Adidas AG

XETRA:ADS

Earnings Call Analysis

Improvements Seen Despite North America Dip

The company is on an upward trajectory, with financial performance slightly better than expected and quicker, more effective decision-making. New product sell-through is improving, drawing positive retailer feedback. Significant investments are driving growth across markets like India and Saudi Arabia, with particular attention on strengthening its presence in Greater China, up 6% this quarter, through direct-to-consumer channels and a new, advanced distribution center. North American sales dipped 9% without Yeezy products, but remain flat overall. Market-specific strategies are in play, targeting sports like basketball across China, and embracing trends in Asia Pacific, leading to a 7% increase this quarter. In LATAM, despite political and economic challenges, the business grew 13% this quarter. Overall growth stands at 1%.

Yeezy's Impact on Revenue and Operational Improvements

The company's net sales have achieved a notable milestone, reaching EUR 6 billion, despite the challenging circumstances posed by the Yeezy partnership disruption. While the Yeezy brand itself contributed approximately EUR 350 million to the total net sales, the company's revenue, excluding this impact, saw a currency-neutral increase of 2%. Operational efficiency also improved, with operating overheads reported at EUR 1.9 billion or 32.1% of net sales, which includes EUR 110 million of extraordinary costs. By excluding one-offs related to severance, closures, impairments, and the Yeezy business, the operating overhead ratio is closer to 30%, positioning the company for a stronger bottom line.

Gross Margin Benefits and Inventory Management

A key performance indicator, gross margin, has benefited from reduced freight costs and a favorable business mix compared to the prior year. This mix includes variables such as product type, market and channel distribution, and sales contributions from footwear versus apparel. Progress in inventory management also positively influenced gross margins, contributing to a reduction in inventory by 23% reported or 19% currency neutral. These factors, coupled with disciplined discounting, signal a healthier business moving forward.

Guidance Update and Outlook

Initial guidance pointed to a high single-digit decline in net sales which was later revised to a mid-single-digit decline. Recent performance and trajectory have now improved this guidance to a low single-digit decline. Operating profit guidance has also been updated from a breakeven outlook to a forecasted EUR 100 million, excluding one-off costs associated with Yeezy. The reported operating loss has been substantially improved from an initial EUR 700 million to now a guidance of a EUR 100 million loss, reflecting not only the second drop in Yeezy's profits but also underlying business improvements amounting to an additional EUR 100 million.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the adidas AG Q3 2023 Conference Call. [Operator Instructions]I will now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead, sir.

[Sebastian Steffen, executive]

Thanks very much, Andrea. Hello, everyone. Good evening, good afternoon, good morning, wherever you're joining us today, and welcome to our Q3 2023 results conference call. We know it's a pretty busy reporting today, so we definitely appreciate you joining our call today.Our presenters on the call will be our CEO, Bjorn Gulden; and our CFO, Harm Ohlmeyer. As always, I would like to ask you that during the Q&A session you limit your initial questions to 2 to allow as many people as possible to ask their questions.And with that and without any further ado, over to you, Bjorn.

[Bjorn Gulden, executive]

