come back to growth at some stage. And if so, about the supply chain issues, are they -- you said there would be result later in the year, but would you say that that situation is more, I mean, under control now?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Thanks, Antoine. Yes, two questions first going to China. This is 16% growth. Indeed, as we've mentioned earlier, it's not that we are accelerating our store openings here, it's more driven by comps at this year, but we also stay committed to point-of-sale network of around 12,000 stores. Of course, we opened new ones, but we also closed some of these. But you're absolutely right. The number that you're seeing right now are largely comp driven, but we also remain opportunistic, and we keep opening stores, just not to the extent that we've seen in the previous years. When it comes to confidence of net sales. Of course, the more we get into the year, the more visibility we get. But fundamentally, there's no change compared to what we have seen 6 weeks ago. It's the same structure that we announced 6 weeks ago, it will be 3% to 4% in the first half, to accelerate into the second half to get to the guidance for the full year of 5% to 8%. And of course, as we go into the year, we have better transparency on what's the timing of the supply chain shortages are? How we mitigate these? As you mentioned earlier. So the better we understand that the more transparency we have on it as well. But generally speaking, it's unchanged from a confidence point of view compared to 6 weeks ago.

[Antoine Belge, Global of Consumer and Retail Research]

Okay. Maybe just a follow-up just on Europe. Is the return to growth linked to the first shipments of Euro 2020? Or there is still hope that Europe could come back to growth maybe before Q4?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

No, it's not linked to 2020. We clearly said, the first half it will be negative in Europe but the second half is growth. So for the full year, we intend to grow, that's easy mathematics with the first half is decline, the second half is growth. So overall, we are going to return back to growth, but it has nothing to do with 2020 at what happened in 2019.

[Operator]

The next question comes from Piral Dadhania from Royal Bank of Canada.

[Piral Dadhania, Analyst]

Thanks for taking my 2 question as well, please. Please, you could elaborate a little bit more on the channel dynamics we've seen in the first quarter. On my estimation, it feels like most of the top line growth is driven by retail with household flat to slightly down in the first quarter. Could you just give us an indication of how you expect that to evolve and what the order book looks like as we progress through the year? I think you commented on new launches expected to accelerate as we move through, but just wanted a bit more color on that, firstly. And secondly, just on marketing spend. Again, the phasing as we progress through the year, there is a step down relative to the high prior year comp given the world cup. What type of percentage of sales should we expect for the full year?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

We are going to see -- on the margins, I will continue to spend probably absolutely more than last year that means you're going to see a slight leverage. But the plan is and will remain every time we see opportunity, we will continue to push into the brands. You should expect this slight leverage, but not a matured leverage. And the first quarter, just to put that into context, is purely a sequence. So you should not read into the relative number of guidance for the future is that we expect to be slightly above previous year, which gives you a slight leverage. On the channel mix, I'll hand over to Harm.

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Yes, on the channel mix, indeed you are right. We have flat environment in wholesale, and we had DTC growth of 18%. And this is again, a specific quarter in Q1. And looking forward, don't expect this to be the channel mix. And as I indicated earlier, the new product launches are working well now on channels, and we expect them to help the wholesale growth in the second half and that's what we're seeing in the order book as well. So there will be -- every quarter will have a slightly different ratios going forward as the mix is changing more towards an acceleration of wholesale and that is something you will see in a -- I don't want to call it declining, but in a less favorable gross margin, but also on the other hand, it will be more favorable on the operating overhead as well as you will see then leverage in the future quarters as wholesale is growing then -- more than in Q1 and the DTC share is not as prominent as it is in Q1. So every quarter will be slightly different from a ratio point of view, but that something you should expect. But for the full year, as we said, we want to grow across e-commerce significantly, we want to have positive comps in retail, but we also definitely want to come back this growth in wholesale.

[Operator]

Next question comes from Elena Mariani from Morgan Stanley.

[Elena Mariani, Executive Director of Luxury Goods and Brands]

Thanks for taking my 2 questions. My first one is again on your top line guidance. As you said, you now have better visibility into the second half of the year but still, your guided range is pretty wide. If we assume a 3% to 4% in the first half, then in the second half, you would need to achieve something between 6%, 7%, up to low double-digit. Would you be more comfortable now with the bottom range of the guidance given all the additional supply chain constraint that you're probably going to have also in the second half of the year. And if not, could you help us understand the breach between 6% to 7% and 12% that you could achieve in the second half. What could bring you to the top end of the range, that would be my first question. And then my second question is about your footwear growth. It was at 3% percent in the first quarter. My understanding is that the supply chain constraint are mostly related to midrange apparel. So do you see this figure as satisfactory? And maybe could you perhaps comment on which products have worked well? Which ones have not worked well? And what gives you confidence in the reacceleration here? Any indication would be very helpful.

