Adidas AG

XETRA:ADS

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome, and thank you for joining the adidas AG Q2 2023 Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]

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

[Sebastian Steffen, Head-Investor Relations]

Thanks very much, Franzi, and hello, everyone. Good afternoon, good evening, good morning, wherever you're joining us today for our Q2 2023 results conference call. Our presenters today are our CEO, Bjorn Gulden; and Harm Ohlmeyer, our CFO.

As always, Bjorn will kick it off in a second with our prepared remarks, and we'll walk you through our Q2 results and our outlook, together with Harm. As always, also, I would like to ask you that during the Q&A session, you limit your initial questions to two in order to allow as many people as possible to ask the questions. Thanks very much in advance for sticking to that rule.

And now without any further ado, over to you, Bjorn.

[Bjorn Gulden, Chief Executive Officer]

Thanks. We all know that they will not stick to the two questions, but we will try. As you can see on the screen, we start with the Women's World Cup. I hope you all follow it. It's been a great tournament so far. Unfortunately, for us and for most people in the room, Germany lost. That means that we will only have five teams going to the next round. But still, I think starting with 10 and the way we look extremely proud of how the brand has showed up. As you can see, we had 10 out of the 30 teams starting in three stripes, and we had more than 120 players contracted and of course, many, many more playing in our shoes.

And I think it's fair to say with all the reports that I've seen, 1.6 million spectators in the stadium, and television rating is very high everywhere, this is the real breakthrough for women's football. And of course, that's what they deserve and also very, very important for us in the future.

What is also new is that not only do we participate, but we also made different campaigns with different players and put the media money. Here, you see Oberdorf, Fowler, Russo, English, Australian and German players that we have used in campaigns together and also individual and then again, in our strategy to be more local in the U.S. Our U.S. subsidiary has done a campaign with Trinity Rodman, one of the American players, who also happened to be the daughter of the famous Dennis Rodman, who used to play in the Chicago Bulls basketball team and was one of the great personalities. So again, just to sum up, women's soccer is coming. We play a major part. Let's see how the tournament ends, and very, very excited to see the development.

Going over to business. I think you have probably seen all the numbers already, but we'll repeat it quickly. It was a quarter where I said or we said we think we were happy with the development. We're starting with the biggest problem, and that's North America. As you can see, minus 16 in the quarter, minus 18 for the first half. Needless to say, you know this. There is still a lot of inventory in the market, not only ours, but also ours. And the problem is, of course, some of that inventory is not great. That means that the sell-through is slow, and we have to work through that for a while and that because of that, also the discounts are high in general and also of our products.

The good thing is that the team in America has reacted and has had what we call a conservative selling strategy, not pushing in more merchandise, but trying to do it very dedicated. And of course, we had some very, very good bestsellers that is, we are now starting to scale up, which means that we hope we can turn it around to be something positive. And of course, that will create more brand heat, and we can get into 2024 looking better. We'll get back to that in a second.

What is very positive in the U.S. is, of course, this. I mean, Messi deciding to go to Miami, helped by David Beckham, who is one of our, what should I say, very, very close friends has been fantastic. He scored now five goals in three games. And there's a real boom after Miami products and especially then, of course, Messi product.

When you look at the screen, you see also quite some, I would say, very innovative marketing that our team turned around in a very, very short time. I'm very, very proud of what they have done. Some critique that all the products are sold out, but I think you understand that the explosion in the demand, you cannot source 10,000 U.S.’s other products within days. So that will be, what should I say, higher demand and supply for a while. But sometimes that's good, and I'm sure we were pleased the demand as the next weeks and months passes.

This has also caused us to review the contract with Leo. There was a question where he would go and it took a little bit of time after the work up to get into the table. But as you can see here, we have signed with him. And of course, he will be part of our family for a long, long time.

What is also important in the U.S. is women's basketball. As you can see in the middle, the Exhibit Select is a dedicated shoe only for her. Using that shoe with all our, what should I say, star players, as you can see on the left side, and we are continuing to invest in more players because we really believe in the women's NBA. And as a part of more focus on women's sports, this is extremely important for us in the American market.

Changing to men's basketball. We know we have not performed the way you would expect and also the way we should. But when you look at the roster, we have four signature players, Harden, Mitchell, Young and Edwards, which we know we can do and have to do a better job with. We have added [indiscernible] as two Young Guns. And then when we take that together with the launch of Fear of God, which you see both on the performance side and on the lifestyle side, which we talked about a couple of weeks ago. These products starting to flow into the market in the second half being scaled in 2024. We feel we are in a better shape in this business than we've been for a long time.

And remember, the opening of the L.A. office, which happened in February, that is not a productive office yet because the results of their work is, of course, not going to be visible until 2024. So a lot of activities going on between global and North American business to strengthen our business because, as you know, it's a very important market for us and the industry. And when you look at the numbers, of course, we're not happy with the performance, but again, in a very, very difficult market, where many are struggling.

If you then go to Europe – EMEA, Europe, Middle East and Africa, flattish, down one in Q1, plus two second half. Again, here, numbers that we're not happy with. We should be stronger in the home market, many reasons for this. But I think you will see next year that we will start to build market share again by chasing more of the commercial business than we've done.

A couple of important investments. We announced together with Man U that we have extended their contract long-term, very, very important for us to secure that right now. Manchester is in talks also of changing owners. We and the Club felt it has very important to get this assured. Many numbers floating around, I can only say like I always say, the more we pay, the better it is. The contract has a retailer, which is fixed. It has royalties for how much we sell and bonuses for how they perform. So that means the more we pay, the better they have performed and the more we have sold. So let's hope that, that will get a high, high sum.

A couple of news in Europe in soccer, we signed AS Rome, one of the most traditional and of course, with the most unique color in the league. Very proud of that. We have gotten the traditional club Nottingham Forest back again in the Premier League. And then we have, again, signed Maccabi Haifa, which is the best club in that country. So we continue to invest in football, and it is, of course, one of our most important sports going forward.

We talked also about Indian cricket. Again, India being probably the fastest-growing market in our industry going forward and as cricket being the major vehicle, it was then clear for us, although it was not part of the global strategy that when we got the chance, we would invest in the national team. And as you can see, they're already starting playing with our performance logo on three-stripes. And of course, they won and the whole market very excited and we think this will be a game changer in the Indian market.

Continuing into a very important market that we talked a lot about, Greater China, plus 16. Remember, we said last quarter that our sell-in was down, but sellout was double-digit up. Now both sell-in and sellout is double-digit up, and that's why the plus 16 was in the quarter, but only plus one for the first half. And we see the energy in China starting to pay out. And as I said, double-digit sell-throughs now two quarters in a row confirms that.

What is also new? We, for a long time, for many reasons, have not been able to activate any major celebrities. We did last week, activate Ma Sichun, which is one of the most famous actors in China. She's one of the winners of the so-called Golden Horse Award, which is the same as the Oscar. And she's been now both in social media and other media, promoting our product and it's worked very well. So hopefully, a breakthrough that we can get back again and use the ambassadors the way we can do optimal and not be so afraid of the impact.

Quoting yesterday morning on the film set of a new movie before they started shooting, she showed up, of course, in the Samba, as you can see in black and white and an adidas track jacket. So she's also using our product in the spare time and very, very positive development for us.

We also sent our world champions, the Argentina national team and Messi to China. Unbelievable interest, crazy amount of people showing up, good for the brand, good for Argentina, good for Messi. So football also global symbols, very important in China. We are investing more and more in sports, even in athletics here in an event that were actually done on the Street, 20,000 people watching Chinese athletes doing different jump competition.

And it shows that the interest in sports in China is growing and that China is going back again to more normal times. And for us, we clearly need to invest even more in sports than we have done before. Another activity, mobile skatepark, our sales and marketing teams traveling around in China, doing different activities for the young generation to connect with the Street culture and skate is one of the things that we see growing. Skate and music together makes great atmosphere.

And as you can see a lot of people and a lot of I would say positive energy around these kind of events. On the totally other side, outdoor, we have talked about the outdoor boom globally. This also happening in China. Terrace actually started a series of ultra trail runs, I think 11 of them. And as you can see, 10,000 of Chinese then doing this kind of events. And again confirming the dedication to sports and also to outdoor activities and good to see that we can play that in China on many categories.

