Adidas AG

XETRA:ADS

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the adidas AG Q1 2023 Conference Call. [Operator Instructions].

It's my pleasure, and I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead.

[Sebastian Steffen, SVP, IR]

Thanks very much, Francie, and good evening, good afternoon, good morning, everyone, wherever you're joining us today, and welcome to our Q1 2023 conference call.

With me here today in beautiful Herzogenaurach, our CEO, Bjorn Gulden; and our CFO, Harm Ohlmeyer. Bjorn will kick it off in a second with his prepared remarks, and then both Harm and Bjorn will be available for your questions.

During the Q&A session, as always, I would like to ask you to limit your initial questions to two and that's, of course, not because the fewer questions you ask, the sooner we will be able to head into our well-deserved weekend, no. That's, of course, because we want to allow as many people as possible to ask their questions. So please stick to the two question rule.

And with that being said and without any further ado, over to you, Bjorn.

[Bjorn Gulden, CEO & Head, Global Brands]

Thanks, Sebastian, and hello, everybody. I will take you through the numbers, but also take you through some visuals to explain a little bit where we are and what we're doing.

And I think it starts with actually the front page where here, you see the jerseys that we have made for all the teams that will play in the World Cup for women in New Zealand and Australia this summer. And these are jerseys developed only for the female teams, and I'm actually very proud of it. You have 8 teams here, actually have 10 when we go to the tournament. And as you remember from the European Cup in U.K., women's football is incoming, and as you see here, having 10 teams in that tournament shows you that we are heavily investing in women's soccer.

If you look at the numbers, I'm sure you had a look at it so I'll go quickly through them. €5.3 billion in sales, which is basically flat, currency-neutral. And if you then -- as we have to do these days, look at the missing Yeezy, then we are actually up 7% without that. If you look at gross profit, losing 510 basis points is, of course, not good, mainly because of discounts and also write-offs of inventory. Of course, there are all the moving parts, which I'm sure you will ask about later, but that's the major reason. I think that down the road, our gross margin should again go towards 50. But of course, the gross margin will be the biggest problem for the rest of the year.

If you look at OpEx, again, an increase, as you see here, around €110 million. And this is, of course, that part of our OpEx was planned and based on a higher sales. And of course, there's no leverage now when we are so far behind the plan that was originally set. But again, Harm and the team has been very disciplined in OpEx, and that's also then the reason why we actually are then having a small profit of €60 million despite, I would say, all the troubles. And it's actually better than what I had expected because I told you we'll have a small loss in Q1. And again, if you remember, the €724 million loss we had in Q4 then is, of course, a big swing.

If you then look at the top line, minus 20% in North America seems dramatic, and it is, but it's also what we actually planned. If you take the Yeezy business into account and the rest of the business, it's down 5%. And of course, these are not strong numbers, and of course there's a big challenge to turn this around in the U.S. But also here, I do think we have a lot of, what should I say, initiatives in place, and I will take you through a few of them.

Important for us, being the home of football or soccer, we extended the MLS contract during Q1 and that is strategic for us very, very, very important because I do think we have to own soccer around the world. And again, as you will see later, we are trying also to create much more soccer culture for the street. And to do that, of course, we need to play bolt on where we are today but also play on our heritage, and that's why it's important to protect our #1 position in soccer in the big markets.

You see up in the left corner, where we tried some of the things that has to do with street. The designer, Daniel Patrick, worked together with the Red Bull team of New York and also took part in the fashion shows. Again, one of these initiatives to bring fashion, music and soccer together in a similar way that we're actually doing in basketball.

Then we had Patrick Mahomes, the best football player currently, and of course, him being the MVP, we have also started to use him more in our marketing.

Very, very important in America is the festivals. And as you probably know, during the last 3 years because of COVID, there was little activity. Now the Coachella was on the road again, and we decided to overinvest. We had a lot of presence there. And I think for the first time, there was also an Asian, our top group from Korea, Blackpink, our major stage and did a great job for us. We also had a great lineup of other artists and a lot of our athletes was there, and I think it's fair to say that our, what I should say, investment there was the most visible on the Coachella.

I think Coachella then also was topped by our collab with Bad Bunny. You see here him on stage, but you also see our, what should I say, pavilion or launch or whatever you call it. And then the collab shoe, the Campus, that he has developed with us that you later will see is now also a best seller in the high end of the distribution. So this recipe works.

The basketball investment goes on. I have said many times that I think to connect to the street in the U.S., we need to be credible in basketball in the court and then take that credibility on the street through our Classics or through new developed silhouettes. For the first time in the history, adi, I think, had 2 teams in the semi-final or the final 4 of the college tournament. Both Miami and Florida were playing in adidas. We also extended the Grambling State University that plays a big role in the street culture, and of course, we are continuing the signature shoes because it's part of this culture, and here, you see the examples of the Harden Volume 7.

Maybe even more important that we finally were able to launch Fear of God. We did that in L.A. a couple of weeks ago, a great shop with Jerry Lorenzo. We had invited all our hyped customers there and it's fair to say that the reaction was great. You see some of the items on that slide. And here, you see the lifestyle direction on the footwear side. And the second picture is actually the first performance shoe, which is called Basketball 1. There will be a Basketball 2 and there will be a Basketball 3, so you actually see quite some performance shoes coming out of the Jerry Lorenzo's Fear of God. That is also going to be played in the NBA.

I think personally that this is a game changer. You will start to see this product visible during the second half. We will have some commercial launches also at the back end of the second half, and then of course, this should be a major part of our basketball initiatives for 2024 and beyond.

If you then look at EMEA, also here is slightly better than what I thought with a small plus. If you take Russia out, which you kind of have to, at least do for a while in the way you compare it, then we were actually up 9%. And the changes we've done there, remember, we announced or promoted Arthur, who was running the region to now be the Board member for global sales, and he has then decided to divide the European setup in this way that he will have 2 reporting lines. One is Mathieu, who has now been running, for example, the French business. He will be in charge of Europe. And then Dave Thomas, who's doing emerging markets, will not report into Europe anymore, but actually straight into Arthur. So that will be a change going forward. Two very good leaders that I think will help us get more growth in both regions.

If you then go into China, still a negative number of minus 9%. If you take Yeezy out, it's flattish. But what is actually very positive is that the sellout in China is up in all our channels, meaning that our own retail is up double digit, and also, our retail partners are having positive numbers on the sellout. That means that we're currently selling in less than we're selling out, which is, of course, is the healthy way of doing it. And I think it's the first time in a long, long time that, that's happening.

In general, a lot of energy in China when it gets to doing new things and the fact that they're not in any, what should I say, restrictions and that people are working freely and not sitting at home. Here, you see an example of that. They took one of our technical shoes from the '90s, the Climacool and did a tech launch only for China. Very successful, created a lot of buzz, and this technical look that adi used to do in the '90s is very popular, and the Chinese team did a great launch we did back in February.

Also positive is that we have started using celebrities again coming out of, I would say, dance, skateboard and a little bit of music. It's not the way it used to be, but it's starting in the direction. And we see that has an impact both on the traffic online and also on the conversion.

I think more importantly down the road is that we see that the Chinese are back again in sports. All the marathons, 5Ks, 10Ks, half marathons are sold out, which means that people are moving again after 3 years of little sports activity. And therefore, we have, of course, as adidas started signing a lot more athletes and also doing more events. And here you, for example, see the Shanghai Half Marathon which was sold out and we are sponsoring. So more sports interest, which is of course, plays in our direction.

The 2 large regions, both Latin America and Asia Pacific, doing very well. Latin America growing, again, almost 50%. I think it's fair to say that we have a very energetic team that has the tools to grow. Flavia, our female leader there, is doing a great job. And I think we've given them more freedom in both doing local programs and also doing the assortments the way they want to do it, so a lot of momentum. And also in Asia Pacific, you see the positive numbers, so that's a positive thing. And that gives you then the flattish year-on-year sales, and again, the 9% compared to non-Yeezy.