[Kasper Bo Rorsted, CEO & Member of Executive Board]

So thank you. I'll take -- this is Kasper, I'll take your first question. I think it's super important that we give as reliable guidance as that truly possible. And that also means that it will be "unreliable" if we were to discuss our guidance every quarter. So we're not going to change our guidance. We believe that we've guided for the full year on all the line items that we have in the annual report and most appropriately. And should anything change in the last number of years, we've try to change our guidance in the third year up or down. And until then, we do not believe unless something material is happening. It's only 6 weeks ago that we gave the current guidance, and we believe that the current guidance is appropriate and correct in all the areas and that's why I can't comment more on the guidance then we already have done as we gave it 6 weeks ago. I'd like to hand over to Harm, for footwear part of the question.

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Yes, on footwear, it's indeed, it's driven by a decline on the Reebok side, on the footwear side and then it's definitely some of the key contents in lifestyle distribution that we've talked about before. That is not just limited to Europe, we see it to some degree in the U.S. as well on the lifestyle distribution. That's what we see in Q1. But as we mentioned earlier, we also had successful launches with UB 19, it started in Q1, it will accelerate from there and the Nite Jogger only was seriously launched in April and these are things that drive, not just Q2, but to second half in as well to accelerate on the footwear side again. But this is really the underlying reasons.

[Operator]

The next question comes from Andreas Inderst from Macquarie.

[Andreas Inderst, Senior Equity Analyst]

I have a question on Europe. Our town techs and talks with industry experts such as Decathlon will sell adidas products again in Europe. And first, can you actually confirm this? And if we are correct, why did Decathlon decided to work again with adidas? And what is the timeline of the launch?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

So as you know, we have been working with Decathlon for a long very time in the past. They took a strategic decision to abandon a number of brands or be very -- have a very, very selective range. That made us along with Decathlon agree approximately 2 years ago that the fit was not good. Decathlon, I believe, made a management change but you should ask Decathlon about that and that followed a strategy change and that meant that we are now re-engaging with Decathlon. On the European numbers, you should be aware of that the Decathlon business in the first quarter is negative, and we wouldn't give you a forecast for the outlook for the remainder of the year. But of course, we will expect over time to build out Decathlon's business. But it's a strategic change within Decathlon and I think that if you were to understand really the background, I think, they are the best place to direct that question.

[Andreas Inderst, Senior Equity Analyst]

Okay. My second question on North America. Adidas prompt plus 5% driven by the performance so that's good to see. You highlighted some challenges in the more sports inspired channel. What do you expect to be the key drivers beyond the Nite Jogger and the supply chain constraints which should be sorted by H2. So what's beyond Nite Jogger driving the sports accounts -- sports lifestyle accounts in North America?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Yes, as indicated previously, Andreas. We definitely have some challenges in -- on the lifestyle side in terms of further launches, we have not preferably worked in 2018. That's why the Nite Jogger is a good start, but we have more packages coming in the second half that would definitely bring that distribution back to where it needs to be because we clearly lost some market share in that distribution and did again. As [indiscernible] counting all the products that are going to come, but you will see some of these already in Q2 and then we're scaling that in the second half. So I remain confident when it comes to the lifestyle distribution based on the learnings and the not so successful launch in 2018.

[Operator]

The next question comes from Erinn Murphy from Evercore ISI (sic) [ Piper Jaffray ].

[Erinn Elisabeth Murphy, Managing Director and Senior Research Analyst]

Hi, it's Erinn Murphy from Piper Jaffray. Two questions for me. First, on digital acceleration in the quarter. It's -- that's 40% versus 24% in the fourth quarter. Could you talk about any of the key drivers that drove this acceleration and then maybe relatively what you are seeing from your new tier royalty program? And then my second question is a follow-up on Beyoncé. Can you just speak about, kind of, how you are thinking about initial distribution of this launch, will it be a global launch all at the same time? Are there some specific channels or markets that you're targeting initially, and any changes to the price positioning from what Ivy Park had currently in the market?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

