Adidas AG

XETRA:ADS

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the adidas AG Q2 2020 Conference Call. [Operator Instructions]I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thank you very much, Haley, and good afternoon or good morning, and welcome to our second quarter 2020 results conference call. Our presenters today are our CEO, Kasper Rorsted; and Harm Ohlmeyer, our CFO. As always, we will kick it off in a second with the prepared remarks from Kasper and Harm. Followed by the more interactive part of the session. [Operator Instructions] And now without any further ado, over to you, Kasper.

[Kasper Bo Rorsted]

Thank you very much. First, we'll have a high-level view on the focus areas for us as a management, then we'll recap the business in our financials of the second quarter. Subsequently, we'll update how we continue to operationally address challenges and opportunities. And finally, current trading outlook and an update on our strong product pipeline. So moving on, the management focus has been divided into 3 areas. We're executing through coronavirus and the related challenges, we're actually shaping structural industry trends that will amplify -- that's been amplified by the pandemic. And we're creating lasting change now to become an even more diversified company. Let me now provide you some more details on these activities. First, executing through the coronavirus. When we last reported at the end of April, more than 70% of our stores were closed. At that time, we expected a largely operational store fleet at the end of the second quarter. And this assumption has proven to be right. Approximately 83% of our stores were opened at the end of June. China returned to growth in May already earlier than initially expected with other markets following since then. We are not back to normal yet, but there's definitely light at the end of the tunnel. When we look upon executing through the coronavirus, a key element has been the protection of our people, communities and partners, which has remained and continues to remain the top priority for us. Comes to the health and safety in our stores, when we look upon our global story reopening, we've had plans, and we still have plans to ensure safety of employees, partners and consumers within the different countries we operate. And we're implemented extensive hygiene measures, including plexiglass screens, et cetera, and this is in rules to ensure that we operate in a safe environment. When it comes to health and safety in our offices, we have enabled now our people to return to offices albeit at limited rate. We are approximately 50% here in Herzo under very strict guidelines and even less in some of other office openings. We've increased our workspace flexibility by working from home. And at the height, we had more than 43,000 people working from home. And last but not least, we take our supply chain responsibility very serious. 85% of our partners, we've been working with for more than 10 years. And these are valuable relationships in the product creation and the quality of how we create product and how we're competitive in the marketplace. And we've helped them to protect the health and income of our employees, of their employees by canceling, postponing orders, researching payments, all in alignment with our partners to ensure that our key partners continue to be around. And I'm very grateful for the relentless efforts of our teams, which has enabled us to take the right actions in the best interest of our consumers, our partners, our employees and, of course, the company as a whole. We're also shaping structural changes. The long-term management trends are supporting the future growth of our company. When we look upon it, we are seeing the rising spot participation rates. We're seeing, research shows a 50% of 18 to 34 old consumers now plan to exercise even more. We see an even more pronounced fashion shift towards leisure. The increase in workplace flexibility is here to stay. And the majority of companies plan more and more permanent remote working. And of course, when you sit at home, you don't wear your suit, you don't wear you tie, but you tend to wear sneakers from adidas or hoodies, and that is definitely helping paving the future way for us. And we're seeing a fast forwarding of the digital transformation. The lockdown has led to a step change in digital penetration. Consumers are shifting to online faster than before. And in the first half, more than 1/3 of our sales, own e-com and partners were digital, a fast forwarding of the digital transformation that also will play into the long-term attractiveness of our industry. Last but not least, we are creating lasting change now. We're a diversified company with zero tolerance for discrimination. adidas employs more than 60,000 people across the globe and has corporate locations over 70 countries. 