Adidas AG

XETRA:ADS

Earnings Call Transcript 2021-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the adidas AG Q1 2021 Conference Call. [Operator Instructions] I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thank you very much, Sylvie. Good evening, good afternoon or good morning wherever you are joining us virtually today, and welcome to our first quarter 2021 results conference call. Our presenters in today's call will be our CEO, Kasper Rorsted; and our CFO, Harm Ohlmeyer. We will kick it off in a second with the prepared remarks from Kasper and Harm, which will be followed by the Q&A session. [Operator Instructions] And I guess now we can kick it off. Over to you, Kasper.

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

Thank you much, and welcome, everybody. First, I'll start with a high-level view on where we stand. [ Then I'll look ] upon our business and the achievements we have in Q1. And Harm will then subsequently take us through the Q1 in further details. And finally, we'll discuss the outlook and of course, also share our excitement about the product launches and the sporting events that we have ahead of us.So let's get started. Own the Game is a growth strategy and, of course, executed by adidas team. We launched it in March, and right now we are in execution mode across the entire company. It has the consumer at the heart and gives us a very clear direction until 2025 and is brought to life by our team in 3 strategic focus areas: the increase in brand credibility, the elevation of the experience for our consumers and the push of the boundaries on sustainability. We have that enablers that will set us up for success: the mindset of innovation across all dimensions of our business and the acceleration of our digital transformation throughout the entire value chain. We're off to a good start and will create significant growth and value towards 2025. There's no doubt that we have what it takes. We believe that the people come first. It's the main force behind our relentless drive for innovation and exciting products. The consumers want to be part of our journey, and we are inviting them to create change with us through large-scale activations like Run for the Oceans. And with collaborations, we are sharing our mindset of innovation with partners and collaborators to create never-seen-before collections and drive brand heat. And of course, we are looking very much forward to the key events that we're seeing in 2021. We're also looking forward to having athletes return to the stadiums. Trevor Lawrence, the #1 NFL draft pick, is the latest addition to our team, joining idols like Patrick Mahomes and Aaron Rodgers on our strong American football roster. We want to continue our mission to be the best sports brand in the world. And we're best when we are the credible, inclusive and sustainable leader proud about the external recognition but committed to pushing further. We're excited that we again were selected for the TIME Magazine's list of the 100 most influential companies globally. And this list highlights businesses that make an extraordinary impact around the world and included for industry-leading sustainability initiatives. We also continue to defend our top spot among the 10 most reputable companies globally in the Global RepTrak 100 ranking. In addition, we continue to do very well in employer ranking, such as LinkedIn's top companies. And we strive to be the best, and diversity and inclusion is a top of our priorities. And together with our strong commitments of our employees globally, we have launched further initiatives to drive greater diversity and inclusion in adidas. We've implemented a new D&I learning program on a regional level. We have created additional inclusivity training for HR and line managers. We've launched the [ Edwin Moses ] mentoring program in North America. And I'm sure many of you remember the greatness in the '80s when he was the world best athlete and has been with our family for many, many years. And we're very excited to have former Olympic athlete Jackie Joyner-Kersee nominated to join our Supervisory Board at the AGM, which will take place next week. And we made good progress on the hiring targets we set ourselves for Black and LatinX employees in the U.S. Now let me come to the business update. Consumer is at the heart of our strategy, and that's why we'll start with a business update with consumer highlights. When it comes to credibility, the UB 21, Ultraboost 21, is the next generation of our most -- one of our most successful franchises. The member exclusive drop sold out in less than 48 hours.In addition, we continue to build credibility in technical running with the adizero Adios Pro. The adizero family took no less than 6 world records since September 2020. And as a result, adidas athletes now hold 2/3 of the world records in the major mid- and long-term distances. Promotion, as promised, we're working hard on improving basic items for women. And in Q1, we took an important step with our D2C exclusive launch of our innovative bras and tights.Also, the successful launch execution of the German Football Federation jersey led to a 5x the demand on e-com compared to the normal jersey launch. And of course, we are very much looking forward to hosting the German team here in Herzo for the upcoming European championship. We formed a new collaboration with Peloton to authenticate training, and we've seen exceptional e-com sell-through. And on the ZX, we kept the release cadence high to further grow the ZX franchise. And the ZX Krusty Burger hype drop was 25x oversubscribed, and we also saw a strong spillover into the apparel range. When it comes to experience, in Dubai, we opened our most digitally connected store, over 60 consumer-facing digital touch points and a focus on sustainability, women and innovation. We confirm that our digital destination for launching hype products is also now in Europe available. And when it comes to sustainability, Stan Smith, Forever one of our most iconic franchises becoming sustainable activated by campaigns with Stan Smith himself and Disney Kermit resonate extremely well with consumers.Now let's look upon the store trend. The global store opening rate trending downwards in March. When we last spoke to you in mid-March, approximately 95% or a bit above 95% of our stores were open globally, 70% in Europe. The opening rate deteriorated to below 90% in the remainder of March, driven by additional lockdowns in Europe. In Europe, the opening rate even decreased to below 50% at quarter end. The trend has reversed in recent weeks, and more later when I will discuss the outlook. Looking upon the overall quarter. On the weaknesses side, we continue to see retail still -- retail traffic is still significantly below prior year, even though mostly compensated by higher conversion rates in e-com. The gross margin is not yet back to the pre-pandemic level despite healthy inventories due to FX only being a drag, and Harm will take you through that in further detail, but there are many good things in the quarter. Our growth strategy, Own the Game, is off to a very good start, and execution kicked off across the entire company. We've seen better-than-expected top line recovery with sales above the 2019 level and 27% year-over-year driven by exceptional growth in D2C with 31%. We saw an over-proportional growth in e-com, continuous with a 41% sales increase on top of 35% growth in the year -- in the prior year quarter. This means the e-com revenue almost doubled over the 2-year period.If we look upon the P&L at a glance, we saw excellent revenue growth and strong profitability improvements. The revenue increased, as I said, 27% in Q1 and was achieved against the backdrop of prolonged lockdowns in Europe and industry-wide supply chain challenges. Excluding these external factors, our growth would have been in the mid-30s. The operating margin of 13.4% almost fully recovered to the pre-pandemic level. Harm will comment again in more detail on the major P&L developments. Now let me speak about our growth markets. In all our key markets, revenue increased above the pre-pandemic levels. In Greater China, we saw a growth of 156%, driven by successful Chinese New Year's collections. And I'll speak about the latest development in this market a bit later. North America, we grew 8%, and the growth was led by double-digit increases in D2C reflecting the momentum we have with our products and campaigns. We also saw strong growth with our key wholesale partners, particularly DICK'S, Finish Line, JD and Kohl's and look forward to continue driving our business with these accounts. Growth would have been in the strong double digits, excluding the impact from the port congestions. In EMEA, we saw a growth of 8%. The D2C revenue grew by more than 20%, driven by exceptional growth in e-com with 65%, and strong full price momentum, which helped us compensating the prolonged lockdowns in large part of the region. Excluding the impact from these lockdowns, growth in EMEA would also have been in the strong double digits.Now let's move on to the growth channels. E-com continues to drive profitable D2C-led growth. Our e-com sales were up 43% on top of the 35% growth in the prior quarter, almost doubling over the 2-year period, the result of our strong sell-through trends and growth in full-price sales. The D2C revenue increased 31% and accounted for more than 1/3 of total sales. And we added more than 30 million members this quarter alone, our most profitable consumers, to our digital ecosystem. We rolled out our membership program in Latin America, and we confirm that for exclusive product drops now also launched in Europe. And from a category standpoint, our growth was led by footwear and our strategic categories. The global revenue growth was strongest in footwear with 31% and driven by strong double-digit gains in the training, running, outdoor and lifestyle categories. We saw excellent growth in running as we launched our next-generation of Ultraboost, the franchise [indiscernible]. Our outdoor business, up close to 60%, with exceptional growth across all markets, driven by Fastest Known Time trail running campaign and our successful product drops like the Terrex Speed Ultra. In training, we saw exceptional growth of more than 30% as our women's [ dedicated innovation ] in this category went live. We successfully activated the 4DFWD apparel line and launched the Watch Us Move campaign. And now I'll hand over to Harm, who will take us through the quarter in more detail. Harm, please?