Well, thank you very much. I'll start with the second question. It would be too early and too premature to make any detailed comments on where we're going to take Beyoncé. It's clear that she is a high-end brand, speak of that way, the lady herself. And we're going to make use of that and you can see, what we have said that we have more than 1 million impression in the first 24 months, any details as to product positioning and distribution will be premature and that's why I'd like to pass it on to a later call because we're still working through a number of details. When it comes to the 40% growth, let me just go back and then state what I've said in previous quarters also. Our growth in online is very dependent upon, which launches we had within a given quarter. So that's why I would caution you to overly read into a number. We had a 76% growth if I remember correctly, in the third quarter. We had a substantial lower growth, in the fourth quarter. Now we had a strong launch of products in the first quarter along with our Instagram check out that I mentioned, that then drives a 40% growth and what, of course, we're focusing on is ensuring that we have a consistent set of launches. But there will be varying growth rates quarter-by-quarter depending on which kind of launch we are having and also which kind of volume behind the launch. And as an example, we launched the Futurecraft through our online channel, we know it drives high levels of traffic. It does drive lesser volume because volume constraining the product. So that's why you can't read overly much into it. We are still committed to hit around the EUR 4 billion mark by 2020. We are very focus from an investment standpoint on that channel because it is the single most important channel for us worldwide. But the 40% was driven by a number of factors, product launches, Instagram was probably the 2 most relevant.

[Operator]

The next question comes from Simon Irwin from Crédit Suisse.

[Simon William George Irwin, Director]

Could you just take us through the little bit of the shape of P&L in the U.S. and in China, particularly in the U.S. If -- I would have expect it if it had been a strong DTC quarter. I assume it suits one of your biggest markets for DTC, that the gross margin would have been up more and the OpEx leverage less and you've, kind of, done the reverse. Maybe you can just start by, kind of, giving us a bit of color around footwear versus apparel in the U.S? And then obviously China, some huge quarter. I think it's a record margin for APAC and again a big quarter for margin. Is DTC significant there? Or is that of, kind of, big shift entity since it's driving the additional margin?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Yes, first on North America. As you indicated, yes, the gross margin is slightly up in North America. But again, you can read that in the numbers, it's 50 basis points up. Again, we believe there is still an opportunity on the gross margin in such a competitive market. But it's also linked to supply chain shortages that we have. I mean, if you ever see we would grow up to perfection we could definitely drive a better margin in North America. But given the challenges that we have and some of the late supplies that we have it's definitely not helping the margin right now in North America that's really where we are. But given the growth that we had in 2018 and the growth that we want to return to after the supply chain, no shortages, there should be more leverage on the operating overhead, primarily in North America as it's a one market scenario not as complex as Europe. When it comes to China, I won't give or disclose any details on the China P&L anymore because we have now a market segment that is called Asia-Pacific. We continue to announce the top line growth, which is 60%. But of course, also in China, we said that at previous quarters as well that we started somewhat late with e-commerce and we're definitely accelerating e-commerce with one significant initiative. We call it our digital innovation hub that we have in China, it's definitely driving the top line into profitability of any online initiatives that we do in China. And yes, we continue to build out our own retail business there as well. But again bear in mind, we are not going to disclose any more details. But overall, the success of China is contributing significantly to success of Asia.

[Simon William George Irwin, Director]

Okay. And just to follow-up on the U.S. or North America. Was there a negative product mix, I -- was apparel weaker than footwear in the quarter?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

They are growing the digits by markets and on the product type, but don't expect a significant impact in that shift.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Alison, we have time for 2 more questions, please.

[Operator]

No problem. The next question is from Jaina Mistry from Deutsche Bank.

[Jaina Mistry, Research Analyst]

I've got 3 question. The first is on Western Europe, Can you give us a bit more detail around the drivers that drives margin in Q1 in the region. And how much of the 600 basis point increase in price margins was driven by currency? My second question is on tax rate. And in Q1, tax rate was about 26%, do you accept this? And will it also be 26% for the full year?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Yes. First of all on the margin, Europe indeed significant improvement on 600 -- 6.1 basis point -- percentage points. Again, more significantly was the FX impact as, of course, on top of some lower sourcing cost. Again, one of the initiatives is One adidas that's also consolidation of the ranges. So we're getting better margins out of the consolidation of the ranges, and it's a better channel mix as we indicated earlier. When you do more in retail and into e-commerce and primarily in Europe, what I mentioned earlier also was accompany the wholesalers in a declining scenario and the growth of e-commerce and retail is contributing to that as well. As I also indicated the management team only came together as a new team in summer 2018 -- spring/summer '19, prices have been set by then -- are largely set by then other than then Q2 that's where you see more strategic price points starting in Q2, but definitely going into the second half as well that the margin is, to some degree, fading compare to the improvement that you saw in Q1. But again, it's primarily driven by FX, lower sourcing cost and then the channel mix. Less so by a product mix or market mix, these are what are only the 3 significant drivers. When it comes to the tax rates. Indeed, a favorable development. Please bear in mind, we are still at the high end of the tax rates in Germany across the DAX 30 even with the tax rate that we had in Q1, but that is driven by market mix and primarily by the continuation of the improvement of the profitability in U.S. Given our tax structure of that is definitely helping to contribute to a lower tax rate and that's what we continue to drive towards the full year as well without giving any guidance, we are pretty happy with the development in Q1 on the tax rate side.

