Adidas AG

XETRA:ADS

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the adidas AG Q1 2022 Conference Call. [Operator Instructions] I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations.

[Sebastian Steffen, executive]

Thanks very much, Natalie, and good evening, good afternoon, good morning, everyone, wherever you're joining us virtually today, and welcome to our Q1 results release conference call. Our presenters today are our CEO, Kasper Rorsted; and our CFO, Harm Ohlmeyer. As always, we will kick it off with their prepared remarks, and we will have enough time afterwards for your questions. [Operator Instructions] And now, without any further ado, over to you, Kasper.

[Kasper Rorsted, executive]

Thank you very much, Sebastian, and welcome to everybody from my side also. And welcome to our first quarter 2022 call. I'll take you through the business update as always, the same with Harm when it comes to the financial update. And I will give you the outlook, and then we will be happy to take any questions you may have.

So let's get started. The reality is, that we're operating in a very dynamic environment with heightened uncertainty. The devastating war in Ukraine, the continued challenging market environment in Greater China, COVID-19-related restrictions in the East, supply chain challenges and inflationary pressure, have left their mark on our first quarter results, and they will continue to be leaving their mark on our business in 2022.

Against this current negative industry backdrop, we remain committed to focus on the things we can control, actually manage our growth levels to drive top line expansion and market share gains, all with the consumer at the heart of everything we do.

We're tackling these supply and demand challenges decisively, with a committed team of more than 60,000 employees. With Own the Game, we believe we have the right strategy in place, playing to the structural growth drivers in a highly attractive industry. Together, we'll continue to diligently execute our game plan.

Before I provide you with the detailed Q1 business update, let me briefly share some key takeaways upfront. Brand strength and the success of recent product launches drove strong underlying momentum in all Western markets in Q1, which, combined, grew 13%. This is the highest growth rate in Western markets since Q1 2017.

In the East, businesses across all industries are heavily impacted by the most recent widespread COVID-19-related lockdowns, now affecting 45 large cities in China. This is no different for us. And as a result, we now expect revenues in Greater China to decline significantly in 2022.

At the same time, the original growth targets for EMEA, North America, Latin America and Asia-Pacific, which, combined, represent more than 80% of our business are confirmed and well underpinned by an extraordinary strong order book. And let me repeat, we expect more than 80% of the business to grow strong double digits in 2022.

And while remaining agile, we will not jeopardize sustainable growth for short-term profit optimization. We are well positioned to accelerate our growth and gain market share in this attractive industry in 2022 and beyond.

I said it before, the consumer remains at the heart of everything we do. So let me provide you with some highlights from the first quarter. We continued our Impossible is Nothing campaign with the announcement of our biggest-ever commitment to women, I’mPossible. In women's, we disrupted the marketplace with our broad revolution offering and a corresponding campaign which generated 90% positive sentiment on social media.

In football, we introduced the Real Madrid Y-3 kit with 100% sellout. The in-line Predator grew strong double-digits, with more than 40% growth. And we revealed the Al Rihla, the Official FIFA World Cup Match Ball. In lifestyle, we broadened our franchise portfolio in Originals and introduced Retropy, [ adizero ] and OZWORLD with a DTC approach.

Many of you have seen it at our Innovation Day in March, and I'll further elaborate on it when I discuss the outlook. Our innovation pipeline is filled with strong product newness, and we remain very excited about everything that is yet to come.

And let me speak about our strategic enablers in detail. Technical running innovation, led by the adiStar franchise, continued to deliver, what matters most wins. adidas athletes, Peres and Evans, just won the Boston Marathon. We also secured the #1 spot for both men and women at the New York Half Marathon. So that's 4 out of 4.

At the same time, with continued premiumization of our lifestyle offering with additional collabs, media rightfully called our latest partnership with Gucci the most exciting collab for 2022, while our existing portfolio with YEEZY, IVY PARK, Y-3 and Prada performed strongly.

We have more than 20 halo store openings planned for 2022 to elevate the physical consumer experience. Our brand-new store in Tokyo is the latest addition. And in sustainability, we focus on both storytelling as we scale our commercial offer. We created a full-sized sustainable tennis court in the middle of the Great Barrier Reef, generating headlines globally around the Australian Open.

Now turning to the strength and weaknesses of the first quarter. We saw a strong momentum in North America with 13% growth; EMEA, including Russia, with 9%; and Latin America, with 38% growth. Our DTC first approach continues to deliver strong results as we elevate consumer experience, and this is reflected in double-digit increases in both EMEA and North America.

We are rooted in sport and saw double-digit growth in our performance category driven by football, outdoor and running. And we continue to invest into several brand campaigns to support new product launches as well as into our DTC business and digital capabilities.

Industry-wide supply chain constraints continue to impact our top line trajectory, with production outage and shipping delays still posing a significant drag on net sales development, particularly affecting EMEA and North America.

In the East, sales declined in Greater China, with 35%, and Asia-Pacific, with 16%, as we continue to face challenging market environments, lockdown and difficult prior year comparables, particularly in the case of Greater China. In addition, significantly higher supply chain cost and unfavorable mix effects masked our underlying gross margin improvement. Harm will comment on this in more detail later.

Let's have a brief look at the P&L. In total, industry-wide supply chain constraints reduced revenue growth by around EUR 400 million in the first quarter of 2022. As a result, revenue declined, minus 3% currency neutral, while being up 1% in euro terms. Excluding the external drag, our top line growth would have been in the mid-single digits.

Significantly higher full price sales were more than offset by higher supply chain costs, bringing our gross margin down to 49.9%. Our operating profit came in at EUR 437 million, reflecting EUR 200 million of additional investment into the brand as well as DTC and digital.

Net income from continued operations was EUR 310 million as a result of the pressured gross margins as well as increased investments. Again, I will leave it to Harm to comment in more detail on major P&L development in a few minutes.

In Greater China, as I already mentioned, the continued challenging market environment, COVID-19-related lockdowns in the country as well as difficult prior year comparables, weighed on the revenue development in this market. We'll have a closer look at the current situation in China later in my presentation.

We saw in North America, strong growth in DTC of more than 20%, and it speaks for how well our products resonate with the consumers in the market. The overall increase was driven by high single-digit growth in lifestyle and mid-teens growth in performance, the latter mainly due to exceptional increases in football and outdoor.

In EMEA, we saw double-digit growth in DTC, 12% year-over-year, mainly driven by exceptional increases in own-retail. From a category standpoint, increases were driven by double-digit growth in all performance categories, while lifestyle started to benefit from releases of new footwear franchises and related high drops.

Now let me underline what I briefly mentioned before. The majority of our markets saw strong growth momentum in Q1, EMEA, North America and Latin America. Currency-neutral sales in our Western markets combined increased to 13% in the first quarter despite being supply-constrained. This is a clear proof for the continued strong demand for our brand and products.

From a channel perspective, we saw a double-digit increase in own-retail growth in EMEA, North America and Latin America driven by strong sell-through of new product launches and an elevated consumer experience across our own consumer touch point.

In e-commerce, revenue grew strong double digits in North America, reflecting the lowest level of markdowns ever in the market, while our global full price share was up by 11 percentage points. Overall, e-com increased 2 percentage points versus the exceptional high growth in the prior year period, reflecting growth of 50% versus Q1 2020.