If you look at the channels, wholesale, where we sell into the retailers, and they sell to the consumer, plus 3%, own retail brick-and-mortar plus 11, I think we have 47 less stores now than we had a year ago. That means that the like-for-like number is a little bit higher and it's about 13%, both in our concept stores and in our outlets. And that shows you a positive, what should I say, development for, of course, selling out is more important than selling in.

E-com, of course, different. Reported minus 23% and if you take Yeezy out, it's actually plus 12%. And here you see, of course, that the Yeezy business for our e-com business was very, very important, and we have not been able currently to replace that. And of course, that is then, what should I say, a challenge for the future. You should also know that we're trying to take the promotions down in e-com are trying to protect our franchises. So top line maximization is not the goal of e-com, but it's to make it profitable, protect the brand, and then of course, clear product where that's needed, but not to be promotional on in-line important franchise.

That gives you the split in our channel of 66% wholesale, 34% D2C, which I think is now a healthy balance. And over the D2C, then you see the split between own retail and e-com is the 19%, 15%, which again, I think under the current conditions where we are, it's a pretty healthy mix.

Look at the divisions. Footwear at €3 billion being up 1%, and again, you have to remember despite not having Yeezy. Apparel at minus 3% at almost €2 billion. I think it's fair to say that there's more apparel inventory around in the market than footwear, and I think we expected this, so not a big.

Positive surprise is that the accessory business is growing and currently at 8%. And that gives you then the split, footwear being 57%, apparel 37% and accessory 6%. And again, I have always said in other companies that 50% footwear is a good ratio and here, even close to 60%. And I think we all know that this industry is led by footwear, and that's why I said also here for the future, we have a good starting point.

What I'm very proud of, although I have -- cannot take the honor for it is that I've said all the time that I think the performance pipeline at adi is good. And you see also here, same thing as we talked about end of Q4, all performance categories up, all of them double digit, except for training, which is flattish. And I think that, again, is a healthy starting point because it would have been worse if we now are up in Lifestyle, but down in performance because we all know that, that is more difficult to turn.

Football, the X, the Predator and the Copa, 3 fantastic franchises here in one of our packs. And again, since I'm new, I can promise you that all the franchises going into '24 is even better. And all the interaction we had with the distribution tell us that we look very, very good for '24 in football.

Women's football gained importance. And I already showed you on the left side, the jerseys for the World Cup and also in line with taking this business series. We launched the women's ball, and it's ironic, but now many of the men's tournaments are actually playing with the women's ball because that's the way it is now in the pipeline, a great ball, which is also selling decently around the world.

I talked about trying to bring Soccer more to the streets. One of the things we're doing there is to take all iconic jerseys from the '80s and the '90s and then launched them as streetwear. Here you see some of examples. And you will going forward, also see original product combined with football. And we did, for example, for some of the teams do some bus branded together with the teams and they sold out within hours. So a new way, I think, of using the heritage of the brand in a way that only we can do.

Sustainability, as is important, as always, that's why we continued doing projects. And here is the Predator with Parley, and we will continue to do projects like this.

What is new? We did extend the contract with Union Berlin, probably the biggest surprise in the bonus league, great personality, great people, fits our brand, so we extended that. We started our cooperation with the Kings League, something that maybe many of you don't know, it's a 7 against 7 league in Spain, especially in the Barcelona area. Very, very popular on Twitch. And I say YouTube, and youth channels, something you should have a look upon because it's a different way of actually being in the soccer game, and we are the major sponsor. And then I already said that we extended the MLS contract.

We have 2 running campaigns. One, the Running Needs Nothing But You, where we used runners and other athletes. So you see Salah showcasing the mood of running and also, of course, the product.

And then very important, we did The Ridiculous Run campaign where we talk about women being afraid or running alone outside a very important message and again, very important in our communication.

Very proud again of our products. The adizero franchise, in my opinion, probably the best running shoes out there from a design point of view, but also from a construction, from a weight and from a last. And the reason I'm saying that is that these shoes are winning almost half of the races around the world. And of course, Boston was the most impressive one, we're number 1, 2, 3 and 4 in the Men's class was wearing adizero, and the #2 woman also. And you know when you have the 3 -- the 4 best ones, then it's definitely a credible thing for the products.

Same thing here, proud. Adi, for the third time, had wrote records where they invite 140 of the best athletes in the world to run 5K, 10K and half marathon around our campus. We also had a run for our own employees, more than 1,000 people showed up, and it was a tremendous event for us and I think it's something that only adi can do. We had also other celebrities from other sports. You see Kaká here, if you remember him from Milan and Brazil. And this -- the live of our campus with athletes and our own employees and all the stars is a tremendous thing. And I get goosebumps when I think about it because this is the way I remember adi from the earlier days.

Sustainability, of course, communication-wise and product-wise, very important. We used to do the run for the oceans. We have now widened this into Move for the Planet. The concept is that when you log on to our running app and you do sports for more than 10 minutes, we will donate €1. And the hope is, of course, that as many as our members does that, so we can actually collect as much money as possible to put into the different programs in sustainability, and the campaign starts on June 1.

We also signed with Les Mills as a partnership in training, training being a huge category, especially on the women's side, and our partnership there very important, a lot of activities going on. And one of the activities also our partnership with RHEON where we have taken materials that has been developed actually in the space program with NASA and put that into our leggings and our bras. And again, a highly technical product to build image in the training side and especially on the women's side.

More women. We had a celebration of Mikaela Shiffrin winning 88 World Cups, 2 more than Ingemar Stenamark. And of course, she being part of our family, we're very proud. She also spent the last week here on campus and was an integral part of many things that we did, and a fantastic athlete and a fantastic person.

Outdoor in general, you know there is an Outdoor boom. We have TERREX connected to it. Also here, focus on women. You see here the women hiker. We did collab with the National Geographic, both in footwear, apparel. And here also inspired by the Japanese market. We did a collab with And Wander, which is a Japanese outdoor label. And again, a lot of activities going on both in the true performance, but also in the lifestyle area. And again, Outdoor being now under the TERREX label doing well.

For those who are interested in golf, we finally launched UltraBOOST also in golf. I think it's fair to say that BOOST is the most comfortable form in the industry, and there's no other sport where you spend so many hours in the shoes as in golf, so it was very logic than to put UltraBOOST into golf. And needless to say, the most comfortable shoe in the market, and I can only suggest that you try it because it's the best golf shoe that you can have.

We continued also with more aggressive design on the apparel side. Here, the floral design that we did together with Rose Zhag. She is the best amateur in the world of golf, been that for 3 years. And here, you can see she looks great, and I'm sure she will be pro in a very short period of time.

I'm a sports romantic, many people here are. Adi has always been very visible in many sports, and that's what we're trying again to nurture. We have, since we talked last time, resigned All Blacks. All Blacks being maybe one of the most symbolic teams in the world. They will also be here on campus preparing, I think, 10 days in the preparation for the World Cup in France. And we will launch a spectacular jersey for them during that time, and we will extend the offer into lifestyle because their logo is carrying a lot of lifestyle appeal. So you can see -- or expect to see a lot of interesting things on that.

In special sport, proud that we have 2 female boxers from India who both won the World Title. So again, focus on smaller sports on the female side. And then a special thing in Germany, you will have the Special Olympics in Berlin in June. We outfitted more than 400 athletes of the German delegation the other day. Again, our commitment to sports and very, very important for our DNA.

That was Performance. We have talked about having issues in Lifestyle. You see both Sportswear and Originals still being negative. But we also see some highlights. The TERREX, the range still doing fantastically well. I think the energy in certain markets around these models are great. And you have to remember, we haven't scaled it yet in a way that you see it in the numbers. There are periods coming in as we speak in much bigger numbers, and this will start to have an impact on our business going forward.

New is that we have another winner. That's the campus that you see on the foot of this model. Not a TERREX style, not a Tiro style, but again, one of our classics. And I think that the way we have done collabs, you see it here together with Bad Bunny and you also see the Samba that we did with Ronnie Fieg, is causing a lot of energy. And as you can see outside the Kith store in Tokyo, people are lining up in hundreds to actually buy this product. And of course, that's creating a later high-low effect for our brand.