What is also extremely positive is that the first time in three years there was a trade meeting again, our sales organization had more than 2,000 customers at an event showing the collections for 2024. And again, I think its three years ago that was done physically last time, it was almost digital. And as you can see, a great atmosphere. And again, things starting to normalize and the way we used to do our business.

Very important for us, the investment in the new distribution center that we open in Suzhou, highly technical, automated and of course, a major vehicle for us to do the growth that we plan and hope to have in the Chinese market. So to summarize, difficult time in China, we see the improvements now two quarters in a row. And again, very proud of what the local team is doing because again China is more local than it’s been for a long, long, long time.

If you then go to LatAm strong growth again plus 30 – plus 39 for the first half, same here a lot of activities, of course around Argentina team, the Argentinian market has been very strong for us and of course, helped by the success of the national team, and of course, also Messi. But also on the women’s football side, we had four of the teams from the region actually in the World Cup. And again, I don’t need to say that I think the Dussán team did a great job on so on this design and the Colombian team in my opinion, looked the best. Also qualified for the next round, I think they play Jamaica. So we have two our coolest team playing each other the next round, and at least one of them will then go through. And again, women’s football slow start in LatAm, but also they’re growing and as football crazy, the region is, this is very, very good for us.

Another small thing, a lot of local events and local products, on the left side, you see some of the SMUs that has been made locally for the market. And then on the right side, you see some of the, what should I say, artists both from the rap side and dance and music side that the local team are using. And again, I’ve said it many, many times we need to be more local in our marketing.

And I think the team in LatAm you see also in numbers have done a terrific job on that. Even on retail trying out new concepts, here you see actually a women’s only shopping shop concept that they have developed. She being a major focus for us globally, but especially now in LatAm. And of course, as flexible we – as we are, we let some of the markets take the lead on that in the first indication very positive.

Moving to the last region Asia-Pacific or APAC 7% up for the quarter, 11% for the first half. We are going to do some changes here. Today, this region is run out of a headquarter in Singapore. It basically has three independent markets, Japan, South Korea, Thailand, and then it has two clusters of markets, Southeast Asia, as you can see. And then Pacific, which is New Zealand and Australia.

Going forward, we are going to have Japan and South Korea as standalone markets going straight into headquarter. Why? Because both of these markets are very, very special. They’re big markets. They’re very trendy markets. And they’re markets that set trends. And that’s why we feel that having them in a region together with, I would say other markets with different direction doesn’t make any sense. So they will be tied into the global machine and be handled and separately as a region.

The other countries clusters will then go to the emerging markets, very successful leadership that will then bundle them and find synergies. And they are sitting in headquarter now in Dubai, but I’m sure they will have some kind of hub going forward also in Singapore. So a change that is strategic, and we think that both Korea and Japan will see an immediate impact of that when they can be more independent and be quicker to market with what they actually need. We will also have our development center, the creative center in Japan, working then very specifically for the Japanese market.

So to sum it up both the second quarter and first half were basically flat and this in our opinion quite better than what we had expected a while ago. You would immediately ask, so what would the impact be excluding GC? And as you can see on the bottom, not big, because the growth was flattish with Yeezy and excluding GC we were down minus one. And if you look at the markets, no big differences between with and without, except for North America, which then excluding GC was down minus 20 instead of 16.

The rest of the impact between 1% and 2%, so not that big of a different to be honest that you might have expected. If you then look at the channels wholesale minus 10 and remember we had an order book that was even worse than this. So of course, we have picked up some, but we have said that we need to put a lot more effort on wholesale. But of course, for a while, the numbers will be negative because that’s what the results of what we did last year is or was. Own retail very strong up 19%. We have only closed net 12 stores since last year, which means that we have double-digit like-for-like growth all over the world and actually a very strong development in our brick and mortar stores.

E-Comm up 14%, of course, this is impacted by Yeezy. Remember Yeezy was only sold in e-comm in the quarter. And you will see later what impact that had. So reported wholesale at 56%, D2C as 44%, and the difference between e-comm and on retail only 2% by 23% and 21%.

If you then look at the business without GC wholesale, then down only seven on retail, the same of course, because we didn’t have any sales in on retail of Yeezy. And then e-comm goes from plus to minus one. And that is then the impact that GC had, which gives you 61% wholesale, 39% D2C. And again, I think this mix is also similar to what we will have going forward after Yeezy.

As you can see on retail 22% and e-comm at 17%. The positive thing of e-comm is that also without Yeezy, we have been much better in selling full price and not discounted. And I think we have a gross margin improvement of around 2% also on the e-comm business without Yeezy. So there is an improvement by taking out discount and using it also as a full price brand building channel, which is going to be very important in the future.

If you then look at the new stores, although we talk a lot about wholesale, we will of course continue our retail. We are experimenting with new retail concepts. And as you can see here, open a flagship in Sydney and also what we would call a big home of sports store in South Africa here in Durban. We currently have around 1,940 stores in the company divided between what you say concept stores and factory outlet value stores.

And as I said, the change in number of stores only minus 12 in the last 12 months. So basically the same amount of stores and the same size in square meters. And again, very impressed what the retail teams have done. And I think when you look at the numbers when we fill the stores with the right merchandise, you also see good numbers, which is a good indicator of what could happen if we get better distribution.

So then to the division footwear, up one apparel minus three that the apparel market is I would say highly inventoried in general. And you see that also here. And then maybe a positive surprise that accessories is up 8%. This code is mainly from the football business, BOOST and other accessories, so a positive development and that gives you them 58% footwear, 34% apparel, and 8% accessories.

And again, always say that footwear in a company like ours must be at least 50% and 58% is very, very healthy. If you then look at the different categories and performance, performance in generally was up. And you see here, football, especially sports, which includes the smallest sport, for example, Tennis and U.S. sports, which is what we do for the American market all up.

And then running training, outdoor and golf slightly down, all in the low-single digits explanation is easy. If you take North America out, you will see that everything is up except for outdoor, which is slightly down by 1% or 2% globally in a business that of course was growing very quickly before. So the only difference is the general downturn in the American market and take some of the performance categories down, but in the rest of the world very positive.

Soccer, of course, the DNA of the brand, many of our teams doing well. You probably know this, very proud that Mexico won the gold cup and that Italy, which is new in our portfolio, actually won the Under-19 European Championship, which shows that they have a talented generation coming up. We have launched the home jerseys for our four major teams in Europe. Very traditional as you would expect, but then we've been much, much more innovative and I would say much more creative on the way jersey. And this going forward is going to be important. We will be more, what should I say, local in our designs, and we will be more tied to the club and not try to do the same design for all the clubs. And as you can see here, it's pretty different than what we have done before and the reaction has been very, very good.

Football boots, again, very good reaction to both Crazyfast and Crazylight. We have very, very good product. And as I've said the product for 24 will be even better. So very happy with that.

Running, you know, the development the last two years on the real racing site very good, new launches of both a Adizero Boston and Adios. And again, the issues are winning marathons every week. I’ll back our running guy has built a product and a sports market, the portfolio that works, but now we need to work on distribution and we will start to hire people again to go out in running specialty, the brand left that part for a while and wanted to serve that digitally. But you will now start to see us be much more active in running communities again, and also have sales reps servicing, running specialty.

Track and field, very, very important as the core in the Olympics and the core of all sports. We, of course, have to invest more again to get back to more athletes and more federation. That takes some time. But the pipeline is already starting to fill up many, many good athletes, especially on the female side. Also in what do you call new markets like India. And we will look good in Paris and we will continue then to pick up both athletes and federation as we go forward, because this is a place where adi should dominate. A new launch in the quarter was, adidas Switch, probably the most comfortable running shoe in the market just out there. So if you want a comfortable shoe then please try it, at least for me, it's the best comfortable shoe I've had. Maybe not the running shoe for the racer, but for those who also are normal this is the shoe. So try it.