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

All right. Thank you, Kasper. And good morning, good afternoon, good evening around the world. First of all, we want to look at our market map again. As you know, we recorded growth in all of our markets in Q1. Kasper already provided you an overview of our 3 strategic markets: Greater China, North America and EMEA. Let me reiterate that both North America and EMEA had grown strong double digits in absence of the external factors we mentioned, reflecting our strong brand momentum. The brand momentum is global and enabled us to also grow in our 2 other markets within a still changing environment. In Latin America, we recorded a top line increase of 18%, driven by exceptional D2C growth of 45%. While the pandemic continued to disrupt store operations, sales in Asia Pacific increased 4%, with exceptional growth in e-com around 46%, in context of continued restrictions in several countries and limited travel to destinations that usually depend on tourism.Let me point out that we have not only experienced strong top line improvements, but also saw profitability and margins recover across all markets. North America and Latin America deserve a particular call out as their operating margin levels in the high teens are high even by historical standards. Now I'll take a look at the P&L in more detail. The commercial success of our products drove Q1 results ahead of our expectations. Currency-neutral revenue increased to 27%. Our gross margin was up 210 basis points to a level of 51.8% and is already back at the pre-pandemic level before currencies, which I will explain in a minute. Operating expenses were down 5% compared to the first quarter 2020. Our marketing and point-of-sales expenses declined versus prior year as physical marketing activities remained restrained in many parts of the world. But we pushed social channels and digital marketing investments to support our D2C storytelling. Operating overheads increased 1%, mainly due to higher logistics costs related to our exceptional e-commerce growth. In addition, as planned and communicated in March, we incurred temporary stranded costs related to the intended divestiture of Reebok in the amount of around EUR 60 million. As a result of strong top line recovery, significant gross margin improvements and the continued cost control, our operating margin at 13.4% returned to a strong double-digit level.Let's now take a closer look at the gross margin development during Q1. First, I would like to recall the drivers in the prior year quarter for your reference. Back in Q1 2020, the negative gross margin development was mainly driven by an unfavorable mix impact due to the overproportionate sales decline in Greater China as well as higher sourcing costs related to the purchase order cancellations with our suppliers. In Q1 2021, this development basically reversed. The gross margin increase was supported by lower sourcing costs as the significant purchase order cancellations did not reoccur. The impact from a more favorable business mix, reflecting the exceptional growth in both Greater China and global e-commerce ahead of the 2019 levels, was also favorable. These positive effects were partly offset by a less favorable pricing mix. To be clear, we experienced another pricing improvement versus previous quarters. However, it was still a headwind year-on-year, given that the prior year quarter has not been impacted by COVID-related promotions. So before FX, which was a drag of more than 2 percentage points in Q1, our gross margin was already back at the 2019 level. The negative currency developments then led to the reported margin of 51.8%. For the remainder of the year, we expect our healthy inventories as well as product and brand momentum to support further reductions in promotional activity. In addition, currencies will turn in our favor in the course of the second half of the year. All in all, this will lead to a significant gross margin increase to a level of around 52% for the full year 2021. Following the P&L discussion, let's now turn to the balance sheet. Adjusted net borrowings amounted to EUR 3.3 billion at quarter end. This represents an improvement of EUR 1.5 billion compared to the position 1 year ago. As you might be aware, we decided to change our definition for net borrowings in context of our first-time investment-grade rating obtained during 2020. To be clear, we did not restate any of the underlying items entering the calculation, and the prior year values you can see here are fully comparable. And finally, our equity ratio remains solid at 33.6%. Let's look at our operating working capital. Inventories and operating working capital decreased. Inventories were down 8% currency neutral year-on-year. This development was, of course, supported by the exclusion of Reebok inventories, as the prior year restatement of the balance sheet is not committed under IFRS. I want to emphasize though that inventories were also down year-on-year on a like-for-like basis including Reebok. I will further speak about the healthy inventory vision -- position on a separate slide in a minute. Receivables were down 12% currency-neutral year-on-year, reflecting our continued emphasis on cash collections. Payables were down 17% currency-neutral year-on-year as our payment terms with vendors continued to normalize, given our comfortable liquidity position.Now let's take a deeper look at the inventory development. As you will remember, we had already arrived at a normalized inventory level at the end of 2020. In addition, we made use of our operational flexibility and repurposed event-related and Evergreen products that were originally meant to be sold in 2020. Instead, we are now selling them through the first half of 2021. As a result, we were able to reduce our inventories further during the first quarter, with a healthy composition across markets despite some adverse impacts from the prolonged lockdowns in Europe. As mentioned before, the further decrease was supported by the exclusion of Reebok, but the overall trend looks no different on a like-for-like basis. In short, inventories developed fully in line with our plan, and the healthy inventory position makes us well prepared for the expected significant sales and margin recovery in 2021.Now let's look at the planned Reebok divestiture before I hand this back to Kasper. As you know, we decided to launch a formal process aimed at divesting Reebok already in February. Even so Reebok is now reported within discontinued operations, I'm pleased to share that the brand experienced a sustainable business recovery in Q1, with net sales up double digits backed by a strong order book going into '21. The overall sales force is well on track, and we are confident about the successful future of the brand and the team behind it. We recorded strong interest during the completed phases of the sale process. We will, of course, inform you on news in this regard as and when appropriate.With that, back to you, Kasper.

