Puma SE

XETRA:PUM

Earnings Call Transcript 2022-Q2

[Gottfried Hoppe, executive]

Thank you very much, Katie. Hi, everyone, and welcome to the conference call on PUMA's Financial Results for the second quarter '22. As usual, I'm here with our CEO, Bjorn Gulden; and our CFO, Hubert Hinterseher. Bjorn will take you through a short presentation. And after that, we will be ready for your questions.

Over to you,Bjorn.

[Bjorn Gulden, executive]

Thanks, Gottfried. Yes, short and short, I think it's about 20, 25 minutes. I know you'd rather ask questions, but we also think we need to at least inform you a little bit about how we see things, and that's sometimes better done in a presentation. First of all, I would like, again, to repeat that we all feel that we have had a momentum or, I would say, a longer period of time. We have grown every year except for 2020 when it was the beginning of COVID. And we've taken that growth and some -- could summate on the bottom line and the rest, we have invested in marketing, infrastructure and making the company better. We have said to you that we think this business is a 10% EBIT midterm, and of course, since we said that there has been a lot of negativity around those, which we will get back to. But I'm still convinced that this is a double-digit EBIT business, and that's also where we will lead it in the future.

It's also important that we feel that we have a people first, I would say, culture. That means that regardless of what is happening in the world, it's our responsibility to take care of our people, both internally, externally as a family. I'm extremely proud of what we have done in the crisis in Ukraine. We have had many teams going in and out of Ukraine, with supplies to our people. We have a safe house that could hold more than 300 people. We have delivered food, water and other supplies in there. We have taken out, I would say, around 160, 170 people out of Ukraine, women and children, and we're currently hosting more than 110 people here at the headquarter, women and children where 26 of the women are working in our office. And I think almost all of the 70 children are in German schools or kindergarten. We also do the same thing in Poland.

And as I said, we do everything we can to safeguard the people that are run into these problems in Ukraine.

Also very proud to see that sports is supporting our teams here in Germany, especially Borussia Monchengladbach and Dortmund have played games against Ukrainian teams to collect money. And I think so far, we have collected more than EUR 1.5 million this way, which again shows that sports is not only about winning but also but sharing.

So the PUMA family and the fact that we are convinced that people make the difference has been important, especially during the crisis in COVID and knowing that all the issues we have around us and ahead of us. I think that this is one of the strengths of our company. Then is our attitude. We want to be really the best partner for our consumers, for our retailers, for our suppliers, very, very important. But also, of course, also for our athletes, ambassadors and influencers. This means to be fair and also in a crisis share, both upsides and downsides, I think, has been a very good philosophy during the volatility of COVID.

Remember, we had 4 strong quarters last year where we grew 30% and not only 30% to 2020, but also 30% to 2019, which, unfortunately, is the last kind of normal year. We started the Q1 or '22 Q1 by growing another 20%. Very happy with that. And then today, we released the numbers showing that we also grew 19% currency adjusted in Q2 or even 26% reported. That means that we now on organic growth are at 90% year-to-date. And I think that's a pretty strong number given the circumstance.

If you break that down, the strategy of prioritizing our retail partners, which is here wholesale continues, so growth of almost 23%. D2C growing only 6%, brick-and-mortar recovering. Of course, I can also tell you that with all the stores having been closed in Russia in Q2 plus half of the stores in Ukraine still being closed and some stores closed in China, we had about 11% of our store count not being operational during Q2.

E-com growing or not growing, but down 4%. A, of course, that is going against very high numbers last year. But it's also impacted by the negativity in China. If you take China out, we would have grown 3% or 4%. We see more potential in e-com. But again, with all the operational issues, we are actually pretty happy with that number.

We continue to open stores. We opened net 11 new stores during Q2. Here, the biggest one, which is the flagship, 650 square meters in Singapore. And those of you who know our stores, you can clearly see the elements from New York and the store opening has been very, very good in a market that used to be very good as long as the Chinese could travel, has been tougher lately, but it's actually recovering as we speak.

E-com, we continue to try to be a global e-com company. All the black areas here are where we're already present before '22. We added green, which is Philippines and Saudi Arabia at the beginning of the year. And then we hope to add all the blue areas during the rest of the year, and that includes my home country in Norway. I'm very proud of that and also Thailand.

We have also been criticized by some of you of not having an app. I have tried to defend ourselves that an app doesn't make sense. If the e-com doesn't work smooth, the e-com is for normal people and the app is for your loyal fans. We felt that we needed to fix certain things in e-com before we went to an app. Over the last 9 months, we have then worked on an app. And we've taken the most digitally in market that we have, India and launched it there a couple of weeks ago. We used Virat Kohli, which is the most known person in India to launch it. We also took over, of course, the e-com site, and we connected it to our retail stores. And I'm happy to report that the feedback has been excellent. If you go in and look at the ratings, you will see that we are almost at 5 stars on the major rating players, and feedback has been very good. So that means that we feel we now ready to launch also the U.S. and then later Japan. And at the end of the year, I think we can also be in some of the European countries and I hope you will then download the app and check it out and report back.

A lot of talk about the metaverse or the Web 3.0, a new area for us. I'm sure also a new area for you. I explained that the metaverse has 2 tasks. It's a digital transactional platform where you can sell digital products like NFTs and other future products. And then it's experience platform where you can engage the consumer, and that's more of a marketing thing. We have started our first steps. We have bought some NFTs, we have the CatBlox. We have the Gutter Cat, which we also have used as a, what should I say, symbol on the LaMelo Ball shoes. And we have also done other, I would say, metaverse activities when launching products and now lately the Slipstream.

And we are on Roblox. Those of you who have children knows what that is. We have our own game and already mid-May, we had 1 million visitors and that's growing pretty quickly. And you will see us doing quite some activities here, like, for example, using it for launch of jerseys. The next one is the third [indiscernible] Manchester City, which we will then actually launch on Roblox.

The real tests, if we have gained enough to experience will be the New York Fashion Week. We will go back there for the first time, I think, since 5 years where we were there with the FENTY and Rihanna. We will have a fashion show live that we call Future Grade. We will then also mirror that in the metaverse with a digital show, so it will be a hybrid experience. And there will also be for PUMA NFTs that will be released that week during the fashion week and that will be a cool experience, which I'm sure we will learn a lot, and I hope you guys will take a look and be excited.

If you look at the divisions, very healthy split between footwear, apparel. Accessory is growing a little bit slower. But you remember, they had a huge growth in Q1, so almost a healthy split. We do continue to push our lifestyle business through, I would say, collabs. We have chosen to work with upcoming young labels, and I would call them very young, huge success with Ami, Liberty, Butter. We have huge expectations on Noah, Kitsune and Rhuigi. And as you can see, these are all young street labels that very, very much fits to our target consumer.

We continue to invest in the Classics. As you know, about 70% of the sports product that goes on the street are what we would call classic shoes that originate from the 70s, 80s and the 90s. We have probably the biggest archive together with the people across the street. We have to admit that Nike has done the best job here. If you take Jordan and Air Force 1 out of their thing, you will see that that's a big part of their business. We have started doing a better job here, and we'll continue to do a better job. And one of the steps was the launch of the Slipstream a couple of weeks ago, a system of basketball shoe from the '80s that we then relaunched in different versions, together with all our assets first in Europe and are now continuing to roll that out across the world. First, [ Selter ] has been very good. And needless to say, the best color is the triple white that you see on the screen.