Yes, thanks. And hello also to everybody from me. As always, we will take you through a lot of pictures and some numbers, both Harm and myself, to tell you what we are working on and what is going on.I'll start with some good news. There has been a lot of critique and negativity around adidas that we are not a good company and a lot of critique on different things. Therefore, I'm actually very proud to see the Forbes research that says that we are one of the 12 best companies to work for and actually the best one in the sports industry. And I think that I've always said that adidas is a great company. And being on the inside of it, I can confirm it. And it's also cool to see that external people say the same thing.We have talked a lot about the soft values. And also a couple of weeks ago, we had what we call a global week of inclusion, where all minority groups and all groups in general were able to present their views, and we discussed on how we should behave with each other. And in a global company, this is extremely important and is actually very interesting to be part of it. I'm proud of the outcome.Also extremely proud to look at what our team in Ukraine is doing under very difficult circumstances. The stores are open, they run the business, and they're also now starting again the running club. And as you know, sports is always important. And the spirit of our people in Ukraine is just a fantastic.Unfortunately, over the last month, we have another conflict in our world, which will impact us, I think, for a while. We have about 620 people in Israel in the offices and the stores. Good is that no one of them are hurt, but many of them are now being called into the army. What we have done is, of course, to assure all the safety of all our people, and then we have started donating for our people and also in the Gaza area through SOS-Kinderdorfer. And we will continue to do that, of course, to help the civilians in the area in this terrible conflict.When you then look at the business, I think it's fair to say that we are trending in the right direction and a little bit better than what we have told you the last 9 months. And by that, the financial performance -- I think both top and bottom line is a little bit better than expected. I think the energy in the team and especially in the decision-making has improved. So we are becoming faster, and therefore, in my opinion, better.We are getting extremely good feedback from the retailers for Fall/Winter '24. And you have to remember that Fall/Winter '24 is the first go-to-market process. That is the way we would like it to be. And the first time we have gotten together as a team, treating the retail partners the way we want with full set of samples, showrooms and also, I will say, with a service agreement that gets the [ SBUs ] and everything. And I'm pretty certain that we will have a very good order book building for the second half of '24.The sell-through of new product is improving. I'm sure you see that also in the stores that you are. And of course, for us, it's about getting enough of the new good inventory through the slow-moving inventory. And as you probably have seen already, the great thing is that our inventory is heavily down 23% and we feel that our inventory at the year-end will be under control with the exception of the U.S.I also think I said in my quote that retail inventory is improving. And therefore, it should be during the first half an improvement in the total sellout, and, of course, then also building then the order book for the second half.Inventory level in the U.S. in general is still an issue. I think it lags about 6 months for the rest of the world, but very proud of what Harm and the team in finance and also what the operational team has done. And you will see the details of that later.If we then get to the top line, North America was down 9%, 15% for the year. So you see that at least the quarter has improved. We still have issues in our American business that we have to work through. We had a management change. Rupert, who's been the President for about 2 years and 11 years with the company, resigned and ended his great career with adi end of October.As an interim solution, our Board member, Arthur, has taken over. And then the idea is that during Q1, we will announce a new permanent President. And it should not be a surprise that they're looking for an American citizen.The issues in the market hasn't really changed. There are still elevated inventory, both in the trade and also in our own books. And especially, the successful outlet business is then almost only clearance business, which has a drag on both sales and on margin. The good thing is that our full price concept stores are all comping like-for-like open with a higher margin. So you clearly see that the D2C business is improving, where we have the right merchandise. We do continue to see high discounts, and we will, of course, continue to be very conservative in the way we sell product in for the next 6 months.I told you about this before, but we need to be more American. That's why the office that we opened in L.A. in Q1 is so important. It will focus on the American street culture, also connected to basketball. And all of American partnerships when it gets to collab and street culture relevant, collabs will then be managed out of L.A. And I think this is a game-changing thing for us. There is no results of this yet because this was open in Q1. So you will not see the impact of this in product until, I would say, Q2, Q3 next year.Stores. I mean I've been in New York every month and very happy to see the development of all of our stores in New York. Here you see some of them. And as the good inventory has floated in, the like-for-like has continued to improve. And in the stores you see here, they're all up double-digit like-for-like. And it clearly shows that the consumer is reacting very positively even in the U.S. to our new merchandise.Messi's entrance to the U.S., we talked about many times. What he has done in Miami is unbelievable. They didn't qualify for the playoffs, but they won the League Cup. And when you see his pink jersey is the most sold jersey in the U.S., I think, ever, and, of course, it has had an impact on what we call also soccer street culture in the U.S. And extremely happy that he went there instead of going somewhere else.Also calling the U.S., we were part of the biggest women event ever, 93,000 people or 92,000 people watching our Nebraska-Lincoln women's team in volleyball playing. And again, one of the small pieces in the focus on women's sports that I think is going to be very important also going forward.American football, extremely important for the U.S. market. Patrick Mahomes probably being the -- what should I say? -- not only the best, but the coolest player in NFL. He was also in Frankfurt last week. We just launched his collection, his training shoe, and we will do more products with him, branded with him. And I'm very, very, very sure that we can market him as a superstar and also get much more commercial success of him especially in the U.S.We have also started to sign college athletes legally with the NIL agreement. That's now allowed. And also here in American football, we started to invest in that. And it's clear to say that both college and high school sports for us connecting to the sports youth culture in the U.S. is going to be important. And here, you see a couple of examples of players that we have just signed.Changing into EMEA, Europe, Middle East and Africa, plus 2%, same in the quarter as for the year. So basically the same business. Also here, investing in things a little bit different. We extended the Kings League. If you follow it, a very cool league for the Gen C coming out of Spain. They will expand this concept into other markets. And it's soccer done in a different way. And the same thing with the battle of the socials. We do try to connect with our traditional sports also into the new generation and into the social media, and are doing quite some stuff outside sponsoring the big teams and the big players, and these are 2 examples of it.We talked about India and cricket. We signed at the beginning of the year. We have sold more than 0.5 million jerseys of the national team, very, very unique, I think, for the sport and also very cool for us. The team won the Asia Cup and is currently playing the World Cup. I think the final is on the 19th. And that will give another boost to a business that -- I've said many times, I think India will be the fastest-growing market for us. And that's why it's cool to see that, that investment has worked very well.Another market that people talk a lot about, Saudi Arabia. We just opened the office. Harm stayed to open it. And it's clearly that Saudi Arabia will play sports -- or play a bigger role in sports. We know that they are trying to get events. We know that the league is attracting players. And I'll be very surprised if we don't see Saudi Arabia investing even more into sports. And that is for us natural also to open our office there, which we now have.If you then move into a big, big, big important market, Greater China, we were up 6% for the quarter, 3% for the year. You remember we started the year being down double digit. Then the business has improved. All of us, all Board members have been to China not only one time, but more times. We have talked to the trade. We have talked to the political, to the government. We have talked to the different sports federations. I have been very active to understand what we can do and not do.And I'm happy to report that the local focus, the energy of the team is starting to improve the business. You see the growth numbers are not that great. But if you take the Yeezy business out, it's already double digit. And all the D2C business, where we really have the best of the best, are up double digit. And as I said many, many times, I'm a big believer of the market, and I'm really, really, what should I say, proud of the energy of the team and feel that we are on a very, very good way.We also took our basketball stars to China. We started our grass root program again, and we know that basketball still is the sport that has the most street relevant culture, so we will continue to do that. And we will also start to bill basketball products for a price level that will compete with the local brands. Because we clearly see that there is 2 different markets. It's the market at the top where we compete now, but there is also a commercial market where especially the local brands have established price points that we also need to enter, for example, in basketball, but also in running.Talking to running and other sports, for the first time, I think, in a long time, we have invested then in many, many sports, from track and field to volleyball to tennis. And the team is signing more and more athletes. So that even if the market is small now, we will be a real sports brand in China because we think that's very important for the future. And we will overinvest in this in the next couple of months and also in years to come.Quoting the breakdance thing, which is also going to be an Olympic sports. That's where we already have a big, what should I say, impact. And needless to say, when you see 3 stripes, when you see -- here I think it's Superstar -- you clearly see that we fit into that and have already, I would say, a good connection to that generation in that market.To service the growth that we foresee in China, we just opened also the most modern and the biggest distribution center. Harm was there. And again, it's a commitment to the market with the best technology and the most automated wares that we have. And yes, I'm sure Harm will say something about that later.Going into LatAm, 13% for the quarter, 29% for the year. So the growth was slower in this quarter. As you probably know, LatAm, many of the markets are in a political, what should I say, situation with elections. There's a lot of inflation and uncertainty. So maybe a little bit more careful growth. But as you can see, still double digit. And we have the feeling that the team with the investments in sport, but also the energy they have on the activations are doing a great job. Here, you see we sponsoring running events in all the markets. And we are opening new and modern stores in all the major cities. And the D2C business there has developed very, very good. And again, I'm sure that LatAm will still be a growing market for us.Very excited about Asia Pacific, up 7% for the quarter, 10% for the year. You know that both Korea and Japan are very trendsetting markets, of course, very lifestyle driven. And here, we also clearly see that the success of our lifestyle business is having a big impact. I mean, you see the reaction to both the regional campaign that