Our DTC mindset continues to be best represented in our membership approach with the rebranding to adiClub, which successfully expanded our value proposition for now more than 250 members globally.

From a category perspective, football increased exceptionally with 31% driven by the latest iterations of our new key footwear franchises, Predator, X and COPA as well as the launch of the Official FIFA World Cup Match Ball.

Outdoor continued its strong trajectory mainly driven by increases in technical apparel. In addition, running increased driven by footwear newness, such as the Ultraboost 22 and adiStar as well as the broadening of the Solar franchise with the introduction of Solarglide.

Within lifestyle, latest additions to our partnership portfolio elevate our premium product offering. At the same time, existing collaborations, such as YEEZY, continues to drive strong double-digit growth with the constant release of Hype products. And Harm will give you the details on our financials before I'll be back with exciting upcoming product releases in our outlook later.

And now, over to Harm.

[Harm Ohlmeyer, executive]

Thank you, Kasper. And let's take a closer look at the markets as our top line development in the first quarter of '22 was still impacted by external challenges on both supply and demand. As in Q4 of last year, Western markets continued to show strong momentum with combined currency-neutral sales growing 13% despite supply chain constraints as a result of last year's lockdowns in Vietnam, reducing our top line by around EUR 400 million.

Let me pause here for a second for an important comment. The fact that the impact in Q1 was lower than expected, so EUR 400 million instead of EUR 600 million does not mean that we got the product any faster. In fact, the opposite is true. Due to the longer lead times, product deliveries are even more delayed than anticipated and would thus also impact our business in Q2.

The good news is, that we were able to better compensate the lack of products sourced in Vietnam by selling more of what we have. This is another clear proof point of the momentum that we are enjoying in the Western markets.

Revenues in EMEA, North America and Latin America grew 9%, 13% and 38%, respectively, driven by increases in both wholesale and direct-to-consumer and despite the negative impact from Vietnam I just mentioned. We will have a closer look at the underlying growth on the next slide.

Furthermore, all of the Western markets recorded another quarter with an operating margin close to or above 20%. In Greater China and Asia-Pacific, the continued challenging market environment as well as COVID-19-related lockdowns continued to weigh on the top line, resulting in net sales declines of 35% for China and 16% for Asia-Pacific, respectively.

Given another quarter with top line being impacted by supply chain constraints, I would like to give you some more information on the underlying growth momentum, in particular, for EMEA and North America. As you can see on the graphic on the upper right-hand side of the chart, EMEA was impacted the most, with more than 50% of its EUR 400 million total negative impact attributable to the particular strategic growth market in Q1.

The majority of the remainder hit North America. So if you have a look at the underlying growth momentum, excluding the negative impact in both regions, EMEA grew 20%, while North America even showed an increase of 24%. This clearly shows that brand momentum and demand in both of our strategic growth markets in the West are well intact and explains our optimism for the remainder of the year.

Let's now turn to the company P&L. As a result of supply chain constraints, our currency-neutral revenues declined 3% in the quarter while being up 1% in reported terms. Our gross margin declined 1.9 percentage points to 49.9%. I will provide details on the development and drivers in a second.

Other operating expenses increased 10% to EUR 2.3 billion, reflecting additional investment into several brand campaigns and the support of new product launches as well as into our DTC business and digital capabilities. As a consequence, marketing and point-of-sale expenses were up 19% compared to the prior year period, while operating overheads increased by 7%. Our operating profit declined 38% to EUR 437 million as a result of the gross margin decline in the investments I just described.

The number includes other operating income of around EUR 20 million related to the Reebok divestiture. As you know, we expect roughly 70% of last year's stranded costs to be eliminated this year. Obviously, with the closing of the transaction having occurred at the end of February, Q1 only reflects 1 month of this. You should expect the amount to increase accordingly in the next 3 quarters.

Our operating margin decreased 5.1 percentage points to 8.2%, and net income from continuing operations was EUR 310 million in the quarter.

Let's now take a closer look at the gross margin development in the first quarter of 2022. I would like to explain the main drivers. As expected, we saw a positive impact from pricing. This reflects less promotional activities as well as selective price increases on DTC exclusives previously announced.

As a result, we saw ASP increasing at double-digit rates in many of our markets; in North America, even by almost 20% across our own channels. On the negative side, we had an unfavorable mix effect, mainly due to the already mentioned sales decline in China, in combination with tough prior year comparables in our e-commerce business.

Lastly, and in line with our expectations, we experienced a significant increase in sourcing and freight costs in total, an additional EUR 200 million just in Q1, which we are not yet able to compensate by the selective price increases introduced in our DTC business. As previously communicated, we expect to see broad-based price increases in the mid- to high single-digit range only in the second half of the year, which will then balance out the negative impact from higher sourcing and freight costs for the year as a whole.

Talking about phasing of the respective gross margin drivers for the remainder of the year, let's take an even closer look at it. First, on sourcing. As previously communicated, we expect supply chain costs to rise strongly in fiscal year 2022. Our freight cost per unit alone will double in '22. This assumption was already confirmed in Q1, and we expect this development to continue throughout the following quarters.

Second, on mix. The sales decline in China is also anticipated to still drag down the combined channel and market mix in the second quarter. In the second half of the year, we expect the mix effect to turn positive driven by sequential improvement in China, combined with strong growth in e-commerce.

As a result, the overall mix effect on our gross margin for fiscal year '22 is now expected to be neutral. At the beginning of the year, we were still planning with a significant positive mix impact on our margin.

Third, on FX. After a flattish development in Q1 due to the impact from the unhedged portion of our currency exposure, we expect to benefit from a meaningful tailwind from more favorable hedging rates during the remainder of the year. This should lead to an overall positive impact from foreign exchange on our gross margin for fiscal year 2022.

Last but not least, on pricing, as planned and announced in March, we started with selective price increases on DTC exclusive products in the first quarter, and we'll continue with that in Q2. The gross margin development in the second half will then benefit from broad-based price increases at the mid- to high single-digit rate on average. For fiscal year '22 in total, we expect a significant positive impact from price increases in our gross margin development.

Now turning to the balance sheet. Inventories were up 12% currency-neutral. Normally, I would feel good about this level of growth. But given that too much of the product continues to be in transit and seeing the demand out there, I would like to see a stronger increase here. And while we still may be somewhat supply-constrained in Q2, we expect to have all the products we need to cater for our growth ambition in the second half. If necessary, we would even compromise working capital optimization for top line growth and market share gains.

Receivables increased 13% currency-neutral, reflecting the strong sales growth in Western markets. And payables were up 29% currency-neutral driven by significantly higher sourcing volume in anticipation of the strong growth we are expecting in the second half of the year. So overall, average operating working capital decreased 3.3 percentage points, 20.4% in Q1 '22 versus 23.7% in Q1 '21.

Talking about elevated transit times, I would now like to have a look at the inventory composition in a bit more detail. Due to the overall supply chain disruptions and the factory shutdowns in Vietnam last year, we saw a strong increase in lead time. And of course, the port congestions are contributing to that as well.

At the end of March '22, still only around 60% of all goods were goods on hand, whereas the rest was in transit, a significant difference compared to the same period in 2021. In markets that are particularly impacted by the supply chain constraints, namely EMEA and North America, goods on hand represented only 57% and 51%, respectively. This clearly underlines how much these 2 markets have been impacted by the lack of product.