Dua Lipa, the hottest, I would say, lady in the music scene, our partner launched her second collection last week. In London, a lot of digital content, very, very good reaction and another step of strengthening our women's business. In that area, also, we need to mention the Euro that is now going on in England, were England qualified for the final yesterday. The highest attendants, the highest television ratings. And finally, I think women's championship that gets the credibility that it needs. We had 4 teams at the start with originally designed jerseys. Austria came to the quarterfinal. Unfortunately, we have no team in the final. We did a very big and important launch together with Liberty before the tournament using players, making special collections, and we are investing in women's soccer because we really believe in that for the future.

And remember next year, the tournament in the World Cup will be in Australia and New Zealand, and I think that will be a fantastic event knowing the interest of sport in both those 2 markets. The Men's World Cup, as you know, will be in Qatar in November and December. No one really knows how that's going to be. But I'm actually convinced it's going to be at least for television and great tournament. We have 6 teams qualified and we'll probably have 17 coming up very soon. And as I said, again, although Italy did not qualify, we will be very visible, especially with our South American and African teams.

On Footwear, we feel, for a while now, we are competitive. We're taking market share in all the major markets. And when you look at this, I think you agree it's fast-looking, well-performing product. And as I said, we're very confident that soccer or football, we will continue to take market share. Running, as you know, we've been in track and field for a long time, especially through Usain Bolt. We have not been enrolled in marathon running for a long time with performance shoes and we have not been in trail and outdoor running but given the introduction of Nitro and the new collections almost 2 years ago, we have really made an in-ground and I'm very, very happy with the performance both in competitions, but also the way the product is performing in the trade.

We're just coming out of the World Championship in athletics or track and field in Eugene. You know the hometown of Phil Knight and Nike. We had a fantastic event on and off, the stadium, a lot of successful athletes, setting both world, national records taking gold medals. And the visibility of PUMA has never been as big. I think the best indication of that is this picture. This is the 4 by 100-meter for the women, the fastest women in the world. And if you watch closely, you see that 6 out of the 12 runners are wearing orange PUMA shoes on the podium which means they were also wearing orange spikes when they were competing and 50% share among the fastest women in the world, I don't think that have ever happened from any brand before.

And more important, as I said, the translation then of track and field success into commercial goals into real running shoes that people run in. And again, the introduction of Nitro with and without carbon plates have been a huge success for us, and you hear some of the models that are doing well. We told you last time that we will not be an outdoor brand, but we will use the first successes in running to go in and out in the nature through trail running and versatile outdoor. We will have both footwear and apparel meant for people that are doing outdoor activities, not at the top of the mountain, but into the mountain. And as we know, there is an outdoor boom. People are doing more activities outdoor. We want to be part of it. Again, I'm stressing we don't want to be an outdoor brand, but we want to be a sports brand that also does product for the outdoor. And you will see more of that in the next coming quarters.

The biggest success for our comeback as a brand, I think, is through basketball and also through this gentleman, Jay-Z here with his son and the famous PUMA airplane. The success has also been linked to LaMelo Ball, our biggest player and maybe the hottest kid now and the NBA. We have with the MB.01 launched 6 cards. They all sold out within 24 hours. We are then rolling out soon also the MB.02, which you see in the middle and next year, we will then have the MB.03, which I have happened to see, and it's the coolest basketball shoes that I have actually ever seen being made.

But it's not only men, it's also women. At the women's All-Star game, we have 3 players among the starters playing PUMA shoes. Breanna Stewart on the left side, maybe the best female player currently in the world is getting her own signature shoe. I think it's the first female signature in more than 10 years. Stewie 1 and we will roll out, as you can see here, 4 colors over the next 6 months. The shoe is called the Stewie 1 and has already gotten very good reviews, and it's also something that she deserves as an enormously good player.

Motor sport, I think I've told you before, since Netflix went into Formula One with a series, it's been a huge increase in interest. We see that through the sales of all our licensed products. We also see that both Formula 1 and the W Series, especially to new races like Miami, Grand Prix is gaining huge interest in the U.S. Next year, there will also be Formula 1 race in Las Vegas, up and down the strip on a Saturday night. And in addition to that, the sports itself is getting attractiveness, a lot of celebrities are being pulled in the direction of Formula 1, which is then also then again has a fashion influence we see that Motorsport is gaining acceptance as the sign influence in a lot of luxury brands and of course, also in the center of the PUMA product. And more activities that we -- the more activities we can do with partners like Porsche, where we have launched limited addition like you see here, is gaining attractiveness and are doing both PUMA and Porsche and other brands very good.

We are proud that we're the only brand that actually have a 360 approach, with Cobra doing clubs and PUMA doing apparel and footwear. We had a fantastic year last year after coming into COVID, Golf to Golf. We have continued to grow the business, so we grow it currently more than 20% and we are convinced that Golf will be a major part of our performance business, and we're very happy with the development, both from a footwear apparel and also from a Cobra point of view.

We have talked a lot about being a good citizen. That continues Forever Better is our platform for sustainability and reform for how we deal with issues like the diversity. Extremely proud that we were named the most sustainable sports and fashion brand. That is a recognition of the work that we do. And the 2 projects that is currently very interesting is, of course, the RE:SUEDE and the RE:JERSEY that are kind of, I would say, indications of how we can do products in the future that will be less or maybe not harmful at all for our planet.

To put all that together and you look at the regional split, very healthy split between EMEA and Americas, growing at 21% and 26%. APAC here being down, but that's because of China. You take China out and you have a double-digit growth. You translate that into P&L, Q2 for the first time in the history, at EUR 2 billion. We never had EUR 2 billion in any quarter. That's a growth of 26% reported 18% currency-adjusted. We lost 100 basis points in margin, mainly because of geographical channel mix and then you add the increased trade and you have the 100 basis points nice leverage on the OpEx side, 150 basis points improvement, and that gives you an EBIT of 146, which is almost EUR 40 million better than last year. EBITDA and net income in the same direction and numbers that we are very proud of.

If you look at H1, putting the 2 quarters together, similar numbers, wholesale growing quicker than D2C, very, very balanced split between all divisions and the same thing, EMEA and Americas with good numbers and APAC with China being down, but you take China out, you have a double-digit growth.

We give you this also internal view where you look at the 5 regions when you look at it the way we do it internally. And I think the only interesting thing here that you should look upon is that Greater China since Q2 last year, since the so-called BCI situation down. Also these 2 quarters all other regions since then up. And I think you see a very strong PUMA brand globally over the last, I would say, 8 quarters, except for then the situation that we all have in China.

You put the Q1 and Q2 together, you get almost EUR 4 billion in sales, which is 24.7% growth. We have lost 120 basis points in margin. I told you already why. OpEx constant, I would say, leverage through the 2 quarters gives you an EBITDA of EUR 342 million, which is up EUR 80 million. An EBIT percentage of 8.7% after 2 quarters, which, in my opinion, given the circumstances, is very good, EUR 0.5 billion in EBITDA and a net income being up EUR 50 million. So I think we delivered everything that we promised.