90% of our employees hold a non-German Passport. In our headquarter in Herzo, we have more than 100 nationalities. And by the end of 2019, women held 34% of management positions globally. This is up from less than 30% in 2015 and exceeds our target by 2020 of 32% and maybe just as a reference point, are global leaders in region. Our European region is led by a German. Our North American region is led by a New Zealander. Our Latin region is led by a French. Our Middle East region is led by an Australian. Our Russian country is led by a Jamaican. Our Chinese country is led by an Indian. And our Asian region is led by a Malay. So overall, in many ways, we have made substantial progress in the area of diversity. However, we also recognize that we need to do more. Diversity and inclusion are one of the most important importance to me personally, to my Board colleagues and to everybody at adidas. I have personally listened to many of our employees in their stores, and that was a humbling experience. We need to create a truly diverse and inclusive adidas that we're all proud of. And upon these reflections, we have made commitments globally. We have established a committee to accelerate inclusion in the quality that I'm personally sponsoring. We have strengthened our antidiscrimination policy and reforming our hiring process. We're celebrating diversities like Black History Month, Lunar New Year, International Women's Day, Pride, [ Davila ] and many more. In addition, we have made very specific commitments in the U.S. We're investing more into the Black communities, EUR 125 million over the next 5 years, plus 50 scholarships for Black students every year. We're filling a minimum of 30% of new positions and 12% of leadership positions with Black and Latin people. We made Juneteenth a paid holiday at adidas where our stores and DCs in the U.S. close. We are 100% committed to creating an environment where everyone is treated equally and giving the same opportunities to grow and advance. With this, let me move on to the business update. We continue to execute our campaigns and product launches despite the closedown. Our Ready for Sport campaign has been a great success. Our #hometeam campaign had more than 400 million views. We're celebrating athletes and teams with the comebacks after the lockdowns, and we launched jerseys for our most famous football teams as players return to the pitch. Our Superstar franchise, which had its first day this year, grew 3% despite a 34% decline. So it shows how much we can do by driving iterations and collaborations around our key franchises. We had our 4D week in May, marked the single biggest week in 4D sales, where we executed a full takeover on the e-com. As a result, the 4D products consistently is in the top 10 sellers in our U.S. adidas.us. With Parley, we celebrated our fifth anniversary, where this year, selling more than 15 million pairs of shoes up from 0 or 5 years ago. And we relaunched UltraBOOST Parley DNA, the shoe, it started all with. Our UltraBOOST continue to be the most searched running shoe globally on Google and with Reebok, our Club C experienced triple-digit growth on the reebok.com site. When we look upon the quarter, it was a quarter that posed many challenges and some upsides. The strength, the China revenue came in flat for the quarter, reflecting double-digit growth in May and June, following a 58% decline in the first half. So a quicker recovery than originally anticipated. Our D2C sales were up 1% driven by a 93% currency-neutral growth and several markets being triple digit, and we also saw triple-digit growth in the 2 first months of the quarter. And we saw no cash outflow in the quarter, thanks to the strict cash and cost measures as reflected by -- our marketing investment down by 25% and the underlying operating overhead also declining double digit. Harm will take you through more of this in detail. However, we also have weaknesses in the quarter. North America is lagging behind other markets opening because of the increased pandemic. And we continue to see also state closing down. Most recently, we saw the close down of California. We're seeing inventories peaking during the quarter, and I want to stress this, as expected. And now being managed down to a normalized level by -- towards year-end. And we're seeing the operating results negative as guided due to the revenue shortfall as stores were closed as well as around EUR 250 million of corona-related charges. When you look upon the P&L. We guided a 40% decline. We came in at 34% currency-neutral decline. Our gross margin was only down 240 basis points to 51. We saw an operating loss of EUR 333 million due to the revenue shortfall in corona-related charges. And a net loss from continued operations of EUR 306 million and a subsequent negative EPS from continued operations. So clearly, corona had a huge impact on our second quarter. In our strategic growth areas, North America -- adidas North America was down 37%. And also due to very high levels of closures. We saw the strongest e-com growth among the 3 markets. We saw headwinds from lockdowns, protests and resurgence of coronavirus in some states. As I spoke about before, Greater China flat. And that was an early expectation 1 month earlier. We thought it would be June; initially came in May, and we saw double-digit growth in May and June. However, we also observed a deceleration of growth in July as the positive impact from pent-up demand is fading and the marketplace and traffic remains below prior year level. We saw e-com nearly doubling triple digit growth, as I said, in April and May, sales more than doubling in many markets. And the growth is remaining at exceptionally high level despite store openings in many countries. We saw the adidas revenue grew 33%, and the Reebok revenue grow minus -- excuse me, minus 33% and reebok minus EUR 42 million. So the reverse picture from the first quarter, which we also spoke about. In Reebok, as we said, it held up better in the first quarter due to the low exposure to China. In second quarter, it was the other way around. We are seeing some categories winning during the lockdown and outperform the overall company. Originals apparel as consumers were looking for casual wear when sitting home and working, running in markets where consumers were able to go outside like Europe and outdoor even grew in some regions, Europe and North America, both up double digits. With this, I'll hand over to Harm, who will take us through a greater level of detail of how the quarter went. So over to Harm.