While we expect the situation to improve in the course of the year, for Q2, we still anticipate an impact of around EUR 200 million from last year's lockdown in Vietnam, but no major impacts beyond.

Before I hand back over to Kasper, let me briefly provide you with an update on our attractive shareholder returns, another important part of our Own the Game strategy. Until 2025, we plan to return between EUR 8 billion and EUR 9 billion to our shareholders via regular dividend payments and share buyback programs. This will be completed by -- or complemented by returns related to the proceeds of the Reebok divestiture.

Let us go through this piece by piece. We already announced our intention to return up to EUR 3.1 billion to our shareholders in '22. Of this EUR 3.1 billion, we already completed a regular EUR 1 billion share buyback tranche at the end of February. In addition, we will pay out our dividend in May, which represents another EUR 600 million. These regular payouts will be complemented by an additional share buyback program of up to EUR 1.5 billion until the end of Q3 to return the cash proceeds from the Reebok divestiture.

Until today, we have already completed more than 1/3 of the total amount. Again, this share buyback comes on top of the EUR 8 billion to EUR 9 billion from Own the Game. The remaining amount of between EUR 4.8 billion to EUR 5.8 billion will be distributed to our shareholders in the years to come. We have share buybacks of up to EUR 3 billion as well as the regular dividend payments of between 30% to 50% of our annual net income from continuing operations.

And with that, back to you, Kasper.

[Kasper Rorsted, executive]

Thank you very much, Harm. Our priorities going forward are clear. We'll be focusing on leveraging new product drops, our 5,000 brand partners across performance and lifestyle as well as key events to drive brand heat and top line expansion.

As we are still operating in a challenging market environment, particularly in China, we remain focused on the levers we can control and are working diligently on executing our comprehensive action plan in the market. At the same time, we are dedicating attention and resources to accelerate the strong underlying momentum in all Western markets as well as the return to growth in Asia-Pacific.

Ultimately, we have to stay focused on our strategic objective in an environment that continues to be characterized by severe external challenges, while remaining agile, will not jeopardize long-term growth for short-term profit optimization.

I have just said it, we have what it takes to further accelerate our brand momentum. 2022 is a year of sport, with major events coming up in the next few months. adidas will continue to be the front and center of all of these big events. We always promised to live a louder and prouder storytelling. We dedicate the next chapter of our Impossible is Nothing campaign to sustainability and the upcoming Run For The Oceans.

At the end of the day, it all comes down to product. We'll continue to bring strong product newness to the market as we unveil our elevated offer across categories on a constant basis. The best is yet to come, and I'm excited to share key highlights for the next weeks and months.

We are building on the exceptional growth in football, 31% in the first quarter and just launched the Diamond Edge Pack for our key franchises, Predator, X and COPA. We're excited about the upcoming UEFA Champions League with adidas partners, Real Madrid and Jürgen Klopp. And Juventus' latest fourth jersey is the prime example of product newness, bringing football and street art together.

In running, I've always reiterated the importance of bringing the credibility earned through wins at the major -- at the world's major races to the everyday athlete. After the launch of Solarglide earlier this year, we are continuing to scale and diversify our running offer at more commercial price points. The latest iteration of our Supernova franchise does exactly this at EUR 100 price point.

Run For The Oceans will be back at the end of this month. And for the first time since 2019, we will be bringing back a number of physical events at several of our locations. What started some years ago with a few thousand participants is being scaled to the most exclusive -- inclusive community for millions of runners. We are all united in sharing a common goal. Together, we can help end plastic waste.

Outdoor is continuing its growth trajectory as we introduced the latest iterations of successful technical footwear franchises such as AGRAVIC. The AGRAVIC FLOW 2 caters to everyone looking to enjoy dry feet and a super-light feel, moving from road to trail and back.

And leveraging the success of our disruptive broad evolution campaign and product offer, we continue to double-down on women with the introduction of a dedicated yoga range. While launched with a women's-led campaign, the high-performance collections, made in part with Parley Ocean Plastic, is offered at various price points and also available for men.

By introducing Sportswear as a third consumer-facing proposition, focused on comfort and style, we can expand our reach as a brand, while at the same time, be more focused on the consumer. In Q2, we'll be prelaunching Sportswear with an aspirational capsule collection. The incubation will spark consumer excitement ahead of the main launch later this year.

Originals' long-term partner, Parley for the Oceans, return with a collection of iconic styles from the Superstar to the Stan Smith, the Nizza to the Forum, and many more. Each sneaker in this collection has been made with a yarn which contains at least 50% Parley Ocean Plastic. The other 50% of the yarn is recycled polyester.

Last, but certainly not least, we are scaling the all-new NMD S1 with new iterations and collaborations, bringing a completely new look and feel to sneakerheads globally. The RYAT represents a hiking-inspired boot, stemming from Pharrell Williams' appreciation for the outdoors. Launched DTC-exclusive, this boot is the very first of many more NMD drops still to come this year.

Now turning to China. While I had mentioned the challenging market environment before, let me provide you with some proof points on what this means in detail. We're seeing the worst COVID-19 outbreak ever, with daily cases reaching 4x the level than during the initial Wuhan outbreak. 45 cities are currently locked down directly or indirectly, representing around 40% of Chinese GDP. In total, more than 180 million people in China are directly impacted by the lockdowns.

As a result, around 25% of our own stores and about 15% of our partner stores are currently closed. Given the severity of the situation, a sudden rebound seems unlikely as drastic countermeasures, such as strict lockdowns and containment measures, are leading to a significant drop in consumer spending.

Sentiment is heavily affected, with retail traffic declining significantly, even in cities not directly impacted by countermeasures. In Shenzhen, which had been in lockdown in early March, traffic in April was still down more than 20%. Traffic in Shanghai, which represents around 10% of our Chinese business, was down 100% in April, while Beijing, approaching similar levels as of late.

In addition, contrary to the initial COVID-19 outbreak back in 2020, we are currently not observing a spike in our e-comm channel. While Hype releases continues to sell-through well, our in-line business is somewhat more impacted by the negative consumer sentiment.

Lastly, the industry is still facing excess inventory in the marketplace, resulting in an imbalance of sell-out and sell-in. Overall, challenges are severe, and we are focusing diligently on the things that we can control as a brand and together with our strong team on the ground.

We are doing everything in our control to get through the current lockdown as we could as possible, with focus on driving consumer engagement, conversion and employee well-being. We are thoroughly managing excess product and support our franchise partners as they also suffer from limited sell-through. In order to clear excess inventory, both our own and what we're taking back from our partners, we're executing special sales events. In addition, we're offering additional incentives to drive sell-out.

Online, we're driving sales through increased live commerce activities in both our own stores as well as together with our partners. We launched a digital OZWORLD campaign on key social media platforms, specifically targeted at lockdown behavior, and as a result, search volume on e-commerce increased more than 25%, supporting key franchise demand and sell-through.

And last, but certainly not least, the health and safety of our employees has and will always be the #1 priority. Accordingly, we are offering comprehensive assistant programs, including food supply packs or online gym classes to help people exercise. And while all of these levers are pulled as we speak to tackle the current lockdowns, they are, of course, also tying closely to our existing action plan.