Balance sheet inventory, yes, up 42%. I will tell you about -- more about that in a second. The rest of the working capital issues in line with the growth and basically a very healthy asset side and a very healthy, I would say, managed balance sheet. Inventories you see here that on hand, what we have in the warehouse is up 36% or about EUR 400 million. That is just a couple of weeks of supply. In transit still at EUR 750 million. And remember, in-transit is about 8 weeks, and this is where the major growth lies. And we have had the policy during COVID and especially with the lockdown situation we had in China over the last 2 months, ship everything you can, not hold anything because if there should be a worse lockdown, we would then not have inventory. So inventory is a little bit inflated by that, but it is in line with the strategy and what we wanted to achieve.

A little bit about the future. Remember, we're 75 years old next year, 1 year older than the guys across the street. So we have the longest history. My history since the end of 2013, and I feel that we have done a lot of good stuff for the brand in these 10 years when we get to next year. Most importantly, the attitude that wanted to be the fastest. I think that's been something that has been very, very anchored in this company of making fast decisions building, fast to solve problems and fast to react and that is an attitude that we will continue with. What is new is that we will bring the 2 messages Forever and Faster together as a slogan Forever talks about the history, it talks about the classics in our business, which is a huge factor.

It also talks about forever going forward, so sustainability and also the fact that we would like to build classic for the future to build the future history, that is the left side, the forever. And Faster has to do with everything we want to achieve in performance, in innovation, in design, in performance in general. And I think it's pretty obvious that these 2 words in sports means a lot. We will only use that slogan going forward, and we think it's very, very important that during a pretty cloudy sky going into '23, we need to have focus and using Forever Faster in all the categories, having a very, very consumer-focused marketing and then trying really to have fewer, bigger, better stores is going to be crucial for the success.

If you visualize what it means from a product and on the non-performance side, sports style, the Classics is, of course, the forever side. The Progressive side is where you have new designs, new silhouettes, where you're trying to bring newness to the market. Sometimes it works, sometimes it doesn't. And this is also something that all retailers are now asking for, and they actually segment their stores in Classics and Progressive. So it actually fits the way we think.

And then on the performance side, it's all about faster because you need fast products to actually be successful. And if you visualize it with product, the classics on the left side, you know that's forever. Faster is the progressive lifestyle product in the middle and then in sports, you're trying in each sports to have the fastest and best product. And I think when you look at it this way, you see that we are confident that we're competitive in all the different segments.

Unfortunately, for the rest of the year, all the risks that we talked about at the beginning of the year. This is a slide from January. There will be some negative impact still on COVID. There are still supply chain issues. And even if they are not there as issues, the freight rates are still high. The China situation has not gone away. We hope that after the election that some of it will go away, we hope that the new COVID, what should I say policy will help, but we don't know. The geopolitical tensions are there, probably worse than in the last decade or the last decades. And the result of all of this is cost pressure and inflation. We know that from a COGS point of view, raw materials, the production itself, freight and energy is putting a high pressure on it. That's why margin is under pressure. And of course, that forces also in order to think about price increases.

We have said all the time, we don't want to be the leader. If you ask me now, the price increases year-to-date, they will be in the mid-single digits. They will be a little bit higher in the second half. And when you go into '23, you are looking at double-digit price increases in almost all markets. We will again stress that price increases are something local because the inflation are not the same in all the markets, that might be that you have much higher price increases in certain markets than others. And our policy, of course, to have a global, I would say, structure in our ranges when it gets to the different levels of product. But the individual price setting from a market is the responsibility of a market and I think that's the only way of dealing with inflationary economies doing averages and run them essentially doesn't work.

And we have very good experience with this because we're very successful in South and Latin America which are probably the world that has seen the highest inflation over the last decade.

If you take all that together and you look at the outlook, here are the numbers for the last 3 years. We told you that we will grow at least 10% currency adjusted with some upside potential, and we said that will bring you EUR 600 million to EUR 700 million. Today, we're saying that we raised our outlook on revenue to mid-teens growth, currency adjusted. We continue not to specify the difference with gross margin and OpEx because there's so many moving parts that are external but we still promised you a profit between EUR 600 million and EUR 700 million. And needless to tell you with the pressure on margin, we need always now a higher top line to achieve the same EBIT and that's what we're going to do.

So with all of that, I think Forever Faster is needed more than ever. We think we have delivered good results in the first 6 months. We have a positive outlook for the rest of the year. And although '23 going forward will be at least short term, or difficult, we feel that PUMA and our sector in general, will be one of the sectors that we do well and we should be taking market share also in the future.

So with that, I think I'll stop and leave Gottfried to drive you through whatever he wants you to do.

[Gottfried Hoppe, executive]

That sounds great, Bjorn. Thank you very much. We can now move on to the Q&A session, please.

[Operator]

[Operator Instructions] We'll go first to Ed Aubin with Morgan Stanley.

[Edouard Aubin, analyst]

Three questions for me. The first one is on industry dynamics and a question on distribution and then a question on guidance. So Bjorn, on industry dynamics, if you look at general apparel retailers, as you've seen in the U.S. and around the world, we had a number of warnings. And I guess the problem has been that you had the negative scissor effect with pressure on demand with inflation impacting consumer demand. And on the other side, you had massive surge in imports in general, apparel. Are you seeing any type of similar trends because we have less data, for example, on imports in the U.S. when it comes to sportswear specifically. So if you could comment on what you're seeing from the competition in terms of what's inventory in transit and so on. Is there a risk that full price sales could be under pressure? So that's question one.

Question 2 on distribution, and we've talked about it in previous calls, but you have, I guess, a unique opportunity these days is that the market leader is retrenching from wholesale. Your fans are saying that PUMA is being very opportunistic and nimble and taking share from this. The cynics, the skeptics are saying that you're compromising on the quality of your distribution. So if you could just reassure us that your PUMA products are being sold at the right doors, that would be helpful.

And then lastly, sorry, on guidance. If you -- if we look at H1, as you reminded us, you had an EBIT margin expansion of about 40 basis points year-over-year. Your guidance, if we take the midpoint implies an EBIT margin compression, of around 70 basis points in the second half year-over-year. I know you have, as you said, tons of different moving parts, and you're going to have lower sales leverage, right? In theory in H2 than in H1. But at the same time, you could also argue that you have less headwind on China than you had in H1, and that's quite a profitable market for you guys. So I guess the question is, are you being overly cautious given what you're reading in terms of all the macro headwinds to come? Or are you seeing already the first time when you talk with the retailers when you monitor full price sales at competitors and so on and so forth, are you seeing the first time that the industry dynamics are getting more difficult?

[Bjorn Gulden, executive]

I think I'll start with the last part, which, of course, has many moving parts. I think it's fair to say that gross margin going forward, at least for the time we can look upon, which is the next 12 months will be under pressure because the cost of goods sold are going up as we speak. The good thing is it's not going up suddenly all at once, but gradually, it's going up because of the raw materials and everything we talked about. The freight rates are actually hitting across the peak right now. And you're not able to increase prices at the level that your cost then. And that's why you see that in addition to a channel mix and a geographical mix you have organic margin deterioration on the gross margin. That's one thing. And that's why you need more top line to achieve the same margin as we did before.