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

Thank you, Kasper, and a warm welcome to everyone. Good morning, good afternoon to everyone. Let's start as always the performance across the markets. And look at the world map illustrates how the coronavirus had a negative impact on all markets in Q2. After being impacted first and most severely in Q1, sales in Asia Pacific were now down by only 16%. As already mentioned, Greater China revenues were flat and posted double-digit growth in May and June as all owned and partner operated stores have been opened again since mid-April. However, our revenue development remains negatively impacted by ongoing disruptions to the retail landscape in other parts of the world, particularly in North America and Latin America, resulting in sales declines of 38% and 64%, respectively. Global store closures also weighed on the second quarter sales development in emerging markets with minus 60%, Europe, minus 40% and Russia/CIS was minus 34%. The regional operating profit development was significantly impacted by several coronavirus-related charges, which I will highlight on the next slide as well as operating deleverage due to the revenue shortfall. So when it comes to the P&L, I want to repeat what Kasper said already, a top line decline of 35%, nominal is 34% currency-neutral. But more importantly, looking at the gross margin, the gross margin declined 240 basis points but remained well above 50%. The more favorable channel and market mix was offset by the promotional environment. More details on gross margin on a separate slide. We also reduced our operating expenses by 7%, while continuing to invest. The marketing working budget was down 25% as we suspended marketing efforts that were linked to canceled events, most importantly, the European Championship or the Olympics, or would have otherwise proven ineffective in times of social distancing. At the same time, we doubled down on digital marketing in order to remain connected with consumers around the world, add new members into our ecosystem and support our e-com growth. Without that investment, we would not have been able to grow 93%. We maintained all of our key partners and are ready to reaccelerate marketing spend as and when circumstances allow for appropriate returns. Operating overhead increased 2% as double digit underlying decline was more than offset by business-related and coronavirus-related increases. More details on operating overhead on a separate slide. As expected and guided, our operating profit turned negative. Development in Q2 was significantly impacted by several coronavirus-related charges. We recorded a combined negative impact of around EUR 250 million from the increase in inventory and bad debt allowances as well as the impairment of retail stores and the Reebok trademark. Each of these 3 effects: inventory allowance, bad debt and impairment accounted for roughly 1/3 of the total amount. Excluding those, the operating result would have been significantly less negative than the minus EUR 333 million we reported. Let's take a deeper look at the gross margin development. Lower sourcing cost and the more favorable channel market mix, China and e-com, being our best-performing market and channels had a positive impact on our margin in the quarter. These positive effects were largely offset by a less favorable pricing mix, reflecting the promotional environment and negative currency fluctuations. On top of this, higher inventory allowances significantly weighed on the gross margin. So in absence of the increase in inventory allowance, gross margin would have actually been up slightly in Q2. However, this should not be viewed as a proxy for Q3. We don't expect another increase in inventory allowances in Q3. Similarly, we don't expect promotional activity, which is here to stay for the remainder of the year, to worsen going forward. However, FX is further deteriorating and support from markets and channel mix will fade in the third quarter. As a result, we expect gross margin to decline also during the remainder of the year. This should not come as a surprise given the current industry environment. It is definitely not a surprise for us, and let me be clear here. The Q3 gross margin decline is fully factored into our guidance for a significant operating profit improvement. Now let's take a look at the operating overhead. The strict cost discipline implemented since the start of the crisis and technical measures to reduce our expenses have led to double-digit operating over decline, more specifically, minus 12% or even more than EUR 200 million in the quarter. These measures include the material reduction in all discretionary spend, including T&E. In addition, we were able to materially reduce our personnel expenses despite our clear commitment to go through these unprecedented times with our 60,000 employees and reduced or delayed our retail expansion as well as certain IT projects. The underlying operating over decline was, however, offset by an increase in business-driven cost, roughly EUR 60 million and coronavirus-related charges, roughly EUR 160 million. The exceptional e-com growth we experienced during the quarter led to a significant increase of logistics and freight cost. As additional warehouse capacity and staffing further contributed to this increase, we added people and shifts in order to cope with the elevated level of shipments. In addition, the significant underlying operating overhead decline was offset by coronavirus-related charges led by the impairment of retail stores and the Reebok trademark as well as higher bad debt allowances. As e-com volumes should normalize somewhat with stores having reopened and coronavirus charges hopefully don't reoccur, we expect to see a significant decline in operating overheads in the second half. It comes to net debt, it amounted to EUR 792 million at the quarter. While this represents significant deterioration compared to the net cash position 1 year ago, net debt position is still modest in historic context, reflecting the improvement achieved over the last couple of years, and the equity ratio remains solid at over 30%. Now when it comes to the operating working capital. The average operating working capital as a percentage of net sales increased to 21.5% as effective cash measures partly offset the increase in inventories. Inventories were up 49%, currency-neutral year-over-year. This represents an increase of 20% compared to the end of Q1 was obviously driven by the broad-based closures, with more than 70% of our stores being shut at the high point of the lockdown measures. At the same time, we still have product inflows as order cancellations and postponements are going to be effective, particularly in the second half. So the good news is that we have reached the inventory peak in Q2 and are already successfully executing our plan to manage down to the year-end. More of this will come later. Receivables were down 31% currency-neutral year-over-year due to the execution of cash measures and, of course, fewer shipments in Q2. Payables were up 23% currency-neutral, reflecting measures to reduce our cash outflows. Now please allow me to go a little deeper on some of the operational topics. And as we execute through the coronavirus pandemic, we are striking the balance between short-term challenges and long-term opportunities. As Kasper mentioned earlier, the health and safety of our people and communities, of course, remains the top priority. In this section, we will cover 4 of our further priorities. First, our operational flexibility. Some tangible examples to