We continue to execute our action plan, and we are making progress on key levers identified: one, strengthen our brand heat; two, create more commercial impact; three, improve the range and activation plan; four, optimize our store network; and five, take excess product out of the market.

To maximize our impact, we decided to double-down on selected initiatives. First, we are leveraging our China-for-China product creation team to drive newness in key footwear franchises. This is absolutely critical for our future success in China as it enables us to quickly react to trends in the marketplace and win with the young Chinese consumers.

Secondly, we are strengthening our local storytelling. Our current Chinese New Year and our Impossible campaign are great examples of that, with nearly 4 billion impressions that generated a 90% positive sentiment on our social channels reached. We have strong proof points that our approach is starting to pay off.

Third, we established a program to review and elevate the retail experience while implementing measures for tactical traffic generation, where the situation allows. Fourth, we continue to leverage our most loyal consumers through our experience-led membership program during both Chinese New Year and I'mPossible campaigns. We are actively engaging with more than 30 million members.

Fifth, we're driving in-season sell-through and lastly, remain committed to thoroughly managing our discounting and pricing framework. While all of our focus initiatives are targeted to create an immediate impact, a positive impact, they will further be complemented by impactful actions to connect with the consumers in a post-lockdown era.

Moving to the other markets. Consumer demand for our products in North America is stronger than ever. We want to double-down on the extremely positive market backdrop and remain focused on driving brand momentum through the diligent execution of our game plan. The increase of our women's business across all strategic growth categories remain a priority. We continue to drive the business support by a broadened and improved range and inclusive storytelling. Our product revolution and the campaign around it definitely moved us to the next level.

In addition to major product launches, such as the upcoming NMD, Y-3, IVY PARK and YEEZY drops, we're looking forward to launch our new consumer proposition in Sportswear and Basketball later this year.

At the same time, it is imperative to maximize the channel opportunity. With our DTC-first mindset, we're elevating the physical retail experience to drive traffic and conversion while investing in digital to enable the next generation, next level of personalization.

Membership still represents a significant opportunity in North America as we grow our revamped partner program, adiClub. In wholesale, we focus on winning key selling moments around back-to-school and holiday seasons and take full advantage of the restocking opportunity.

Driven by our improved product offering across both performance and lifestyle categories, we will significantly increase our market share with our key alliance partners, such as DICK'S, with focus on soccer and American football; JD, with a focus on lifestyle, footwear, apparel; and Foot Locker.

And talking about Foot Locker. I'm happy to announce that we just entered into a 3-year strategic partnership with Foot Locker. This partnership will pave the way to nearly triple the respective revenues for both companies across all Foot Locker banners in North America, EMEA and Asia-Pacific, to more than EUR 2 billion sales at retail value by 2025. In 2022, we already expect up to EUR 100 million incremental net sales from the new partnership.

And let me briefly walk you through the pillars of this collaboration. Foot Locker is to become adidas' lead partner for Basketball, spanning the lifestyle and performance category. At the same time, both companies will drive and expand adidas Originals key franchises and Hype products. Foot Locker will also play a prominent role in the launch of our new Sportswear offering.

In order to elevate the consumer experience, both in-store and online, we will provide Foot locker with a dedicated team to create demand and elevate the marketplace. This will involve partnerships on product development and will ultimately result in an elevated premium presence of the 3 stripes across Foot Locker's entire portfolio of banners with [ a special focus ] on key cities that both companies serve.

Lastly, to provide consumers with a seamless consumer journey on and off-line, both partners will increase their digital focus and accelerate the rollout of the adidas partner program at Foot Locker. I'm sure this elevated partnership will enable consumers to experience the adidas brand, our product franchises and innovations stronger than ever.

Now turning to EMEA. Our strong innovation pipeline and bold brand campaigns will fuel the acceleration of the top line momentum in this market as well. And let me give you a couple of examples. To increase traction in key cities, Paris, London, Dubai and Berlin, we're dedicating additional resources to culture marketing. Key cities remain amplifiers of trends, where the experience comes to life and where we connect best with our consumers.

All of our strategic growth categories will play a key role here. In lifestyle, we're driving Hype to scale with key collabs, such as Gucci, Prada and YEEZY and Y-3. And running will build on our comprehensive portfolio across all consumer needs and price points. In football, we are leveraging the consumer excitement leading up to key events, like the UEFA, Women's Euro or the FIFA World Cup. In outdoor, our product range will cater even stronger to the need of the fast-growing group of urban outdoor consumers.

We'll double-down on e-com and implement our innovative Home of Sports retail concept. In the digital space, our revamped adiClub membership program is off to a great start as well as we have introduced new benefits, like the redemption of points for exclusive events and onboard of additional countries.

While our DTC focus remains key to Own the Game, we are increasing the -- increasing allocations and resources for strategic wholesale accounts like JD, Foot Locker, Zalando and ASOS, to drive significant market share gains.

So the building blocks for our top line acceleration in 2022 should be clear. We'll build on continued strong underlying momentum, particularly in Western markets. You have seen in today's presentation, and also live at the Innovation Day in March, we have an exciting pipeline of new and innovative products that will spark consumer excitement and will support our top line development. We'll also continue to leverage major sporting events, such as the Women's Euro and the -- and of course, the FIFA World Cup in Q4.

While over the past 6 months, we haven't been able to deliver the requested volumes to our wholesale partners, starting in Q3, the supply of products will no longer be constrained. This provides a meaningful restocking opportunity for us, and we're going to take advantage of it. On the back of increasing brand heat and a strong product pipeline, we are strengthening our partnership with strategic accounts in Western markets to drive significant share gains.

Summing all of it up, we have what it takes to drive strong growth in wholesale and DTC by converting our extraordinary strong order book and exciting the consumer with our elevated consumer experience, both online and off-line. And it is these building blocks I've just talked about that will help us drive significant top line acceleration quarter-by-quarter, starting in Q2.

Based on the strong momentum experienced in Q1 already and driven by all the exciting product launches, campaigns and events, we are expecting growth in all of our Western markets to accelerate in the second quarter. In addition, our business in Asia-Pacific will return to a growth trajectory given an improvement in market backdrop and supported by easier comps.

And this means that while revenue in China are expected to develop broadly in line with the first quarter, we expect market representation of more than 80% of the business to grow at double digits in Q2. And as a result, as a company, we will return to growth in the second quarter despite the continued sales decline in China and the negative impact from supply chain constraints in the amount of around EUR 200 million.

I've talked about the net sales impact from supply chain constraints we had done before. Let me now put this into context of our expected quarterly top line development for the full year. Back in March, we initially expected this negative impact to be around EUR 600 million in Q1 2022. Now we know that the lack of product due to last year's lockdown in Vietnam reduced our top line by EUR 400 million in Q1, while we expect another EUR 200 million negative impact to our net sales in Q2.

So overall, the negative impact will remain around EUR 600 million, but the distribution over the quarter will be different than initially expected as we are facing additional shipping delays. After Q2 2022, however, we do not expect any major impact from the Vietnam capacity loss. So what does that mean for the quarterly top line development going forward.

As mentioned before, we will return to growth in the second quarter, and April was a good start as all our Western markets as well as APAC accelerated their growth compared to the first quarter. And in the second half of the year, we expect strong growth of more than 20%, which is underpinned by an extraordinary strong order book.