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

Thank you very much, Harm. And we're now coming to the outlook. But before I go there, I will speak about our focus, and then I'll move to the product pipeline and the financial aspects [ surrounding it ]. Our #1 priority remains driving brand momentum after we ran out of the gate fast. We also continue to engage and win members, our most loyal and profitable consumers. At the same time, we have an action plan in place to mitigate industry-wide supply chain challenges and meet the increased demand for our products. But most importantly, we are preparing for welcoming our consumers back in all parts of the world. With more than 1.2 billion people vaccinated globally and a big part of that in the U.S. and Europe, we are optimistic about a fast return of public life. With return of public life, we will see the return of real sport events. The months ahead will be packed with major sport events. Cup football finals, UEFA Cup EURO, the Cup Americas, the Grand Slam and of course, the Olympics. Most of those are planned to take place with fans in the stadium, and it's great to have sport back for the fans. We will showcase our brand on all of those major stages through our effort and teams amplified by overarching brand campaign, Impossible is Nothing. And against this backdrop of significant brand awareness, we'll have an array of innovative product releases that will cut through and continue to drive our growth momentum. I will take you through some of these key events and launches in some more detail. We promised to become louder and prouder as a brand communicating with consumers with one voice. In this period, we launched our biggest brand campaign ever, Impossible is Nothing. We are at our best when we see possibilities, and seeing possibilities where other see limits have always been our innovative engine. Together with more than 3,000 partners around the world, we drove massive brand awareness, with more than 150 million views in the first week of the campaign alone. The campaign will run over the coming weeks and accompanying major sport events and product launches. Our attitude, Impossible is Nothing, comes to life through our actions. We want to help end plastic waste by uniting people all over the world to take part, raising awareness of marine plastic pollution. What started just a few years ago with a few thousand participants will be expanded into the most inclusive digital and physical community presence for millions of runners. And we hope that you'll mark your calendars and run with us in the month of June. And in football, our home game, we will finally have the major federation tournaments, the EURO and the COPA taking place immediately after club football season. We are the official kit manufacturer for 8 out of the 24 teams in the EURO, including Spain, Belgium and Germany as well as for the COPA host countries, Colombia and Argentina. And we're excited to welcoming the German national team on our campus, where they'll have their home base during the EURO. The preparation is on full spring -- full swing, and of course, we'll do the utmost to be the perfect host. And the excitement is also building ahead of the Olympics. It's an excellent platform for us to showcase our performance credentials and innovations with more than 4 billion viewers. 11,000 athletes from more than 200 nations will compete in 33 different sports. We have partnered with many of them in outfitting 14 Olympic teams and 35 federations. And just yesterday, we launched the official outfits for the German and the British Olympic teams. At the Olympics, personally I look forward -- or most forward to the running events. As you know, we are on a winning streak with our adizero Adios Pro franchise, which makes our fastest runners even faster. So the 3 stripes will be highly visible at the major sporting events this summer. We're also highly visible in all things sustainability, implementing sustainability innovation at scale by making our most popular products also our most sustainable ones. And we just delivered an industry first and launched Made with Nature iterations of Stan Smith using Mylo, a mushroom-based material that performs like leather. And after 3 generations of prototypes, we're also commercializing Made to be Remade. The Ultraboost Made to be Remade will be exclusively available for our members. The shoe is made to be worn, returned and ground up and then remade into a new pair. This is only the beginning. We will be introducing Made to be Remade concept to more franchises and categories very soon. And besides the record-breaking adizero Adios Pro franchise with its Lightstrike technology, we have another major midsole innovation coming out into running. The 4DFWD is the first performance running shoe that applies our innovative 3D printing technology for measurable performance benefits tested by thousands of runners. And we've released the franchise just a few days ago with a D2C-first focus. And we'll then scale it with iterations for the Olympics plus additional colorways later in this year. With consumers running on and off-road, our outdoor team innovates for consumers that enjoy spending time in nature. To that end, we introduced a Swift R3, our most versatile outdoor footwear franchise. And for products like Swift, we are piloting new sustainable business models. Consumers in France can rent our products and return them after the outdoor [ convention ]. Renting has become a major movement as younger consumers want newness and [ the greatest gear ] while at the same time still looking for sustainable ways to shop. First introduced in -- Forum, first introduced in 1984 as the most innovative basketball shoe at that time, the Forum has become a streetwear icon. It relaunched as tip of our basketball lifestyle push, which will be led by Jerry Lorenzo and our team based out of Los Angeles. When it comes to the ZX, we will see a high launch frequency in this area, our newest lifestyle franchise. After having successfully launched the ZX 2K Boost with selected drops last year, we are going wider now and scale the ZX franchise. By doing frequent drops of limited ZX colorways and collaborations, we are striking the right balance between driving awareness and going after the commercial opportunity. While many of our existing iterations like the ZX 1K or ZX 2K or ZX 8000 are already new favorites for our consumers, we're excited to launch the latest addition to the family, the ZX 5000 later this year. We're convinced that this will elevate the entire franchise to the next level. We've also established hype as a proven mechanism to drive brand heat and growth. We drive hype to scale by managing the volume and number of drops we're putting into the marketplace through our digital ecosystem. And let me give you one concrete example. We used our