illustrate why we are very confident that inventories will be back at a normalized level towards year-end. Secondly, our financial flexibility, an explanation on how we have been able to prevent cash outflows during the quarter despite the material revenue shortfall. Thirdly, digital opportunities, an overview about the digital ecosystem overall that we have established under tradings in new and leveraged in order to nearly double e-commerce sales in the second quarter. Finally, the retail recovery, and Kasper will give you an additional color on the positive store opening trends throughout July as well as some observations on traffic and conversion patterns. So I'm going to discuss the operational and financial flexibility and then Kasper's going to cover digital and retail. So let's start with inventory. As we had mentioned in April, we have already taken all necessary measures to adjust the product inflow to our needs for the second half. Now we are focusing on liquidation of existing inventory. First, event-related evergreen products was stored and repurposed into 2021 product. But differently -- put differently, we will not touch those inventories in the remainder of the year and instead use them to drive the business in 2021. The majority of the remaining product will go to our own operating factory outlets. Our store fleet is now largely operational and comps already turned positive in the second quarter. We will continue to sweat our assets, in this case, the 1,100 factory outlets we have globally, for which we had largely stopped our ordering. Likewise, e-com will also provide an opportunity to clear inventory through commercial moments. As you know, most of these major online sales events take place in the second half, whether it's Cyber Week or Singles' Day, and are getting bigger year after year. While usually, we are ordering products to meet these rising demand, we will mainly use existing inventory this year. Smaller portion of inventory will also be moved through select retail partners as partner stores have also reopened. To sum things up, our inventory level has peaked during Q2. And we are already successfully executing on our liquidation plan. This gives me great confidence that we will get to a normalized inventory position by year-end, in line with the December 2019 level. Our confidence is underpinned by the fact that the majority of our inventories is directly linked to confirmed customer orders for the second half. Now I'd like to give you some more concrete examples of the product pipeline. Let's look at our inventory actions from a product perspective through a consumer lens. In some cases, we are shifting products into 2021. So 2021 will now be a big sports year, and we shifted some releases accordingly. Unreleased Euro 2020, a major release, for example, will now be launched in 2021. In other cases, we are adjusting the launch calendar, especially for major product drops like ZX 2K Boost, while beyond the products, we have adjusted our launch calendar to ensure consumers and distribution are there. In addition, we are repurposing product stories. Parts of the Olympics range product now launched as part of Ready for Sport campaign. We created the one more year chapter, featuring athletes that wear our Olympics gears for another year of dedicated training leading up to Tokyo 2021. In all cases, we are executing fully digital. Product launches in our digital ecosystem were well received by consumers throughout the lockdown period. We doubled down on e-com front and back-end to ensure we serve consumers in the best possible way, even in those extraordinary times. Going into 2020, we were gearing up for a major sports here with a very strong product pipeline. Now our operational flexibility allows us to still translate the pipeline into success. Now some of the short-term cash measures. We have increased inflows. E-com delivered exceptional growth with an immediate cash impact. China recovered with double-digit growth in May and June. And the credit collections exceeded our own internal expectations that we set ourselves end of March and in April. We have reduced outflows for active adjustment of our order book and the benefit -- and the full benefit of that will mainly come in the second half with less product inflow. We made use of flexibility of our cost base without jeopardizing future prospects. We also reduced and delayed our retail expansion as well as certain IT projects. We have secured additional financing on top of the EUR 2 billion cash at quarter end. We still have access to EUR 3.2 billion of unused committed credit lines. This, of course, includes the EUR 3 billion from the syndicated loan facility through KfW. An important safety net we had secured in April in the midst of the global lockdown and uncertainties were the highest. In these unprecedented times, the KfW loan provides us the financial flexibility to take a balanced approach of short-term measures versus long-term prospects at any given time. Now highlighted also that the cash outflow was managed very well in the second quarter. So the success of all our cash measures becomes visible when we are contrasting Q2 with Q1. In Q1, we had little time to react to the rapid outbreak of the coronavirus. Consequently, the sales decline of more than EUR 1 billion translated almost 1:1 into an operating cash outflow of EUR 800 million. In Q2, our short-term cash measures took effect. While sales declined by almost EUR 2 billion, we were able to prevent a further operating cash outflow.As we rented further operating cash outflows, our cash position remained largely stable at the end of the second quarter, actually improved by around EUR 40 million compared to March 31. This excludes the EUR 3.2 billion of unused committed credit lines including the syndicated loan facility through KfW, which I had mentioned before, and that was unused at the end of June. In July, we actually decided to make use of the facility, and this is the time of the year where our working capital needs typically peak. In order to maintain full financial flexibility and a certain liquidity buffer at any point in time, given prevailing uncertainties, we have drawn around EUR 500 million of the syndicated loan facility through KfW. We would like to think, again, the German government for its fast and comprehensive course of action in response to these unprecedented global crisis. And as stated in the past, we will repay any used portion of the loan as quickly as possible with the timing dependent on the further developments related to the coronavirus. Now let me finish with the outcome of the credit rating. As you can see, we have managed to keep our balance sheet in a very healthy shape during what was a challenging period. Our strong business profile and credit metrics' robust liquidity profile and conservative financial policies are also recognized by the leading rating agencies. Earlier today, we obtained strong first-time investment-grade ratings from both S&P and Moody's. S&P rated us A+ with a stable outlook, while Moody's ready as A2 with a stable outlook. This makes us one of the highest-rated companies, both in Germany and in the global sporting goods industry. The rating are a testimony to our track record in delivering strong financial results as well as to our global scale and reach in an attractive industry. With these ratings, we are now ideally positioned to secure access to the capital market at all times and to further optimize our capital structure as well as our financing costs. With that, over to you, Kasper, on the topic of digital and retail recovery.