When it gets to, I would say, the top line, I mean, no one knows what will happen, but it's pretty obvious that many retailers are nervous, especially on the apparel side because, let's face it, a lot of the apparel we're selling in the sports industry are apparel that also other vertical and apparel companies are doing and I think it's fair to say that the inventory situation that at least I think I'm seeing is higher on apparel than it is on footwear and the alternatives to buy apparel are much, much bigger than it is on the footwear side. So if I look at the demand that I think I'm seeing then demand for us is much bigger on footwear than on apparel currently, and people are more nervous on apparel than they are on footwear.

Again, you can do the math and you can look at the contraction of an EBIT margin in the second half, and I think that's realistic to be honest, because I really don't know if it would be healthy to try to go the other way and create leverage because you will have to take risk on the top line, and you might price yourself out of the market if you try to kind of work too hard against the margin deterioration. Don't forget we are consolidating in euros. So we are in trouble also on the FX side very soon. So I think it's a fair assumption that the second half will see a margin deterioration for the whole industry.

Question number one, I think I already answered because the apparel, what should I say, the demand looks to me to be more under pressure than footwear of the reasons that I already told you. I think I'm also seeing a lot of cancellations on apparel in factories and piling up, I would say, apparel inventories on the Asian side of, I would say, many appeal companies.

And then when it gets to distribution, the cynics that are saying that we are then deteriorating the brand because we go with bad partners, I would clearly say that those cynics are wrong, you shouldn't listen to them. We only sell the PUMA product to partners that also sells Nike and Adi products. And it's not like we are running towards retailers that all the brands are leaving. I think if you look at our distribution, we are pretty structured in the way we look at distribution on the lifestyle side, on the performance side, on the specialty side and on the core side, which is the value side, and we are getting more space A, because we're performing better, we are investing more. And of course, if Nike is, what should I say, reducing the amount of product that they give to this retailer, we will gain share. But there's very, very few retailers that we sell to that Nike doesn't sell.

There's a little bit, I think, a misunderstanding that Nike is pulling out of retailers. I mean they're reducing quantities because they sell more D2C but there's not many, many retailers around the world that we sell product to that doesn't have Nike on the shelf. So -- or Adi for that reason. So I am a big final multi-branded retail. I do not believe that sports is a category where mono brand will work. I think the consumer, if you start running, you would like to get advice on what running shoes fits you. Not only within the brand but across many brands. If you're playing soccer, you would like to see the shoes that Neymar, Ronaldo and Messi are playing. And even worse on the fashion side, I mean, no brand can always own all trends. So you would like to go into a [ SNIPES] or Foot locker or whatever and see what is trending, and that might one year be, I don't know, canvas shoes from bands or Converse that might be a classic shoe for Nike or it might be a modest spots from PUMA.

So I don't believe you can own the consumer across performance and sports style for a long period of time as only one brand. I might be the only one to think like that. I do, of course, see the spreadsheet margin is double as high and that the more D2C, the better you look on the spreadsheet, but the question, how sustainable is it over time?

And what size do you then need to say that, that's the only way. So we think that 70-30 wholesale retail is the right mix. If you look at our numbers now, I think we are at 21-79. So we're not even close to utilizing where we think it could go but with the limited amount of merchandise over the last 2 years, we set the rule that if there is demand higher than supply, we will always give the product to our partners and not to ourselves. Of course, our D2C people are not very happy with that strategy. I can understand that. But I think our retail partner has appreciated that attitude. And again, you're right. I mean, why should we be nimble if other people are not nimble. I mean it's obvious that, that is a strategy. So I hope that answers all your questions.

[Operator]

We'll take our next question from Ms. Zuzanna Pusz with UBS.

[Zuzanna Pusz, analyst]

So 3 questions. First of all, maybe just to follow up on the gross margin. You've mentioned there will be some sort of pressure on the gross margin in the next 12 months. And you also reminded us of the currency mismatch between your sales and COGS. So how should we think of your gross margin next year? I mean I think the industry is going to push through some incremental price increases in the second half of this year. But I'm just wondering to what extent you will have the ability to offset the hedging pressure -- FX hedging pressure in 2023 when we are just generally seeing inflation everywhere. So I'm just wondering how are you thinking about the consumer's ability to really absorb even more price increases next year?

And secondly, maybe just a question on your sales outlook. So the outlook implies still roughly double-digit sales growth in H2, which I think is quite positive coming from you guys because you tend to be a little bit more cautious usually. So you must be clearly seeing a very strong order book and obviously, still strong trends continuing. So I would be just curious to hear if you could tell us a bit more about the order book for H2. Or just generally, what are your thoughts on that because it seems from your slide, which shows sales by month that in June, you had roughly 14% growth.

And then thirdly, on inventory levels, it seems like they were up a little bit in H1. If I'm not wrong, roughly 26% of sales versus, I think, roughly historically 2022. I guess there's hopefully nothing to worry about, given that you're obviously expecting a strong sales growth but maybe if you could just reassure us tell us that maybe that's also driven by some of the inventory arriving because of the supply chain issues, that would be very helpful.

[Bjorn Gulden, executive]

Yes. I think on the inventory side, we have had the policy, as I said, to ship everything we can when we are afraid of a breakdown somewhere. And you have to remember that 3 months ago, the lockdown in China started again and 30% of our products are still made in China. And we, at that point in time, accelerated shipments again. And some of that merchandise is then coming in earlier than it would have done normally. And some of that is then sitting in goods in transit, which is more than EUR 750 million of that inventory. We grew 20% inventories up. I think currency adjusted now 36% or something and that's why it is in line with the inventory levels that we have had before. The stock turn is the same as we had before. You have to remember that last year, we had far too low inventory at the same period. So it's a little bit scary when you look at the difference.

But we don't see an inventory area in total. There are 3 inventory areas that you should be aware of, not only with us but everybody. The Chinese inventory level has been high because no one had expected that China should be so difficult, so long. So there is, what should I say, inventory produced for the Chinese market that has to be reallocated. And then, of course, it's the shutdown in Russia since all of us, I think almost all of us shut down our stores in China and in Russia and we have not imported any more product to Russia. But of course, we have produced for Russia. That inventory is also now currently being allocated to other markets, and that's a surplus inventory. I think that's 2 things that you should be aware of that is kind of a little bit extraordinary.

The rest, I would say that we currently have a very healthy inventory because it's new products that are in demand. And I always say inventory, you can turn into margin, cash sitting on your balance sheet. You can't do anything with because it takes too much time. So I'm not worried about the inventory right now. I do see though that there are certain retailers, especially on the apparel side that has too much inventory. I see that. And that's why people are also nervous. You see people are canceling more. People are, what should I say, delaying more and people are nervous about back-to-school, I think, in all markets, that is visible.

We have a strong order book. There's no doubt. We have an order book that for this time of the year is very, very strong. But we do not expect to convert that whole order book. We are also conservative in our own estimate on how much of that we can convert because we do expect a slowdown in demand in certain markets. Everything else would be very strange.

When it gets to your gross margin and price increases, then it is, first of all, very big differences from different markets. You know that there are inflationary markets already that are way above the inflation that we talk about here in Europe. If you go to South and Latin America, we've had inflation for, I would say, the last decade and we've done very well because management has learned how to deal with it. I think the inflation in Europe and America is new to us. Price increases has started to happen already Q1, Q2. As I said, we have price increases now on a global level in mid-single digits. That will go to, I would say, between 5% and 10% during the second half. And then you will see double-digit increases next year.