we started in September, but also to the [ Terra ] trend and other trends that we have generated. Our stores are doing extremely well, especially -- actually in Korea and Japan.So when you look at all that, you see that the Q3 growth was then 1%, and we are flattish for the year. If we then take a quick look how it looks compared to the non-Yeezy business, you see that North America was 9% up in total. If you take Yeezy out, 9% down for the quarter. If you take Yeezy out, then with minus 10%, so a small impact.EMEA, actually no impact, plus 2%, plus 2%. Greater China, plus 6% with the Yeezy, plus 10% without. So you clearly see that the impact of Yeezy was less and the underlying business is stronger. LatAm, almost flattish. And then Asia Pacific, a little bit the other way, where actually the business was then helped by the Yeezy business with plus 7% to plus 5%. All in all, as I said, our growth at 1%. If you exclude Yeezy, the underlying business was then up 2%.If you look at the channels, wholesale business down 2%. You have to remember that we started the quarter with an order book that was down more than 20%. I've always said that the second half order book was very, very weak because of all the inventory and because the way the retailer was reacting to adi a year ago. So you can see we've been able to chase the business and then deliver into the trade much more product that was not on order from the preorders, but actually then products that we accelerated and scaled, especially on the lifestyle area, where they may able then to sell-through and, of course, then also make money with us.Own retail, brick-and-mortar, up 10%. Number of stores, if you take China, Russia out, flattish. That means that most of this is like-for-like growth. Very happy to see that our concept stores, meaning the full price stores, are actually up between 10% and 15% everywhere. And then the factory outlets are, of course, weaker because, as we know, they are currently selling almost only clearance. But the most important thing is that our own retail full-price concept stores are up double digit.E-com up 1%. Same thing here. We have said that it's not to optimize or maximize top line. It is now to balance the brand side of it together with commercial success. So the share of full price here has increased substantially. We're protecting our franchises. And the new management of digital clearly has the view of being more branded and value creation than maximizing top line. That's why we're actually very happy with that number under the current circumstances. That gives to the current split, 63% wholesale, 37% D2C. And as you can see, brick-and-mortar and e-com is basically 50/50.Talking about digital, we had a change in the management. So Scott left us as the Chief Digital Officer, and we welcome Tobias again. He has a big history with us, but also with other digital companies and was the natural replacement when Scott decided to go. I think Tobias has been here for a month and has already had a big impact on looking at the strategy, making sure that we build plans based on the new adi and the new environment in digital. And then, of course, make sure that we really are pushing the brand side and not only the commercial side.If you look at divisions, very important for us that footwear is still growing here at 6%. Apparel we said we're going to be down with all the inventory in the market, down 6%. And then accessories for the quarter a little bit worse than flattening. Remember, last quarter, it was up because of all the football accessories. So I would say in line with our expectations.Footwear being almost 60% of the business, apparel 36% and accessories only 6%. I think a very healthy split. You could argue that accessories, which should be high margin, could be bigger. But as long as footwear is above 50%, I'm very happy.Performance, basically a flattish business. Football being up slightly; running, flat; training, down very, very slightly; outdoor, strongly up. Golf actually down now. We clearly see a stagnating side on the golf side after a series of quarters with the positive number. Specialist sports down, but that has more to do with deliveries into the market. And then U.S. sports, up. Especially, a very healthy business in American football, which is kind of cool for us that in America 3 stripes can actually have high market share in America, triple. That tells us that if we build the right product for America, we can actually also be good in the U.S. sports.On the performance side, I don't need to talk a lot about it, but very proud of Women's World Cup. Not only winning with Spain the whole tournament, but also taking 3 of the 4 individual prizes with our players. And again, a clear commitment from us to women's football. And I think the tournament was a great, great win for women's football in general and look forward to that investment to continue.Some cool takes we're doing on women football, not only building now shoes for her with specific models, but also starting to use collab partners. Here you see that one of the jerseys that Arsenal is playing is actually a collab with Stella McCartney. And you will continue to see us actually doing different branding on certain teams to make it more street relevant and build brand heat also through the combination of, I would say, partners, originals and performance.Cool collab on the soccer/football side. Here an example of what we just did with Bugatti. And again, same thing here on footwear. We will do more collab product to create heat with the more limited edition and create excitement in football. And we have all the vehicles to do that.Welcome home to Newcastle. After a while, they are coming back to 3 stripes. When new ownership and very, very high ambition, this is a great fit. So look forward to that. Ballon d'Or, almost as usual, Messi won his 8th. And then I think the future Jude won the Kopa Trophy, which is the young player's award. And again, needless to say he's probably the Superstar of the future and, of course, playing in our product.A lot of critique on us that we are not having enough innovation. I think that is not true. And I think the Pro Evo you hear from Adizero is a good example, the lightest shoe in the market, the best performing shoe in the market, setting also the world record with Tigist here in Berlin, almost 2 minutes better than the previous one. But also in other, what should I say, records, if it's records on track or it's records in markets, this shoe has been unbelievable, and it shows that we can bring innovation very, very quickly to the market if necessary. I'm very proud of that.Then in general, in running, we are investing a lot of money into events and to athletes to build credibility. We know we still have a long way to go to actually be back again by adidas belong, but we have the credibility now by winning races, arranging races and having the best performances. So now the job is, of course, to build credibility also into the commercial area, and that's what we're going to do in the future.Same thing on track and field, very important for us to be in the most, what should I say, credible sport. In Budapest, a lot of our athletes did a great job, and we're very visible with the footwear. Going forward, you will see a shine again more federation to also be visible on the apparel side. And again, as I said many times, we will invest more and more money also into the smaller sports.Same thing on outdoor. I think with the Agravic Speed Ultra, we have the most innovative train running shoe. And here the same thing, winning a lot of events, taking part in many events and showing innovation as a big part of investment of what we're doing in TERREX.Very proud also what happened in the Rugby World Cup. Siya Kolisi, the captain of the South African team 9 months after he pulled his ACL. He kept them to the championship, a great ambassador for our brand, fantastic guy. And even if he beat the All Blacks, which is our team, he's a great, great part of the family. And the same thing with the All Blacks, probably the team with the best spirit in the world in any sport, doing their training camp here in our campus very proud to work with them. And I'm very, very happy that they extended that contract, and we will extend that cooperation into also other product categories also into the lifestyle area.If we then look at the lifestyle side, the business is up for the first time in a long time, good growth in the higher area with originals. Basketball also growing double digits. So we clearly see that the higher end of the market is accepting our new product. Sportswear, the more commercial side is still down a little bit. But again, with the pipeline of more commercial products for '24, we will also turn that in to be a positive number. And needless to say, the left side is more important in the beginning to create brand heat again, and that's what we have actually been able to do.Couple of things that we have done in the basketball area. We have signed a new multiyear contract with Overtime Elite, which is a professional league, both in American football and in basketball, linking the college athletes into the professional leagues, the MBA and NFL. We will do a lot of collabs and partnerships with them to be more connected to that youth culture in American sports.Then Anthony Edwards, the new superstar in NBA launched his first signature shoe, as you see here. We launched it on the field of play in September and is now being rolled out in the different markets. And needless to say, he captain also the American national team, and we expect actually a lot of good stuff coming out of that cooperation.Mostly proud of probably is the original campaign that we launched in September, the first campaign, I think adidas has done for original since 2015 or '16, very well received campaign between EUR 50 million and EUR 100 million in media money, very well executed all over the world, both with global stars, but also connected into local celebrities. And it's a message that we will continue to use also going in to '24.The collab with Moncler launched in their fashion show a couple of months ago now in the stores. And the same thing here, Moncler for me, the only luxury brand that has connected into the winter culture for us being together with them with fantastic product, very, very thankful for their CEO that they did that and the product also selling very, very well.A couple of other things. We did the call up with Korn, sold out very quickly, collab that is also connecting to the young consumer. Then we did in China with Edison Chen a collab both on the global, as you see here, but also local. And here, you see people lining up in front of the stores. So, one of the very, very high impact collabs that we've done shortly. And this is the replacement that we have to do to replace the Yeezy business. We need many smaller collabs that can create the heat and that we then can commercialize.Not surprising probably Samba has being named the Shoe of the Year in the U.S., so we will receive that award I think end of the month. And then I've said many, many times, what has turned the brand lately is, of course, the Terrace trend with the Samba, Gazelle and Spezial. We have then lately seen Campus outselling Samba in certain markets already, especially, I would say, in the men's area in the kids area. So then we have something outside Terrace that is working well. And then those who follow fashion has seen that Superstar, especially in Black White and Triple Black is picking up, and that's a shoe that we will heat up for the future.Extending the Terrace trend into running, we are into the 70s running here with SL72, which is then a natural evolution for us, again, getting into running lifestyle, and you will see these products starting to seed in in Q1 and then be scaled into the second half of next year. We are also working on 4, 5 very interesting silhouettes on the running lifestyle side of new silhouettes to replace the successful shoes that we had, for example, the [ NMG ].Needless to say, next year will be full of 3 stripes and color. This is in line with what you see on the footwear side. And we have, I think, 16 color combinations coming in different silhouettes and you will see a lot of this in the market, and this is being very well received currently of the retailers.Couple of words about Yeezy. You know we have had 2 very successful launches, 1 in Q2 and 1 in Q3 we are still sitting on about EUR 300 million of the inventory, and we have decided not to have any more launches during Q4 and will then spend the rest of the year then to evaluate what we should do next year.And I think with that bla bla, I'm ready to hand over to Harm, who will take you through the real reason why you're listening, the numbers.