[Kasper Bo Rorsted]

Thank you very much. Digital is and will continue to be our most important commercial and brand driver. And we leveraged our entire digital ecosystem in order to nearly double e-com sales in the second quarter. Platforms enable us to connect to consumers and get them into our ecosystems. 400 million video views for the #hometeam campaign. The training app users was more than tripled in the lockdown period between March and May, and this pool of connected consumers fuels our commercial platforms. We increased our adidas app sales by more than 4x year-to-date. The Creators Club members purchase account for more than 6% of the online sales. A customer we know is a more valuable customer. Our Creators Club members have a 2x lifetime value compared to the non demos. And we again added millions to members in the second quarter, which will contribute to future commercial success. At the beginning of 2017, we made digital a strategic priority for the company, and named our dotcom the most important store in the world. And since then, we have built a strong digital foundation as part of the CTN this allows us to cope will spike in H1 and raise our e-com target to more than EUR 4 billion. We've already defined building blocks and investments for the future. Focusing on Creators Club members as the anchor of the digital experience, shifting marketing investments towards digital and achieving consistent storytelling, leveraging consumer insights along the value chain and scaling data-driven creation and strengthening operational backbone with additional logistic capacity. To be clear, digital is more than just e-com. As part of our digital transformation, we launched our first ever rapid creation product pack last month. In just under 48 hours, teams created a 3D-rendered product based on the latest consumer research data. Believe it or not, the product shown here displays 3D rendering rather than physical samples. The Rapid Creation Pack launched in July performed very well as the tropical colorways match current consumers' taste as we had inferred from our data. It's a major step to enable digital creation end to end. Let me give you another example for how digital transformation looks like at adidas. Over the past couple of months, physical showrooms were closed, but we still wanted to hold productive selling meetings with our wholesale partners. And to make these meetings possible, we used our digital showroom tool that combines 3D-video previews and augmented reality to bring our products to life virtually. We have seen a tenfold increase in the number of wholesale partners using this tool. While digital sales were the bright spot in the quarter, we made great progress in terms of reopening our physical store fleet. As mentioned to you earlier, the global store opening rate improved all the way through Q2. At the end of June, it was 83% of our stores open. This positive trend has continued throughout July and the global store opening rate stands at 92% as of today. However, we do not expect the store-open rate to increase significantly from here on, given that we are at level -- already at a level above the 90%. Also keep in mind that we still have stores in several markets that are open but operate and reduced hours. Our efforts to revitalize retail have led to a continuous improvement of traffic in the stores that reopen in all 3 major markets. However, traffic remains below the prior year level due to the reduced opening hours as well as social distancing guidelines. On the other hand, we registered an increase in conversion rates as consumers at [ busy ] stores tend to have a clearer buying intent. By hypothesis, the traffic in physical stores continues to greatly improve. It's also one of the assumptions for our third quarter outlook. Now let come to the outlook. But before I discuss the financial aspects of our outlook, I'd like to discuss products because we continue to create cool and great products. Wherever we open our business, be it in physical stores on digital space, consumer demand for our products is high. We'll continue to serve consumers with great launches in the remainder of 2020. Within the global Ready For Sport campaign, we activate ready and apparel performance concept has recovered in all conditions. So you can see we use a blockbuster campaign Ready for Sport to specifically promote seasonal products and drive sell-through. And running, in particular, has seen a unique uptick in particular rates during and after the lockdown. At the top of the pyramid, we launched an exclusive quantity of the adizero Pro. The lottery for fastest ever racing shoe was 15x oversubscribed and the available pairs gone in just 15 minutes. We used the hype around the adidas adizero Pro to successfully relaunch Supernova, one of our most trusted running franchises for everyday runners that is especially popular among women. Another category that benefit from consumer appetite to spend time outside and stay fit was outdoor. We've been very visible with our TERREX outdoor products, encouraging consumers to enjoy ventures in the local forest and mountains. We made sure to update our proven jog, running franchise like the TERREX Two with fresh color waves sustainable materials at a time when many young consumers hit the trails for the first time. We're launching our Club Jersey amidst the excitement of professional leagues reassuming 3 out of 5 European A Clubs have won their domestic leagues. Bayern, and Real and we're looking forward to seeing our teams compete in the 2020 UEFA Champion's League Finals rounds in August.Our ZX 2K is a new lifestyle franchise that we're starting to build for the long term. We saw successful integration with the first limited drops in May, delivering 100% sell-through. And the consumer response to the first launch of releases in the beginning of this month was extremely promising. YEEZY continues to bring Hype to the market with all 350 and 700 drops achieving close to 100% sell-through. The YEEZY Hype remains strong, a sign up for the YEEZY Zyon exceeded supply more than 10x. We used the distinct 4D concept to kickstart new franchises with 4D Hype drops like we did with the ZX 2K 4D version. And for the remainder of the year, we plan almost 150 drops as we keep volumes low and the frequency high.The Superstar is celebrating its fifth anniversary in 2020 and we continue to reiterate releases and collaborations. Think of Superstar as being one franchise with many stories. The next big story will be Superstar Hype drop in collaboration with Ninja, the world's most followed e-gamer on the following weekend. This is a great example on how we keep building the legacy of the Superstar franchise by making sure it remains relevant and credible with young consumers. And clean Classic. Speaking of newness around iconic franchises, we're giving our icons, Stan Smith and Superstar eco-friendly makeovers. The clean classic use at least 70% recycled content in the upper and 100% vegan. And when it comes to Reebok, our sustainability commitment is, of course, also here at the top of our mind. Reebok Zig Kinetica made from recycled plastic remains a top seller on reebok.com. And meanwhile, Reebok also continues to grow a successful [ name of the ] franchise. When we look upon the specific outlook for the third quarter, we are seeing significant improvement in Q3. The sequential top line recovery has continued since the end of Q2 with a global store opening rate at 92% as of today and still exceptional e-com growth. While civil markets posted significant declines in July, some countries, including our home market, Germany, follow the China example and also returned to growth last month. And while this is encouraging, monthly sales are, of course, also impacted by the timing of wholesale shipment and pent-up demand. In addition, we know that the revenue development remains negatively impacted by the disruption in the retail landscape, particularly in North America and Latin America, the reduced opening hours as well as lower traffic due to social distancing. In total, we expect the top line development in Q3 to improve materially in all markets compared to Q2. Nevertheless, we continue to expect revenue to remain below prior level -- prior year level in Q3 and forecast mid- to high single-digit revenue decline. Our operating profit is expected to improve significantly and turn positive again in Q3 to the tune of EUR 600 million to EUR 700 million. So we are seeing light at the end of the tunnel. We're also seeing a sequential improvement in July compared to June. The key assumptions on this guidance is that our global store fleet will remain operationally in the absence of any major lockdown. This means that at least 90% of our stores remain open throughout the period. Traffic in physical stores continue to gradually improve. It almost goes without saying that uncertainty remains high in the current trading environment. This chart put the sequential improvement between Q2 and Q3 into perspective. We expect an operating profit of EUR 600 million to EUR 700 million in Q3, and that implies EUR 1 billion improvement -- profit improvement versus -- in Q2. It also means that we'll return to double-digit operating margin already in the third quarter. In summary, we are working very diligently on creating lasting change for diverse inclusion now. We are seeing sufficient short-term flexibility to keep navigating for the long-term success due to our strong balance sheet. We have seen exceptional growth in e-com enabled by integrating the entire digital ecosystem. Our business normalization is on track with store fleets now largely operational. And we are shaping structural sport and lifestyle trends, which will amplify -- which have been amplified by the pandemic, which will help us in the future. I am very much looking forward to the opportunity to lead adidas into a successful and sustainable future, together with the team after coming out from a difficult Q2, but looking into Q3 with a much more optimistic mindset. Thank you very much.

[Operator]

[Operator Instructions] And the first question comes from the line of Graham Renwick of Berenberg.