In general, a lot of activities in lifestyle going on, a lot of positive feedback. Of course, with many things that's still not as scaled, but you know you need to do small things first to get heat back again and then scale them. And I think it's fair to say that when we work through our archive, we are in a very good situation if we can manage this properly. I would not be surprised if you also see shoes like Superstar coming back heavily, as you see in white, black and black-white, because we already start to smell it. The trend magazines and in the, what should I say, fashion areas, and then we will have another winner.

Great job of Adidas with Gucci. I think the Samba boom that we see is coming out of this cooperation, and here, you see some examples of it. And again, I think both the Gucci team and adidas team has done a great job on these lines. And I guess that at least I have very, very many so-called friends who wants to get their hands on this collection, and of course, I will try to help them.

Pharrell talked about it last time, now being the LVHM head lead on the Men's side. Here is his take on the Samba thing where he will launch many, many fashionable colors together with us in the second half of the year. Very cool, I would say, development.

Sportswear also starting to turn around. We now have a positive order book. Here you see the Jenna Ortega and the AVRYN shoe. And again, the things are starting to go in a direction where we also get the right volumes on this.

That was the physical product. We're also dealing with the Metaverse. There was a fashion week end of March, where all the brands were showcasing in that space. I'm very proud that we also here are very active and that actually, our launch was the most visited also in this space. Probably not my world but the world for the younger generation, and we are actually investing quite some time and energy with talent also in this space.

That was sales and products. Very quick on the balance sheet. Inventories, as you can see up here, 25% are reported. That's 27% in neutral currencies. I'll get back to that in a second. Accounts receivable flat, of course, because our wholesale business is flattish. Accounts payable, down €600 million. Same thing again. This is also proof that we're sourcing less, buying less, which is in the strategy of getting our inventories down. And inventories up, accounts receivable flat and payable being down causes then working capital to go up. And of course, this will start to normalize as we get a better balance on these short-term activities. That means cash and equivalents at around €800 million. I think Harm's goal is to be around €1 billion, so we are in the ballpark of the number that he wants to have.

Inventory, just a quick one on that. As you can see, €5.7 billion. The Yeezy part of that is €500 million. If you remember, back in Q4, it was €400 million, so that tells you that there's another €100 million that came in. And this is what we told you that when the contract was broken, we had things in production that we continued with to not what should I say, have people in the factory lose their jobs. And as you can see, then €100 million has been delivered into our inventories also on the books during Q1.

I have the feeling that if you take the Yeezy out, we are at €5.2 billion, which is less than we had in Q2 last year. And I think with the plans that we have that we should have, our inventory in control, both from an amount and also from a mix at the back end of this year.

When it gets to the relationship to the trade, we are leaving the on the game and feel that we now have to earn the game. We have invested over the last 3 months' time, energy and, of course, resources in really showing our retailers what kind of partner we can be.

A couple of weeks ago, we had the owners and the CEOs and the most important people or most important retailers here on campus for 2.5 days where we showcased everything we have. We showed them the pipeline and innovation. We showed them the Campus. We showed them the resources. Of course, we showed them the product. And we also showed them the new creative direction of the brand. And if they have a nice wrist wear, they could also play, for example, paddle with, [indiscernible] and take part in other activities. For me, a great, great event with a lot of good feedback.

We did the same specifically for football. We invited again all the football specialists to be here for 2 days, went through all the product and concepts for '24 and also the innovation pipeline beyond. Had players like Del Piero, Alonso and also our long-term partner, Beckham, here, and again, in a great atmosphere. And again, as being new to the brand again, the feedback on the '24 line is fantastic because I think it's the best line both for footwear and Apparel, including Lifestyle for Original that I have seen.

Running. I told you already that we have the products, we have the technologies. Of course, we don't have the market share yet for A, winning the races and B, having the products. So again, we did the same thing. We invited the specialists to be here for 3 days. They were also here during the Road to Records. And I'm very, very sure that Alberto and his team will get better distribution because now we have the product and look forward, A, to only not get credibility, but also get commercial business in the running area going into '24.

At the other spectrum of our business not in sales, but in sourcing, we did the same. We invited all our suppliers for a 3-day summit in Jakarta where we again presented where we are, both positive and negative, and had a very honest discussion about what we need to improve. Topics like speed to market, topics like local sourcing, and of course, trying to share resources was the major topics. And I have the feeling that was very, very welcome. And again, I love these suppliers because they have experience making products for many, many, many years. And I think we need to use the technology even more than what we have done.

So that was what we have done. A quick look at the outlook. It shouldn't be surprise for you, a big, big focus on the core of the business. Design, development, sourcing, which is the creation of the product. Then marketing and sales and then, of course, delivering it as good as we can. And neither -- or if it's wholesale or DTC, doesn't really matter, we need to do both better than we're doing. And of course, in the middle of all that is the consumer and everything we do need to reach the consumer because if not, it's a waste.

That also means that in '23, we will continue to focus on things that are important to build the base for '24, which would be a better year. And that should again then lay the groundwork for '25 and beyond which should be, I would say, good, good years.

Most importantly, that is our people. It's obvious that the people have had a tough time during COVID, not being on campus. And of course, when the results are not good, the atmosphere is not great. So important that we create that adidas spirit again, which adidas was known for.

Product is king. Without the right product, we will never win, so product is hero. Everything we do should hit the consumer. Retailers is our partners, and I really mean partner. We need to share all ups and downs with them, and they need to feel that we are the best servicing partner in the industry. And then, of course, we are there for the athletes and not the other way around. And that's an attitude that adi has always been known for, and that's what we're trying to wake up again.

You know better than me that there are still some challenges in the environment. The geopolitical tensions and the situations is still not good. There are macroeconomic challenges although, at least what I can see, there are some positives. Inflation is coming down. The raw material prices have come down. Freight has started to normalize, so at least there are some external factors that help us. And then the high inventory levels that you have seen or we have seen are still there, but my feeling is that when we get to the back end of the year, I think the whole trade and the brand should be in a better shape which will, of course, help all of us.

You put that all together, and we confirm our guidance for '23, which we have said from the beginning is a transition year. Net sales with a high single-digit decline and an operating model that is now basically a breakeven. The assumption for that is that we don't sell any of the Yeezy inventory which then translates into a €1.2 billion lower sales and a loss of operating profit hypothetically of €500 million.

In addition to that, we said that we could see an operating loss of €700 million if we have to write off the existing inventory, which would then be the €500 million of the balance sheet. And then on, of course, based on all the strategic changes we need to do of around €200 million. This is in line with everything we told you last time we spoke.

So again, we have all the ingredients for success. I am -- so very positively, I wouldn't say surprised, but confirmed what I've seen. But in the short term, we're not performing the way we should. And I hope you have some patience with us because for us to short term, try to show numbers would not make any sense. We need to manage through the year in the best way. And then, of course, using all the energy to do the right thing also for the future.

So with that, I hand over again to you, Sebastian.

[Sebastian Steffen, SVP, IR]

Yes. Thanks very much, Bjorn. And Francie, we would be ready to take the questions now.

[Operator]

[Operator Instructions]. And we have the first question from Erwan Rambourg from HSBC.

[Erwan Rambourg, HSBC]

Congratulations and good to hear you're alive and kicking, Bjorn, after your recent accident. So I'll keep it to 2 as planned.

Just on China, I'm wondering if you can comment on your vision of Western brands relative to local Chinese brands in terms of market share? Do you think we could see a situation later this year of stabilization of market share? And maybe just related to your business, you said that you were down 9%, and at the same time, sell-through is up double digits. So should we expect a snapback, a rebound in Q2 for sales? Or is that still a bit premature?

And then maybe secondly, I think you made a few comments around the fact that you were hopefully a bit closer to determining exit options for Yeezy. I'm just wondering if you could take us through what the latest thinking is on the possibilities there?