CONFIRMED app for sneakerheads for hype drops of the Bad Bunny Forum. We achieved triple-digit oversubscription rate for the shoe, and more importantly, gained thousands of new members through cross-selling into our digital ecosystem. Other sought-after drops, like the ones from the ZX series or the collaboration with LEGO, are being executed according to the same proven recipe. Now let me speak about the store opening trend, which we are seeing having an upward trend since Q2 -- since the start of Q2. The prolonged lockdowns and store closures in Europe had a negative impact on the global store opening rate throughout the Q1, but it has improved in recent weeks. Lately, lockdowns have been easing in several countries in the region of vaccination where -- in the regions as vaccination campaigns gain speed, improving our store opening rate in Europe to almost 80%, up from 50% by the end of the first quarter. As a result, our global store rate is at 91% as of today, up from 89% at the end of Q1. And we expect they will be approximately 94% by next week. So we will be able to execute our strong product pipeline into more stores, online as well as in physical stores. We have put a dedicated plan in place to mitigate the industry-wide supply chain challenges. And while store openings improved and are north of 90% now, we still have to deal with some industry-wide challenges on the logistics side for the time being. And there are 3 aspects to consider. Freight costs have increased. We're seeing capacities are constrained, especially regarding the availability of containers. And port congestions have led to delays, especially in the U.S. Those are the results of the long-lasting pandemic and have recently been intensified by the issue in the Suez Canal. We've been able to mitigate a significant amount of additional logistics costs, and all products that were stuck at the canal have been passed or diverted with an average delay of approximately 2 weeks. However, as a result of this disruption, there is still an overall shortage of container capacity, which could lead to further delays and/or higher freight costs in the months to come, especially if we decide to make exceptional use of air freight. After all, we want to ensure available -- availability of the products that consumers desire, even if that comes at somewhat higher logistics cost.Let me be very clear. These external factors will have an impact on our business, with the exact magnitude still uncertain. What is certain, though, is that whatever the impact will be, it's already fully reflected in our 2021 outlook. We're also looking forward to welcoming our consumers back in all parts of the world. Consumers want to engage with our brand because we're not only offering great products but also unique experiences. While we always iterated that we put health and safety first, we're excited to physically reconnect to our consumers as vaccination campaigns gain speed around the globe. We're prepared to present the best the brand has to offer, the best experience, the best products, the best artist collaborations and location-based surprises and exclusive treats for our members. And wherever our stores are opening and we're able to welcome our consumers back, we can clearly see the desire to consume is strong. We are excited about the consumers returning to our stores, and we can see their excitement about our brand firsthand. The demand for our products have been stronger than expected across channels, which speaks to the healthy brand momentum. As a result, we're upgrading our full year sales outlook, and we now expect to grow at high teens rate. This upgrade comes despite the impact from prolonged lockdowns, the supply chain challenges I just mentioned as well as the geopolitical situation. In the second quarter, we expect a significant sequential acceleration, with global currency-neutral sales projected to increase by around 50% year-over-year. This exceptional growth will get us back to the 2019 levels in the second quarter as well despite continued headwinds. So turning to China. Let me first point out that our first priority is to show consumers' appreciation and respect. This applies to China and every other market in which we operate. After a significant drop in traffic across physical and digital channels in China at the end of March, we have experienced a slow but steady recovery throughout the past couple of weeks and expect this trend to continue. In the second half of April, we have started to tell our brand stories again on our digital channels. In addition, we have started to revitalize physical retail and participate in events like 5/5 shopping festival in Shanghai. So while the trend is positive, it is still too early to tell what Q2 in China will look like in detail. Accordingly, we have built several scenarios for that. These scenarios are reflected in the Q2 guidance for around 50% global growth and in our full -- in our upgraded full year top line guidance. And all of these scenarios are also fully reflected in our unchanged bottom line outlook for the year. Regardless of these scenarios, we continue to expect strong growth in China for 2021. And looking further ahead, there is no question that China will remain a fast-growing market and one of our long-term growth drivers. So in summary, we are confident that 2021 will be a very successful year. We delivered Q1 ahead of plan despite being restrained by external factors. We saw an exceptional growth in D2C, which is reflecting our strong brand and product momentum. And against this backdrop, we upgrade our full '21 outlook this year to be very successful -- with this year to be a very successful start of our new strategy cycle. We continue to expect strong growth in China in 2021 and an even higher-than-expected growth for the company as a whole, executing the game across the entire company as one team, along with our more than 50,000 employees. Now let me come up with an announcement that we would like to invite you to an Innovation Day in the fourth quarter. As you've heard, we are very confident about our trajectory due to the brand and product momentum we are seeing. Today, we have zoomed in on Q2 product releases and stores, but this is only a fraction of our innovation pipeline. To do the quality of our innovation pipeline justice, we will host a dedicated day on innovation during the fourth quarter. We are optimistic that we'll be able to welcome you on campus to give you an exclusive and comprehensive preview of unreleased platforms and products for 2022, including our new sportswear range. We can't wait to have you here and experience our world of sport. And with this, I'd like to thank you for your patience and attention during our presentation. And Harm and I would be delighted to take and answer your questions and answers -- for you answers -- questions.