[Graham Ian Renwick, Analyst]

Just have 2, please. Just firstly, on current trading. You mentioned July improved sequentially versus June. Are you able to give some more detail on what the revenue decline in June was? And can you quantify the sales improvement in July? And then also, could you give us a sense of how each region is performing within that? I think you already mentioned that China had moderated in July. And then on 2021, if we were to think of a scenario where 2021 revenues could recover to 2019 levels, which looks to be a fairly reasonable assumption given the path you're on. And then we assume you have clear inventories going into next year, so promotional activities normalize. Is there any structural reasons why your 2021 EBIT margin could recover back to 2019, so around 11.3% or possibly even higher, if you can have a more streamlined cost base going into next year.

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

Thank you very much for your question, Graham. What we can say is, in the second quarter, we saw every month sequentially improve. But we don't give details on that. And we have seen a sequential improvement also in July over June. We are seeing, as we said, several countries coming back to previous years' trading, like China and Germany. But we're not going to give any more guidance on this. When it comes to '21, we'll be happy to give you guidance on that in March. But I will say the same that you -- the following your 40 million additional unemployed people in the U.S. and our industry is related to GDP per capita. So I would ask you to take into consideration, irrespective which guidance we will give that there is a correlation between spend and our industry and unemployment. So that's the only thing we can give you to '21. We'll be happy to give you very specific guidance to '21 in the month of March.

[Operator]

The next question is from Jurgen Kolb of Kepler Cheuvreux.

[Jurgen Kolb, Analyst]

Two questions. First, on your learnings from the IT and the online business and the digitalization, where would you say you need additional support or where you have to build more expertise in order to bring this whole digital business even further in the next couple of years? And secondly, on your retail strategy, stores are opening. However, we're seeing at the same time that some of your retail partners had to go out of business. Does that alter your physical retail strategy in the future so that you might think about a new concept for physical and retail?

[Kasper Bo Rorsted]

Jurgen, thanks for the question. First on digital. I mean, as you can see, a lot of things we have done already right in the past where we build a digital ecosystem. Otherwise, we couldn't have grown 93%. And the opportunities that we are looking at is more at the data science, and it's the artificial intelligence that we can build on this one in the future. This is still something where we are looking for the right expertise in how we deploy that across many markets. And that's for one opportunity that I would call out data science, artificial intelligence going forward. But the foundation is laid out.

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

When it comes to the retail landscape, what you've typically seen is it's been the smaller, less specialized retailers that have struggled throughout this period of time. And you've seen our D2C business being flat for the first 6 months and also in the second quarter. So you are going to see an acceleration of the D2C landscape moving forward. This is a 2-to 3-year, I would say, fast forward that corona is bringing to us. It does not change the view on our own store landscape. I think it has shown us that when we control the consumer engagement, we have an opportunity to sell deeper and more frequently to the consumer, along with the wholesale partners with whom we can digitally engage like the JDs, the DICK'S Sporting Goods, the Foot Lockers or the [ pure plays ] or the Zalandos. The struggling part of the partners are going to be those who do not manage the digital, I would say, integration with their suppliers in the future.

[Operator]

The next question is from Geoff Lowery of Redburn.

[Geoff Lowery, Partner of Non]

Can you talk a little bit more about e commerce? What's driving the growth in terms of additional customers versus the installed base spending more? Any comments on geography? Just really trying to understand whether the e-com revenue number this year is genuinely a new base for the group? Or do you think you'll be giving some of that back next year?

[Kasper Bo Rorsted]

If you look, we have seen very, very strong growth in all our 3 regions almost at a similar rate, which is high double digit. We spoke about America being the highest. There's no doubt that the entire app -- building apps for consumers and being able to engage with the consumers in a much more integrated way has helped us. Secondly, we have -- which we spoke about, dramatically increased the number of hype drops we do through our digital landscape that makes reoccurring traffic increasing. So it is the -- the use of apps. It's the use of hype drops. And I would say, a consistent -- I would say -- and daily -- or hourly looking upon the data and what the data tells us that allows us to do what we call chase runs, where we look upon revenue streams that are available for us, dynamic view on demand per product. So as Harm spoke about the data and the capability to analyze data. We think that this is a fast forward, as I said. We probably don't think that we're going to maintain the growth at the same level moving forward because you are seeing an opening up of more and more stores coming up. But there is no doubt that the consumers that have moved online will continue to be online and will continue to, where they're getting a good experience, shop at that space. So the -- our capability to capture consumer, address consumers with the right products in the right moments has proven to be very fundamental for us. So today, we have a much more data-driven setup than we had 3 years ago, where it was a more transactional driven setup.

[Geoff Lowery, Partner of Non]

And can I just ask a general one? You've done a lot of work on the infrastructure in your business over the last 3 years. And I guess we can see the benefit of that in terms of the flexibility with which you've responded to COVID. But is there is there further big change ahead of you in terms of infrastructure? Or do you think you've completed the big projects in terms of SAP and so on? I'm just trying to understand whether you've learned something through virus that makes you think you need to go further with your actual organizational structure?

[Kasper Bo Rorsted]

Well, I think if you look upon our overall infrastructure, there's no doubt that the transition to e-com will require us to invest more in dedicated distribution facility so we can ensure that we can distribute to our customers because we took a 2- to 3-year step forward. When it comes to systems, the more data-driven we become, the more it pays out. You can see that we have a much higher trading when we get people into app landscape. So moving forward, you will see us consistently invest more and more systems in AI, in infrastructure that allow us to deal better with the consumer. I don't think you're going to have a stopping point. I think that the winning formula is the more you can invest, the better, you can understand the data. Actually, the more competitive advantage you will get. And I think that's where the big companies have a huge advantage over the smaller ones because we have the capability to invest with more than 200 IT people overnight into our digital space and accelerated a number of development projects that smaller companies cannot do. So we're quite encouraged by it, but we also understand the requirement for fairly large investments moving forward.