[Bjorn Gulden, CEO & Head, Global Brands]

Yes, I'm doing fine after my ski accident. I never look pretty and I don't look pretty and also enough so small damage, so -- but I'm okay.

In China, we need to be careful because the positive thing is the following. We have so in less to the trade that they have sold out. So that means, for the first time, inventories in the trade of adidas product is going down, and there is a demand that the retailers haven't seen for a long, long time. It's the first time I see this in many, many quarters. And that makes all of us, of course, positive. We also had our 2 big retail partners from China here in headquarters, and it's the first time again that they see, I would say, not on the light of the tunnel, but see some normal developments coming.

That gives our team, which you remember has been almost in 2.5 years kind of quarantine or under heavy restriction of course, have a lot of energy, and there's a lot of activities now going on in China that is consumer fronted. We talked about athletes, we talked about culturally-relevant events. We talk about in-store activities. And also in the social media side, starting to build campaign again to generate traffic and conversion. So that's very positive.

The reason why I'm hesitating to say, okay, that would mean that Q2 and Q3 will be up in sales, of course is again, if I say that and it doesn't happen, you get mad at me so I'm careful. But the indication is, of course, that if this continues, that will happen. It's obvious. And I do think you will see an increased top line coming in China. But don't arrest me on quarter-to-quarter because it's impossible to kind of be certain about that.

My personal feeling when it gets to market share is that, of course, all the Chinese brands have exploited the last 2.5 years and in a very smart way. But I do also -- and again, from everything I can see, feel that is being saturated so that the growth that they got almost for free is starting to slow down, and that you will see Western brands, again, starting to take back some market share. And I, of course, hope that we will take most of it back again.

I do not think that China will be 1-to-1 the way it was because competition is, of course, now harder. But I am counting on China being one of our fastest-growing market and also one of our most profitable markets, if not the most profitable. So I am or we are, I think, realistic, optimistic mid-term about China.

When it gets to the Yeezy, there is nothing else to say than what we said last time. We are working on different options. The new thing is now that all the inventory is now on our books. Most of the inventory are in the right warehouses and that we could theoretically sell product if and when and how is still in the evaluation. But of course, the decisions are getting closer and closer because that's the way it is. And we have spoken to all interesting parties many times, and there are 3, 4 scenarios that are now building.

And as soon as we have, what should I say, all their evaluation done in a way that we and then, to be honest, even our Supervisory Board feel comfortable, we will then go out with the decision. And that could happen in the, I would say, mid-term, in the future.

[Erwan Rambourg, HSBC]

Best of luck.

[Operator]

The next question comes from Simon Irwin from Crédit Suisse.

[Simon Irwin, Crédit Suisse]

Can I firstly just come back to you on China, particularly since you've had the partners in town. How many points of distribution have you now got in China? And has that bottomed out? Or do you think there's kind of a further decline to come?

And secondly, when you talk about the route to margin, you talked about gross margins of up to 50%. So to get to the 10%, you mentioned -- 10% EBIT, you mentioned on the last call, implies at least 500 basis points of operating leverage. I mean, do you -- is it leverage or do you see an opportunity to cut costs? I mean, how do you think you cross that gap and how long do you think it will take?

[Bjorn Gulden, CEO & Head, Global Brands]

The number of sales points in China, if you combine our own, our partners is around 8,000. Now you have to remember that only points of sales is not relevant because it's also the size of them. And what you have seen during COVID -- actually, before COVID that they were starting to open bigger stores. So instead of the numbers, it's also the total amount of square foot. But we have reduced, I would say, the number of sales about 2,000 stores and it's now around 8,000. But it doesn't mean that we have reduced 20% of the square footage because some of the stores are bigger.

I think that right now, that is good, but then I do expect again as the business stabilizes in the growth mode that we can open stores again in the third and fourth and fifth tier cities again, that you will actually see store base is going up again. But again, that's too early to do right now.

When it gets to the gross margin, then 45% is, of course, not acceptable. Even with a 65-35 split between Wholesale and Retail, the margins should be close to 50%, if not 50%. And again, it's not only leverage. It is -- you have to remember that we are running at a very high discount. We have, because of the high inventory, written off high values. And then again, a lot of the inventory that we now are selling have a very high freight because it's been bought at container rates about 10,000 and has also, from the sourcing cost, has the highest price.

So I would be surprised. I'm looking at Harm, but I hope that this is the lowest gross margin that we will have. This and the next quarter are kind of the type of product that has the lowest margin, and then it should start to improve in the second half.

To get to the 10% EBIT, the math is pretty easy. I mean, you need 50%, 51% gross margin. You're running marketing at 11%, and you can have an operating expense of 30%, then you are at the 10%. And this is where we should be, to be honest with you. And that is not impossible with what we have as a business. We just need to get into a normal stage where we're not all inventories, and we're focusing on our Wholesale and Retail business in a more, what should I say, realistic way.

I clearly see the 10%, but I'm not saying to you it's '25, '26 or '27 because then you will be disappointed if we do something wrong. I hope you give us '23 to show that we know what we're doing, that you see some improvement in '24. And then the acceleration of our EBIT then depends on all these factors. But I think we all -- and I'm looking at Harm, we should have 10% as a target, and that should be realistic.

[Harm Ohlmeyer, CFO]

Yes. Definitely, Simon, no doubt on the 10% in the midterm, but I want to echo what Bjorn said on the gross margin. We have reached the lowest points. Q2 already, we'll see some progress given the progress we make in China with the inventory situation, the better sell-out with our customers, largely normalized inventory situation in the next quarter in Europe. And again, North America takes a little longer, but it should sequentially improve.

And then to your question on the leverage on the operating overhead, of course, we are not happy with those 33%, 34% that we have reported recently. But the key thing is to get growth into the company. But secondly, that's what the €200 million onetime cost in this year is also for that we -- if we look strategically at the right elements to put in this €200 million to have a better base for next year. But that is something where we want to be carefully review the right actions. And clearly, the operating overhead needs to get closer to 30%, if not below 30% over time. But this is not something that we will see in the next quarter, so it will take time.

[Operator]

The next question comes from Adam Cochrane from Deutsche Bank.

[Adam Cochrane, Deutsche Bank]

A couple of questions on, firstly, on the wholesale order book. Can you give us any or shed any light on what the order book position looks like for 2Q and 3Q and maybe even early signs for the fourth quarter?

And then secondly, you talked about sourcing more inventory for some of your bestsellers. Can you just talk through how important that could be, how much of the demand you can fill on a reasonably short time scale for those products, which are selling well?

[Bjorn Gulden, CEO & Head, Global Brands]

When I said we're scaling the things that are trending, then you have to remember that many of these shoes, especially the Terrace [indiscernible] were meant to be in what we call incubation. So they started in collabs on high end of the distribution in the second half of '22, like the Gazelle did with Gucci. And then the plan was still to incubate it and built heat during '23.

But when I came in, the demand was so big that we said, hey, we need to scale it now. And that's why we went from some 100,000 pairs to now actually looking at million pairs and we have done that pretty quickly, to be honest. We put brand sourcing, finance and the supplies together with the commercial team and changed all that plan already the third week of January.

And it's easier now because the capacities in Asia and the factories are easy to get because you have to remember with all the inventory issues, there is less orders in the factories than there has been. So we could scale that pretty quickly, and the first time that you actually see some substantial volume hitting the big market is as we speak. It's now in May, and it will stay as a pretty high volume during the whole second half.

The trick now is, of course, it's not only one shoe. It's -- if you look at it, it's actually 4 different styles. There might even be a 5th one coming, and we need to manage them now so that we still, even if we scale it, keep supply lower than demand so that there's still heat and that we continue to do both collabs and other marketing activities to keep these franchises hot, and I think that's a test for us. Can we do that disciplined? And very, very important that commercial and brand and the sourcing side works together, and I think that's how you should judge us if you do it in a good way. But I have a very, very good feeling.