But again, you're, of course, trying to do that in a smart way that you're not increasing carryovers that are visible to the consumer. You are introducing new price points and you're waiting your collections a little bit different but no one knows how this will go. Is there a danger that the quantity and the value of all the products produced in our industry will be too high, and there you will get promotional activities again back to the old days. Yes. But again, we will have to do better than the rest. There's no other way of doing it.

The hedging effect in Europe, if you're looking at the dollar rate between EUR 120 currently in a hedging contract and almost parity on the day course is no way that you can adjust for that in addition to the increases in your cost of goods sold. So the European side of the business will have the deteriorating gross margin is not the way. You cannot adjust both those factors and plan for a positive development of gross margin, that's impossible. So we are planning with lower gross margin in Europe next year. America is different because we buy all our products in dollars. So U.S. is not hurt by the FX.

[Operator]

We'll take our next question from Graham Renwick with Berenberg.

[Graham Renwick, analyst]

Just have 2. Just firstly, on China. I know you've always said that you weren't originally planning for any growth this year in the region. China was down 40% in the first half. Can you talk a little bit about how the recovery there has been so far since the reopening in June? And within that new mid-teen sales guide, what decline are you assuming in China?

And then secondly, just managing the risks or the potential downturn, you've been delivering pretty strong momentum and presumably you're still planning and producing inventory for the best case scenario to sustain that momentum. But how flexible do you think you are in terms of costs and inventory flow should we suddenly see a downside scenario where consumer drops off sharply across the second half or next year and perhaps you're left with a little bit too much supply?

[Bjorn Gulden, executive]

I mean, you are correct. I think when we spoke to you at the beginning of the year, we told you that we have not planned with any recovery in China in '23, and we still haven't. We saw a little bit of improvement in the business in China in May, to be honest. But then as soon as you had some improvement in your business, you went into the lockdown situation, so you didn't really know what was going on. The current numbers in China is a little bit better than there was before, but there is no real change in the business. I can tell you what we are doing is that we are doing 80% of our product in China local for local, meaning we're producing it in China. That means that we are able then to shorten the lead times and therefore, we are able then to limit some of the risk when it gets to inventory.

We have strengthened our so-called regional creation center. That means that in those 80%, a lot of those products are dedicated to science and development for the Chinese consumer from a sizing point of view, of course, but also from a design point of view. We are trying everything we can from a go-to-market process when it gets to marketing to be as local as we can. We still cannot use, I would say, Chinese national celebrities but there are signs that you can use, what we call micro influencers, more local heroes in cities or regions. We are trying to push performance more because it seems like that's easier also from a marketing point of view. And as you know, the Chinese want their people to be healthy and fit. So there is a push for performance in general.

The space side, we see that the expansion of retail space that was going on didn't help the productivity. So right now, we're trying to close some doors with our retail partners and have maybe fewer doors, but then bigger doors. So maybe on a square meter base, it's the same, but you will have fewer doors in a city. And then it's obvious that given that margin is under pressure, we are trying to open more doors ourselves and instead of giving a location to retail partners in China, right now it would make sense to do it yourself. I think that's the short-term thing that you're trying to improve. We believe next year that we can have a margin improvement in China under the same sale because I think we have cleaned up a lot of stuff that still has been an issue. And then the top line, I think we will go into the market with the assumption that we will be flat and hope for a turnaround.

In general, when you ask what will happen if consumer demand globally shuts down, well, you know that then our industry will be over inventory. That is the history of our industry. And it's unfortunate that even if we would be more flexible than others and shut it off, we are all hurt by our inventories. So I'm worried about inventory levels should our industry be heavily hit by consumer demand because of the inflation. We are trying to be very flexible. I mean, I can tell you we talked about by plan and stopping and delaying and all that every week. But of course, there is no way with, for example, 8-week shipment time and a throughput time in the factory of a month that you can switch on and off and adjust on a weekly basis. So there is a risk.

But you know us, we always try to be conservative with our planning and then be flexible to gain more. That's how we work. And the inventory level that you currently see is high but that is relative to last year, and it's not relative to sales, and it's not relative to where we want to be. It's just that it looks like the number is high. I think that when you get to the end of the year, you will see numbers that will make you more calm on the inventory side. We don't see inventory currently as an issue for us. I hope I'm right also at the end of the year.

[Operator]

We'll take our next question from Anne-Laure Bismuth with HSBC.

[Anne-Laure Jamain, analyst]

Yes. I have 2 questions, actually, 1 on the Asia Pacific ex China. So you have posted solid double-digit performance in Asia-Pacific, China. I was wondering what are the best-performing markets and what are the key factors of the trusted performance there?

And the second question is on the FX. With the strengthening of the USD versus euro and given your cost base is USD then would it be possible to have an idea of what would be the impact of a 5% moving USD versus euro and the EBIT? And just can we come back on the hedging rate, especially on the euro USD and how much have you hedged for next year?

[Bjorn Gulden, executive]

The Asia Pacific region ex China is improving in almost all markets, I would say, except for Korea currently. You have to remember that all the other markets in Asia were hurt very badly by the lockdown because the amount of tourists and the amount of movements within the Chinese -- within the Asian countries were very slow and especially the missing of Chinese consumers were hurting badly. So you go against lower numbers and because you're going against lower numbers, and we are taking market share I think without lying, we are actually growing in all the Asian markets, double digits, except for Korea, and it's pretty much across all markets.

When it gets to the FX, I think I'm looking at Hubert and let him speak. So I'll go on mute and he can talk to you.

[Hubert Hinterseher, executive]

Yes. hello from mine. You outlined the question how much a 5% FX increase would mean to the EBIT. This is very, very difficult to calculate because it's not only depending on the US. dollar, of course, we have cross rates with other countries and then the inflation and the ability to forward prices are the most important areas to mitigate FX impact. So this is really something which is not possible to answer.

If we talk about how much to -- have we hedged for '23 already for the first half year were covered -- we have covered our exposure almost completely. This is our policy. The FX rates are, of course, not as favorable as we had in H1 '22. And for the second half year '23 were at the moment in the 30%, 40% ballpark in hedging. And you can imagine with the current level of the U.S. dollar, it's quite difficult to avoid negative impacts in H2. The difference is, I would say, more than 10 cents definitely as we had in H2 '22 of 120 hedge rate. I hope that answers your question.

[Operator]

We'll take our next question from Grace Smalley with JPMorgan.

[Grace Smalley, analyst]

I'm sorry, I also have a clarification on the comments on gross margin. I think you mentioned that you expect European gross margin to be under pressure next year given the currency headwinds and the raw material costs. But I guess if we look at gross margin more from a global perspective, how should we think about that in 2023? Because it sounds like, on the one hand, you have benefits from pricing and hopefully from China improving. Then on the other hand, you also have a negative mix impact -- sorry, a negative impact from currency and cost headwinds.

And then my second question on margin would just be, you started the call on confirming that you still think that this is a double-digit EBIT margin business. Could you comment over kind of what time frame now you think it's feasible that PUMA gets to a double-digit EBIT margin.