[Harm Ohlmeyer, executive]

Thank you, Bjorn, and he gets a deserved a break for a couple of minutes now as I guide you through the financial update. Well, unfortunately, there will be not a lot of news, which is probably fortunate as well because we did the press release already a couple of weeks ago. So what you see in the P&L should not be a lot of news for you. Again, EUR 6 billion on the top line in Q3, leading to a 49.3% gross profit and then to an operating profit of EUR 409 million.Of course, all of you are interested, what is the relevance of Yeezy in these numbers and then the EUR 6 billion net sales, which is roughly 1 percentage point currency will increase EUR 350 million Yeezy in there, as Bjorn alluded earlier, if you would do a like-for-like without Yeezy actually 2% up currency neutral. And also on the gross profit, if we exclude the Yeezy part, the underlying business at 48% gross profit, and I'll come back to that in a second.What's also important, looking at our infrastructure, because we always said we need to have healthy top line, and we need to continue to grow the top line, to grow into our infrastructure, while we also rightsized the infrastructure through the onetime costs. So we have EUR 1.9 billion operating overheads, which is around 32.1%. But in there was EUR 110 million extraordinary costs. So EUR 80 million one-offs, which is a combination of severance, DC closures or retail closures and impairment and EUR 30 million linked to the Yeezy business. So if I would deduct that one, we are getting closer to the 30% line, which again would contribute also to the bottom line in a healthier way. And on the bottom line, it's EUR 150 million Yeezy is included there.So as gross margin is a very important KPI for us. I want to decompose that a little bit when it comes to Q3 compared to prior year. As you would expect, freight is a significant benefit in that gross margin bridge, but also the underlying business mix is positive compared to prior year. What is the business mix? Of course, it's a combination of category mix, market mix, channel mix, but also what kind of products we are selling when it comes to footwear versus apparel. So all of that is in, and that's what I want to say, I call it business mix or underlying business, which is healthier compared to last year.Inventory allowance, given the progress that we made on the inventory also contributed positively. And then we have a significant negative impact on the currencies on the FX because, as you know, we're hedging early on going into that season, and that has significant negative impact on our gross margin. And compared to prior year as we continue to clear some products, especially on the wholesale side and in our factory outlets and primarily in North America, it had also a negative impact compared to prior year.If I compare that quarter-to-quarter, you see the similar impact on the freight. It's very positive and will continue to be positive for the next couple of quarters. Discounts here is already positive because we made so much progress on the inventory. So that is also something you should expect going forward. And the business mix is slightly negative. That is the reason as we're expanding our wholesale business as a higher share of business, and that has an impact there. And of course, when you come to the market mix, it's a similar impact there.FX, it's also negative because we are going into a season of negative impact, and therefore it continue to go into early next year as well. And here, like-for-like from Q2 to Q3 Yeezy also had a negative impact because we had, on the one hand, a smaller business in Q3 versus the second quarter. And of course, it was a mix of our own D2C business and a combination of our hotel partners as well. So that hopefully share some light into our gross margin bridge.What probably was new today is our balance sheet information in more detail. The highlight is probably the first number. The inventories of EUR 4.8 billion, again, 23% down reported or 90% currency neutral. And I give you one more detail on that on the next page, but that is definitely a significant progress that we have achieved over the last couple of quarters. Accounts receivables are somewhat down given our declines all on the wholesale side and the accounts payable are significantly down as we bought less given our trajectory of the business overall. So don't be surprised that was required to bring the inventory down as well linked to a conservative sell-in and making sure that their sell-through in the market.One more number on this page you see cash on the balance sheet. It's roughly EUR 1 billion on the balance sheet. Also that is a healthy level compared to 12 months ago. I am as a CFO, very happy to see that development on the overall balance sheet, very healthy situation on the balance sheet.When it comes to the inventories, we all remember Q3 was the peak on inventory last year with EUR 6.3 billion. If you compare it to today, it's EUR 1.5 billion down. That is significant progress and also look at year-end, EUR 6 billion, made significant progress. We always said it will improve quarter-by-quarter. But now being at EUR 4.8 billion, EUR 300 million of that Yeezy and still having higher product costs in 12 months. To go over from an inventory point of view, we're now at a point where we're happy with that inventory.We're happy with what we have on our side. And of course, by the year-end, we are also happy with what we have around the world, but North America when it comes to our retail partner, still North America, slightly too high, especially with our retail partners facility to work a couple of months to get to a deepen level of inventory. But tremendous progress and happy where we are and do expect this coming further down going forward.Now of course, we gave a complicated guidance at the beginning of the year, and we changed it a couple of times. So I want to explain that a little bit in more detail. Going from net sales through operating profit underlying and operating profit reported. We started the year with a high single-digit decline on the net sales as a guidance. We changed that to mid-single-digit decline on July '24. And when it comes to the guidance a couple of weeks ago and today, it's now only low single-digit decline. So significant improvement on the top line over the course of the last couple of quarters.We have not changed in the last update on the underlying business, which was reported as a breakeven. Now we said even that one is improving, not just on the top line trajectory, but also on operating profit point of view. Now we believe EUR 100 million is now the guidance for the underlying business, excluding any one-offs for Yeezy business.And of course, what we're going to report is yet another number. We started with EUR 700 million decline or loss as a starting point, moving to EUR 450 million. And now we believe, as we had a second drop in Yeezy, we can report a loss of EUR 100 million. How does that relate to probably simpler bridge? How do we get from the EUR 700 million to the EUR 450 million that was linked to the first drop of Yeezy, where we generated a net EUR 150 million in profit and EUR 100 million less potential write-off of the Yeezy inventory. A similar thing happened now in the third quarter, another EUR 150 million net profit from the Yeezy drop from the second drop. Of course, with that, less risk of writing off the Yeezy inventory because we sold it. And then what's new now is also that the underlying business has improved by EUR 100 million to now lead to a guidance of EUR 100 million negative.I know this is not where we want to be, but we show significant progress. But now I want to hand over to Bjorn again, where we head from here.

[Bjorn Gulden, executive]

As Harm said, we are not where we would like to be, but we have asked you for some patients. We feel that we are making progress and actually a little bit faster than we thought. There was a lot of critique from you that we're not creating brand heat. We are not having what should I say, innovation. I do actually believe that that's not true at all. The pipeline is full of innovative products. I think also on the lifestyle side, we've been able now to activate 4, 5 of the franchises. That will also move into a high-low effect on the apparel side.In the next couple of weeks, we will finally have the Fear of God product that we talked about for a couple of years in the market. They are now in the markets and will soon be in the stores. We will in the next week -- actually, next week, launch the ball for the European Championship here in Germany that will be done in Berlin. And for the Indian market, we will probably win the World Cup final with India. And again, it's been a huge investment for us that has paid off. And we actually do believe that if you give us the time, we will show you that we can again be the best sports brand.I ask you, when you say your long term to think long term. Q4, when you do the math, you will say you're too conservative. It's obvious that we will not do something to look good in Q4. We will build the base for a better '24 and a successful '25 and '26. That is important. And then you will ask about the Yeezy inventory. You know in that outlook it's currently that we write off old inventory. If we will do that or not depends on many factors. And if we don't do it, of course, you can add that back again to your P&L.And I think with that, I've already answered some of the questions you will have, but I hand back again to Head of IR.

[Sebastian Steffen, executive]

Thanks very much, Bjorn. And I'm sure there's going to be more questions. So Andrea, we're happy to take the questions now.

[Operator]

[Operator Instructions] The first question comes from the line of Aneesha Sherman with Bernstein.

[Aneesha Sherman, analyst]

I have 2 questions for you, please. The first one is, your Q4 guide implies a pretty big deceleration in revenue trajectory, double-digit revenue declines at the midpoint. Can you talk about what's driving the deceleration in your performance? And does your current performance align with that Q4 guidance so far in the quarter? And then my second question is, Bjorn, you talked about your ability to sell-in product this quarter and the past that wasn't part of the preorders originally. Given that response, are you seeing retailers change and have more appetite for higher preorders in H1 or H2 2024?