When it gets to the order book, we are not publishing the order book, and there's good reasons for that because if we had, you would see that the order book last year would not be relevant because of all the cancellations. You have to remember that last year, everybody ordered too much, and the order book at the second half of last year was inflated and it was never realized.

That's why it's hard to judge now what is the order book. It is negative against the order book you had in the beginning, but that was inflated then it never happened. And we are trying now to manage the balance between clearing old inventory and then having enough new inventory that is selling through, not necessarily to take all the business. We're not chasing business in the second half because we think that will be too risky.

So don't expect us to show growth in the second half, but expect us to see that we're following the plan of taking down the inventory and then having the basis to have decent margins going into '24. So we are not in change mood to, what should I say, surprised you positively on the top line because the risk of that would be too big. And again, we need to clear the old inventory. So that's the strategy.

[Adam Cochrane, Deutsche Bank]

So if we were to think about the inventory number that you published. Is there a big difference between what's at hand and in transit within that number?

[Bjorn Gulden, CEO & Head, Global Brands]

I mean the transit number here would normally be around, I would say, a quarter maybe, ballpark. And that transfer number is not necessarily a lot different than -- that's actually smaller than last year. It is actually, if I'm really honest with you, it's probably €400 million lower than last year. So -- and you can see that in the payables, right? So the reduction in payable is mostly the difference in transfer because you see we're buying less and also.

[Operator]

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

[Piral Dadhania, RBC Capital Markets]

So could I maybe start with the gross margin? Are you able to share in a bit more detail on the moving parts in Q1? I think Bjorn mentioned that the 2 biggest factors were markdown and inventory write-downs, but just curious if you could share with us the quantification of the other factors, which are obviously FX, channel mix, regional mix and so forth?

And then my second question is just on the U.S. Obviously, the well-flagged pressures in the U.S. market for various reasons. Could you maybe just share a little bit more in terms of detail around how your inventory clearance process is going there? How you see inventories at your -- some of your key distribution partners, whether those are full price or off-price? And how you expect the business to evolve for the remainder of the year and whether you believe you can get to a clean inventory position in the U.S. by the middle of the year as you're expecting for the other regions?

[Bjorn Gulden, CEO & Head, Global Brands]

I'll do the U.S. and then Harm can take you deeper into gross margin. The answer to U.S. inventory midyear, no. The inventory issues in U.S. is bigger than that we can have that normalized the midyear. And the reason being that the inventory level, we are now channeling most of the excess inventory through our D2C. That means that our factory outlets, for example, which normally should have fresh merchandise also coming directly out of factories is now being only serviced by clearance, which again takes your margin down. And there isn't any way right now to clear excess merchandise through channels that you normally do. The value channel with the TJ Maxx's and the Ross' and stuff are also full. So that's why our approach is to do this over 3, 4 quarters and not try to flush it in 1 quarter because it won't help because it will come back again.

So I would say that all other areas the inventory should be, what should I say, normalized during Q3. I think the U.S. inventory will still be there for a while. And again, it will be there for a while in the sense that instead of buying new merchandise for outlets, we will actually fill them with excess inventory. So it will have an impact on the U.S. business for a longer period of time both on the top line and the gross margin line. I think that's the honest answer.

[Harm Ohlmeyer, CFO]

Yes. Piral, on the gross margin, more details without giving you the decimal number because there's a lot of mix effect within the mix effect, right? So we can talk about channel mix, but then there's an Yeezy impact on the channel mix as well.

So I just want to keep it simple. I assume there's not a big channel mix impact. There surprisingly is not a huge currency impact as well in the first quarter. The biggest impacts are actually FOBs and supply chain costs. Especially on the supply chain cost, that's the freight because the freight was peaking in October -- in September, October times last year. And of course, we are realizing the freight cost in the margin when we are selling the product. So Q1 is definitely the biggest impact from a freight point of view.

Then, of course, significant was inventory allowance, given our calculation that we had the first impact of fall/winter '22 inventory being partly allowed for in Q1. And again, clearing the inventory discount. So the significant headwind is supply chain cost, especially freight, inventory allowance and discounts. And of course, to some degree, Yeezy. And then you have a positive, and that's the only positive is pricing that has been carried forward from last year as well. So the prices are still -- they're holding up for the fresh products that we have. That's the first quarter and largely the first half as well.

What's going to change for the second half? First, freight is definitely almost normalized to where it used to be 2 years ago. That will be less negative in the second half. Inventory allowance will be neutral in the second half because that's the timing right now as we're moving through the fall/winter '22 inventory that will be normalized into the second half.

And of course, as we move to the inventory first in China, second in Europe and then later in the year in North America as well, as Bjorn just mentioned, discounts are easing and should be more positive as well. And everything else is pretty much neutral. But that's how we should look at the second half. That's why I also repeat what I said, Q1 was the worst margin for the year, and we always see improvement in the second quarter and then more to come in the second half.

[Operator]

The next question comes from Jurgen Kolb from Kepler.

[Jurgen Kolb, Kepler Cheuvreux]

Two indeed. First one is really on your €200 million restructuring or business improvement plan. Have you any additional information for us on this front? Have you identified additional projects or something that you could share with us?

And second one, thankfully, you detailed breakdown into wholesale, DTC, owned retail. At the same time, you talked about products, running, football, basketball, what have you. Could you also maybe give us an indication about the breakdown in the footwear category into the different categories, running, football, what have you? Or if not currently, then maybe what an ideal breakdown would be given that these individual categories obviously different in size from a global perspective?

[Bjorn Gulden, CEO & Head, Global Brands]

The second question, the breakdown in each channel by category, what we have and what will be optimal, I think you and I should sit down and discuss that when we have product in front of us because it's impossible to explain that on the phone.

You know that as a brand, we need to have a certain performance business that carries the image of the brand. And in sports specialty, if you look at a running specialist, that should be 90% performance product. In a football retailer, it should be 100% performance. And then when you move into the family channel, I mean, is performance, right? So you have to, what should I say, be very detailed to look at that, and it's hard to find numbers on it.

In our own distribution, it's obvious that if we have a concept store on Fifth Avenue, then we will try to showcase all the categories. So normally, the mix will mirror the mix that you have as a brand. If you have a small store, then depending if it is in a pedestrian area or it's in a strip center, it will be fashion and lifestyle in a pedestrian area and it will be more multi-category on a strip center. So it's a very difficult thing to explain because there's so many moving parts.

A new trend that you might be interested in is that we see actually that the differences between performance and lifestyle is disappearing. If you look at brands like HOKA and ON, which you talk about as running specialty are now starting to sell even more products on the Comfort, and I would say, on the lifestyle area, and it's the same product.

So again, the consumer in the end decides what the product is for. And I think you will start to see that distribution between fashion and performance is starting to be more loose, and that's why the old segmentation and the old way of distributing product is going to be a little bit more, I would say, loose, and that will change some of the classifications even on the product.

So I think that's all I can say because it's very, very difficult to give you any numbers on that which would make sense.

[Harm Ohlmeyer, CFO]

Yes. And during on the €200 million, there's no more detail that I can give you right now. But as I said previously, it will be a combination of potentially the one or the other retail store closure. We will also look at what we have built in the digital space. And as we know, without the Yeezy component and with a different trajectory in an e-commerce, we will look at some of the infrastructure that we have built there. Maybe the one or the other application or system need to be impaired, and we look at that overall structure. And of course, we will go through some selective rightsizing in the organization potentially here and there. But that's something we haven't decided yet.

But also rest assured, we have not reported any onetime items in Q1 because it hasn't been meaningful yet. But probably going into Q2 and then more pronounced in the second half, and we are clear on how we want to move forward. Also going into '24, we will be more transparent what's in that €200 million bucket. That's how we look at it.

[Jurgen Kolb, Kepler Cheuvreux]

Fantastic. All the best.

[Operator]

The next question comes from Thomas Chauvet from Citi Research.