Training, a category that is very interesting and where we are starting to invest again. We partnered with Les Mills and had globally had a series of events. The last one in the right corner was last week in Los Angeles, where I think more than 10,000 people were doing activities with us and Les Mills. Again, we have the product – a lot of innovative product both for her and him. But we've not been good in distribution and we believe that this is one of the avenues where we can get growth with the normal sports stores all around the world.

Outdoor, talked a lot about it, as you could so only flattish development. But of course, we had great growth last year. TERREX as an innovation outdoor brand won for ISPO awards. So very proud of that. That means that the product is right and now we need to also there work on distribution and get it placed more in the right wholesale environment. Talking about outdoor and TERREX, our female ambassador, Mikaela Shiffrin won the ESPY award for the best female athlete. This is the award that the American ESPN is giving out. And we also won with Patrick Mahomes, the Men's Awards. So both the best female and the best male athlete was adidas award. So very, very, very, very, very proud of that.

Talked about golf, important boom during COVID, slowed down stagnated a little bit afterwards. We have Rose Zhang who went straight from being an amateur to win her first professional tournament. And as I said, many times, golf is, especially in the U.S. a very important category for us. And we will continue to invest both on the female and male side.

As sport, we don't talk a lot about volleyball, but a big sport, especially in the U.S. Here you can see that the Nations League, which is kind of the World Cup for national teams, we were in the final with both teams, China and Turkey. And Turkey actually won. But that means again, here, both on apparel and on footwear, a category that we will also invest more in, together with investment in more smaller sports to be the leaders that we used to be.

Quickly over to lifestyle, for the first time, I think in many quarters, the original side was positive. And also when you take Yeezy out, it was kind of flattish, I think, down only 1% or 2%. So a positive development on that side.

The sportswear side, which is then mainly the product that is a little bit lower priced in price still down, but the minus becoming less and less. Activities here was, for example, in the Paris Fashion Week, where we both had a collab fashion show with Wales Bonner. We had with our friend Pharrell Samba Café with product that he had called designed with us.

And then we used actually our marathon runners, as you see on the right side. And also long distance runners as models and a very cool, I would say, atmosphere that we created at the Paris Fashion Week. And you will see us more in this environment going forward. Needless to save it Pharrell actually working out of Paris, we hope we can do a lot of cool stuff with him going forward.

Quickly, Yeezy. We had a very successful first drop. Harm will get more into it, but we sold around 400 million in Q2, which is basically the same as we did a year ago. The whole launch worked very well. We are currently, as we speak, in a second drop you see the 10 all that we have offered this week. And we will have smaller drops going forward too. But as we said from the beginning, we will not report this or take any of this revenue into account until we have it in the box.

We've been very careful with this and we'll continue with that. And I hope you agree with that strategy because six months ago people said we should burn, destroy the product and now we have found ways of selling it and we can use part of that revenue to actually do something good in society. And instead of writing off the inventory, we can actually create cash. I'm very proud how the team has worked on that so far.

Quick look on the product side, I've said this many times, the Terrace trend is continuing and we scaling it up. The number of pair in the market is still small, but the consumer who buys it is absolutely the right trendsetter. So we're scaling that up with bigger volumes every month. And then we also have the campus that is being highly in demand and that is also picking up.

When you combine that with what we call Adicolor, which is our three stripe original apparel, very colorful, very clearly three foil and three stripe branded. We think this is going to trend very, very heavily going forward. And then going into next year, you will see that we will add the 70s running, which are the running silhouettes that mirrors what we're doing on Terrace and with our archive and the models we have there, we think that this is spot on to create brand heat again for both our logos, which is the performance logo on the left side, and then of course the three foil on the right side.

So again, a quarter that developed as we had hoped, the Yeezy thing was something we were nervous about that worked, and we've seen our inventories go in the right direction and we feel that the business is slowly moving in the right direction in a very difficult and of course very volatile and uncertain environment.

So with that, I hand over to Harm to take you to the details of the financials.

[Harm Ohlmeyer, Chief Financial Officer]

Alright, thank you Bjorn, and warm welcome and good morning and good afternoon from my side. So I would like to go to the financial update and decompose the P&L and some working capital balance sheet items to give you some more clarity on probably some of you would say a more complicated guidance that we had out there. So I want to shed some light into this one.

So I want to start with the net sales, and of course, we want to grow the net sales fast in the future, but I think there's three things that I want to focus on today. One is gross profit percentage and what is the health of this one, then of course our cost development and cost control initiatives that we have, and then the health of our inventory. And these are the three things that I want to focus on, and I'm pretty sure this is what you are interested in as well.

So I want to start with the gross – marginal gross profit. The most important number here is the 50.9% in that quarter 60 basis points up. And what's important here, and I come to that on the next chart is, what is the impact of Yeezy in that gross margin. If I start on the left hand side, we still had a headwind on FOB to increases headwind on [indiscernible] based on the hedging that we have done many, many quarters ago heavily discounting still first in the first quarter, but definitely partially in the second quarter as well. It was neutral from an inventory provisioning point of view, because we did a lot of that in the first quarter, and I come back to that on the next chart.

But positive mix and pricing effects, especially in markets where we have high inflationary scenarios, we did a lot of pricing increases, when we talk about your Argentina, Turkey or some of the more volatile markets, the mix is definitely benefited also by full price sell through where we've been very disciplined on our D2C channels. So overall positive development. And then importantly, if you take out the Yeezy effect, because you're interested in what is the underlying gross margin without the Yeezy because that's an indication for the future. So it roughly has been 2 basis points. So the 50.9% would've been a 48.9%. If you have some puts and takes on the margin on one loss, I would say, it's a fair 48.5% margin – underlying margin that we have is out Yeezy and some puts and takes, which is a good indication for the future.

If I compare that with Q1 to Q2 also there, Yeezy had an impact, but you also see that discounts have improved. We have been less promotional, as I just mentioned, an inventory allowance was not built further in the second quarter, because we covered in the first quarter and we had positive mix effect, even excluding Yeezy that is also important, excluding Yeezy, a positive mix.

So if I just combine these four elements, it explains 5 percentage points out of the 600 basis points of improvement. So overall, again, very disciplined in our D2C channels, not just in retail, but most importantly also in e-commerce, which is a clear signal to our wholesale account. We want to grow and accelerate the growth going forward that we are disciplined in our own channels, so definitely on the first KPI a positive development.

If you then continue on the cost side slightly down on the marketing, but more importantly when we look at the operating overheads even so reported we are 7% up. But I also want to be clear, that’s an extraordinary item of €160 million in there. €50 million of that would be classical one-offs that would be accounted against the €200 million in our guidance. And then it would leave €110 million, which is actually donations that we have paid already in the second quarter, but also an accrual of €100 million of donations, which will be paid over the next couple of quarters or even years into the right communities for the right purpose. So €110 million of donations built into the Q2 P&L. So if I would take that out and there haven’t been any significant one-time costs last year, we actually would be below the prior year on a quarterly level.

This all results in an operating profit of €176 million. Of course, Yeezy had an impact of net of donations of €150 million, but again, underlying slightly better than we originally had guided. And we are making progress on a small bottom line, but we at least making progress. When we come to the inventories, only 1% up reported, 6% currency neutral also there good progress and you see more clearly the progress on the next page.

On the left hand side, you see the development by quarter compared to prior year. We always said we peaked in Q3 last year. You see 63% up compared to the comparable quarter than only 49% up and 27% up and now only 6% up currency neutral. When we look at the absolute amounts €6.3 billion was the peak at the end of September last year. Now we are – we have been down at €6 billion at the end, €5.7 billion, €300 million better by the end of Q1 and now only €5.5 billion.

And in the €5.5 billion as you know, still €400 million of Yeezy inventory, which is higher than the comparable quarter in 2022. So really, if you would take the Yeezy out, we actually would be below prior year quarter already. So very clearly today I say inventory is not from a size point of view our biggest issue. Of course, as Bjorn said in North America, it’s still in the market. But we are definitely making good, good progress on the inventory.