[Bjorn Gulden, executive]

Well, your second question definitely is yes. As I tried to say is that 9 months ago, we started to look up on how we would like to treat the trade in the future. And that has to do with what we offer them, how we offer it, how we treat them, blah, blah, blah and that actually our retail partner is more important for us than D2C. And of course, to set that up, take some time. And the first, what should I say, go-to-market process that is in line with that it's fall into '24, which is happening right now. So we clearly see a big increase in the interest of the retail partners and therefore, expect a much higher order book for the second half of '24. You have to remember that we've been working on a negative order book as long as I've been here in the sense that the sell-through of the product, the inventory has not been good, therefore, the preorders for all the quarters in '23 was negative and that will improve all the quarters in '24.I think I said to you that the order book we were working against for Q3 this year was over 20% minus. We ended at minus 2%. So the difference is what we then have chased. And I think I also said you on the lifestyle side, when we began the year, the whole Terrace thing was not on the calendar to be scaled this year, but next year. And of course, you have seen that the visibility of that has turned around, I think, the image of the brand very quickly, and that is based on actually chasing the business and then put good product on the shelf and therefore, increasing the sell-through. But what you also have to understand that we cannot do that with everything. So hopefully, when we get to Q1, Q2 next year, we can actually fulfill preorders, which are then increased in these areas, and we can have a more planable business.The reason why Q4 looks the way it is, is, of course, we are not going to chase any business in the sense that we will pull anything forward to look good in Q4 because it makes no sense because then we will actually put even more pressure on the pipeline. So Q4 for us will be to lay the foundation for a better first half next year and a very good second half next year. And that's why the guidance is the way it is. I'm sure when you do your math, you think it is conservative and maybe it is. But you also have to understand that for us, the performance in those 3 months is not relevant for the long-term story of adidas. So that's the way we deal with it. Same with Yeezy. We could easily have sold Yeezy in Q4 to look good, but it doesn't make any sense where we're sitting. And I hope you agree with us that what we're trying to do is to build a business now with brand heat, the performance and lifestyle products that we can extend for a longer period of time. We have gotten the inventories down. Of course, we need them to improve the quality of the inventory, both in our own inventory, but also in the trade and all those things are not done in 12 months. So you need to be a little bit patient and believe in us and then we will actually convince you that the strategy is correct. But your math is, of course, correct. And then we will see if it's a little bit better or if we will end exactly on the guidance.

[Operator]

The next question comes from the line of Graham Renwick with Berenberg.

[Graham Renwick, analyst]

Just firstly on full price sales. You made quite a few comments there of making good progress on full price sales mix. Just to put a bit more context to that. Are you able to tell us where full price sales were as a percentage of that brand sales ex Yeezy pre-pandemic, where that mix is today and what your ambition is the full price sales mix in the midterm?And on running, it was flat overall in Q3. We've seen the headlines of athletes breaking records in Adizero shoes. You mentioned the Adizero family is up strong double digit. I presume that's from a low base. I just wondered how long it takes to build that credibility and better distribution in the commercial segment. So when will we see Adizero success. As the athlete level starts to cascade down to stronger growth across the broader running business, should we be expecting a big impact as soon as next year? Are you already seeing that stronger demand in order books? Or is this something that needs to be developed over a longer time frame?

[Bjorn Gulden, executive]

Well, I take your first question. I mean, what we clearly see is that the new product that we have been chasing where demand is selling at full price everywhere in actually all markets and all channels. And then, of course, not all the products we're selling is that new product, and this is what should I say, difficult that we are in is that there isn't enough good product to kind of replace the bad product, and that's why the numbers are now better than they are. If we only have the right product now, we would already promise you probably 10% EBIT next year. So it takes some time to get through all the issues that we have had because you have to remember that we had an order book being down 20% because the retailers are full of product that didn't sell. And we have been able to take the inventory down partly in our own, as you saw, down 23%, but also with many retailers, we've been able to clear a lot of products. So we are cleaner than we've been before. That's why the full price sales of new product is much, much higher.On our e-com, we have protected our franchises. So we are not allowed to discount them ourselves, which should also help our retail partners. And the full price share is then going up and margin is going up. But of course, when you look globally and especially in the U.S., all our outlets are selling at a high discount because it's only clearance. So we are not there yet. And a lot of the retailers still have too much of the inventory that was not selling is now being sold at a discount. So the picture is, of course, not as clean as we would like it to be, but the trend is right. And I think with the fact that we now have in the way we work with the retailers and especially the reaction for the preorders for fall '24 is, of course, that now they can buy a brand that is selling well with new products, there's the trust on how we go to market. And of course, we're then starting to build our business on facts and not only believe. So it's a better situation to be in.In the running area, we have chosen or what should I say, the business unit have chosen to build credibility at the top. So there, the sell range is probably, I think, even competitors will say the best technical product in the market, and it's selling and performing very well. But as you rightly say, it's a small part of the segment. And of course, our challenge then is to take that, what should I say, credibility, having the right athlete, the right technology and the right product and then cascade it down to more commercial product. And of course, the speed of that, I can't promise you, but it's better to do it that way than the other way around.You know that there are other brands currently that has played the Comfort game. I mean both HOKA and OMs had success with their story, and you should not be surprised to see also in our line, you will have more running shoe that is built on the Comfort story. I can't promise you any numbers. The only thing I can promise you that the visibility in running will be increased. So you will see us at more events, you will see us with more athletes and you will see a bit more, what should I say, products out there, and then we will be patient.On running specialty, it's also fair to say that adidas is less running specialty in many markets, so we didn't have a sales force anymore. The idea was that the runner will buy it in our D2C, and that doesn't work. So we are again building our sales force and I would say, technical experts to support running specialty to also build a real relationship to running community, which you have to do physical and not digital. So there is quite some investment going on there. And of course, the payback of that will take some time, but it's the only right thing to do for a brand like Adi. So you also have to be a little bit patient, but the product is there.

[Operator]

The next question comes from the line of Erwan Rambourg with HSBC.

[Erwan Rambourg, analyst]

I had one for Bjorn and one for Harm. So Bjorn, one on China. I just came back from China about 3 weeks ago. And there's a lot of talks of Western brands taking back share from local Chinese brands after pretty much 2.5 years of misery. I'm wondering if you could comment on that. How easy is it now to operate in terms of brand ambassadors in terms of events? Is there a role post the neo-restructuring? Can you comment on inventory levels, specifically in China? And last year, you were down 50% in Q4. So what can we expect both short term and long term for that market? So that's for you, Bjorn.For Harm, I was just wondering on the gross margin levers, you talked about freight input costs, promotional activity, FX. I'm just wondering if you can comment on timing of when some of those start to turn. The FX pressure, how long will that last for? The promotional activity, it seems that leaving aside the U.S. that's going to temper somewhat, but can you help us understand the building blocks to think about gross margin in, again, the short and the longer term from here?

[Bjorn Gulden, executive]

I'll start. On the China situation, I think we need to divide the lifestyle business and the performance business. When it gets to the performance business, it's obvious that the local brands has built a price point for running shoes, basketball shoes and all the performance shoes that is below what, for example, we are offering. That means we have been competing in running, I would say, also in basketball in a smaller part of the market because our price points has been high. And if you want to have real volume, I think you need to go down and also do re-performance shoes at sub-$100 price points. That's what we are going to do to compete for a bigger part of the consumer. The rest, I mean, the higher end is starting to grow again, but that market is smaller than you might expect.On the lifestyle area, we've been lagging the, what should I say, the opportunity to actually work with celebrities coming out of music or out of art or out or whatever. And that has changed in the sense that we now are starting to activate again, actresses, actors, musicians, I would say, street culture relevant people, for example, in breakdance. So far, all these activations has been working without any shitstorm for any what should I say, communities. How long that will last? And is it forever, we don't know, but the team is very energized by actually starting to compete again on a fair level compared to local brands.You saw that our underlying business was up 10% for the quarter. And again, our own concept stores, where we actually have the best of the best is actually much higher than that. So there is clearly, what should I say, a consumer that goes back again to Adi on a higher level than it was a year ago.I think when you look at Q4 in China, you have to be very careful because there's many movements in the wholesale business there with takebacks of inventory and how do you actually push in products for Q1 and not so I'm not going to give a number, but the Chinese number will at least be up double digit, regardless how high it's going to be. And it's the same thing there. We will see how 11/11 goes, which you know we are in the preselling right now. And then we will adjust all our wholesale business according to what we see. We will not push anything into the market in Q4. I can promise you that. And then, of course, we will hope that the market will continue to develop the way it should. We will overinvest in marketing and then continue to see a growth in the Chinese market, but not to try to get it very, very quickly up to the previous levels because the risk then again is, of course, that it crushes.We have moved 75% of our volumes to local sourcing, and we are doing 30% of our product at what we call quick response replenishment. So the preorders that we're taking with all our partners is going down substantially because we don't want to push it in and take back. We want to deliver in and then replenish both with new products and with all products. So the business model is changing. And I think if you ask our local team, they're very, very happy with the way we're developing when it gets to the business model. And with that, I hand over to Harm.