[Thomas Chauvet, Citigroup]

The first one on lifestyle on Samba, Gazelle and Campus, Terrace shoes. You said, Bjorn, how quickly demand went from 100,000 to millions of pair, are all the lifestyle products that could experience the same kind of upside to your maybe internal forecast, initial forecast? You mentioned Fear of God. Anything else? And for Terrace, will you be willing to test some price increases once you lap the huge initial success especially if you keep supply low?

And secondly, on Russia, there was a detailed article in Russian newspaper earlier this week about a potential agreement to sell the stores to a partner a bit, I guess, like what Inditex did recently. It was in Russian so I had to translate that. It wasn't so clear. Could you comment on that? Or on your, more broadly, your options in Russia? Would you want to follow that route or to contemplate a return to Russia? And if you could remind us what the size of the business was in 2019 -- sorry, in 2020 -- sorry, '21. Just before the -- well, yes, probably in 2020, '19 before COVID and before Ukraine and the wind down of the business?

[Bjorn Gulden, CEO & Head, Global Brands]

I mean on the -- what should I say, scaling of the product. If you think about our archive, we have many shoes that we can scale. And again, I think the good thing is that there is an energy being created right now which wasn't there a year ago, and it's now up to us to manage it properly. And it started with what we call Terrace with Samba, Gazelle and Spezial. Now there's another court-shoe, Campus, coming, and we start to see some movement also on the Superstar. All this being court-based and of course, the danger is that we need to manage this properly so we don't destroy any of them. So they need some discipline, but I think they're all scalable.

What we desperately need in the next 18 months is also to find silhouettes on the running lifestyle. We had a huge success with some of the Yeezy shoes that were running-based. We had NMDs that were running based, and we had all the models. And right now, on the shelf of the lifestyle account, there is very little running that is coming from us. And that's one of the special projects that we're now working on with our new creative people is to develop new silhouettes together with also old classics from the '70s and '80s, which we have in the archive. So we need both.

And again, I think all the shoes in that €90 to €120 price points coming out of the archive are scalable. And that's why I feel I'm sitting in a very good situation midterm because we have all these shoes, and you know they come and go. It's just a matter of managing them and also have enough resources on telling the story and heat them up so that we don't go up and then go down again, which has been the history of adi and where we have to admit that Nike has done a much better job.

But it gets to the price increases, we need to be a little bit careful because you know that when cost and freight and everything go up, there was a lot of price increases in the market also from adi and not all of those worked. That's why in the in-line normal styles, I'm not looking at price increases, but then when we do collab like Bad Bunny or we do, what should I say, limited editions with different materials, there is much more air to then do higher prices, which is then creating the heat on the style. So this is a little bit a puzzle of making sure that you have stories, that you take prices up on special editions, that you do collabs, but that you keep the commercial price points, I would say, between €90 and €120 million. Above that, on the court side, it starts to get difficult. And I think that is not what we should do.

At the same time, you can do takedowns. Also, what you do at €100 and €110 million as an Original, you can also do at €60 as a takedown in the family channel. And this is, of course where, for example, all the companies have done a better job than adi has done, and this is something we're working on to capitalize on the heat on 2 different price points in different distribution channels.

So again, still a lot of work to do. But again, we have all, as I said, the ingredients. And if we get a little bit of time where we can manage this and do it in a proper way, I'm actually very optimistic that we can have more franchises at the same time play in more distribution channels, and that we can then have more consistency and when we are phasing things up and phasing down and do a better job on it, which is the task. When it gets to Russia, I'm looking at my friend.

[Harm Ohlmeyer, CFO]

Yes. When it comes to Russia, first and foremost, nothing has changed. We're in the process of winding down the business. But as you all remember, we had a pretty significant operations in Russia. We have our own warehouse. We have a long-term lease with our office. We had many retail stores, and of course, we are in the process.

We have already sublet most of our office space. We have transferred or notified some of the retail stores. We are in the process also to transfer some of these stores or sublease some of the stores. And of course, we are looking at opportunities and multiple options for our warehouse as well. But really clearly, nothing has changed in winding down the operations.

[Thomas Chauvet, Citigroup]

So no plan to return to Russia anytime soon?

[Harm Ohlmeyer, CFO]

No. I mean very clearly, there's not one store is open or e-commerce business, and the warehouse is still operating because we still have -- which is not a lot after 1 year, still some leftover inventory of Yeezy that's still being transferred and sold in Russia, but that is part of winding down the business and clearing the warehouse and then finding somebody who is subleasing it or who would take it over, which is not an easy process in Russia nowadays but that's what we're working through. But nothing else has changed and no operations in Russia.

[Operator]

The next question comes from David Roux from Bank of America.

[David Roux, Bank of America Merrill Lynch]

Just two questions from my side. Just to go back to the points around marketing. Could you perhaps give a bit more detail as to how you plan on getting down to 11% of revenue? And just remind me, has adidas achieved that before?

And then the second point is just on the OpEx. In terms of the cost savings from the existing €700 million BIP program that was flagged for this year, I think it was in the back end of last year. How much of the €700 million was realized in Q1?

[Bjorn Gulden, CEO & Head, Global Brands]

The marketing, if you look at most successful companies in this industry, a marketing expense around 11%. It might be 10.5%, it might be 11.5%, it might even be 12%, have kind of been, at least what I have seen and what I manage my previous business, is that. And it is the same place where adi is. Of course, the percentage depends on what your top line is, and that means that it can vary a little bit.

If I look at the activities that we have and the fact that we're spending €2.6 billion ballpark in marketing, that does include also performance marketing, which is what you're doing in your e-comm to drive traffic. Of course, that should be enough for us to kind of develop the business where we are.

At the same time, there's always changes so if you look at the big teams, if you look at the big players, there is some inflation, contracts have to be renewed. So I have, at least in the brainstorming with Harm and the rest of the management, not even put in a target to save on marketing. We have said that let's see what we used in the last 3, 4 years. Let's go through all the assets we have. Of course, there's some assets we don't need, and then there's some visions we have. Of course, we would have liked to have Holland, we lost him, but there are other prospects. And I think that will mean that we will not save on marketing.

But again, being at 11% or 11.2% or 10.9%, I think right now that is not really relevant, to be honest. It is to make sure that we have, in absolute terms, enough money to do what we need to create the heat that we need. And again, €50 million up or down doesn't make the difference. And the percentage is a little bit the result of what the end of the top line is.

So I feel that we have a good base of assets. I feel that we have, I would say, decent marketing plan. I do think we need more media money to actually tell the stories, and that's just one of the challenges, how can we make sure that all the good stuff that we are going to bring in the next 12 months, how do we make that visible to the consumer both globally and locally. And I think that's one of the challenges. But I would view, if you're trying to model us, look at the marketing expense of 11%, 11.5% as a benchmark. And then if there are variance, let's talk about it. But it's not a goal to find leverage on the marketing right now. I think that will be the wrong signal.

[Harm Ohlmeyer, CFO]

Yes. When it comes to the €700 million business improvement program, we do not want to track this now on a quarterly basis and be transparent about it. What we clearly said is it is a combination of cost mitigation where we wanted to keep the ratios. Like on marketing, we wanted to keep the ratio on a potentially lower sales. That is also mitigation. We, of course, renegotiated some of the freight contracts that we have. But if I now try to compare Q1 '23 with Q1 '22, it probably doesn't look that good. If I compare Q1 '23 with Q4 '22, of course, it looks better. And that's why we don't want to get into this one.

But we clearly, and also in selective salary round, we are very careful on hiring and leverage the attrition that we have in the company. We look at all ends. But again, it's a combination of mitigating cost increases that we saw coming already last year and real savings. But rest assured that everything that we have communicated last year is built into our not just internal budget, but also into our guidance that we gave to all of you. So -- and we want to focus on the guidance that we have given that we deliver on this one.

[David Roux, Bank of America Merrill Lynch]

Very clear. And I'm very happy to see UltraBOOST, now on golf shoes, so thanks for that.

[Harm Ohlmeyer, CFO]

So are we. Now we have to go find the time for it.