In total, our order book shows broad-based strength in North America, EMEA, Latin America and Asia-Pacific. It is up more than 20% across these markets, with a strong acceleration as the year progresses, reflecting the phasing and scaling of some of our newly introduced products, like NMB, Sportswear, Gucci as well as the timing of events like the FIFA World Cup.

Of course, we know that under the impression of the recent supply chain shortage, retailers tend to order a bit more than normal, but rest assured, we've analyzed our order book diligently and adjusted it for this effect in order to get a realistic picture. And even this adjusted order book looks extremely strong and is ahead of our growth expectations for our markets.

As a result, we're not only confirming our growth expectations for EMEA, North America, Asia-Pacific and Latin America, we believe that the strong underlying momentum in all Western markets and the return to double-digit growth in the company's Asia-Pacific region will allow us to almost fully compensate the lockdown-related revenue decline in Greater China. As a result, despite the significant headwind coming our way from China, we're confirming our 2022 top line guidance at the lower end.

At the same time, we're updating our gross margin guidance to reflect the less favorable market mix due to the significantly lower than expected revenue contribution from Greater China. We will nevertheless continue to invest into the brand, its products, our DTC business and our digital capabilities to support the top line acceleration in our Western markets in Asia-Pacific in 2022 and to secure long-term market share gains around the globe.

Therefore, we also expect the operating margin to come in lower than initial planned. As a result, we're confirming our net income guidance, which is now, however, anticipated to reach the lower end of the previously communicated range between $1.8 billion and $1.9 billion. And since you're going to ask anyway, this outlook is, of course, based on several assumptions regarding the development of the business in China.

Firstly, we expect the steady recovery from the negative impact of the geopolitical situation to continue. Secondly, we're assuming no lockdowns in major cities as of the third quarter. And thirdly, we're expecting sequential improvement from the strong double-digit traffic decline Q2 during the second half. However, we still expect at the end of the year traffic to be down significantly compared to the levels in early 2021.

Before I come to my summary, let me reiterate that in this environment, characterized by severe external challenges, it's imperative to stay focused on our long-term objectives. While we remain agile to manage the challenges we are being confronted with, we will not jeopardize our long-term growth opportunity for short-term profit optimization. We're not compromising on the long-term development of our company. Our 2025 financial targets remain as is.

Until 2025, we still expect our net sales growth at a CAGR of 8% to 10% with 2022 expected to be above this corridor. Gross margin is expected to reach a level of between 20 -- 53% and 55%, and our operating margin a level between 12% and 14%. Our net income from continuing operations is forecasted to grow at a CAGR of between 16% and 18%. And also here, our guidance for 2022 with a net income increase of more than 20% lies above this long-term growth vision.

The achievement of these targets will be supported by less dependency on just 1 or 2 markets but instead a much more balanced top and bottom line contribution across all our markets going forward. This makes us less vulnerable to local challenges like the one we're experiencing in China right now.

To sum it up, the launch of innovative products will continue to drive strong demand in our Western markets and will help us to return to growth in Asia-Pacific in the second quarter. We have various building blocks in place that will accelerate our top line momentum going forward. We'll also continue to tackle the industry-wide demand and supply challenges by thoroughly executing our action plan. In a nutshell, 2022 will be a successful second year of Own the Game with top and bottom line growth above our long-term targets.

With that, Harm and I will be happy to take any questions you may have.

[Operator]

[Operator Instructions] And the first question is from the line of Warwick Okines from BNP Paribas Exane.

[Alexander Richard Okines, analyst]

I've got 2 questions. The first is on your price increases thus far. I appreciate you've only made some small changes so far. But have you seen any volume impact when you've taken up your DTC prices since March?

And secondly, on China, I was just wondering when you talked about your activities to stimulate the market, how should we think about the WeChat live streaming that you've ramped up? Does that tell us that you're more comfortable with the geopolitical situation? And if I could also ask about other activities. How big are the inventory takebacks that you mentioned?

[Harm Ohlmeyer, executive]

Yes. Thanks, Warwick. I'll start with the price increases that we have done in the first quarter already on our DTC only. And we really don't see an impact there. You saw the e-commerce growing only 2%, but that's the comp versus last year where we still were largely lockdowns. But from a sell-through point of view, we do not see an impact from the consumer, especially in Europe and North America. So it's definitely steady state. And again, it's more the impact not having enough inventory that's more the factor, but definitely no impact on price increase. That's why we're also optimistically going into the second half when we grow more broad-based.

[Alexander Richard Okines, analyst]

And on China?

[Kasper Rorsted, executive]

What we are seeing in China, we are seeing, I would say, more balanced landscape when it comes to social media, and we have been able to expand that, and we're also engaged in TikTok. And one of the consequences of the current lockdown could probably be that the focus on having a mobile marketplace might come back. So right now, we are seeing from our side an increased activity on social media. We have not quantified the takebacks, but of course, they will be significant, as you can expect, because right now, we can see the trading volume is down 35%. And I think that's pretty much, given the market, you can see one of our competitors are seeing a similar thing, and we want to make sure that we continue to do it as we speak, so we don't have a problem that actually will accumulate. But we don't specify the number. What we specified was the guidance for the second quarter, which will be in the similar size, around the 35%, as you saw in the first quarter.

[Operator]

The next question is from the line of Adam Cochrane from Deutsche Bank.

[Adam Cochrane, analyst]

The first question is a financial one. In terms of you've lowered the sales and lowered the margin guidance, but the net income is going to be sort of broadly in the same region. Could you just give us the balancing pieces between the lower EBIT and the net income, please?

And then secondly, what are your assumptions on the consumer slowdown in Europe or the U.S. within the second half? And if this does happen to be the case, what measures can you take to given your sort of higher plans for sales growth if the consumer is a bit weaker?

[Kasper Rorsted, executive]

So of course, we look upon how the current market outlook is, and we have not seen any slowdown. And I think that's the important part. So we -- as we said, we have seen accelerated trading in the second quarter. And we also believe that the products we have actually are at price points which are probably not the most relevant when it comes to savings. I think probably electronics or travel is the same. So -- and particularly in a number of countries, we're seeing acceleration. We're not seeing a deceleration.

So of course, we look upon alternative plans, but I do think it's important to look upon the overall situation in a balanced way. And that's why we went out and actually confirmed the outlook for 7% or 8% of our business. And that is the current view we have it. Despite the current trading environment, we're actually seeing a pickup. So right now, we're trading ahead of the curve, and we believe that overall it's a balanced outlook. Of course, if the world falls apart, the world falls apart, but I think we need to look upon it, and nobody would have I would say, expected that we'll be trading at 38% in Latin America in the first quarter, and we continue to see exceptionally strong trading, and as I said, an acceleration in the mature countries. So we believe it's a balanced view. Harm?

[Harm Ohlmeyer, executive]

Yes. I believe, Adam, I forgot your question, right? You're interested in the bridge from a lower operating margin to the same or at the lower end of the net income in absolute. And there are largely 3 factors, and I know it's not easy to model that in, in your respective models given all the currencies and market mix. But the first thing, the most important one is the FX component. There's definitely more tailwind on the top line to have an absolute higher net sales given the strong dollar and strong RMB. That leads, of course, to a lower operating margin as a percentage but to a higher absolute net income on the bottom line. That's the first factor.