[Sebastian Steffen, Senior Vice President of Investor Relations]

We're now ready to take the questions.

[Operator]

[Operator Instructions] The first question is from the line of Graham Renwick from Berenberg.

[Graham Ian Renwick, Analyst]

I just have a couple, just firstly on China and the consumer boycott. I was just hoping you could quantify just how much of a negative impact that had been to China from the end of March to date. And what assumption you have for China embedded in that Q2 guidance of 50% growth? Just so we get a sense of the size of the headwind and also how strong you're performing elsewhere. And are you currently ceasing any product launches and marketing in the region? And if so, when will that resume? And then just secondly on inventory, you exited Q1 in a very healthy position, which is encouraging. But given the disruption in China alongside the continued lockdowns we're seeing in Europe, I just wondered if you foresee any challenges with inventory build again, and whether you think there's a risk that the promotional environment could, in fact, intensify again in China and Europe?

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

So I'll take the first question regarding China, and Harm will take the inventory position. So while the trend is positive, it's still too early to tell what Q2 in China will look like in detail, and we will not disclose the details any further. Accordingly, we have built several scenarios for that. These scenarios are reflected in our second quarter guidance for around 50% global growth and in the upgraded full year guidance. And all of these scenarios are also fully reflected in our unchanged bottom line guidance. Regarding these scenarios, we continue to expect a very strong growth in China for 2021. And that's all the detail we will give you and can give you on China at this stage. Harm?

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

Yes, just on the inventories in China, of course, we got a lot of experience in 2020 how we deal with inventory. And the good news in China is that on the one hand, we have scaled our effective online base. Secondly, we are in the sourcing region. So we have more flexibility to optimize the second half, especially Q4, from an order profile point of view. And then of course, we have to manage it, whether we move some of the orders that we placed with respect to other markets where we have additional demand. And again, all of this is baked into our guidance from a top line and also from a margin and from a bottom line point of view. So again as I said earlier, Graham, do not worry about the inventory position that we have. We will manage through this one market by market.

[Operator]

The next question is from the line of Andreas Riemann, Commerzbank.

[Andreas Riemann, Equity Analyst Consumer Goods]

Two questions. One again on China, maybe a comment on the celebrities. Are these local celebrities coming back to work with you again? This would be my first question. And then the second one on the reopening situation, do you observe similar behavior of customers across countries whenever there is this reopening? Any observations you can share with us would be appreciated.

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

So we still have very many celebrities under contract in China today. And of course, we are in intense dialogue with those who left us. On the reopening, you have somewhat similar patterns. And the overall pattern is that traffic is lower than before and conversion rate is higher. That's the overall, I would say, similar pattern. And as you can see, the opening is still very different. In the U.S., most stores are opening. In Europe, we are slowly opening up. But overall I would say, and this goes almost across all industries, traffic is down, conversion rate is up. And that is also built in, in the scenarios that we have looking forward, and that it's going to take a while before we're going to see the same kind of "congestion" or density in the store, if you want to use a nicer word.

[Andreas Riemann, Equity Analyst Consumer Goods]

Maybe in terms of categories, after reopening, is there a particular category that is benefiting or another one that is not benefiting? Anything you could call out here?

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

Of course, everything that's related to sport is benefiting, running, team sports, tennis. What's still dragging is football in Europe because the football fields are closed. And what we do expect is that when you start seeing opening of the stadiums, we expect a dramatic increase in the licensing sales. We will see -- or we are very confident that the entire [ fan gear ] will explore the moment you start opening stadiums and people in stadiums or around stadiums, so when public gatherings can start watching football.So with the increased opening rate, we expect that will be the place. And as I'm certain you follow, all stadiums are opening up with very few exceptions. For the EURO coming up, with participation rates between 20% and 100% in the stadium. So we do expect a strong increase in the license sales. And of course, when you start playing football again, you start buying new boots again.

[Operator]

The next question is from the line of Zuzanna Pusz, UBS.