[Bjorn Gulden, executive]

The European gross margin is definitely going to go down because of, I would say, it's not possible to do price increases that cater from both the FX and the inflation in COGS. And of course, also, short term, the freight will not go down, although it should -- if you look at the P&L of the freight companies, they should be forced to take down the freight rates very quickly. The U.S. does not have the FX side. So I think in the U.S., it's going to be a question of demand and how the consumer is going to react and there's a chance there that you can actually keep and maybe even increase your margin should the market move in the right direction.

The LatAm side is going to be tough. You have the same issues there with both the FX and the inflation. Asia is a big question mark. We think we can do better in China because we have better control at the lower level of our business. If you put it all together, there's no doubt that the gross margin will depend on how the demand side in the different parts of the world will work and how good we are at setting prices that, A, are taking some of the pressure away at the same time, not price yourself out of the market. So there is a big uncertainty on gross margin.

If I were you and I modeled it, I would be very, very careful modeling gross margin to be up. I think it's very difficult to say where a global gross margin would be. But I would be assumed that with the same geographical and the same channel mix, you are looking at the gross margin, that would be down for all the companies. Everything else would be very surprising. I think we look at 2023 as a transitional year when it gets to getting out of a COVID crisis into a momentum. And now we're going in again to a very, I would say, uncertain territory when it gets to both demand and margin.

Having said that, I mean, we feel that we quicken our feet and that we've been good working both inflationary markets and in what I would call prices markets. And of course, our strategy is to be very, very flexible and react to the things that we see. But I think it's fair to say that maximizing gross margin is not the goal. For us, it is to take market share and strengthen the brand and be well positioned for the future when suddenly and you know this will happen. Freight will go down, inflationary pressure will go down, raw material will go down. It started already. If you look at cotton, polyester, oil prices it's has being gone down over the last 4, 5 weeks. So there might be some, what should I say, exaggeration in the expectation of inflation going forward.

But again, we can't count on it. If you take the situation in China out and you take the Russia and Ukrainian prices out and you look at that we are at 8.7% gross EBIT margin already now in H1, we would have been at 10% in the normal circumstances. So when you ask when will I promise you that, well, you tell me when China and the Russian crisis is over and you know when it's going to happen. I think margin expansion short term now is a very dangerous strategy. And that's why we think we should continue with the growth strategy with investment strategy and then gain the benefit of that leverage when we get into a little bit more normal territory. That's at least how we look at it today. Because I think if we try to optimize either by cost cutting, or by being too aggressive on pricing and gross margin, I think there's a danger that you can actually reverse things that we build very positively over the last 4 years.

[Operator]

I'll take our next question from John Kernan with Cowen.

[John Kernan, analyst]

Congrats on all the momentum in a challenging global market. I wanted to focus just on the Americas. The business has roughly doubled since 2019, which is incredible given the current environment. Just curious how you see the competitive environment in the Americas as we get into the back half of the year. It feels like inventory that we can see here in the United States looks elevated both in wholesale channels, outlet channels, and even some of the direct channels. So, how should we be thinking about Americas, the margin environment in the Americas in the back half of the year? And how prepared are you to participate in a more promotional environment?

[Bjorn Gulden, executive]

Yes. You're sitting in the U.S., and I'm sure you're sitting on the information that I don't have. So you probably have a better info than I have. But you know, I'm an old shoe dog who's been in the industry. And I think what we saw over the last 24 months was that given the supply chain, we were pretty disciplined as a business or there were less promotional activities that ironically, both the brands and the retailers are making more margin and everybody was happy.

And now, of course, there is a danger that when supply has catched up and it's catching up. And at the same time, there is a nervousness on the demand side. Then you know that retailers use one tool very quickly, and that is discussed. And I think you start to see it already. And therefore, I'm not afraid as you that there might be promotional activities again. And if that happens, we will be part of it. So I don't think that we have the power to kind of sneak away when that happens.

But I think there's a misunderstanding that if you have a bigger D2C share, you don't have to participate because that is so true. it's obvious that if the retailers in a multi-brand environment starts to discount, you cannot continue with full price on your own D2C and I think that we will sell the same amount. So I don't think the challenge decides what is happening. It is the total market that we do. So we are monitoring prices as you can think every week. And we are trying for retailers that are nervous about the inventory levels to find solutions other than giving discounts. We are holding back shipments. We are taking back the merchandise. We will, at the point in time, take discount money but there are many levels that we work with the retailers on.

And one thing is positive, that is that PUMA as a player in the U.S. market used to be non interesting for the retailer because we were such a small part of their business, so they didn't really care. Now because all the major retail has a growth plan with us and they have seen that we have delivered to them what we have promised, both from a product, from a marketing, from a sell-through and a partnership. Of course, it's a totally different conversations going on, on what to do and not to do. So I think we are in better shape than ever having an influence on what is going to happen with our products in the different channels.

But again, I don't need to tell you that should Nike go very promotional. It's not like PUMA will sit there and laugh and go full price. And we all go at the same speed as well. So we need to make sure that we are on our toes. I don't think I can answer it more different than that.

[John Kernan, analyst]

Understood. Yes, definitely, from our perspective, there's Nike and others are starting to get more promotional as we get into back-to-school. I guess my final question is just on Asia Pacific and specifically China. I think a lot of the Western investors and analysts are struggling to understand how Gen Z and millennial consumers in China are thinking about Western brands these days, particularly in athletic and sportswear, pre better content initiatives in pre-pandemic. Certainly, there was great demand for Western Athletic brands. Has there been a structural change in the way younger Chinese consumers are approaching Western brands in general?

[Bjorn Gulden, executive]

I mean I'm sure you asked this question to all my colleagues. So feel free then to correct me if you think I'm out of line. I think the Chinese consumer in general, would like to buy Western brands and are buying Western brands. Even if we are showing negative numbers, we have to remember that most of us are still on 2019 level without doing real marketing. So that tells you that is a big group of consumers that are still buying all the Western brands, although they are kind of being told not to do so.

I think the biggest, what I say, a problem is that the Chinese market on the digital side, meaning when you're selling on the market platforms or on your own e-com, you need the Chinese most influential people to help you convert. So having LaMelo Ball or Neymar or supermodel being the international carrier of your brand makes you international, but the conversion of getting the 16-year-old girl to buy your fashionable shoe has been in China that the soap opera star or the singer or whatever is actually converting her and we have not been able to do that. That's why the e-com business in China has been mostly down.

If you look at the outlet center, the out-of-town locations that are selling the core of our brand, they have been doing okay. That means that the Chinese family that wants to shop a Western brand in an environment that you not buy the latest fashion and you don't need to be influenced. These centers have the best numbers. And that's why I read it like yes, the Western brands are there to stay.

Yes, the Chinese consumer is still going to buy Western brands. But to get her in to buy the fashionable stuff that at any point in time is changing, you need to be a digitally and you need to be there with the right influencers and that has not been the case since 18 months. And that's what's been hurting us the most. Then you add COVID restrictions on top of it, and you see the results. I'm willing to make a bet that in 5 years, we have a normal situation in China because I cannot believe that 1.3 billion consumers that are doing sports and sports fashion will not buy the Western brands just because politically, they should -- that I don't believe.

[Operator]

We'll take our next question from Warwick Okines with BNP Exane.

[Alexander Richard Okines, analyst]

I've got a couple of questions about pricing, please. Firstly, I'm just interested to hear about your experience of how consumers have so far responded to price increases and what you think will happen as you raise prices by more into H2 and then double digit again in 2023?