And of course, a significant decline is in China. It has an impact on the tax rate mix as well. So we have a more favorable tax rate overall, given the lower profitability in China. And then thirdly, we take a harder look at some of the prior year tax accruals that we have, whether we can look at these and have an opportunity releasing some of these in '22. These are the 3 factors, but the most important one is the FX.

[Operator]

The next question is from the line of Aneesha Sherman from Benchtein.

[Aneesha Sherman, analyst]

I have 2 questions, please. So Kasper, you've answered the question several times on what makes you bullish on 2022. But let me ask it a different way. So you've lowered your FY sales guide by about EUR 200 million if you go from the midpoint to the bottom end of the guidance range, yet the change in guidance for China is maybe about 3 to 4x that amount, depending on what we assume. So I'm curious why the guidance isn't lower for the full year? I know you just talked about -- in answering Adam, you talked about the acceleration you're seeing in Q2. Are you saying that you're now more bullish than you were 2 months ago on the Western markets?

And then my second question is on Foot Locker. Foot Locker, as I understand, has also signed an exclusive deal for Puma's basketball line and continues to have more than 50% exposure to NIKE. So how do you see your partnership as different from what Foot Locker has with other competitors?

[Kasper Rorsted, executive]

So we are more optimistic in the other markets, and that's why we continue to see -- we've continued to see a very strong order book. And as I said, our order book is up 20% year-over-year, and that is above the guidance for the other markets. So right now, we're looking upon -- and of course, our confidence built by the order book and the feedback we get consistently from our wholesale partners across the board. That is number 1.

Number 2 is that we're clear #2 within Foot Locker. We're dramatically improving our basketball offering to a level which I think maybe only one other company in the industry has and all -- with all due respect the size of our Basketball business and that of Puma is different, if I have to say it politely. We're dedicating a product team. We are getting significant amount of space. And if you look upon the size of the business we're striving toward, that is positioning us with a very, very clear #2 and a very strong market share expansion through dedicated teams, dedicated products and using Foot Locker as a primary destination for basketball. And as I said, with the Jerry Lorenzo offering, we have an extremely strong product offering coming out off court and on court.

[Operator]

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

[Zuzanna Pusz, analyst]

So my first question is again on the outlook. I mean, you expect a double-digit sales growth in H2, as you mentioned in the presentation, over 20% growth. So -- and I understand this is -- I mean, it's supported by your order book. But would you be able to tell us maybe a little bit more about the timing of the various product launches or marketing campaign to specifically support it? Is there anything sort of big we can expect to kind of get more confidence on that? So that's my first question.

And the second question is on -- again, on also your partnership with Foot Locker. So as per the press release, you mentioned that you expected to generate over EUR 2 billion in revenue and retail sales by 2025. And there's EUR 100 million benefit this year. But would you be able to tell us maybe a little bit more beyond 2022? I mean, should we expect some sort of calculation we can make that the kind of additional revenue from that will be equally split over the following years, or is this something that is going to maybe accelerate with time? So any incremental color on that would help.

And if I may just ask, I know it's 2 questions, but it's just a follow-up. I mean, there was this benefit in income from the Reebok divestment in Q1 of roughly EUR 20 million. Is this just it, or should we expect anything later in the year?

[Kasper Rorsted, executive]

As you look upon the Foot Locker deal, you can see we're trimming that -- the business over the 3 years, and that is we don't give a timing of it. Of course, the timing will be we'll guide annually on it, but our clear objective is to triple it with EUR 100 million incremental this year, and that's really the guidance we're going to give on that. We will not give any further insight to market campaign of product launches. I think we have spoken about in my presentations with potential launches of sportswear and scaling that with launches of Gucci and scaling that end with Fear of God and our basketball launch coming by the second half of the year. That's the only detail we will want to give at this stage, simply for competitive reasons.

[Harm Ohlmeyer, executive]

Yes. And to add to that, quite honestly, that's why we had all the innovation that we have seen many of these products that are hitting, not just the second half but also going into '23. So -- and again, the confidence is built with what we're getting from our retailers and the order book. So I think everything has been said about this one.

On the Reebok, indeed, we always said 70% of the stranded costs from '21 will be seen as in other income. We have the first EUR 20 million in March, and you can then calculate it through. I mean, there's more coming in Q3 and then Q4. And Q2 and Q3 will be similar, and then Q4, some of the business has been handed over to new owners. So it will be slightly different probably in Q4. But overall, you can assume that 70% of the stranded costs from '21 will be seen in other income.

[Operator]

The next question is from the line of Grace Smalley from JPMorgan.

[Grace Smalley, analyst]

I guess, firstly, when you think about the demand for your category in general, are there any factors that make you think that demand for athletic footwear and apparel is more resilient relative to other consumer categories if we do go into an environment where consumer budgets are being materially squeezed, or how do you think about that?

And then my second question would just be also on the Asia-Pac region. Could you comment in more detail in terms of what's driving those declines in Q1 and also what you expect drive the inflection in revenue growth in Q2 onwards?

[Kasper Rorsted, executive]

If you start with the latter part, it's very clear lockdowns and travel restrictions. That has been very prominent in the first quarter across almost every country in Asia. And that is now starting to open up. There are still certain countries where you're locked down, but that has been very prominent across the board. And of course, the first part of your question is we do believe that athleisure continues to be a very resilient category because people still want to go out, still want to start exercise and still want to be -- take part in sport. And we do think that we're in a category that's characterized as an affordable luxury, and that's why we think it will continue to be more resilient.

And maybe on a question I was asked this morning, the Netflix question. A lot of people have been sitting in lockdown. We still think that everybody has come out. A lot of people are coming out. I think people are sick and tired of sitting in front of a screen and watching television all the time. And I think some of the spend will go to athleisure and active wear categories because people want to start having a normal life again.

[Operator]

The next question is from the line of Cedric Lecasble from Stifel.

[Cedric Lecasble, analyst]

Most of the questions have been asked, but I have 2 remaining. The first one, on the remarks you had about traffic at the end of 2022 in China, expected even if you have the end of the lockdowns, you said it would still be materially below prepandemic. How long do you think it would take for the situation to normalize, especially for Western brands in China, that's the point number one.

And point number 2, regarding the overall athleisure of putting this market, do you think this market has evolved in such a way that it's very different from what it was in 2008/2009, when we had a real downturn in demand given the much tougher macro situation with no crystal ball for what's going to happen in the coming quarters?

[Kasper Rorsted, executive]

I think speculating when you're going to return to something different is an illusion. I think that the spend is more important than the traffic. And I think that spend will come back. But I think that the speculation when human nature will start changing around, again, what we are seeing in China is you are seeing a significant decline in traffic even in countries that are not closed down. And I think it will take a while until people get comfortable with the situation. And so that is one. And that's why I think the important part is that we need to focus on what we can control, and we can control 80% of the business outside China, and there are many things we can control within China.

And what we are not going to do is we're not going to socialize the Chinese problem to the rest of the world. What we are going to do is we're going to try to figure out how we do whatever we can to double down on accelerating the growth and executing the order book. And that's why we said we're not going to kill operating overhead because it might look good in one quarter, but frankly, I think that the consistent message from you and the consistent measure from us is we want to drive growth. And that's why we focus on controlling what we can do and then playing offers in the -- or you can say differently in football language, playing offensive in the markets that you control and playing defensive in the market where you're less in control. And that is going to be the Chinese strategy.