[Jaina Mistry, Research Analyst]

And just a follow-up on the Western Europe. You mentioned your consolidated ranges, are you now happy with your SKU?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

Well, largely, I mean, we are -- I wouldn't say we are finished, but we made tremendous progress over the last 3 years. And there's still some optimization in the one or the other category. But we also need the trends the consumers are setting with more colors with different materials, so it's a moving thing. But overall, we made tremendous progress and that progress is reflected as gross margin as well. From an operational point of view outside of FX, but I think that we are -- without giving you a number, we made tremendous progress. But still, some work to be done category-by-category.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thanks very much, Jaina. And Alison, we have the last question now, please.

[Operator]

Certainly, the last question comes from Omar Saad from Evercore ISI.

[Omar Regis Saad]

Another great quarter, congratulations. I wanted to dig in on the digital acceleration a little bit more. I know you said there are some key product launches, maybe you can give a little bit more detail around that and Kasper, I think you had mentioned that the Instagram -- shopping with Instagram was a factor as well. Maybe you can give a little bit more insight on that. And I just want to dive in a little bit on my second question back in the gross margin. Such a strong performance. I know some of the drivers are transitory. Maybe help us understand that the mix DTC piece you can size versus FX and the -- that the lower proportionality, help us understand what might we be able to see the flow-through if throughout the year and on a longer-term basis to drive the gross margin?

[Kasper Bo Rorsted, CEO & Member of Executive Board]

So. Thank you for the question. I'll take the first one and then Harm will take the second one. Just for the 4D perspective, we grew 36% last year, so we are pretty much in the same ballpark. Of course, we're growing 40% on a higher base than the 36% was. But the 40% is more or less the range that we need to be in, probably 35% to 36% to 30% and 43%, 44% to get to the EUR 4 billion. There is no doubt that Instagram did have a positive impact, but what we are seeing and what we'll continue to see that when we take our 4D Futurecraft shoes through this channel, it does drive revenue. And when we take -- when it launches, either on apparel products or footwear products. The expansion of the number of launches we have with Kanye this year where a significant amount of those will be online -- we'll drive traffic to our online store and then subsequent generate business outside the Kanye franchise. So that's how we look upon it. We really make sure that we drive more launches through online store being more effective store and easier-to-buy store and then when we look upon the stats which we do very directly, and I repeat what I said since I've been CEO of the company. Every single management meeting we had so far, every single one, this has been on the agenda. Of course, we go through all the key dates and metrics and one of the most important one is the increase in conversion. And we've worked very diligently on making certain that with the shift from stationary engagement to mobile device, we've been able to dramatically increase the conversion rate on the mobile device because the mobile device had a lower conversion rate than the stationary device. So we are looking upon data, conversion rate, launches, check out capability, buyer opportunity and of course, also the app is going to help us, more than 9 million downloads, and it's not only the initial download, it is getting to consumers one connection to us and that allows us to make sure certain that we reach out to those consumers that are most loyal and have the highest profitability from a buy and that's why the app is so important for us. So with 40% in the context of last year was more or less in the same range. The difference is, we're operating on a different size and we grew our business last year by EUR 600 million. Harm?

[Harm Ohlmeyer, CFO, Labor Director & Member of Executive Board]

On the gross margin of the 43.6%, we not going to disclose the details of the impact. But rest assured that the majority of the improvements is coming out of FX and the first quarter and that's what I indicated earlier that is changing quarter-by-quarter. Of course, there's an impact of buyer-to-consumer as well. But we also should look at that in light of the overall industry. I don't see there's any brand in the multichannel environment that post the margin that we had in the first quarter other than probably vertical brands, they can do that. And given the strong dollar that we are seeing right now and looking forward, not just into the second half but also looking to 2020 as you talk about how sustainable, as said, that is our long-term view that's how we should look at the margin as well. That's why we haven't changed the guidance on the gross margin, yes, we are conservative about it. But also looking into 2020, as the year coming after 2019 there's a strong dollar right now. It's in industry-leading margins that we have and yes, the channels will contribute also in 2020. But if you consider that half of the improvement or more than half of the improvement is coming out of FX. It could go another -- the other way as well when we move towards 2020. That's how we should look at the gross margin.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Okay, thanks very much Omar, thanks very much, Kasper and Harm. And thanks to all of you for participating in our call today. Our next reporting date will be the 8th of August for our Q2 results. Until then, we look forward to seeing many of you during the upcoming conference season here in Europe and obviously, on our travels to the U.S. Should you have any questions in the meantime, as always, please don't hesitate to reach out to either Adrian or myself. That's it for today. Have a nice weekend. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes today's call. Thank you very much for your participation. You may now disconnect.