[Zuzanna Pusz, Head of European Luxury Equity Research]

So my first question is on the top line. So you've upgraded your top line outlook, which basically at the low end implies a very mild top line growth in H2, I think, sort of low single-digit if we take into account your strong Q1 and also the Q2 outlook. So -- and that is despite the fact that -- I could be wrong, but I think majority of your product launches should be hitting the trade in Q3. So can you explain to us whether that cautiousness is driven just by rather conservative assumptions around China? Or is it just the fact that you may not be sure if you can convert full year order book if the environment is still uncertain? So any color around how we should think of sales outlook in Q3, Q4 would be very helpful. And my second question is on China. I guess it's just a follow-up. But you mentioned towards the end of your kind of presentation that the trend is positive. You mean there's a sequential improvement? Or have things turned positive? I guess the market is quite -- well, it's not the easiest one to reach, so the comps are over the place. So it would be very helpful to get an idea of what did you mean by positive. And also maybe broadly, what are the assumptions for China in Q2, given that it should have a pretty meaningful impact on profitability in the quarter?

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

So from a low end of Q1, we're now seeing a slow and steady recovery. And we're not giving any guidance on China for Q2. The guidance of 50% includes our assumption for China, which we are not giving.

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

Yes. No, you're absolutely right when you look at the second half. We also shouldn't forget, we are still in a global pandemic. Of course, we have different scenarios for China that we built in our guidance. And again, we need to look at things that tourism isn't back. We don't know how travel will come back overall. But that's really how we look at it. But our focus is really quarter by quarter, how we drive growth and ensure our brand momentum and how we will invest in the second half as well. And that's really what we are focusing on right now. So again, we're enjoying the momentum that we have right now. There's no reason it shouldn't continue in the second half.

[Operator]

the next question is from the line of Jurgen Kolb, Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

Just one question. With respect to the Capital Market Day, you talked about and you introduced the second sportswear line, sportswear as between Performance and Originals. And I was wondering if you could share some feedback from retailers how that collection has been received and in what stage you are from that collection?

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

So the retail feedback is still very limited because we've only had the conceptual conversation with which they're very excited about. They have not seen the products yet. I went through an extensive product review this week. And if you were to join us in our Capital Market -- no, on our Market Day here in the fourth quarter, you will see that at that stage, we have the full feedback from our retailing partners. There's a lot of internal excitement about the products, which is a full range from apparel to footwear that we will have ready by then. And at that stage, you can see it. But overall, the strategic position has been received extremely positive. Of course, end of the day, it's a product. And we're now starting to see the first samples of our products. And you'll see the full range for 2022, Jurgen, if you were to come to our show in the fourth quarter. So it's very much up to you.

[Operator]

The next question is from the line of Chiara Battistini, JPMorgan.

[Chiara Battistini, Co]

The first one would be on the U.S. market or North America. You've mentioned that then when you gave the guidance for the year, you're expecting this market to grow high single digits. But you're already a high single-digit in Q1 [ in light of port ] congestion. So I was wondering whether maybe your outlook for this market has improved, and we should be thinking about better growth for this market specifically this year? And sorry, a follow-up on China and your brand ambassadors there -- or rather your marketing strategy at the moment. What kind of communication are you keeping there? Are you keeping it low profile? Or how are you managing communication at the moment in China, please?

[Sebastian Steffen, Senior Vice President of Investor Relations]

So Chiara, let me take the question on China and just help you and repeat a little bit all the bits and pieces that we've said about our communication. So we have started in the second half of April to tell our brand stories again slowly on our digital channels. That has accelerated over the last couple of weeks.In addition, we've also started to revitalize our physical retail. We participated in several events, local events, like the 5-5 Shopping Festival that took place over the last couple of days in Shanghai, and we will continue down that road. And we remain positive and expect this positive trend to continue. And with that then, over to Harm on the North America question.

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

Yes, North America, Chiara, you're absolutely right. We gave a guidance of high single digit and delivered that already in Q1. And again, there's brand momentum, and that's why we updated our overall guidance as well to the higher end. And of course, North America is contributing to that as well. But we are not updating every KPI that we have right now. But again, there's brand momentum. There's, of course, a lot of impact from the stimulus checks that are being distributed. So too early to say. But definitely, North America is contributing to the upping -- to the high end of our company guidance.

[Chiara Battistini, Co]

Would you say that, that is the region that is contributing the most to the upgrade?

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

It's contributing.

[Operator]

The next question is from the line of Warwick Okines, Exane BNP Paribas.

[Alexander Richard Edward Okines, Research Analyst]

Sorry, another question on China. I know most of the focus has been on the revenue impact, but have you had any challenges working with suppliers in China relating to the overall issue?And secondly, could you give us a bit of detail on the performance in Western Europe? Obviously, very impacted by store closures, but how do you feel about your market share performance in the first quarter?

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

So again, a very short question -- answer to your first question. The answer is no, there's been no constraint in relationship to any suppliers in China. Harm?

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

Yes. And in Europe I mean, of course, we can only talk about EMEA now and not about Western Europe. But just in Europe, as we have the lockdowns, it's too early to talk about market share. Of course, we have some [ peer ] consumer panels and everything, but market share is too early at this stage. But we are having good momentum in Europe. And again, I don't need to repeat that we had some mediocre developments in the previous years. But strong momentum, especially with the online retailers, and especially with our D2C business as well driving tremendous growth with e-commerce in that market. And of course, with some of the pure players as well, just to mention Zalando and ASOS, really good momentum for everyone who is prepared for the digital space. And we will definitely build on top of that going forward.

[Operator]

The next question comes from the line of Geoff Lowery, Redburn.