When we then go further on the inventories, of course, the accounts receivable are slightly down linked to the 10% decline in the wholesale business. And most importantly on the accounts payable significantly down by more than €1 billion. That’s an indication that the inventory will come further down in the third quarter based on how we finish it right now because the payables are a good indication of what you will see in the next couple of months, which not just will impact the inventories, but also our cash situation.

Talking about cash. We have finished the quarter with €1 billion on cash on the balance sheet down compared to last year, but significantly improved to where we have been six months ago. Also that is something we are very happy how we are progressing and that will continue to improve in the third quarter.

All of this led to an updated guidance. I want to decompose that guidance again because I said earlier it was somewhat complicated this year. Starting with the currency neutral net sales. We originally said it’s a high-single-digit decline, assuming we don’t sell any Yeezy inventory, now we started to sell some Yeezy inventory. So the new guidance mid-single-digit decline only. And that is reflecting the €400 million, first drop of the Yeezy and a slightly better underlying new business on the other side as well, so that to the change.

On the top line underlying, we always said we are a breakeven company. If we wouldn’t account for any Yeezy’s and we will continue to be a breakeven company. Even so, we are slightly better on the top line and on the bottom line. But this is where we are and the guidance is unchanged. Now, from an operating loss point of view, we said the guidance is minus €700 million. This would’ve been €500 million potential write-off of the Yeezy inventory and €200 million one-off cost. So if you’re a breakeven company adding these two things up, we would be reported minus €700 million. That was the old guidance.

Now the new guidance as we have today roughly €100 million of the inventory, so the maximum write-off could only be €400 million. The one-off costs are the same. And we said it’s already €50 million in the second quarter and €70 million in the first half. So we are on track to move towards the €200 million. And Yeezy had a positive impact in the second quarter of €150 million. So if you add it all up, you’re moving from minus €700 million to a new guidance of minus €450 million. This is only accounting for the first drop. And of course if you would be successful with a second drop, we would look at that guidance again.

But that’s where we are. I hope it’s clear, but I’m pretty sure we’ll get some questions on that later on. But I want to hand over to Bjorn again to make some more comments.

[Bjorn Gulden, Chief Executive Officer]

Yes. Great explanation Harm. I’m sure you’re all saying this is conservative and yes it is, but I think we all agree that we have promised you that we will only report on things that are happening and with the uncertainty around Yeezy, we will not account or tell anything about Yeezy until we sold it. And we have things in our pocket and I hope you understand that. Of course, we all hope that we will continue to sell and things will go smooth. And we also hope of course, that there is some more improvement in the underlying adidas business. But I think you all agree that we take step by step and again, that 2023 is just about what should I say, lay the ground for a better 2024, and then for a good 2025 and 2026, as we said all the time.

Couple of more infos that is important for you to understand us as a company. You know that we have the purpose of through sport change people’s life. And we’re doing a lot of activities outside of what you normally see. The one on the bottom the Special Olympics in Berlin was a highlight for me personally, I think for many of us. First we had a lot of the athletes here on campus and then we saw them compete in Berlin, which was great. And with small investments, you can help a lot of people.

We continue to work hard on helping the planet on the sustainability side. Different activities where we collect money and give it to people that we work on that side in addition to all the things we do ourself. And then a thing we did in China, Run in the Dark where blind people are also being taken for runs and can participate in sports through things that we are investing in and we are helping. And there’s only a few of the activities, but important that we as a sports company think about inclusion also on the things for the people that doesn’t have it as easy as we have.

We talked about the donations. We have in the second quarter paid around €10 million in donations and in addition to that Harm has accrued for another €100 million. This €100 million are proceeds out of the business – the Yeezy business that we will use, especially for those organizations that works against hate and discrimination. And of course, also for communities that has been hurt by the things that happened. And then in addition, we will continue to donate for sustainability projects.

In that context, I would like to mention that we are working with ADL. We are working with Keeta Floyd Institute. We are working with the European Jewish Association, and of course with many others around the world. I would also mention that we now work with Robert Kraft and his foundation to combat antisemitism. Robert is a very, very knowledgeable guy in the industry coming from sports and he is investing a lot of time and resources to work against hate. And we will do quite some projects with him because we are very impressed by what he’s doing. And we think we can do a lot of good things together. So you will see more of that going forward.

And then just a couple of slides. We have a fantastic facility here in Herzo. We build home ground, which is a hotel for the German National Team when they were here during the last Championship. We are now using that for other teams. So in the last couple of months, we have had German Ski Federation of the athletes here. We’ve had the Women’s National team here preparing for the tournament. We had the Arsenal here for a week. We had AJAX here for a week, and we had a lot of the Special Olympics athletes training here. I think we also had the German referees here. And we will go forward almost every week have teams or individual athletes living on campus and training because we have the best gym, I think in Germany and the best facilities in general. And this is the way our campus should be taking a mixture of employees, world stars and other athletes living on campus is very, very special. And I’m very proud of that.

We have also tried to bring the old adidas energy back on campus. A lot of town halls, we’ve had a lot of athletes, coaches, you see some of them here. We have wrote to the records where world class athletes are trying to set world records on the campus. We’ve had soccer tournaments, we have had world stars talking to us. We had fan fest now during the Women’s World Cup and all these things is again, to bring back what at least I know ADI used to be a place for sports, fanatics and people that has a big adidas heart, and not only in Herzo, but all over the world. This is how we would like adidas to be seen and we feel we are on the way of getting that spirit back again.

Final thing. As you probably have seen from our announcement, we had a change in the Board. Michelle has taken Amanda’s place. She’s now in charge of all HR. She’s legally not in our Board yet. We have said it’s interim on the legal side, but she has all the duties and all the tools that Amanda had. And then at the end of the year, we will then sit down with Michelle and here if she wants to continue with it forever or long-term. And I’m sure that we have a very, very, very strong HR leader that has the DNA both from adidas and the industry.

So with that again, for us, a quarter that confirms we’re on the right direction. We still have a lot of work to do. But I think we all feel more comfortable than we did a quarter ago. And in a volatile world, we feel that we have a good basis to work from to get where we all need to be. So with that, I hope you have some questions not as difficult as the sport you see on the screen, because that’s at least my most difficult sport. But I hope we can handle your questions better than I handled my swing. So with that over to you.

[Sebastian Steffen, Head-Investor Relations]

Yes, thanks very much, Bjorn, thanks very much, Harm. Yes, we’re going to move to the Q&A session, and you’ve heard it from Bjorn that he was questioning your ability to stick to the two question rules. So now it’s up to you to prove that this is a well-behaving crowd. Let’s see how that develops. And with that over to you, Franzi.

[Operator]

Thank you very much. [Operator Instructions] Our first question is from Warwick Okines from BNP. Please go ahead with your question.

[Warwick Okines, BNP]

Thanks very much. I’ve got two, I’ll stick to that. The first question is around distribution. This quarter you’ve talked about sort of stable number of retail doors and last quarter you talked about reducing the Chinese number of doors and that work had taken place. When you look at your distribution broadly and globally, where do you think you want to get to? Do you want to increase the number of wholesale doors in particular, and is retail stable? And then the second question is around product. Last quarter, Bjorn, you said that you were starting to smell the comeback of Superstar. Can you just update us on the brand heat of that product please?

[Bjorn Gulden, Chief Executive Officer]

Well, it’s two questions, but there’s long answers. The distribution around the world is of course not optimal. I think what you referred to China is that we said we reduced, I would say 2,000 plus partner stores. We are working – the wholesale market in China is that our retail partners are opening adidas stores. And they have had during COVID reduced the number of doors. And the direction also goes to open bigger stores. So even if you reduce the number of stores the space you have available could be the same. But it’s also been a clean-up on the Chinese side.

Our number of owned and operated stores, that means those who are adidas branded and we run and own are stable around, I think it’s 1,940 and the change is only around I think 12 stores in 12 months. And that’s stable. I don’t see any huge difference in that going forward. We will open concept stores in those cities and markets where we feel that it’s a good investment, we will open commercial doors in those markets who doesn’t have a good multi-branded or shall I say, retail market like India. And then we will open value stores in those markets where that is what should I say underpenetrated. But I don’t see a huge difference in the number of our own stores in the next 12 months.