[Harm Ohlmeyer, executive]

Yes, Erwan, on the gross margin, very good question. And of course, I'm not going to give you any guidance for next year, but you can assume that FX is probably the only drag going into next year. And that FX is probably more negative in the first half and then it's during neutral and maybe even positive in the second half. That's where we are from an FX point of view.When it comes to all the other elements, freight will be positive for the full year, probably more positive in the first half, as it then more neutral in the second half as well. And then, of course, as Bjorn alluded to, we have more trajectory with our Terrance products and lifestyle overall, lifestyle presents ourselves an attractive margin. So the overall business mix will turn positive as well. And this is where we look into next year. So the combination freight positive, given the scaling of some of the products that we have, we hope for normalizing or benefits on the production cost as well.So simple terms, FX is a negative next year for the full year, more in the first half than the second half, everything else return slightly positive. That is also something where we will live in the midterm. We always said we want to get to a 50% or plus margin, and that's required. If you look at our Q3, again, if you get to 50% margin with some of the drags going away over time, we would plot the 50% margin already and then having a normalized infrastructure given the growth that we have on the top line, we have shown in Q3 what's possible, and we can build on this one. So that's roughly where we are.

[Operator]

The next question comes from the line of Zuzanna Pusz with UBS.

[Zuzanna Pusz, analyst]

I will stick to 2. So first of all, maybe to follow up on gross margins. Thank you Harm, that was very helpful to understand the drivers for next year. But I also wanted to follow up and see how we should think about the gross margin in Q4 because, obviously, we are coming from an extremely low base, which had many one-off items last year. So I mean, I think it was 39% last year. So I was just wondering whether the Q3 at Yeezy is the right way to sort of think about the gross margin or what are sort of the puts and takes we should consider when we look at the Q4 gross margin?And then a question maybe just for Bjorn on the performance in Q4. And I think it's very clear, and I understand that you say you don't want to pull forward any business into Q4 because that's not the point of your strategy. But if I'm not wrong, I think the business in Q4 tends to be a little bit more retail driven, at least has been in the last 2, 3 years. So I was just wondering if you could maybe comment on the current trends you're seeing. I think some of your peers have mentioned that actually weather had a negative impact on at least for them on Q3 and October was seeing an improvement. So any comment you could make on how sort of retail is developing so far, if that sort of double-digit growth you're seeing in your own stores is something that could continue into Q4? That would be very helpful.

[Bjorn Gulden, executive]

Q4, I think historically with adi, and it was the same with Puma, was almost never a profitable quarter because there's so many movements. And where we're sitting right now, we will have improved business in our D2C when it gets to the sell-through of the product on full price. I'm 100% sure because we see that trend already. But you know that 2/3 of our business is the wholesale business. And for us to get into a more structured business and not what should I say, hunt the business that is in demand, we would rather have the preorders for Q1, Q2 be fulfilled in a way that we can plan the business they're now trying to stress Q4. And that's why, to be very honest with you, for the story of Adi going forward, how we perform in Q4 doesn't really matter. I hope you agree and that's why we're very relaxed on what numbers we're showing.And again, we can talk about it at the end of the quarter how our sellout and how our new franchises is working. And I'm very convinced they will do well because they're doing well also in October. But in the big scheme of things, then what do we do? We take back from retailers. And how do we, what should I say, deliver maybe demand that is there out of the order book of Q1 I think we'll be very careful. And then the -- what should I say -- the easy thing is also that we could easily have said, "Let's make a drop in Q4, so we look good," but we're not doing that because we have to really build stone by stone and do the things that are right for the business into '24 and '25 and people do that also in Q4.The demand for the new product is actually very good. So the sell-through thermometer on what is hot is good. And we also clearly see a demand for 3 stripes now also going into apparel, which the high low effect of what's happening on the footwear side. And again, the order book for Q1, Q2, which wasn't that great either is now building the order book for Q3. Q4 will be very good. And then the question is how much stress are we putting into this to short term, try to impress you? Or are we now trying them to do what is right for the business also going into '25. And you know me that we're now trying to promise you think that we can deliver and making sure that we build stone-by-stone. And that's why Q4 looks the way it does, so. And then I hand over to Harm for the margin.

[Harm Ohlmeyer, executive]

Yes. Zuzanna when it comes to the Q4 margin, unfortunately, I'm not going to give you a lot of more details than what you heard before, but the key drag in Q4 will be, again, there's no easy business plan. And then secondly, there's significant FX headwind that is coming towards us. But you also need to understand, given where we are after 9 months and having made some progress also in the underlying business and made tremendous progress on the inventory side on the total level of inventory. Now looking into '24, we want to make sure that we do the utmost in Q4 to have a higher share of good product where the bad product in the inventory, and that's why we take advantage of it and then get better prepared for 2024. That's the plan. And I will leave it there.

[Operator]

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

[Jurgen Kolb, analyst]

Bjorn, first question for you, again, around the order book. Thanks for mentioning also Q1 and Q2 order book. When you last time talked about the order book for the H1 next year, it sounded at least as if that's a negative one that was down because of especially very reluctant retailers, specifically coming from North America. And I was wondering, as you said, this is building, are we in positive territory, especially also maybe with a little bit more optimism coming from North America? Moving on to the second half, very strong, as you pointed out. Maybe one indication on price and volume. Is there a price component included in this order book? Or is it more like-for-like? And again, also here on North America, if you could give us an indication if you're seeing good demand from North America also in the second half?And the second part of the question, Fear of God, a good news, it's coming to the market. I was wondering if you could share with us some thoughts as to why that took a little bit longer. And if maybe any of the plans related to that category has changed or if that still is as initially planned, but just a little bit of delay here and there?

[Bjorn Gulden, executive]