[Geoff Lowery, Partner of Non]

Just one question, please. Can you talk a little bit more about your e-com performance? I'm very struck by the degree of growth on growth. I'm just keen to understand, really, where is it coming from? Is this new customers? Are you getting more of the wallet of existing customers? Anything by geography? We're just dealing with some very big euro million revenue additions now. So anything you can help us understand on the where and how it's coming from would be much appreciated.

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

So if you look, we have now built a substantial e-com business. And it's almost doubled over the last 2 years. If you take the first quarter, it was up close to 4.5 billion last year. And if you look upon the member -- membership and the number of members, it's up approximately 100 million year-over-year. And a big part of our business is getting through our membership. And what we're striving to do is, of course, through selective launches, making certain that we increase the full-price sell-through to drive higher margins up. And that we're seeing, I would say, with certain differences, but I would say also a lot of equal development region by region. So what we are doing is we're implementing the [ app structure ] we have in different regions, whether it's our membership structure or whether our CONFIRMED app, as you've seen. So it's a consistent global rollout with different maturity in different places. We still need to have the full suite rollout in Japan and Korea, which is coming later. But overall, it's a much more sophisticated engine that is driving a very consistent growth, a consistent rollout of our membership structure and our CONFIRMED structure and thereby increasing also our full-price sell-through coming a lot through our membership base, where I said, we were up 30 million in the first quarter. And if you do gorilla math, our starting point was about 165 million. So we're close to 200 million now, up 100 million a year ago. So very, very strong growth in our memberships, which is, of course, also a much stickier proposition.

[Geoff Lowery, Partner of Non]

Understood. And can I ask how much of your website revenue is done with products that is exclusive to you? And how much of your total product range is actually on your website? Because I'm quite struck by some of the differences between you and some of your partners in terms of what you're actually showing the consumer in the digital space.

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

We are still not show -- by any means, showing all our products online. And that's what we are considering. So we still have a vast majority of expansion we can pull on and have on site. And if you look at the exclusive -- if you look upon overall volume, overall revenue is still low. But what you are seeing is you continue to see an increasingly higher launch of exclusive products, so whether it's LEGO or ZX or the jersey or the UB. So when we bring new products to the market, you're seeing an increasing use of our online site as the first destination either throughout the life cycle, if it's short. But if its a long-haul life cycle, then through the initial phasing of the product.

[Operator]

The next question is from the line of Erwan Rambourg, HSBC.

[Erwan Rambourg, Global Co]

I look forward to seeing you on campus later in the year. Two things, maybe just a follow-up on the online business. I'm wondering how you think about the balance between online and physical stores in an environment where you're now close to 94%, I think you said, in terms of opening. Are you seeing a rebalancing? Or are you still seeing an outperformance of online despite the world reopening somewhat? And then maybe just a more general question on the guidance. You're increasing the top line, but not the margin. Is this essentially linked to reinvesting? Or is it linked to a change in the regional mix maybe with a -- you had China booming in Q1, maybe that moderates somewhat relative to other regions? Or is there something else to take into account, to understand why the margin hasn't moved even though you're increasing the top line?

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

So I'll take the first question, and Harm will take the second. I think we have to separate between short term, long term, right at opening and then subsequent to opening. There's no doubt in the long term that the primary growth driver is going to be online. That's very clear. And the shop is going to be an integral part of our online business, but the real growth is going to come from online. I will have a -- put a caveat in. I think there's a huge appetite for consumers to come in the store. And that is what we see when we open up, particularly in countries where the store has been closed for 2, 3, 4, 5 months. There's a huge appetite to go and look upon products or purchase products in. And that's where you're going to see a short-term deviation probably in the curve and then when you open up, people will run to the stores, to stand in line outside the stores, simply because there's a pent-up -- not only demand for product, but pent-up demand for an experience. So I would not over-interpret the short term. I would say maybe slow down in online and pick up on off-line because it's really the medium term that's the most relevant one. And that's simply just the pent-up demand for social activity.

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

Yes. And the reason why we didn't upgrade the bottom line guidance is primarily 2 reasons. One is the supply chain challenges. So freight rates are already up significantly and might see further increases given the container shortages that we have seen. And of course, the Suez Canal situation didn't help there either.In addition, we also want to make sure that availability of the products that consumers desire. We want to ensure that one, and that might come with somewhat higher logistics costs, especially air freight. We want to make sure that the product is available. That will be a combination of gross margin impact and operating overhead impact. And then secondly, we want to accelerate our marketing spend. We want to build on our current momentum, with sports returning, with spectators, whether it's club football -- club football finals, the EURO, the COPA, Grand Slam, all in front of spectators. And consumers being enthusiastic to go out and celebrate sports. We will invest significantly and welcome them back around the world. So in summary, having said that, it is fair to assume that with the increased sales outlook, of course, the lower end of our guidance has become less likely than it was 2 months ago.

[Erwan Rambourg, Global Co]

Just a tiny follow-up on logistics. I think you mentioned that without the hiccups in Q1, you would have grown in the mid-30s rather than the 27%, which was already impressive. I'm just wondering, the gap of high single-digit that you lost in Q1, do you make up for that in Q2 in part?

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

Largely, yes. That is part of our guidance where we say we're accelerating Q2 beyond the 50%.

[Operator]

The next question comes from the line of Omar Saad, Evercore ISI.

[Omar Regis Saad]

I appreciate all the color. I really wanted to ask for more detail around the supply chain constraints and challenges you're facing. Is it mostly a port and freight issue? Maybe is it happening in the manufacturing end, accessing materials? And do you think the outcome is mostly going to come in the form of a higher costs? Or are you having -- is product coming in late? Are you having trouble getting product in? And then is pricing -- are you going to use pricing as a lever, given this kind of supply/demand imbalance?