When it gets to distribution with our retail partners, I think it’s fair to say that first we need better distribution in their stores. There’s many retailers today, I think because we went D2C and we didn’t service that well, who doesn’t look as good as they could if they had the right products on the wall. If you go to our showroom and you see our lifestyle collection and our commercial collection, and I would also say running and other categories if that had been in the stores, our performance and the retailers performance would’ve been much better than it is today. So this is back again to servicing the wholesalers and retail partners in a way that they get the best adidas product on the world that they can have.

And it’s not necessarily the number of doors, although there are also in certain markets bigger opportunity to have more doors, but it’s mainly about looking better with the retailers that we already in. But where the amount of adidas product compared to what it was five years, of course is, in my opinion, much, much too small.

And then the other question was Superstar. Well, this is a difficult one. As you can see, Terrace is now very hot and it’s being scaled to be commercial. Hopefully, that will go on for the next 12 to 18 months. The campus that you saw is not a Terrace shoe, but it’s a suede shoe that is kind of in between Terrace and Superstar. And currently now we are cleaning up Superstar, so we see that Superstar in black, white, white, black is trending very well in the fashion area. And in those markets that has had the bigger volumes of Superstar, we are trying to get that out of the market. So the market will be clean. And then there is a natural development that you go from Terrace, you go to campus, then you go to 70s running, which we think will be scalable second half of next year.

And then going into 2025, you should not be surprised if Superstar will be a hot shoe again. So we will start to heat that shoe up in the higher end of the market and do collabs with it to kind of have that in the pocket to be behind the Terrace and then 70s running. So I hope that answer your question. The timing of these things is not always plannable, right? So you build kind of a sequence and then depending on what happens you will then scale it at the time when it’s ready to be scaled.

[Warwick Okines, BNP]

Got it. Thanks, Bjorn.

[Operator]

The next question comes from Zuzanna Pusz from UBS. Please go ahead.

[Zuzanna Pusz, UBS]

Thank you for taking my questions. So I’ll try to stick to two, but I have also one clarification, so it shouldn’t hopefully count. So first of all, on retail. So thank you for sharing all the figures ex Yeezy that’s very helpful. So just to understand, so I presume you said only retail was plus 21% ex Yeezy, e-commerce I think was slightly down. But if we just look sequentially, total retail ex Yeezy in Q2 versus Q1, again ex Yeezy, so just adidas brand. Can you share with us what’s been the sequential improvement? I don’t know if I get to the – let’s say right estimate that it improved broadly mid-single-digit versus Q1. So it would be very helpful if you could share a little bit about that.

And then secondly, that’s a question more for Harm. I think Harm, you mentioned that 48.5% margin, excluding Yeezy is a good indication and I think you mentioned for the future. How should we read it? Is this how we should think about it for the full year? Or any clarification around that would be helpful because I presume in the midterm you could get to a higher number.

And then thirdly, that’s not a question, but just a follow-up. I think you mentioned the reorganization of APAC, so I just wanted to clarify if it’s just kind of reorganization of the business, or are you going to actually restate that the regional figures going forward? Sorry, I’m asking, but there’s been quite a few restatements in the past, so I just want to know what we should be ready for. Thank you.

[Harm Ohlmeyer, Chief Financial Officer]

Well, let me start, Zuzanna, on the margin, and I can also talk about the APAC reorganization to clarify that. So first on the margin, again, I indeed said 48.5% is a good underlying margin that is clean for the second quarter. That is not necessarily the margin for the full year 2023 or for the second half because we have some headwind on the strong U.S. dollar that we have seen six to 12 months ago. But it’s an indication for 2024 where we say with the dollar normalizing at around $1.10 or $1.12 in that ballpark if that is stable and the world is stable and we have cleaned the inventory, which is our plan. So it’s not an indication for 2023, but it is neither a guidance or anything, but it’s an indication for 2024 and not for the midterm. We always said for the midterm, which is 2025, 2026, we want to be north of 50%, right? So that’s on the gross margin.

And on APAC the question was whether there’s any additional cost I believe you asked. Again, we want to focus on Japan and Korea, which gets dedicated support from the headquarter to have the right products into these markets. And the rest of the markets will be integrated in emerging markets. So if there are some additional costs through that restructure, it would be part of the €200 million one-time cost.

[Zuzanna Pusz, UBS]

No. Sorry, just to follow-up, I didn’t mean cost. I meant if you’re going to actually restate the way you present the region?

[Harm Ohlmeyer, Chief Financial Officer]

We don’t know yet. It’s too early to say because we want to see how we cluster the region. So not decided yet, going into 2024. For 2023, we remain as is.

[Zuzanna Pusz, UBS]

Okay.

[Operator]

The next question comes from Graham…

[Bjorn Gulden, Chief Executive Officer]

No, no, no, no, no. We didn’t answer the retail one. I think you asked about the retail growth Q1, Q2. Q1 one was plus 11% and Q2 was plus 19%. So you see an acceleration in the performance in basically the same amount of stores. I think that was the question.

[Zuzanna Pusz, UBS]

Excellent. Thank you.

[Bjorn Gulden, Chief Executive Officer]

Okay. Perfect.

[Sebastian Steffen, Head-Investor Relations]

Now, Franzi, we can go to the next question, please.

[Operator]

Okay, which is from Graham Renwick from Berenberg. Please go ahead with your question.

[Graham Renwick, Berenberg]

Hello. Good afternoon. Thanks for taking my question. Just firstly on DTC. What was the growth specifically in DTC sales in the U.S., EMEA and China and how did that compare versus Q1? And just to confirm, a small part B to the question. DTC was about 40% of sales in Q2, I think you mentioned earlier that is the right mix now for the business. So going forward into 2024 and beyond, should we expect that 60-40 mix and for retail and wholesale growth to be more balanced. And just on the Terrace shoes, you’ve obviously talked about the extraordinary demand for Samba, also Gazelle campus, although relatively small volumes at the moment.

How quickly should we be expecting Samba and the Terrace shoes to be ramping up in second half and into 2024? I think previously you said that Samba, perhaps started the year a few hundred thousands of units, maybe going to 1 million this year. But what could it look like next year? Could it be in the order of 15 million, 20 million units that we saw for Superstar back in 2016? So any sort of numbers or help there would be very useful. Thank you.

[Bjorn Gulden, Chief Executive Officer]

I think you can basically say that the DTC numbers have double-digit growth in all markets. I mean I think that's the simplest way of looking at it. The sell-through has been, I would say, at that level everywhere I think that's the easiest way of saying it.

And when I look at the proportion, I said to you that the DTC business, if you excluded Yeezy was 39%. So wholesale was 61%. And if I had it in, it was 44% and 56%. And I think having DTC between 40% and 35% is where we're going to have it if we have an optimal sell-in to the retailers. But this is, of course, now in Q2 skewed because of GC came in again as though Yeezy was only DTC. And of course, that skewed the numbers. But I would say between 35% and 40% is where D2C should be.

When it gets to the scalability of the different products, it is true that I think the original plan for adidas not to scale Samba almost this year at all. But then when we saw the heat in January, February, we decided to scale it, and it has been scaled every month, but the real volumes that has any impact on the business is coming as you speak. So you will start to see Sambas also on the shelf so you can actually buy it because I think in most markets, they have always been sold out, and it's only been broken sizes in the different stores.

How big Terrace can be? Yes, it can be in bigger than 10 million, 15 million pairs. Of course, it can. And I think that when you add then the 70s running, which I think is the silhouette that is missing in the market, which then is the same kind of trend, but a second pair for you or it's another customer, I think we will have two, what should I say, silos that we, as a brand can own and then you have the Superstar. And again, when the cycle is full, it will be back again to Stan Smith at a while and then we can start to turn it. And the test for us is, of course, that we can manage these franchises in a better way, both the way we scale it and the way we distribute it and that we keep it out of discount in our own channels.

I'm very proud to see that in e-com in Europe has been able to be clean now on discounts on these franchises since beginning of the year. U.S. has been a little bit different. China has also been a little bit different because of the retail events. But we clearly, clearly see that the discipline to actually scale up in e-com for us has started to work. Same, of course, in the concept stores and that we feel we're starting to get control on the way we manage this, which is going to be crucial through 2024 and going into 2025 and further to be profitable, good adidas that you want it to be.