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

Just to add to it, Geoff. We finished our corporate headquarter investments, whether it's in head so and we finish in our port and village by the end of the year. We have invested a lot in our DC network given the growth in the future. Of course, there will be one or the other add, but the big investment has been done over the last couple of years. And as Kasper said, digital will never be finished. We will keep investing into that so important channel.

[Operator]

The next question is from Chiara Battistini of JPMorgan.

[Chiara Battistini, Co]

My first question would be on the level of inventories, not the one on your balance sheet, but rather the one in the trade with your retailers. If you could give us any color on those levels if you're concerned at all about that, and especially particular color on China following as China is the country more advanced in the recovery. And the second question, we -- can you confirm that your geographical mix plus your channel mix in the quarter actually contributed to around 450 basis points to your gross margin. That's my calculation. But just if you could confirm that. And if I'm reading correctly, Slide 19, that the promotional impact is negatively impacting the gross margin was equivalent to that?

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

Well, first, on the inventory, Chiara. First and foremost, yes, we saw it on the balance sheet that we are well on track with our plans that it's peaking in Q2. And we are moving through that one in the second half. And also, when we look at the inventory levels, where we have visibility with our wholesale accounts. Most of the wholesale accounts, at least, the winners in the marketplace had a really good trading online as well, better than we expected and similar to what we have seen as well. And we're actually seeing demand from these wholesalers as they move more products than they probably expect and we have expected. And what I said earlier, they are seeking demand. And we have our inventory matching that order profile. And that's why we are confident going into Q3 from a shipment point of view. Similar pictures in China. Of course, China, the pandemic started earlier. And we have made more progress in China. So that's why we're working also with good visibility to the right inventory level with our franchise partners because it's a true partnership, there's a lot of visibility, and we are improving there month-by-month as well. When it comes to the geographic mix and the impact of it, we are not quantifying it in detail. It has been significant. And again, the chart that you're referring to, it's more illustrative of nature. Don't match it one-to-one. But the geographic mix, given the recovery of China has been significant.

[Chiara Battistini, Co]

And just a clarification on what you mentioned before about promotional activity impact in Q3 and the second half. Just to clarify, you're not expecting a deterioration of promotional activity and also the promotional environment overall in Q3 versus Q2?

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

That is correct.

[Operator]

The next question is from Antoine Belge of HSBC.

[Antoine Belge, Global of Consumer and Retail Research]

Yes. It's Antoine at HSBC. And Kasper congratulation on your new contract -- or renewed one, sorry. First question relates to e-com again. I think it accounted for north of 30% of your sales in the quarter. Obviously, accretive to gross margin. But I think Harm mentioned the incremental cost as well. So -- but what was the magnitude of the accretive impact of the growth in e-commerce this quarter? And maybe longer term, what type of contribution to the EBIT margin enhancement could that deliver? And my second question relates to the U.S. market. Could you maybe give an outlook of how the back-to-school season will look like for that market? Maybe looking at a different type of distribution network in the U.S.

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

Antoine, thanks for the question. First, on e-commerce, the share of e-commerce, indeed, was north of 30%. So around 1/3 of the total business in Q2. And we're not going to disclose the details and the accretion to the corporate profits. But as we said in many other calls, the e-commerce profitability is accretive to the corporate profits.

[Kasper Bo Rorsted]

On the back-to-school, we saw positive trading in the month of July. But clearly, we're not expecting the same level of back-to-school in Americas as we did previous year because a lot of schools have still closed. For instance, the state (sic) [city] of Portland, Oregon, the schools have right now been closed until November, and that is the earlier state. So while it will continue to be a big trading day for us. It's clear that the educational system in the U.S. is impacted as it is in many other countries around the world. That is included in our forecast.

[Antoine Belge, Global of Consumer and Retail Research]

Okay. One follow up on e-com. So the -- again, so a bit around 1/3 of your business. What was roughly the split between your own e-com and the e-com of your partners?

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

We don't give the details split, but the vast majority of that was our own platform.

[Operator]

The next question is from John Kernan of Cowen.

[John David Kernan, MD & Senior Research Analyst]

And Kasper, congratulations. It's great to have you signed on for more time.

[Kasper Bo Rorsted]

Thank you.

[John David Kernan, MD & Senior Research Analyst]

Can you talk a little bit more about the EUR 4 billion -- the more -- now more than EUR 4 billion e-comm targets and how the adidas app, which I think you said grew 4x in the current quarter in terms of total sales. In the Creators Club, I think you mentioned members there are 2x the lifetime value of other digital consumers. Maybe just talk about how the app and the Creators Club fits into your long-term strategy? And in any numbers around total Creators Club members there are right now and how fast that's growing would be very helpful.

[Kasper Bo Rorsted]

So until a couple of years ago, we did not have any apps. We came from the dot com site. The apps we had came out of are fantastic, which were not commercial-driven. Right now we are seeing over-proportional growth, as we said from our adidas app landscape, we'll continue to build more apps with more functionality and more advantages for key consumers i.e., give them access to, what I call, restrictive launches or launches with very limited volume. So it does play a key role for us. We do not disclose the numbers of it. We put a target of EUR 4 billion plus. Because last year, we were slightly below EUR 3 billion. So you can see an enormous growth in the first half, and 93% in this quarter. We expect also a very strong growth, probably at lower rate in the third quarter because of the reoccurrence. But we are going to see a, I would say, more differentiated way of engaging with consumers online through our dot com and through a variety of apps that are relevant for different consumer groups and are giving the more loyal and consumers for the higher spend, more advantages by trading through editors. And that gives us the opportunity to upsell and cross-sell. That's pretty much where we're going to leave it. But we have millions of members. And of course, it's growing very, very rapidly.