Well, the Fear of God thing, I think it's a good example for working with a partner and not having a clear setup what is expected. I wasn't part of the first 2 years of this, but I've been part of the last year. And I think it's wrong expectations. And again, not having the layoff is up and actually a lot of misunderstandings of what it means to work on a performance product and then on a lifestyle product with a guy like [ Jerry Lorenzo ]. That's now fine. I mean, as I said, there's about 42 articles that has landed in the warehouses. This performance product ready to go on the pitch or on the floor. There's lifestyle product bought in parallel and footwear ready to go. So I think those, what should I say, problems are over. And now it's for us to, what should I say, get the heat going and then commercialize it. And from the feedback from retail and also from the fashion show in L.A., it's been actually very, very positive.When it gets to the order book, I think it's fair to say that the order book for Adi has been negative and heavily negative for a long time, especially for the second half of this year when we started, there was a terrible order book. And we have been able then to replace that with replenished business and then, of course, also pushing the lifestyle things that has worked and chase the business. Remember, I said we need to fight and we found the things that we could fight with, and I think the team has done a great job. The order book initially for the first half, as I told you '24 was also negative. That's now starting to build to a positive order book. And I expect the order book for the second half of '24 to be very good, positive.I'm very careful with the order book in the U.S. because the order book there doesn't really mean anything other than we need to go by account and look at what inventory do they have? And if we give them a positive order book, then we need to make sure that we either have clearance plants or that we take inventory back because it doesn't help to have a high order book and then deliver into a store that is full of old merchandise. So U.S. is lagging, I would say, 6 months behind the development that we see all over the world, not from a heat on the product, but from an inventory level in general and the amount of discount also on adidas product, but not only adidas.So again, if I should build a scenario, I think when we end the year, we will have a positive order book globally for Q1, Q2, and we will have a very good positive order book for Q3 and Q4. And then we will see how much we then have to chase on top of that order book. The growth numbers on the 5 shoes I showed you in the presentation is, of course, much, much higher currently than the trend that we have in the order book, and we are actually not taking orders on many of the franchises because we want to manage it. So this is now a course also for us to show that we can be disciplined and not overheat some of the franchises.But again, I'm extremely proud of the team, what they have done for go-to-market for autumn/winter24. The way we have treated the customers, the way we have now done all the pre-lines, the quality of the samples, the amount of samples. And I think all retailers worldwide will say, wow, the service we feel now from Adi is great. And I think they want to do more business with us, and that was the goal 9 months ago to get there. And then we will have to show that the product we are doing is also selling and knowing that our D2C business in the full price stores is up already like-for-like double digit that gives us a good, what should I say, indication that the right product in the right location with the 3 stripes on our logo works.

[Jurgen Kolb, analyst]

Just a quick one on pricing in the order book. Is there a component of price increase? Or is it rather flat?

[Bjorn Gulden, executive]

Well, it's obvious that if you -- I think I showed you that the growth in our lifestyle business is in original higher than on sportswear, then it's obvious that right now, the order book is on a higher price. But that also has to do that we haven't chased the order book yet on the more commercial side the way we should probably. So right now, I would say that there is a higher demand on the higher product, but that's not necessarily because the demand is like that from the retail, it's more the way we have been able to sell it. Any trend we do upstairs, like all the Terrance which also have takedowns we are in this crazy situation that the higher end has much higher orders now than the lower end. And of course, in a normal franchise, that's not the way it is. This has more to do with where we are in the cycle.And as you go through next year, I think you will also see that the lower end and the sportswear side will start to grow as we scale up the same silhouettes. So this is more just a view if you look at it right now. But we don't see average price increasing as much as it currently looks in the order book.

[Jurgen Kolb, analyst]

It's a nice problem to have the higher price and higher demands.

[Bjorn Gulden, executive]

Yes. But you would like to do both, right? So there's a good thing and a bad thing. So it's like in a perfect world, you would do both and then we will be closer to our 10% EBIT, right? You have to remember where we're coming from. So it is good right now that all categories have higher demand on the higher price. I agree with you because that's the same as we have in running. But of course, you need to commercialize it. So there is a job to do to get where we want to go. But Rome was not built in 9 months. So we need a little bit more time.

[Operator]

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

[Geoff Lowery, analyst]

Two questions, please. Firstly, can you give us some feel for how many units associated for Terrace, you will have sold in 2023, do you think? And the second one is a slightly bigger picture question. How far are you in getting the wider management team where you want it to be? I don't know whether you think in terms of top 50, 80, 100 leaders in the business. But how deep and full is the bench right now?

[Bjorn Gulden, executive]

The Terrace is a millions of pairs. I think I have to be careful with mentioning the exact number because there's also uncertainty what is Terrace and not Terrace. But the court side will be tens of millions of pairs when you get through 2024. It's a big, big category.If you look at the team, also a difficult question. I mean you've seen that we have changed most of the Board. So that is a check. Then when it gets to the rest of the team, there are changes. You've seen a couple of them today. And of course, there will continue to be changes but most of those changes is actually elevating internal talent. I think what we have seen is that we have a lot of good people in the second, third and fourth string internally. And the goal is clearly to recruit less outside. But then to give our, what should I say, talent that is hold back the chance to get into a higher position. And I'm very, very impressed actually from what I've seen in the 9 months, how much talent we have. And again, give us some time and then we will look at structure again during 2024.You have to remember that this year was about attitude and what should I say, take away a lot of hiddenness and breaking rules to get quicker and go to market quicker. We still have a lot of work to do when it gets to actually formalizing that into processes and structure. But attitude and results first and then you can make it more professional afterwards.

[Operator]

The next question comes from the line of Edouard Aubin with Morgan Stanley.

[Edouard Aubin, analyst]

So one question on China, one question on sales next year. So on China, Bjorn, sorry, just some clarification on the back of what you just mentioned earlier. The neo line, are you looking at completely you're downsizing the business? Are you looking at completely kind of discontinue this line in China? And also related to what you have said in the past in terms of designing product in China for China, I think you gave the target of about 30% kind of if you could give us an update in terms of that objective and kind of come back on why the need to design product locally in China? And then just lastly, related to that, is the push kind of designed to compete more with the Chinese brand in lower-tier cities? Or would you rather compete more with making higher tier cities? Are you basically want to compete with everyone in China? So that's that for China.And then just on next year, so you kindly commented on the order book. If I look at your total company sales next year, I think consensus is looking for about 8%. You're going to lose the benefit of Yeezy, which is adding, I think, 3% or 4%. So basically, consensus is assuming kind of a very low type of double-digit type of growth next year underlying. Do you think that's kind of -- I know it's a bit premature. You're not going to give us any exact figure, but is it in the realm of possibility, low double-digit organic growth, given what you've printed this year or not?

[Bjorn Gulden, executive]

First of all, China, all products in China are different than the product you have in a different market on the apparel side because they have Chinese specs. So the sizing and the spec are different even if the product looks the same. So you have to think about it. The product is different anyway. And what we have said is that if it's different anyway, why don't we let the Chinese decide also more on the design? So we have now 50 designers sitting in Shanghai, which has the freedom to add supplement or create something that we haven't done before in apparel from older collections. If that is 30% or 40% or 20%, I don't really care. It is all the Chinese organization that is deciding on that.On footwear it's a little bit different. But on footwear, we can produce locally all styles also in China, which is an enormous advantage. And that's why also there, we give the Chinese the possibility then to add SMUs material components due changes to the collection and produce it locally, which on a landed cost could be cheaper in our duty. And of course, from the lead time when it gets to both transportation and production gives them advantage. That's why we're stopping this selling in as much as we can and take back what we cannot sell to a plant business where we say that we only sell in 70% and then the rest, we actually will replenish or put new product into the store during the season of the quarter. So this is a new kind of way of working.When it gets to the market, I think on the performance side, we have been competing, I would say, only against the Western brands and then you're right, especially Nike. But the local brands, the Li Nings, the Anta stuff have created, I would say, performance segments underneath EUR 100, which still people are running marathons and playing basketball with them. I think that's a market that we strategically now are looking at to build, I would say, high-technology product, but at the price point also below what we normally would do for the Chinese market to make sure we're competing for a bigger piece of the pie.When it gets to the cities, we are obviously competing in the major cities. That's where we lifestyle wise, I think, for a long time, a market leader. And that's something we want to grab back again. And there we are competing both against Nike but also other brands. And in the lower tier cities, the distribution is thinner. We have closed, I think, about 3,000 stores with our partners to kind of clean up a lot of bad distribution, and that's where neo played a big role. So currently, neo will be reduced to a very, very small part of the business. The brand neo itself will then disappear and then we will have partners that will then attack the smaller cities with a special, what should I say, offering, but in a much more narrow what should I say, process than what we used to do.So it is a little bit what should I say, more details than what you asked. But in general, you will say, yes, neo will disappear. We will find or have found retail partners that will attack the smaller cities with a specific range. And then we will focus with our major partners and on the bigger cities and D2C, don't forget that our D2C business in China is pretty low. And then we will try to balance and optimize the offering as good as we can.You have a tendency to try to get a top line guidance, and that's the way you set up the question. And of course, your math is correct, but it's very difficult now to say are we shooting for 7%, 8%, 10% or 12%. As I said, in the first half, and again, we haven't even decided what to do with Yeezy. The first half will have a lower growth than the second half, just naturally. And that's because the order book, of course, is building as we go from quarter-to-quarter. The U.S. market is lagging behind and will probably not grow at all in the first half. I think we can look at some growth in the second half. And then, of course, it depends on what we do with Yeezy.But underlying, we will have growth, for sure. But I think we should prove to you that, again, the growth that we are having is a profitable growth, and it's a growth that we can build on instead of trying again then to convince you with some numbers and then run into overheating the market again. Right now, I think the demand for the second half is going to be very strong. And then the question is how do you face the first half and how do we make sure that we don't overheat franchises, but that we manage them properly. And I hope you saw that Terrace, then into Campus, then into Superstar, then into 70s running. And then we have a new lifestyle running products behind that. And then all these trends rolled in, what should I say, copy down to other price points. So we have all the ingredients that we actually need to improve during '24. But remember, the goal is to be really profitable in '25 and '26 and not try to overheat in '24.