So first steps taken. Also, as Harm said, very, what should I say, happy and impressed that the discipline and other buying has worked. You can see it in the inventory. You can see it in the payables that people have not been overbuying, and we have a process now that people follow, actually to a degree that we now need to make sure that we have enough good inventory to grow from next year, but that's a good problem to have compared to being over-inventoried and then have a lot of discount also in our own channels. So things are improving slowly, and we're starting to get a little bit more handle on how we can hand it in the future.

[Graham Renwick, Berenberg]

That’s great, thank you very much.

[Operator]

The next question is from Jurgen Kolb [Kepler Cheuvreux]. Please go ahead with your question.

[Jurgen Kolb, Kepler Cheuvreux]

Thanks very much. Trying to behave and limit myself to two questions. First one on running. Bjorn, you indicated that running overall was down. And if we would take out the U.S., it was up nevertheless, However, I'm a bit surprised to see the whole category to be down and apparently, it must have been down quite a bit in the U.S. because you obviously had a lot of new products coming to the market. So has there been any specific adjustments that you had to do with the – on the distribution side? Or was that broadly expected for the second quarter in this specific category?

And then secondly, you talked a lot about product innovations and product introductions. Do you think you've changed something in the overall product life cycle management within the company that is coming through as of now for the future? Or is it basically still the same, just doing a little bit more or a better execution? Thank you.

[Bjorn Gulden, Chief Executive Officer]

I think when you look at the running market, there is no doubt that the running collections, in my opinion and I think also the market are good enough, both from the top and also into the commercial, although the investment has been on the higher end, and that's why we have signed a lot of runners. We have signed a lot of events, and we have designed a lot of high-end products. And of course, that investment has not filtered down in the commercial area yet.

But I think this is the right sequence, make sure you have a product that works, they can set records, that can win marathons and 5Ks and 10Ks, then put them on the best athletes, both female and male and then show that it works and then you start to scale your distribution.

That we're down because of North America is not really what should I say, a surprise because America is the most difficult market for us to sell into currently because the market is full, and that's why was partly expected, to be honest with you. I think the key now is to invest in running specialty. That means, again, servicing the smaller accounts, invest in the running communities and then actually have salespeople on the road again, that is servicing these accounts because that was taken away. And I think that is the key and the game changers to get volume again. And then we can scale and actually do I say, running shoes to walk in at price points in a much, much bigger scale. And we start to see that, that demand is coming on, and you know that issues that never people run in, but they come out of the running category, and it's being sold in the family channel. We haven't chased that business yet, but are starting to do that now. And that's why I think you will see the running category next year being in green.

When it gets to the whole innovation pipeline, I think it's fair to say the following, and this is a kind of a joke, but the innovation department here has actually a task to bring things to the market as long as I'm here. That means that ideas that I think will be after my time, they don't need to work on. So it's like the pressure is to bring things to market. And we are going through the innovation pipeline every month together with the business units. And there is a lot of innovations that are now ready to be launched or ready to go into the market. But the test is then how much can the market take. And that is in materials, it's in silhouette, it's in plates, it's in loss. It's in construction.

And the innovation team is now led by our Creative Director, so Alistair, who has been over a year, heads up design and innovation, and that's why part of innovation is now also design. I mean, let's face it, that innovation. It's not always a new material or a new technology, but also the way you design things and the way it looks. So I'm actually very happy with that.

And as I said to you before, the pipeline in performance was good before I came in. It was just that the product was not necessary in the market. So I feel that Adi in the major categories has the product, a little bit question mark in basketball if we have all the ingredients yet, but in the rest of the categories, I think the product is there. And then, of course, it's about distribution and how we market it. And then we need to add all the smaller sports again, so that we will have best weightlifting shoe and the best wrestling shoe and all the best special shoes in the Olympics because we have the facilities. We even have our own factory in Seinfeld, who can do it. And designers and developers loves to work on these kind of products, and they have again an effect on the rest of the collection.

So I think you will start to see that we're working the way Adi used to do it, make the best product for the best athletes and then commercialize it. And I think that's just – I'm the – what should I say, opening the door again to work the way Adi should work and has worked in the past. I think that's the difference.

[Jurgen Kolb, Kepler Cheuvreux]

Very good. Understood. Best of luck. Thanks guys.

[Bjorn Gulden, Chief Executive Officer]

Are you depressed about Germany?

[Jurgen Kolb, Kepler Cheuvreux]

Indeed, indeed. There is a picture, unfortunately.

[Bjorn Gulden, Chief Executive Officer]

Well, we need a meeting with David Bear. We are calling them tonight. Take care.

[Operator]

The next question is from Edouard Aubin from Morgan Stanley. Please go ahead with your question.

[Edouard Aubin, Morgan Stanley]

Yes, good afternoon, guys. Thank you for taking my questions. So two for me as well. The first one is on the cost to compete on, Bjorn. So I think if I'm not mistaken, your A&P is around 11.5% of sales in Q2. And I think that in the past, you've said, at the level you tend to keep broadly stable.

I mean, recently, the market leader was kind of indicated that they wanted to step up in terms of this area of A&P, and I know it's not completely comparable in terms of how things get measured. But to what extent are you seeing an impact or expected to see an impact? I think you guys just signed Manchester United a few days ago for $1.2 billion deal, if I'm not mistaken. So be curious to have your views on that on the cost to compete.

And then, sorry, just to come back on the performance. So I think in the recent years, you've lost share in some of the big sports like soccer and running, and we just talked about running. But can you just help us understand or quantify roughly kind of the magnitude of the share change and how big this franchise are within the footwear market? Because you guys have some estimates, obviously, and – but for investors and analysts, we kind of sometimes struggle to size how big these opportunities could be if you went back to the previous market share you had in some of these categories. Thank you.

[Bjorn Gulden, Chief Executive Officer]

I'll start with the first one. I think the cost to compete, I don't really see any rising prices right now. I think there's a big question mark where professional sport is going when it gets to the price level. But at least what I feel is that the most expensive ones are always getting more expensive, but the other ones are basically on the same price level. So I haven't seen any – what should I say, the impact of what you just said, not also from competitors, to be honest. The Manchester United and the club deals and the big federations of course, always had an increase, but you have to remember that they are tied to performance. And it's easy to sign contracts that says, if you're Bellander, you get a lot of money because there's only one who can win Bellander or you say Champions League has a huge bonus because only one can win it. So there is some tricks in the basket that can blow up the values of certain contracts because it tells about the possibility that people can get, but not everybody can get it. I feel that between 10% and 12% and between 11% and 12% is where a branch should be. Of course, I haven’t been here so long, so I can’t just justify all the investments or say how efficient is, but I have the feeling we have enough money to be what adidas should be when I look at the budgets, but again, maybe I know more in half a year.

When it gets to the categories and market shares, it’s a little bit different because the way people classify products is very, very different. I mean, the running category is a blown up category. Most running shoes are not being used for running. I think in the U.S. MPD says that every American has 4.3 pairs of running shoes. I mean, not – all Americans doesn’t run the same with basketball. I mean, it’s Superstar basketball shoe or is Air Force 1 a basketball shoes. So I’m very careful with market shares in the different categories because the way people classify shoes are very different.

What we know is that when you’re successful in basketball performance, it has an impact on your classic court business. So we need to be on court in basketball to be strong in our classic business. We need to be in performance running to be a sports fan, and they also sell a lot of take down shoes in the family channel. So we need to take market share on the performance side. And then we need to what should I say, capitalize on that in the leisure market. And that’s the strategy and the weight of this is different from market to market.

I think that adi left the special distribution for a while for different reasons. And especially in running, you need to be there to activate your products in the running community. And I think in hindsight, maybe we should have done that. In Soccer, adi has always been in the specialty side and done a good job. I think the product now is better than it’s been before. And as I said, 2024 is very, very good.