[John David Kernan, MD & Senior Research Analyst]

That's helpful. And then maybe just one follow-up question on the product launch cadence for the back half of the year. Just -- I think there was a new UltraBOOST 21 slated for back half launch. We've clearly seen some of the success you're having with 4D. And then just anything on YEEZY launch schedule as we go into the back half of the year. What are you most excited about across the adidas and YEEZY brand as we head into the holidays and beyond?

[Kasper Bo Rorsted]

Yes. I actually think we have the strongest product pipeline that we've had in the last 3 years. If I look upon the 3 -- the ZX that came out, super cool product. The 4D where it's migrated towards our technical running shoe that we have high to low right now. And of course, YEEZY, but YEEZY is one component. As I said, we'll do more than 150 hype drops by the by the remaining of this year. So we're becoming much more balanced in the way we do drops. We do drops going back to the call, what you asked about digital. If you look about 150 drops, and we have about 25 weeks left that you can do your math yourself. You can look at how many drops we do. So it has been a dramatically improved pipeline. We're not seeing, of course, the big commercial outcome out because of corona. But the reliance on 1 product or 1 brand this year is much lower than it's been in the past 3 to 4 years. And that's why we're quite excited about the traffic we can generate, but also the consumer excitement that we're getting. And as I said, said ZX, super cool product. And the running shoe is really getting us back to where it needs to be. The [ Techfit ] running shoe is right now, by far, the best piece of running equipment right now in the market. And there'll be new products also to come.

[Operator]

The next question is from Jamie Merriman of Bernstein.

[Jamie Susan Merriman, Senior Analyst]

I was wondering if you could talk about China. I know last quarter, you had talked about taking inventory back from your partners in China. So can you just talk about how much of the growth and the improvement that you've seen in Q2 was driven by sell-in to partners versus sell-through? And where you see the underlying growth rate in China at this point?

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

No. It was a onetime event that we had in Q1, where we had the coronavirus breakout in general already. As we said on the previous call, we have a different approach in Europe or North America. So it was a onetime significant event for Q1. Q2 is -- that's the underlying performance that we're reporting, there's nothing specific. There's always some returns happening in the market that we need to feed into our factory outlets. But look at everything that we said today about China as an underlying performance.

[Operator]

The final question is from the line of Piral Dadhania of RBC Capital Markets.

[Piral Dadhania, Director of Premium Brands]

I'm just curious when you talk about the product pipeline for the remainder of the year and the fact you're accelerating new product drops. Obviously, that's new product. That's a hyped product. How does that balance and sort of interact with the fact that there's also, on the other side of the table, an excess inventory situation and we're expecting an elevated promotion environment? How are you guys thinking about that balance between new product and then having to discount from the other side for slower moving or excess product? And secondly, I'm just curious, the DTC revenue was basically flat in the second quarter. Could you help us understand how much of that was driven by discounting in the absence of that promotion where would we have been on the retail side? How meaningful is that, I guess, to that revenue outcome for the retail channel?

[Kasper Bo Rorsted]

So on the product pipeline, the 2 are not really, I would say, comparable because the hype products are typically iterations of an existing product or seeding of a new product that will come 1 or 2 or 3 quarters out with very low volume, but it drives attention or traffic to our site or to our store. So the 1 does not compromise the other. Actually, very often, you can use hype drops to actually sell off inventory because you get an increased traffic either online or offline. So this is a trend that we've seen accelerating that the necessity of having hype products is very high in order to ensure increased traffic online or offline. And handing over to Harm for the second part.

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

Yes. Just on the [ DTC ] you're right, we have been growing actually 1% in Q2. That, of course, was driven by 93% e-commerce growth. And then when you look at the physical retail, we're not going to give the details of what has been a promotional share of it. But what we can say is that, of course, the return and the like-for-like or factory outlets have returned faster to growth than the concept stores. And that as much as we can...

[Kasper Bo Rorsted]

Maybe before I hand over to Sebastian, I just want to thank you those who congratulate me on the contract extension. I'm super happy at adidas. I'm very excited about the future. There's no doubt that this has been a particular difficult year not only adidas, but for different industries as a whole and will continue to be such. But I'm very, very convinced about the big upside that this sporting goods industry has. And if you look upon the consequences of corona with casual wear with a healthier lifestyle will fight against obesity, I think everything is playing back into the tune of the industry, also the growth of digital. And I'm proud and happy to be able to support the company and drive the company along with my management team going forward. And I'm very, very optimistic about the future aspects of it. This is a setback. But I think that the underlying work we've done in the last many years will be very beneficial for us for. So I look forward to see many of your digital. Unfortunately, it's not going to be physical for a while, but I can say, I certainly feel the same at a given stage. I can't wait to go out and start traveling again. So thank you for the kind words, and also thank you for staying with adidas, also during this period of time. So back to the Sebastian.

[Sebastian Steffen, Senior Vice President of Investor Relations]

Thanks very much, Kasper, and thanks very much also to Harm. Ladies and gentlemen, this actually concludes our Q2 results conference call. As Kasper said, unfortunately, we will not be able to get on the plane and travel to see you physically, but we will make sure to connect with you in a virtual way, which has worked quite well over the last couple of months as well. If you have questions today or over the next couple of days, please don't hesitate to reach out to Adrian, Christoph or myself. I guess you know how to track us down. And that leaves me with thanking you for the participation, saying bye-bye and most importantly, stay safe. Take care.

[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.