When it comes to the significant impact of the economy, I still think that China at this stage is in a very different position in 2008 and '09. Not only the size of this economy is completely different, but also the diversification of the economy. So we'd assume that it's going to be more resilient.

[Cedric Lecasble, analyst]

It was more about North America and Europe, actually. It was about the state of the market versus 10 or 15 years ago.

[Kasper Rorsted, executive]

I think that if you look at our North America and Europe right now, look upon the unemployment or lack of the same. It's -- I know the interest rate is going up and unemployment is extremely low. I don't think for us, we're going to end up with that position, but that's our assumption.

[Sebastian Steffen, executive]

And I would probably add to that, Cedric, if I may, that we've talked a lot about many of the trends that we're observing in our industry being -- be it higher sports participation, be it athleisure having been accelerated as a result of the pandemic that we've gone through. That's clearly something that we're seeing in many markets that the consumer is coming out of the pandemic with a lot of savings willing to socialize, willing to travel. And this, in combination with those structural trends makes us optimistic about the spending and the development in the Western markets.

[Operator]

The next question is from the lin of Erwan Rambourg from HSBC.

[Erwan Rambourg, analyst]

And thanks for the very thorough presentation. So 2 questions, please. You made a really interesting comment around hitting records in terms of selling at full price, notably in the U.S., if I got that right. And you're implying more than 20% growth in H2. So I'm just wondering how do you balance the risk, the arbitrage of a risk of an overhang and maybe not being able to maintain a sort of elevated portion of full-price sales. In other words, have you sufficiently cut the wholesale orders to ensure you don't move from a scarcity of product to a glut of product that you'll have to deal with? That's my first question.

Second question very interesting partnership with Foot Locker, focusing on a lot of different products but also on the basketball category. With the launch of sportswear and the segmentation of products that you outlined during the Innovation Day, I'm just wondering, are there other partnerships that could be coming? Could you be looking at another distributor with whom you would -- I'm just making this up, but you would announce a football-specific leadership partnership or something along those lines?

[Kasper Rorsted, executive]

So let me start with the last question, and Harm will start with the first one. Clearly, what we are seeing, we're seeing an increased growth within our strategic partners. And so we're seeing a consolidation of that landscape, which is also what we're striving towards. And of course, it would be a natural extension of doing exactly what we're doing. I think the important part is that we have a logical segmentation of whom we do what with. And as I expressed in my presentation, we're seeing a very strong development with DICK'S, with Kohl's and with JD to mention a few and online, of course, with ASOS and Slando. So of course, the more we can segment that, that is not an unrealistic expectation for the future. But right now, we're not speculating in the future. We're trying to execute the order book and get the Foot Locker relationship up to an accelerated level. I can tell you both Dick and I are very excited about the relationship and the focus on it. Again, I spoke to him yesterday. And Roland has done a tremendous job of really building, along with brand, the portfolio. So we're very supportive of that and excited about that, and what come next, come next.

[Harm Ohlmeyer, executive]

And you asked an interesting question on the full-price sell-through. And of course, we are pretty excited about what we're seeing right now in the nonpromotional environment, but we're also not naive. We understand that, in the second half, not just us, but other brands are unconstrained from a supply point of view. We understand inflation is coming. We understand that we're not the only ones raising the prices. So that's why it's really important that, on the one hand, we're not surprised about it. So we got to manage it. And what we're managing is focusing on sell-through. So we have a lot of data intelligence that we focus on. We understand what is selling. We have better data analytics that we built in our DTC business. Of course, we can control prices better. The higher our share in DTC is, and of course, as Kasper said earlier, we cleansed our order book as well. We don't accept every order. So we're reviewing these as well, how realistic these orders are.

And then we need to manage it month by month. We got to stay agile, but we also don't want to miss at the opportunity in bringing new markets -- bringing new products into the market, whether it's in our basketball offering, whether it's the sportswear. So again, the order book is not a loose commitment. It's a solid commitment. Of course, it can slightly change, but it's not fundamentally changing. And that's why we're so optimistic going into the second half. But a lot of that is based on, first, knowing what could happen and, then secondly, managing it month by month and week by week.

[Operator]

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

[Jurgen Kolb, analyst]

Actually, it was a similar question on your order book for the second half, so I'll skip that one. But on Foot Locker, again, sorry, also not being very creative, but Foot Locker, how does that cooperation work. I mean, is there a guaranteed volume that Foot Locker has to take in? Is there a guaranteed selling space or shelf space that they now guaranteeing to Adidas. So how does that work so that you can be so confident that you're adding this significant amount of revenues to the top line?

[Kasper Rorsted, executive]

Jurgen, before I go there, let me first address probably the most important part for you. Congratulations on Frankfurt yesterday.

[Jurgen Kolb, analyst]

It was a bit rough.

[Kasper Rorsted, executive]

Yes. The likelihood that you will win is probably low because you're not playing in the 3 strikes, but it's good that you got that far. On the Foot Locker relationship, let me go back to what I said on a number of calls we had following the annual meeting, or the annual results. The important part is that a relationship has to be mutually beneficial. And that means that we have to offer an incremental product set to Foot Locker to ensure that, quote/unquote, that they have something that others won't have and, in return, that we get a better and elevated shelf space and positioning within Foot Locker. That's really if you were to oversimplify it. And that is what the relationship is about.

And then, of course, we have mutually worked on a plan that describes products, activities, launch activities, marketing activities on our side and from their side what I just this, but of course also the elevated product positioning. Let us monitor business plan. That business plan amounts to a buy, and we assume that buy is a realistic buy going towards the number that we're speaking about, and that's been agreed on both parties. Of course, eventually, the buyer will only come to fruition as soon as we sell it. But we don't sit and do these plans and don't think we're going to sell it.

So there is a mutual obligation. But of course, there's no point of us selling too many products if they don't sell. But at the same time, if they sell well, we'll sell more. But it is a plan that is mutually agreed with numbers and activities and signed off on both sides in a very high level of detail, and now it's up to both sides to make sure that it happens and being executed.

Jurgen, maybe since we spoke on this, I've been traveling quite a lot in the last couple of weeks. And those of you who want more proof points, I was in London. Today, I spent a lot of time also on the JD stores. Our product position today in a JD store compared to 6 and 12 months ago is night and day. And I think that's why we continue to also to be excited about it. And if you want to see it just go down -- up the street and see the position we have today compared to 6 months ago. And that's clearly a reflection of the improved product set but also the great relationship we have with the JD.

[Operator]

The next question is from the line of Elena Mariani from Morgan Stanley.

[Elena Mariani, analyst]

I will stick to 2 questions as well. My first one is a clarification on the gross margin dynamics by region in the first quarter. When I look at the year-on-year development, I think that some of the dynamics have been a bit counterintuitive. I think you've mentioned a very strong full price environment in North America, for example, and sales were up quite a lot versus your own expectations, but gross margin was down, and you've done a lot also in Latin America. So when you look at the development of the gross margin by region, could you clarify a little bit these moving parts? That would be very helpful.