Outdoor, I think we can scale distribution because it’s getting more mainstream and we be working on that. And then I think in basketball is like, the difference between the classic side, which are going on the Street, and then the performance side is of course very, very big when it gets to the product. But the connection is there. We need to connect to the 15-year old kid in the U.S. on court or NBA to actually sell our classic shoes.

And I think that’s where we have to do a better job. And that’s why both the classic side and the performance side is sitting in LA now with new designers, with new people, some of them makes Yeezy people working on that. And again, if you put the right people from the right culture to do the product then the chances are that they will do it better than if you do it from another place. So we feel we have all the tools to crack these things and we just need a little bit of time to actually make it happen. It’s easy in PowerPoint, but it’s more difficult to actually get it done, and it takes time and you need to have a little bit patience with us.

[Edouard Aubin, Morgan Stanley]

Okay. Thank you.

[Operator]

Next question is from Aneesha Sherman from Bernstein. Please go ahead.

[Aneesha Sherman, Bernstein]

Thank you. I have two questions, please. My first one is about the China business. Last quarter, you noted that there’s still a channel inventory issue in China, and it’s going to take a couple of quarters to normalize. We’re now seeing you grow your sell in and you’ve had strong gross margins. So does that mean that you’re in better position on channel inventory? And do you have an update on when you expect it to normalize?

[Bjorn Gulden, Chief Executive Officer]

Wow, that, that was only one question. Good. Yes, it’s true. I mean…

[Aneesha Sherman, Bernstein]

I do have another one, I’ll come back.

[Bjorn Gulden, Chief Executive Officer]

Okay. Well, we said in Q1 that we were reporting negative numbers because the selling was less than the sellout, but we already in Q1 had double-digit sellout. And then I think I said in Q1 that this will change in Q2 because you will see actually we are posting positive numbers and that has happened.

The inventory level in China is almost normalized in the sense that it’s what it used to be. And again, we have had double-digit sellout now sequentially through this year. So the demand of course, and the size of the business hasn’t normalized because remember, you have 2.5 years to catch up since the BCI, but when you look at what is in the store, the aging of what is in the store and what is needed to be taken back, I would say it’s all more normalized.

Now, I have to tell you that we will take less and less orders in China when it gets to pre-orders because we’re putting more and more on replenishment. That means that we are going to instead of taking orders for 100% of the demand, we might take only for 70% and then actually replenish the 30% or change it to something else. So going forward, our supply chain in China is going to be much quicker and more flexible.

And therefore, we expect less take backs and less clearance in the outlets. That’s kind of the strategy, and that’s why it’s good that we don’t report the order book because you’d really need to understand the order book and the sequence of what we’re doing to understand the business. But again, we feel that China after a lot of negativity is turning into something positive from a demand side. And again, very proud of what our team has done during a difficult time. And as you saw in the presentation, even now using celebrities for the first time in three years is also for the local team, of course, a lot more fun. So open up a lot more avenues on what we hopefully can continue to do so, so a positive development, yes.

[Aneesha Sherman, Bernstein]

Okay. Thank you. And my second question is actually about pre-orders. So you’re relief this morning mentioned that you’re seeing some caution in pre-ordering amongst retailers. Is that referring to H2 and are you seeing some of that caution spreading into spring summer 2024 ordering as well?

[Bjorn Gulden, Chief Executive Officer]

Well, especially the second half, you have to remember that the order book that you took last year was done in a time where the market was screaming for products, so the order books were inflated and never converted. So it’s difficult to kind of measure, but the second half this year is definitely having a negative order book.

But that doesn’t mean that the end will be negative, it just means that the ordering less and especially in the U.S., you see that most retailers are planning to chase business. So they don’t want to commit, they want to have you take the risk, which in a way is a little bit dangerous because as I tell them on the hot sellers like the Terrace, if you gamble on actually chasing, there might not be anything.

And also I think this unbalance between pre-orders and chasing business will normalize again when we get into next year. It’s too early to talk about the order book for 2024 because as you know, Q1 is not even done yet. So it’s too early to tell, but very cautious, especially in the U.S. for the second half this year. That’s correct.

[Aneesha Sherman, Bernstein]

Okay. Thank you.

[Operator]

Next question comes from Simon Irwin from Credit Suisse. Please go ahead with your question.

[Simon Irwin, Credit Suisse]

Hi everyone, couple of questions for you. Firstly, just going back to your comments about Yeezy, Campus, Terrace , et cetera, is kind of sounds as though there’s quite a big bet going on in which we call classics or retro or whatever. I mean, how confident are you that the market will go that way or do you have products if the market kind of goes in a different direction? And the second is, has the sell through of Yeezy changed your mind about what you could do with these designs, which obviously you do own in the medium-term? I mean, could you potentially sell them through as added as products in the future? And kind of related to that is the absence of Yeezy for next year, one of the reasons behind you are slightly more cautious kind of view about 2024?

[Bjorn Gulden, Chief Executive Officer]

I’ll start with the Yeezy, no plans of taking Yeezy designs and transfer them to adi. Yes, legally we could, but I think that would be the wrong timing. Remember, we inherited quite some inventory and we were choosing between destroying and writing off the inventory against selling and doing something good with inventory and then also for self of course creating cash to pay the inventory.

And I think we landed on something that has worked. We spent a lot of time talking to the different organizations and felt that we had support to do it. As you see, we have accrued or paid $110 million in donations, and now we are at the phase of launching the second drop. And of course, there’s uncertainty. We never know what will happen. So that’s why we are very, very careful.

And that’s also why I think any speculation of using any designs for something else would be absolutely wrong priorities on getting this inventory out of our books and end the story, I wouldn’t say as quickly as possible, but as healthy as possible. That’s the goal. The cautiousness next year is based on we are in a situation where we’ve said that we had a lot of bad inventory sitting in industry in general.

We had a lot of slow selling inventory on our side and we did not want to continue in that situation. So very disciplined buying and very, what I say, structured way of going to market and not try to short-term impress anybody by taking risk and that’s why this is about building one step at a time.

And that’s why we are also cautious for 2024 because we need time to change the things that we need to change. When it gets to the trend that classics will be in, I’m not worried at all. I mean, classics has always been and the question is what kind of classics? And I think the good thing now is that coming out of what I would call the Air Force 1 trend, White Sneakers that Nike has dominated I think the Samba trend is something that is unique to adi. And we are now exploiting that A, by having done a lot of collabs, I think the collab for example, Gucci was brilliant. I think the work that they did with Pharrell was brilliant and that has created the heat.

And now we are at a time where we can scale it and we see that the shoes are lining on the right feet and there’s a lot of potential on this whole direction. We are then launching the campus with also potential that’s picking up. We have in our backyard superstar again in white black and black white. And then personally, I think for us to come back in running lifestyle, where we were strong with both the Yeezy issues, but also with an NMD direction.

We think that the seventh is running, which is kind of the partner to the tariff look, but on the running construction is the next wave. And again, we are starting to see that, we starting to do collabs on that. And hopefully, we don’t have a second leg coming out of the archive next year. So you can never be certain, but all indicators that we have and what we can measure, I think we have two very good tools in our closet. And then in addition to that, you have to remember that our whole innovation team is also working on more than silhouettes on the running area, that can go lifestyle. And you have the performance shoes, the Adizero, for example, or now the Switch that also had lifestyle appeal when we put them in different materials.

So a lot of options and we just need to work with the trade to get the right ones on the shelf and also do quite some testing and – but it's not like you're sitting here not having a lot of options. I think we have plenty of options to play on in the next 18 months. So positive on that, but of course, we need to do it together with the retail partners and be disciplined.

[Simon Irwin, Credit Suisse]

Brilliant. Thank you very much.

[Bjorn Gulden, Chief Executive Officer]

Thank you,

[Sebastian Steffen, Head-Investor Relations]

Franzi, we have time for two more questions.

[Operator]

Okay. Then the next one is from Thomas Chauvet from Citi. Please go ahead.

[Thomas Chauvet, Citi]

Good afternoon. Thank you. Two questions. One on gross margin and one on Yeezy. On your gross margin drivers, so discounting had a negative impact on two gross margin, but you said rightly that from Q1 to Q2, there's a tailwind with reduced discounting. Could you comment on which regions are seeing this trend? Is it more on performance or lifestyle? And then pricing was a tailwind in Q2. Is it mainly the pricing effect of the second half last year or was there more pricing in Q2 2023? That's my first question.