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

So let me try to take a stab at it. If you look upon overall, you've seen the freight rate goes up. So this is not an adidas problem. This is not an industry-specific problem. It's a -- you're seeing a recovery, a quicker recovery in the industry than originally anticipated. And that's why you're seeing a dramatic increase in freight rates where the price has come up almost 5x. I believe that normally, a container would be $2,500. Now it's about $8,000 to $10,000. So this is the industry -- this is across industries. You have a much higher demand than originally anticipated. And that's why I was looking upon the Danish company, Maersk, which I'm of course very proud of. They now have the best results ever in the first quarter in their history. So that's what you're seeing, that's not related to us. Then you have -- a second component you have, which was the Suez Canal. And then you have the third component, which is simply just port congestions around the globe where you have containerships sitting outside the harbors. And when they come into the region, particularly in North America, you have a constraint on containers within America. Again, unrelated to us.The only thing you have seen that is really related to our industry has been the political situation in Myanmar. And that has a minor impact because for us because Myanmar is still a very small sourcing country for us. But the other ones are very much related to the global situation. Of course, we are looking upon pricing. I think you might not see increase in pricing. You might see less discounting, depending on the category. But of course, you've got to hit the season. There's no point coming with a pair of swimming pants if you land them in October, then you will be on promotion. So that's the way we look upon it.

[Omar Regis Saad]

Got you, got you. And so to be clear, at the manufacturing level of procuring materials, you're not seeing nearly as much congestion.

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

No, no, no. No, that's not what we said.

[Operator]

The next question is from the line of Cedric Lecasble.

[Cedric Lecasble, Research Analyst]

Cedric Lecasble, I have two follow-ups, if I may. The first one on China not on recent evolutions, but longer term. How should we see the split between the channels going forward, the store development for additions? And in e-commerce, could you give some color of the growing split between own e-com and to global platforms such as Tmall? How should we see things in the future? And the second one would be on your apps. Could you give us maybe the weight of your apps generating e-com sales? So what is the share of e-com coming from your apps? And what are your midterm targets in this field?

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

So if you look upon, we've set ourselves to D2C target of approximately 50% by 2025. You'll see a very similar development in China also. And that means that you're going to see a much stronger growth also in our own retail space and our own digital space. Of course, Tmall and increasingly TikTok will continue to play a very large role in China. But you're not going to see a fundamentally different split between the online and the off-line. You are going to see, of course, a very integrated retail setup. What you might see in China that is different to the rest of the world is our franchise partners, which will be very closely integrated in to our digital infrastructure. Because of course, from a consumer standpoint, he or she will not be able to recognize whether it's a franchise or not. But from a business model standpoint, you're going to see very similar to the 50/50 we have globally. The revenue we are generating out of our -- at our app portfolio is approximately 50% of our total digital revenue. And we know that that's a stickier model. So basically one should assume that there is a higher lifetime value, as we said. So that means the follow-on trading is going to be higher with that structure. So that's why rolling it out and quickly in an attractive way has a very high, I would say, ongoing value for our company.

[Operator]

The next question is from the line of John Kernan, Cowen.

[John David Kernan, MD & Senior Research Analyst]

All right. Congrats on the momentum into Q2.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thanks so much.

[John David Kernan, MD & Senior Research Analyst]

I'm curious -- sure. Harm, just curious on capital structure outlook. A lot of cash on the balance sheet, there is a net cash position. I think a lot of us agree that your stock is very cheap versus many of your peers. I'm just curious how you're viewing share buyback as we go through the remainder of the year.

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

Yes, pretty straightforward answer. Thanks for the question. Of course, we have our annual shareholders meeting ahead of us next week. And so we decided -- or we recommended to get the approval for paying dividends again. That's next week. We always said we want to be a solid and reliable dividend payer first. And then as liquidity allows, we will enter back into share buyback as well. But let's do step by step. And don't forget, we are still in a global pandemic. We also have bond to be repaid in the second half in October. But again, let's wait and see. Let's see how the momentum continues. Let's see how the second quarter works and how consumers come back to the stadiums. And then we will update you accordingly in what we would do in the second half or going into '22.

[John David Kernan, MD & Senior Research Analyst]

Excellent. And maybe just a follow-up to some of the prior questions on Europe. What are your assumptions for -- specifically for Western Europe, which was hit very hard from a lockdown perspective? What are your assumptions in terms of the sequencing of the reopening? And how do you -- how does that fit into your overall guidance for the full year?

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

Well, first, we expect significant growth from Europe in Q2, regardless of the opening. And because we had the lockdowns last year more pronounced, and again, it doesn't really matter when a country or a store is opening up, what really matters is the traffic and the conversion and primarily the traffic that is coming back to the stores, right? And that's where we have a lot of learnings from other markets. And we believe with the summer coming, with sports event coming and sequential opening of the doors that we will have a healthy recovery of our own retail doors. And as importantly, is our wholesale doors as well, that's our assumption. But again, whether it's opening or not, the key topic is the traffic needs to come back, and that is built in our assumption.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thanks very much, John. Thanks very much, Kasper and Harm.Ladies and gentlemen, this concludes our Q1 2020 results conference call. If you have any further questions, be it today, next week or over the next couple of months, as always, please don't hesitate to reach out to the IR team or myself. We definitely look forward to being in touch and talking to you soon. And with that, thanks very much for your participation. Have a good remaining day. Have a lovely weekend, and take care. Bye-bye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.