[Sebastian Steffen, executive]

Andrea, we have time for 2 more questions, please.

[Operator]

The next question comes from the line of Andreas Riemann with ODDO BHF.

[Andreas Riemann, analyst]

First question on fall/winter24. You said this is the first collection from you and the team, Bjorn. And we know you want a more local product. You want a bit more wholesale, you want to cover more niche categories. So what strategic aspects are already reflected in this fall/winter24 product? This would be the first question. And somewhat linked to that, my second question, other than China, what are the countries where you see the biggest need for a more local adidas product?

[Bjorn Gulden, executive]

Well, I think what I tried to say is that the '24 autumn range is the first, what should I say, range that we go to market in a way that I think is right. Remember, I've been here for 9 months. So actually setting that up with what products are we showing what customers, how do we show it? How do we sample it, what kind of dialogue have we had with the retailers before we make the collection, how do we go with SMUs and how do we go in in-line product, I feel that autumn/winter24 is closer to what I see as optimal and is the first what should I say, go-to-market process, where I can say, yes, this is the way Adi should be, and I feel good about it.The other quarters before that was chasing business to fill a gap because the order book was down heavily. So that's why I'm saying I feel comfortable sitting looking at autumn/winter24 because I've seen the reaction. I've been in many of the meetings. And with everything we see in the market, God forbid that the world goes into a crisis again, I feel good about that.When it gets to the markets where we need local products, I mean, you definitely need it in India. I don't know if you know, but the Indian government has put a new regulation that actually forces you to do a lot of local sourcing. And when you do local sourcing, why then also do local product? I mean there's no need to force designs on people when you have to source it there anyway, then you can also try to do the science that is committed to that market. So India will have a lot of local. China we already talked about. Then there are needs, especially in Japan and Korea to do trend stuff in a different way.And then I think the big difference and the biggest discussion many retailers have and I guess, brands is what is the difference between the U.S. and Europe? And we know that American street culture is different than the street culture in Germany, what should I say, the basketball and hip-hop influence in the U.S. is different than what it is in Europe. And the differences are bigger than you think. And that's why for us, we have set up this process and the office in L.A. to target very specifically at the street culture in the U.S. If that product then can go to Europe, fine. But if it doesn't, then we develop product also here.So in the future, the sum of, I would say, what we do in China, what we do in India, what we do in Korea and Japan and what we're doing then in Herzo together with L.A. is then the total of what we do. And then the balance, how much is then global, how much is local, doesn't really matter because we have the resources. It's mainly different factories. And again, I think that we can get closer to the consumer, and we can get quicker when we do it that way than trying to sell one collection to everybody. So I don't think there's a big disagreement on this, and I think the retailers in the different areas loves us for doing this approach. So I hope that answers your question.

[Operator]

The last question comes from the line of Cristina Fernandez with Telsey Group.

[Cristina Fernandez, analyst]

So following up on that comment around the U.S. market and consumer. I wanted to ask how do you feel about your wholesale distribution as far as the doors and the points where you are in. If you think about the strategy do you feel like you need to make changes to the partners where the product is showing off that?

[Bjorn Gulden, executive]

Well, again, all good retailers should have more adidas products. That's number one. I think that the share we have with some of the retailers is far too low, and that is a consequence of us focusing on D2C. And also, I don't think during the last couple of years, focused enough to work with them. That's changed dramatically. Most retailers that you know in the world are interested in a strong Adi. And that's why I feel that the feedback we have with them and the process we've had with them over the last 9 months has developed more and more positive. But again, the real result of that is first visible in autumn/winter24 because that's the time lines that you're working to, and that's why I'm very optimistic about the order book. I think we will see growth in the wholesale business also in the first half, but then less than what you've seen in the second half.There are segments of retail that we have totally, what should I say, gone out of. I mean running specialty is one of them where we divested from physically servicing them, and we thought we could do it only digital. We're changing that. The good thing is now we have the product. As I said, I think we have the best running product in the high-end market, but we lack distribution. So that is one area that we need to win back again. There are areas in special sports, tennis, for example, where we need better distribution where we have the product, but it's almost not visible.And then in the U.S., all the U.S. sports, if you do American football or you do basketball, you do baseball, it's obvious that on the performance side, both distribution wise and what should I say, partner-wise have a lot to do. When it gets to all other general sports distribution or sports fashion, I think we're working with all the partners. It's just that they haven't felt that we service them properly. And that's why the share of the wall is not what it used to be. With many of these retailers, we have half of the SKUs on the wall now than we had 10 years ago.But the good thing is I haven't met one retailer yet who doesn't say that they want to grow fast with us, and it's now up to us and to show that we can give them the product and the marketing and the heat they need so they can make real money with us because remember, the only reason for a retailer to buy a brand is that they can make money with us, and that's what we're trying to do. And over time, I'm very, very convinced that, that will happen.

[Cristina Fernandez, analyst]

And one other question I had was on the inventory, you're not going to have Yeezy drop in the fourth quarter. Do you still expect improvement in the terms of year-over-year decline in inventory? Or from here, it's really more about the composition of the inventory until you decide what to do with Yeezy?

[Bjorn Gulden, executive]

If you take Yeezy out, you have EUR 4.5 billion in inventory, I think that's a healthy level. There is, of course, some more inventory still in the U.S., but that's -- I would say, if we can keep this inventory level but have a high quality of the inventory, I think we'll be in good shape. And then remember, in our guidance, it is then the assumption that the Yeezy inventory is going to be written off in the current status, right? And we will make all the necessary analysis to see how we will treat that inventory. And should we decide that we will sell it, then, of course, we will not write it off. So that you also have to have in your mind when you look at the value of the inventory.

[Sebastian Steffen, executive]

All right. Thanks very much, Cristina. Thanks very much, Andrea. Thanks very much, Bjorn and Harm. And also thanks very much to all of you for joining the call on this very busy day and for mostly sticking to the 2-question rule. This concludes our Q3 2023 conference call. If you have any open questions, be it today, tomorrow or over the next couple of weeks, as always, please feel free to reach out to Philip or myself. We will be happy to connect with you. And with that, thanks very much again. Have a good remainder of the day. All the best. Bye-bye, and 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.