And then my second question goes back to China. So did I understand correctly that you would expect Q2 to be still down around 35%, so in line with Q1 but then the second half of the year to improve but remain in negative territory? So if you assume that the lockdowns are going to be much over by the end of Q2. Why not expecting a stronger acceleration in the second half of the year? What makes you believe that you cannot go back to the expected growth that you were incorporating in your previous guidance? It was a bit unclear to me what your embedded outlook is for China in the second half?

And then a final small clarification still on China. So given the lockdowns and the excess inventory, is there a risk of another large buyback as the one that you have done back in 2020, or you're not in a position to do something like that because the situation is a bit better versus 2 years ago?

[Harm Ohlmeyer, executive]

Well, lots of questions. Let me try to sort all of these. So let's start with the gross margin by region. First and foremost, I focus on some regions because there are different reasons for it. So in EMEA, first and foremost, of course, we have a positive development given the hedge position that we have with the U.S. dollar to the euro. We already had that also last year, so it's a positive development in EMEA from a gross margin point of view, from an FX. In North America, you would have expected the full price sell-through. The gross margin looks better, but it's significantly impacted by air freight, get the product into the market because the highest demand, it's really in North America for our products. So it's really impacted by air freight. First and foremost in the first quarter, there will be a little bit in the second quarter as well, but you see a significantly better gross margin in the second half in North America.

And then Latin America, even though it's growing 38%, you would expect there's a higher gross margin. In Latin America, as currencies are very volatile. We are not hedging up to 80%, and we have very strong currencies there. So you really have an FX on a continuous base in Latin America that was impacting the first quarter. This is really the gross margin by, I would say, EMEA, North America and Latin America and the China and APAC is balancing each other out from a gross margin percentage point of view.

In China, you actually heard it correctly. We said in Q2, it will be a similar decline in China versus Q1. So you can assume another 35% decline, which would mean the first half is down by 35%. And then we said we're not going to grow the second half. We say it will be around flattish in the second half. With we believe is sequential improvement still being negative in the third quarter but also turning positive in the fourth quarter. And we should not forget we had been 24% down in the fourth quarter '21 already so definitely easy comps. And I really want to make it very clear as well. We are not talking about geopolitical tension anymore. We have a reset based on political attention. Q1 was still an impact from that. That was down. But now we's are talking solely about lockdowns. This is the only reason why we changed the guidance in China. It is lockdown related.

The last question, and I hope I covered all of it, can it be as bad from a returns of products as in 2020? I would say no. In the assumptions that we have that we are flattish in the second half and that we are not significantly impacted by lockdowns of a lot of cities in the second half, we believe it's more a normal course of business supporting our franchise partners with some of the take-backs. That's what we started during Q1. We will continue to do in Q2. That's why it's 35% down again around 35%. So take-backs will be part of it, but we always know we can sell in less, but we also need to support our franchise partners. But that is a little bit more than normal course of business given the situation that we're in. But we largely believe we're somewhat more back to normal in the second half. That why we believe flattish is an assumption in an uncertain environment. That's really where we are.

[Sebastian Steffen, executive]

Thanks, Elena. Natalie, we have time for 2 more questions.

[Operator]

Our next question is from the line of David Roux from Bank of America.

[David Roux, analyst]

I just had 2 financial questions, both on margin. I think firstly, I'd just like to better understand the OpEx investments this year. I think your targets for the year loosely imply that you should achieve some operating leverage for the full year. I'd just like to understand which cost lines you think this will come from given that you absorbed a bit of OpEx in 1Q?

And then the second is on gross margins. Am I correct in assuming some of the initiatives in China to rectify the excess inventory will be a bit of a gross margin headwind this year? And if I'm correct, where's it reflecting your gross margin bridge for '22? Is that in pricing or sourcing?

[Harm Ohlmeyer, executive]

No, it's really from a gross margin percentage. I'll start with the second question, David. From the gross margin percentage, taking back the product doesn't really change anything gross margin, just changed the absolute net sales and the absolute margin but not the percentage. That's why you don't see it in the bridge from a percentage point of view. And then secondly on the OpEx, we definitely had planned to have leverage for the full year, but given now the new guidance of China and not compromising on our growth and investment in the other markets, we're probably not seeing a lot of leverage. We still need to go through some of these puts and takes, but what we're investing into is definitely supporting the growth in our growth market in the Western World, keep investing in our digital infrastructure and our digital proposition, especially in e-commerce but also on digital wholesale.

And as we said before, we're leveraging through GBS, global business services, but we're also investing into our new infrastructure called S/4HANA. So we're replacing our apparel and footware solution, SAP, we see latest on S/4HANA. That is an investment that we do not want to stop and compromise given China because that is bigger for the company than just China. That's really where the investment goes in.

And I'm not sure you talk about just operating overhead or OpEx overall. We will also keep investing into marketing. And again, with the drag on China on the top line, of course, leverage is more difficult there, but we will definitely take a look at that depending on the overall development.

[Operator]

The last question is from the line of James Grzinic from Jefferies.

[James Grzinic, analyst]

Two super quick ones. The first one is, can you perhaps clarify what your full-price ratio currently is? Would be very interesting. And the second one, also on freight rates, perhaps, when did you hedge? And when are those hedges lapsing, please?

[Harm Ohlmeyer, executive]

Well, in the full price sell-through, we don't disclose any more details. So we mentioned a little bit about what we do in North America on DTC, where we have a good visibility. But when we talk about the overall company, just not reliable data that we have across all our wholesale accounts. So that's why we don't disclose that one.

On freight rates, we're not really hedged. We have contracts with our forwarders. We have been somewhat protected last year with a contract that we had in place. And again, we have a new contract for this year. But again, that's why we have been somewhat protected last year, and it's more pronounced this year because we hit fully compared to last year. But again, they're different providers. We have different lengths of contracts, but we're not hedging. We're going into different lengths of contracts with our forwarders. And we believe '22 will still be a difficult year, not just from a comp point of view but also overall freight rates. Depending what's happening in China to overall supply chain, which so far we don't see an impact, we are very optimistic about demand and supply growing and balance again going into '23. So there should be, from a comp point of view, benefits emerging in '23 compared to '22 when it comes to freight rates.

[James Grzinic, analyst]

Can I just follow up on that point on freight rates? I appreciated sum of many contracts, but would it be fair to assume that you broadly refresh those forward contracts at the end of '21, and that forward by covers most of '22. So you'll be looking at renegotiating that at the end of this year. Is that fair?

[Harm Ohlmeyer, executive]

And that is correct. I mean, there would have been an option to lock something in with one of the partner for 3 years, but we said let's say, agile. So -- but you're absolutely right. It's locked in for this year, and then there's a new game going to next year, and we believe it will be more balanced.

[Sebastian Steffen, executive]

Thanks very much, James. Thanks very much, Natalie, and thanks very much also to Kasper and Harm. And of course, also thanks very much to all of you.

Ladies and gentlemen, this concludes our first quarter results conference call. As always, if you have any questions, please feel free to reach out to any member of the IR team or to myself. We're very much looking forward to being in touch with you over the next couple of weeks, either via phone or physically meeting you at some of our upcoming roadshows and conference attendances. And with that, all the best. Thanks very much again. Have a nice remainder of the day. Happy weekend and all the best.

[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.