[Bjorn Gulden, CEO & Head, Global Brands]

It doesn't help against your slides though.

[David Roux, Bank of America Merrill Lynch]

Anything could help against that.

[Sebastian Steffen, SVP, IR]

Thanks, David.

[Operator]

The next question comes from Cedric Lecasble from Stifel.

[Cedric Lecasble, Stifel, Nicolaus & Company]

I'll have two with follow-ups on the previous ones. Bjorn, maybe after few months within the company, what's your view down to vote for the kind of achievable targets for companies like adidas with the assets that you know very well? And especially versus initial targets before the problems jump in of like 8%, 10% organic growth, 12%, 14% margin, like long-term sustainable profitability. What's your view on the previous goals of your predecessor at some point in time? That would be the question number one.

And question number two, in your ambition to recover the 10% profitability without -- with China at 15% of sales versus 25% and Yeezy out, would you need to -- what would be the main levels that create successful platforms such as Nike that you elaborated a little on being more efficient than before? Or do you need to go China to more than 15% of sales and to grow market share in China to reach this ambition?

[Bjorn Gulden, CEO & Head, Global Brands]

Well, Cedric, that's kind of 1 hour speech, if I should answer all those questions. And I hope that when we get to our new midterm strategy, that's what we're going to tell you.

But to simplify it, I do think that we need to have a different business model than Nike. You have to remember again that Nike has a centralistic business model coming out of the U.S. where they generate what I call the American street culture and they export it. It's an efficient model as long as that works and then we will see down the road if it still works.

I think we, sitting in Germany, doesn't have a German street culture to export so we need to do it in a different way. And that's why the strategy for us in the future is to have creation centers that works on Lifestyle products out of Herzo, out of L.A., out of Tokyo and out of Shanghai, and the sum of that is our offer. That is less efficient on the cost side but might be more efficient on the consumer side. So the -- what should I say, our strategy will be to be the best sports brand globally from a credibility point of view, but then execute more local which again then, of course, could be limiting your max profitability. That's why I talk about 10% and not 14%.

And again, everything I have seen in the 4 months both from people, from structures, from innovations tells me that we have all the chances to do this in our way. I don't think I should comment on previous targets and strategies because I don't think that's my job. I look at the market and I look at this fantastic brand and I put the pieces together. I look around the table and we all say, yes, 10% is achievable. And yes, we agree we should be adi and not Nike. And if there is an upside to that, then there is an upside to it. I don't think we should now force ourselves into artificial numbers on e-com and say that China should be 18% or 14% or whatever.

Let us fix the basics, let us set up the structure, let us clean up the inventory and then we can have a midterm discussion when we come with our strategy. But the 10% is achievable. And again, I really think that adi has a special DNA that should have a business model different than anybody else and we should be visible in more than the 5 big sports. We should be more, what should I say, retail friendly, and we should be what adidas once made it, the best company for the athlete and the consumer. And I think if we do that, instead of trying to impress you with artificial numbers, we will be successful. And then the irony of that is if we do that right, then the profitability can even be higher than we talk about, right?

So expect us to work the way we said and then let us come back at the end of the year, beginning of the next year with a new strategy. I think that's the fairest way of doing it.

[Cedric Lecasble, Stifel, Nicolaus & Company]

That's very helpful, Bjorn. Maybe just to put a difference on China, do you think conditions are met for China to become again the profitable markets that it used to be for international...

[Bjorn Gulden, CEO & Head, Global Brands]

Well, if you think about that, they have 1.4 billion, 1.5 billion consumer. If you think about that, the retail structure is very homogeneous. There's basically 2 big partners, maybe 3, D2C that is a big e-com business and that the differences geographically in China is much smaller than what they are in other markets, then the answer is yes. All the ingredients for making that the most profitable market is there.

And again, with 1.4 billion consumer, you would also think that the growth rate there should be one of the highest. My favorite to be the growth winner the next years after LatAm is going to be India, because you start to see a development in India also from a consumer point of view that they're buying more Western brands. They're doing more sports, and of course, I would hold them as a favorite percentage-wise in growth. But again, India is a more complex structure, so it might be less profitable. But for me, China is still the favorite to be the most profitable market in our portfolio.

[Operator]

The next question comes from Aneesha Sherman from Bernstein.

[Aneesha Sherman, Sanford C. Bernstein & Co.]

I want to ask a follow-up about your earlier comment about order books, but I want to ask about FY '24. So on the last earnings call, Bjorn, you talked about starting to meet with vendors to place spring/summer orders. So assuming that wholesale remains the majority of your business, is it fair to say that now, you have a pretty good idea of your H1 '24 sales makeup and sales growth?

And can you remind us, you made the point about cancellations for 2023. Can you remind us of the timing here? I mean, to what extent is there flexibility for your partners to then ramp up or pull down those order books? And like at what point of time are those order books pretty much set in stone? Is it more like the second half or even Q4?

And then I have one other follow-up on your previous comment about target inventory normalization by Q3, I assume that means on your own balance sheet. Can you talk about any expectations you have about inventory in the channel with your partners and when you expect that to normalize?

[Bjorn Gulden, CEO & Head, Global Brands]

A couple of clarifications. The cancellations on the order book was not '23, it was '22. So if you compare the order book in '23 against '22, it's not a fair comparison because the '22 order book never happened. It was huge cancellations, and in many brands had on order books that were very, very high, and then most of the retailers canceled with everybody because they didn't believe in the beginning that they will get all the products and then when they suddenly got deliveries, they started canceling. So that was in '22, not in '23.

The visibility for H1 '24 is not there at all. We haven't started placing those orders. Normally, an order book is being built 6 to 8 months before deliveries, so we are currently in the process with our retailers to fill the Q4 order book. When it gets to building relationship and giving visibility, we have showed them Q1, Q2 in '24 and even further because for us, of course, it's important that they see there are plans for franchises. There's innovations going forward, even into '25, but there is no order book yet for '24 in the system. So I -- even if I would, I couldn't tell you the order book for '24.

What I can tell you is that I think the fact that we are now saying that we are much more wholesale-oriented, and you see it's now 66% or 64% of our business. And the fact that we have opened up our campus again for all these retailers that we have partnership meetings in general. We had them on soccer and we had them on running. It's, of course, something new, and I think that's giving them the feeling that adi is again what adi used to be, and I think they really appreciate that. And then of course, it's up to us then to fill their pipeline with products that they sell because without the sell-through, relationship doesn't matter, so.

But I think we all feel better now than we did 3 months ago when it gets to the relationship with our vendors. And then we all know that you can't be friends with everybody from the beginning, so of course, we still have a lot of work to do. But I feel that most vendors in the world, if not everybody, would like to have a strong adidas and are appreciating the direction we've taken.

[Aneesha Sherman, Sanford C. Bernstein & Co.]

And then could you address the question about inventory normalization in the channel? And do you have any expectations for that versus on your own balance sheet?

[Bjorn Gulden, CEO & Head, Global Brands]

Ironically, they are kind of connected because I do believe that if you look at many retailers, they were over inventoried at the beginning of the year. They were really, really scared about the development in sales. I think most of them have seen a better sell than they expected, but of course, also at a higher discount. And ironically, I would bet that there are actually categories that might be under inventoried in the second half because the order book on certain categories is too low, and that people will start to chase certain products again at the back end of the year.

If you look at Apparel, I think people will be over inventory until the end of the year and that you first will see a relief in '24. But it's pretty much the same picture, especially in the U.S., I think also for the trade as we are seeing. So they need the second half to get out of it and then maybe some other markets will recover quickly, but it kind of goes hand in hand.

[Sebastian Steffen, SVP, IR]

Francie, we have time for two more questions.

[Operator]

Okay. Then the next one will come from Zuzanna Pusz from UBS.