And then secondly, in this sort of price inflation environment, what sort of currency neutral growth do you think that you now need to see operational leverage do you think that the bar is lower now given the price inflation?

[Bjorn Gulden, executive]

The reaction to price increase is a difficult one because remember, we have not taken existing products and price them up. What we have done in the, let's say, 5%, 6% price increases that we currently have is that we have introduced new products at prices that are higher than the previous product. So I cannot tell you a reaction on the consumer that is measuring price increase on an existing product because that hasn't really happened with us in any major market, except for those markets that have high, high inflation like Argentina, Brazil and those markets where we've done that constantly for the last, I would say, 5 years.

It looks to me that some brands have overpriced certain franchises because you see it later that they've taken down again, but I don't have any proof for that. I think the real test on the prices is coming next year where you clearly would see that normal price points. If you go to a Foot Locker store and you say that the white,white sneaker from any brand is costing EUR 90 will now be EUR 100 or EUR 110, then I think you will see it. It's also a normal price elasticity in our industries that the lower price points are the worst one to increase. If you're used to selling in the family charging a EUR 50 shoe to take that up to EUR 60 has historically made a huge impact. That's why we will always keep a EUR 50 shoe. But instead of having 4 models, we will now have 1 and we will have 1 at EUR 55 and 1 at EUR 60 and EUR 65. And you will, what should I say, gradually let the consumer choose if our price increases will work or not.

And this is, as I said, local engineering because it's very different from market to market and from retailer to retailer. So I don't really have an answer to you how the consumer have reacted. You look at our numbers and they're fine. Both on retail and on wholesale. But as you know, we are talking about mid-single-digit price increases so far. So I don't think I'm the best measures for it. I think you can ask some other brands, specifically because you can ask them of what franchises that have taken up and they will have a better answer to you than I have.

[Operator]

We'll go next to Simon Irwin with Credit Suisse.

[Simon Irwin, analyst]

A couple of quick ones for you. Firstly, you talked about the app and obviously with the launch into the U.S. and Europe later this year and with the potential that supply will no longer be constrained next year. Does that mean that D2C will be growing at least in line with wholesale or even ahead next year? And firstly, that one.

Secondly, just a bit of a clarification. When you talked about double-digit price increases next year, that is on top of this year's price increases, I assume. And just finally, on China -- on margin in China, you talked about volumes coming back. Do you think those margins are coming back that you used to enjoy in '18 and '19? Or do you think that now it's much -- a much more fragmented market, there are more local players that you probably won't go back to those historic margins in China?

[Bjorn Gulden, executive]

What has happened in China is that if you look at the development of the local brands, they used to be selling similar products as the Western brand, but 30% to 50% off. So if we simplify, they were selling copies or inspired product at a lower price. What has happened over the last 18 months that all these brands have raised their prices and have, from a quality point of view, at least from a perceived one and at least from a lifestyle point of view, hit the price points that the Western brands have, that would indicate that when the consumer comes back again to the Western brands because we do more relevant marketing, there will not be a fall in prices. And if there's not a fall in prices and knowing that we're doing local sourcing in local currency, that should indicate that the margin will stay.

But again, that's too early to conclude because we don't know what happened. But there is no downturn in prices in general in the Chinese market. I would even be surprised if you look at total and you include the Chinese brands that might even be a price increase over the last 18 months instead of a price decrease. But again, I don't have any numbers on that other than what I can see and hear from the people that I talked to.

Your question on the app and on the D2C growth, yes, should the supply stay up so that we can supply the demand in both channels. We will, of course, also give more priority to our -- on D2C. And there's no doubt that the app will have programs that gives priority to D2C. There will be limited additions and there will be exclusive programs only at the app which will not be either in the wholesale channel or in our older D2C channel. We are currently not planning or having as a target that we need to increase the D2C share but I think it's a fair assumption that one of the results of what will happen next year is that D2C will start to grow quicker again.

But that's not an official strategy because I will be stupid now going to our retail partners and now I give priority to myself. So that will be more a result of supply being good enough and that the consumer because we are doing a better D2C they will turn to us, and we will then be able to cater for it in a better way that we have done so not a clear strategy. But within -- we have told the retailers that our max D2C share is 30%. We're currently at 21%. So we have the leeway of doing that, and it would, of course, also help our margin.

Two was, what was the question?

[Simon Irwin, analyst]

The final one on just pricing. It's just. So we're over 20% by end of next year?

[Bjorn Gulden, executive]

No, not necessarily because when I say double digit in spring, it's compared to spring '22, right? So we are now at 5%, if you put 10% on 5%, you're at 15%. I haven't said 20% yet. So -- but you are looking at mirror prices season to season that are going to be double digit.

[Operator]

We'll go next to Jurgen Kolb with Kepler Cheuvreux.

[Jurgen Kolb, analyst]

Two questions from my side. First of all, can you quantify or give us an indication how much revenues you generate annually with real new products in terms of share of revenues or maybe in terms of units. Is there I mean, given that you find it easier to increase prices with new products, would that be maybe an initiative to speed up the number of new product launches for the next years to go broader here? That's the first one.

And the second one, in your presentation, you showed 1 slide where you broke down your products into nonperformance, the performance category, Classics, progressive, sports. On this slide, where do you think PUMA is currently best positioned? Where do you think you need to push a little bit in order to get better and to do better business? Maybe a quick word on your on your perception of where you've done good and where you should do better.

[Bjorn Gulden, executive]

Do you have half an hour? I think it's fair to say that where we have been lagging for a long time is to have a real breakthrough in performance. And performance is more dependent on having the right product than anything else. And I think it's first now that given that we cracked the running side, we have introduced basketball. We have both the Golf and the soccer business under control. I would say that we cracked the performance side. So we have now all the elements to be successful in performance.

And earlier, we didn't. Where we have done a poor job compared to the possibilities on the classic side because, as I said, we have the biggest archive of shoes next to Adi, much longer history than Nike, but we're selling a fraction of what they are doing on the classic side. So I would say that we have cracked from a product development, the most difficult area, which is performance. I can go toe to toe with any of the other brands in any category currently when it gets to the form, to the plate, to the upper to the technologies, the look and then where we've had the biggest opportunity, but have done the worst job is on the classic side. So there are, what should I say different things that we need to do to be successful, but all the elements are there.

Your question about how much is new product and old product is a difficult one because it depends on how you classify it. If you look at the apparel, almost all apparel is new because either you change the color or you change the cut or you change some of the design elements and there's very, very little apparel that is carried over from a business point of view.

In footwear, it's very different because a lot of the franchises that are successful carries over forever. So the SUEDE, the Clyde, the CA Pro and there, when you say new product, what you do is that you upgrade some of them. So you might do a collab, I don't know, let's say, you do a SUEDE with BMW or you, I don't know, Clyde with LaMelo Ball or whatever. That's where you take higher price points. So the franchises themselves, the big part of it are actually old products on the lifestyle side because they carryover from a model point of view, but then you actually upgraded them either by upgrading as a collab with a partner or upgrading into the storyline in that you do better materials or you do sustainable materials or anything. So I can't quantify it the way you would like it.