[Harm Ohlmeyer, Chief Financial Officer]

Okay. Let me answer that first before you very likely shoot out your second question. First on the gross margin, you're absolutely right. I mean, discounting has been less in the second quarter compared to the first quarter. And we first see it in our own channels, as I said, in e-commerce and retail, where we have been very disciplined, especially on the key franchises that Bjorn talked about, whether the Terrace or the Superstar, the Stan Smith. It continues in North America, so not a lot of benefits in North America. It's still very promotional, but in Europe we have made good progress on the promotional environment. They'd be much more full price, especially in our own channels. Secondly, in China, also better, because the inventory situation improved much better there over the last couple of quarters and everything that we did in 2022 already. So also there the promotional environment got better.

So it's primarily accounted to China and Europe and it takes some time in North America given the inventory situation our side, but also in the market. When it comes to pricing, yes, of course, we're benefiting from the price increases that we did last year, but it's always a tricky part. You got to look at the pricing and the discounting and combination, right? So you always need to go down to article level to have the right picture. But yes, some benefit from last year. We do not intend to increase prices in the future, given where we are inflation is at least stabilizing on a high level. What you see in the second quarter is more inflationary environment. When we talk about Argentina, Latin America overall, when we talk about some of the emerging markets, where we are more flexible with the pricing and react partly even on a weekly basis when it comes to Argentina or Turkey, and then some emerging market on a monthly basis. So it's not as seasonal or quarterly based as in Europe and North America. But in the more mature markets, Europe and North America as the pricing is rather stable and don't expect prices to go up going forward.

[Thomas Chauvet, Citi]

Thank you, Harm. And my second question may be for Bjorn, on Yeezy and what you will do with the incremental profit this year after donation, obviously. Is it fair to assume the majority of that incremental profit after donation will be reinvested in incremental marketing or sponsorship initiatives as early as this year? Obviously, the don’t know if the timing of the Manchester United renewal is related perhaps to that. Anything you want to highlight that you could reinvest this year. And just does this significant one of profit change your view on capital location? I mean, dividend consensus is close to zero this year, you said there would be no buybacks in 2023 and 2024. Does that profit pull from Yeezy could change a little bit your view on the dividend in particular? Thank you.

[Bjorn Gulden, Chief Executive Officer]

Well, first of all, we need to generate profit, right? And you're talking about the Yeezy profit like it is in the bank. I think we need to agree that every launch we are doing with that product has certain risk to it. And that's why we're so careful, we got into this situation, because it's a very tricky situation A, with him, his management, the legal side with the trade, with the Jewish organizations, with the black community. So to maneuver here is a day-to-day, week-to-week. And that's why we're so careful. And that's why we don't promise any profit. The profit that we have generated you have seen, we decided to donate €110 million of it. The rest of the gross margin we have showed you in the €176 million EBIT line, which is mainly coming from that.

And then you have to know that there's a lot of cost in our normal cost lines on the tech line even on the personnel cost, on the infrastructure that is driven by Yeezy. Because we have built a lot of technology apps, logistics, mini labs, development centers that was tied only to him business – his business. And these costs are not now allocated to Yeezy, because we haven't stopped it. They're still there.

And our task is then going to see what can we transfer into other operations, so that we will, what should I say, contribute to other product lines or do we have then to write them off or do we then have to expense them in a different way? So there's many moving parts in this and that's why I think 2023 is not necessarily about generating a lot of profit.

It's about cleaning up the issues we have, hopefully, get rid of the Yeezy inventory. So we clean, maybe we have to carry some of it into 2024. And then I think we should talk about, what should I say, profit allocation or capital allocation at a later point in time. Buybacks is currently not a topic, so should we do anything? We talk about dividends, but right now I feel we should get the business under control, the way we are promising you and that we should grow again and generate more and more profit. And then I think the topic is more relevant. And believe me, this company will be a good company, again, I promise you. But give us a little bit of time.

[Thomas Chauvet, Citi]

Thank you, Bjorn and best of luck.

[Operator]

Next question is from Piral Dadhania from RBC. Please go ahead.

[Piral Dadhania, RBC]

Thank you for taking my question. Firstly, just on the revised guidance, negative mid-single digit revenue growth for this full year, the implied second half, given what you've already done in the first is kind of almost negative 10%. Appreciate that the North American markets under some pressure, but could you just help us understand what your expectations may be by major region or even by channel, obviously, wholesale under pressure. It just feels like that's a sequential slowdown given where you've come from in the first half, which has actually been better than expected on an underlying ex-Yeezy basis. And then secondly, just on business improvement plan, perhaps, I know that you've talked about it indirectly, Bjorn, but maybe you could just help us understand what progress you've made in the last few months around changes to the business and whether the €50 million one-off cost is directly attributable to that. Thank you.

[Bjorn Gulden, Chief Executive Officer]

Well, the guidance you talk about is of course, conservative because it implies selling no more Yeezy and of course having problems in the adidas business in certain markets, that's what it implies. So that would then, as you rightly say, mathematically be almost 10% negative sales in the second half. Hopefully, that doesn't happen, but that's what the math says. And then when we gave out this, we promised you that we will not be – what should I say, positive in our outlook, but we will kind of play the worst case scenario and that's what it is. And hopefully, as we go through now the second drop of Yeezy and we go through the quarter, we can actually improve those, because we have facts. But you're absolutely right. That is what it is. When it gets to the business improvement plans, there's a lot of projects going on and there will be more projects, because of course we haven't fixed everything that we need to fix.

I think we are getting a good overview on where the issues are, and then there will be many work streams necessary to kind of simplify and make the issues better. There is still a lot of work to do, and I think we should report on that when we get to the end of the year. The idea is to take all the findings and all the issues that we discussed and put them into a new strategy that then hopefully can tell you how we see the adidas business and the way we do it will develop over the next three to five years.

But that will take another, I would say, half a year, nine months before we are ready with. I think you need to understand, we have a new team and taking over quite some difficult areas and we need to have some time before we issue a new strategy. And that has quite some work streams globally that we need to work through. So I think that's the only way we can say it. I don't know if you want to add anything, Harm.

[Harm Ohlmeyer, Chief Financial Officer]

Yes. Let me add a little bit. I mean, if I look at the first half of the €70 million of one-time cost just to give some light and some transparency, I mean, most of that and Bjorn talked about a little bit, we built an infrastructure for our Yeezy or even more importantly for our e-commerce business that was meant to be €8 billion to €9 billion in on the game, of course, in 25 will be a different size. So in the €70 million you have some right sizing of some infrastructure already that we have closed or reduced. We have looked at some retail stores that do not perform to the way that we expected to perform.

So we did some impairments or made some decisions on closures and roughly €20 million of that is already in some of the rightsizing of the organization in some markets. And again, we had some severances to be paid in the first half already that you're probably aware of. So that's pretty much what it is. So I would say, 30% in severance, 30% in infrastructure and 30% in retail closures and impairment. And again, we keep looking for the remainder of the year, what else needs to be done as we keep reviewing our strategy and make some decisions. So – but that's where we are right now.

[Piral Dadhania, RBC]

Thank you.

[Sebastian Steffen, Head-Investor Relations]

All right, thanks very much, Franzi. Thanks very much to Bjorn and Harm. And also thanks very much to all of you, first of all, for participating in our call today. And then of course for sticking to that two question rule. I think that actually worked quite well today. So this concludes our Q2 2023 conference call. As always, if there's any open questions, please feel free to reach out either to Philipp or myself. We're actually very much looking forward to seeing many of you over the next couple of days and weeks as part of our roadshows and conference attendances. With that, thanks very much again for your participation. Have a good remainder of the day, and for those of you who didn't have it yet, have a nice summer break. All the best. Bye-Bye. Take care.

[Operator]

Ladies and gentlemen. The conference is now concluded and you may disconnect your telephone. Thank you very much for joining and have a pleasant day. Goodbye.