[Zuzanna Pusz, UBS]

I'll stick to the rule, so just two. The first question will be on some of the franchises you've been mentioning, Samba, Gazelle, Campus. Would you be able to tell us maybe -- I understand that most of these franchises would even when we look at Stan Smith, Superstar, they've been historically quite cyclical. But I mean, how big can some of these -- or have some of these franchises become in terms of sales in the past in terms of at the peak? So let's say, Stan Smith, Superstar, in the last cycle, I think between 2015 to '18 when they were very hot, how big were they actually getting, just so that we can get an idea of Samba, Gazelle, what is their potential?

And then secondly, sorry, just a follow-up on marketing as a percentage of sales because it's quite an intriguing topic. But would you be able -- now, I understand you don't want to comment on anything that may have been done by management in the past. But if I look at my model, basically over the past 20 years, I think the lowest level of marketing spend as a percentage of sales was 12%. So clearly, I guess, if a more reasonable level is 11%, which to be fair, is the industry average and adidas was always above. Are there any specific buckets of marketing spend where you would say maybe the money wasn't ideally spent? I know you mentioned a couple of things, but maybe if you could say what will be the top 1 that you feel like maybe wasn't the best type of investment? So that's my second question.

[Bjorn Gulden, CEO & Head, Global Brands]

You know, Zuzanna, that marketing is very subjective and there's no formula that tells you where to invest because if there was one, we would all invest like it but then the formula will be destroyed again, right? So marketing is 50% rational and 50% emotional. And you also have to remember that the component that goes into marketing over the last 20 years have changed dramatically. Performance marketing, Google Search and all those things didn't exist only 10 years ago, and it's now hundreds of millions to actually generate traffic on your e-com. And of course, that didn't exist before. So it is a different, what should I say, buckets, and it's very hard now to sit and say that, okay, with 11% or 12%, these are the changes we should have been done.

If you look at marketing in general, you need as a company as adidas to have certain global, I would say, assets that makes it a global brand. So Real Madrid, Manchester United, Bayern Munich, the German Federation, the Italian Federation and stuff is the basis to even be a soccer brand. And then you have the Messi and the Salah and whoever you address, individual stars, and you can always survive by reducing them short term. But the question is what happened in long term if you do it? Then I wouldn't be in a situation to criticize what adi has done because I think adi always kept the visibility in sports.

To a degree, maybe that if I should criticize something, they have gone out of too many smaller sports lately to be efficient and are losing a little bit of this difference to Nike by being in the smaller sports, which we will go back into again. And again, I really have the feeling that we need to be adi visible across almost all sports, also those who are not commercially very important because they don't cost a lot. The creativity that we then have in design of making a wrestling shoe or a ski boot or whatever will have a positive impact on the creativity in the brand in general, and that's why you don't need to measure it only on the business, but actually measure it more on a creative spirit in the company. And that's what adi always used to be good.

So if there's one thing to criticize, I do think that during COVID and the last years, it streamlined too much, so we lost a little bit of that edge which we're trying to find back again. The good thing is that we have the people, we have the competence and that we can start to invest again. The bad thing is that we can't get back again quickly enough in some of the sports because it takes time to sign federations and it takes time to get product on the people's feet, on uniforms again, so we will take a little bit longer time than I would like. But I hope when we get to the next Olympics after Paris, we will be wider again because in Paris, in my opinion, we will be too narrow.

On the other hand, you asked about how big were these franchises. And this is a tricky question because certain franchises could be up to 20 million pairs. And then the amount that they bring compared to is D2C or is it wholesale, right? €100 shoe and 20 million pairs. You do the math, that's a €200 million business. If you do it -- no, that's a -- 20 million times €100 is €2 billion. If you do half of it or all of it in wholesale, it's then only €1 billion, right? So it's again, the split in the channels is as much worth as the pairage.

And we have, compared to Nike, a lot more franchises. If you really look at Nike, you will see they have 5, 6 franchises, which I'm sure is doing more pairs but they kept them alive over a longer time, we have gone in and out of them. So if you just look now, Samba, Gazelle, Campus, if we then add for example, Superstar and Stan Smith to it, we would have 5 court big franchises. And of course, it's -- the question is, can you have 5 big ones at 1 time or do you then have to play 1 down and 1 up and manage them properly? And I think this is where we have not been as good as what our friends at Nike has been.

At the same time, we had huge running franchises through the history and started with maybe the flux. We had the NMD, which was fantastic. We had the beginning of the UltraBOOST. And right now, that's where the shoe is not doing that well. And in general, there's very few running franchises out there that goes lifestyle. Ironically, it is brands like ON and HOKA coming in from the performance side and certainly those lifestyle. And I'm not sure that I'd be last long, but of course, we need to make sure that we very quickly are having an answer to that, and that's what we're working on.

So again, we have all the ingredients to have franchises that we can scale up to 20 million pairs, but we need to make sure we do it in a proper way and then not oversupply so we start to discount again. And this is the test that we are now going through because now we have this energy in certain of them, and now, we need to scale, but scale it in a way that we can actually keep them for a long time. At the same time, exploit the look also in the down channel. We take down version that we can then sell in the family channel and that's how you make the franchise profitable, and that's what we're trying to do.

[Operator]

Our last question for today comes from Warwick Okines from BNP.

[Warwick Okines, BNP Paribas Exane]

On the last call, you talked about the changes you've made to the Executive Board. And today, you talked about EMEA management. Could you give us an insight about how much change is taking place further down the organization?

And secondly, could you give us some feeling of what you think the shape of revenue will be this year? Obviously, you're flat in Q1 and you're still guiding for high single-digit declines. Is Q2 the low point, do you think?

[Bjorn Gulden, CEO & Head, Global Brands]

We did the two changes in the Board that you know. We changed Roland after 33 years with Arthur and that was, of course, necessary to do the changes we need to do on the commercial side. And then I took the brand side away from Brian, again, necessary to get the speed of all the creative environments so they can go straight to me, which is important in the change.

And then when you go down in the organization, of course, there's many changes in people that you don't see, and there's quite some changes in the way we are trying to go to market. We're trying to open up the campus, have more samples in the showrooms, have much more accounts coming to our headquarter. We are changing calendars to be quicker in the way we develop products, and we are trying to be more local. So we give more autonomy to the markets to also utilize the engines in the markets they sit.

So there's quite some changes going on between beginning of January and now when it gets to the product cycle. Difficult to quantify when it gets to people, but there are rules being changed, and there will always be changes because that's the way our business is. When it gets to...

[Sebastian Steffen, SVP, IR]

Revenue development.

[Bjorn Gulden, CEO & Head, Global Brands]

Revenue development, we're still seeing high single-digit decline. And the reason for that is, of course, that we do not know if we will have enough good inventory in the second half to actually do higher sales. And remember, I said we will not chase any business because we think that will be the wrong strategy. So the priority is not to have growth on the top line, but it's to get out of the year with a cleaner inventory.

And if we now are chasing sales, we could end up in the ironic situation that we could have a better top line, we will not get rid of the inventory that we're sitting. So that's why we kind of have a hybrid, what should I say, strategy for the second half. Of course, try to sell as much as we can on what we have, but maybe not chase everything we could by buying into it but have a better start to '24. That's why we keep currently the -- what should I say, the sales guidance the way we do.

And then don't also forget that should we be able to start to sell off the Yeezy product in one way, shape or form that has a lot of work for us because that's a complicated thing right now. So that's why we have consciously not tried to impress you guys with any numbers in '23, but are trying to do everything right for midterm and are putting focus on that. That's why the guidance is the way it is. And that's also how we are trying to act every day.

[Sebastian Steffen, SVP, IR]

Thanks very much, Warwick, thanks very much, Francie, and thanks very much also to Bjorn and Harm. And of course, also thanks very much to all of you.

Ladies and gentlemen, this concludes our Q1 call for today. If you have any further questions, please feel free to reach out to any member of the IR team. And of course, also myself. And with that, thanks very much again. Have a good remainder of the day and a great weekend ahead. All the best. Bye-bye.

[Harm Ohlmeyer, CFO]

Thank you all.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you very much for joining, and have a great weekend. Goodbye.