But I can tell you that in any volume product, even on the lower end, we will introduce a new SKUs and be very, very careful with saying that this here was EUR 50 and now it's EUR 55 or EUR 60. That would hardly not happen. So price increases where the consumer or the retailer will see that we have increased the shoe by EUR 10, EUR 20, EUR 5, we'll be very, very limited.

[Operator]

We'll take our next question from Andreas Riemann with ODDO.

[Andreas Riemann, analyst]

Two topics. A follow-up on Jurgen's question running and basketball improved a lot. Maybe any insight here? How big are these 2 categories? Maybe a percentage of both combined. So any help would be appreciated. And then on China, again, your comments imply that the Lifestyle business is the tough part in China. So then this would lead to the question, is the performance business also down 40% in China? Or is it less? And then on competition in China, I think you started to touch that topic. And my question would be how are your products priced compared to local products in China?

[Bjorn Gulden, executive]

The running and basketball business to quantify it is a difficult one. And I think I've explained this many times that most basketball shoes and running shoes are not being used for the intention. I mean you know that. Again, I know all the brands will hate it when I say this but 90% of running shoes are never being used to run. That's why all people in Florida and Arizona are always buying running shoes because it's the most comfortable shoe, but they never run in it. That's why it's difficult when you say, can you quantify the size of the market because it depends on how you classify.

What we have done is that we always sold millions of pairs of running shoes. We were in the sector of comfort that no one was running in. And the new thing for us now is that we have a performance line where people are really running 5K, 10K marathons, half marathon and we're gaining a new consumer that we haven't touched for a long period of time.

Same with basketball. I mean the number of basketball shoes that are being used to play basketball on the court is very, very small compared to, I would say, the halo effect that basketball has, for example, on your classic business. So both those businesses are much, much bigger than when you define the sports itself. And that's why the leverage on it is so big. If we look at the investment in basketball, I would say that the biggest impact basketball has for us in the U.S. is that we're selling a lot more classic shoes because the 16-year-old kid that LaMelo Ball is playing PUMA, then certainly understands that he can buy triple-white Clyde shoes because Clyde Frazier was also a basketball player and it's now cool. And earlier, he had no idea what PUMA was all about because we were not seeing the sport that we cared about.

And that's why we can afford to do these investments, which in itself, if you measure basketball investment against basketball performance shoes is not a profitable business. So that's that way. When you look at the China market and price points, as I said, we used to be priced similar to Adi and Nike and all the Western brands. And the Chinese brand used to be, I would say, 30%, 40% lower than us. But over the last 18 months, I would say that they have lines in their business, either in their mainline or even at top line priced product up to our price point.

So there are now kind of competitive price points on everything with this lifestyle . When it gets to performance is different, and you have to remember that China is not the performance country yet. The quantities of products that are being used to perform very, very small compared to the lifestyle area. And that is why the Chinese brands have not been [indiscernible] on a real effort performance. We're doing it on the lifestyle side but not on the performance side.

And you asked the question are also our performance down 40%. The clear answer is no. And there are categories and performance in China in our business that are even up. So the loss that you have is on the non-performance side only.

[Operator]

We'll take our next question from James Grzinic with Jefferies.

[James Grzinic, analyst]

Two quick questions, please. The first 1 is around freight hedging. Can you perhaps help us understand when you renewed your freight hedging? And when you that will lapse. That would be very helpful in terms of giving us the total picture on the gross margin dynamics. And then as part of that, can I just -- I think that's the case, but you did not switch your mix of deliveries in favor of air freighting at any point in any significant way in recent weeks of you or recent months rather.

And I guess 1 last one. Should I take it that the shape of your order book has started changing in the U.S., given some of the comments that you made? And Bjorn, could you confirm that, please?

[Bjorn Gulden, executive]

The shape of the order book in the U.S. has changed in the fact that the people are ordering now both preorders on the, what should I say, normal lead time, and then they're trying to adjust the order book either by canceling and replacing orders. So they're trying to, what should I said, adjust their order book all the time. If you go 1 year back, it was give me product, product, product, product. So that is correct, the shape and the timing of the order book in the U.S. has changed over the last 4 months, I would say.

The mix of airfreight hasn't really changed. We're trying to keep our airfreight below, I would say, 1% of our total, and it's pretty stable. And we're only using airfreight strategically if we have to -- I don't need to tell you that shipping apparel, shoes currently is $15 to $20, sometimes even $30, and it doesn't make sense commercially. So we're trying to avoid it.

And what you call freight hedging is we are currently doing a long-term contract that are linked to the index, I think it's called the Shanghai Index on freight and the latest contract we signed, I think, took impact in May, and it changes prices all the time because due to the, what should I say, indexes our freight is currently for a 40-foot container going Asia to 1 of the major European harbors, I would say, around 7,000. And then on top of your normal freight, you have the, what you call it, the oil price indexes that are changing so I would say that freight for us is currently peaking right now.

We had very good short-term or long-term contracts going into the year. We have a very, very good contract for the U.S., which has stable prices. But as a global, I would probably say that the freight we are currently having between 7,000 and 8,000 is probably the highest that we will get, and then it should start to go down again in '23.

[James Grzinic, analyst]

And just to understand, so clear like you've got, what, like 9 months cover roughly on that on rate contracts, and then you would resume.

[Bjorn Gulden, executive]

It's to be very honest it's -- I mean, we have a long-term contract commitment both ways. It adjust prices on the rates every 6 months. But it adjusts the oil price indexes more often. So the prices could change from quarter-to-quarter. And I do think -- and again, I don't have a guarantee for this because God knows something can happen but I think the prices you see now in Q2, Q3 are probably the highest that you will see, I hope.

[Operator]

We'll take our next question from Cedric Lecasble with Stifel.

[Cedric Lecasble, analyst]

Yes. I have 2 remaining questions. A follow-up on your comments on running and basketball. You've been an outperforming brand in good times. Now that things become more difficult and given your new relationships and building relationships with some key strategic retailers. Do you think you could continue to likely take market share even if in a tougher world because of your dynamics with the retailer and with new categories in performance? That's question number one.

And question number two, I was interested in your comment on multi-brand and mono-brand and the fact that [indiscernible] stores are dangerous. If we look at China, we have a distribution system with franchise exclusive partners in many cases. So do you think there's the whole distribution model in China that should be changed? You mentioned having more own stores, closing some franchise stores. What's your thoughts on that? And how fast could it go?

[Bjorn Gulden, executive]

I mean, to answer your first question, the answer is yes. I mean, we should outperform the market because not we are doing a poor job, right? So the target for us is to take market shares at any point in time, good than bad times. And it's obvious that market share and growth is first crucial since we're smaller than the 2 big ones. And so I have to say yes to that, and you will measure me on that.

When it gets to my comment on mono-branded and multi-branded, I'm coming from the consumer side, and I don't believe that the sports is the same as the luxury. I do understand when you're paying EUR 8,000 for a handbag that you go to Gucci or you go to Hermes or whatever you go because it's a very special product. But buying a sneaker for EUR 100, which you buy more often, I do really think that the new young generation will like to be in a multi-brand environment. And I don't believe that regardless who you are that you can own the consumer, and therefore, I believe in multi-branded environment in our sector.

When it gets to China, you know that, that is a mono-branded environment because that's traditionally how they've done it. I do actually personally believe that even China in 5 years will be more multi-branded, but I might be the only 1 who believe that. And you are right that currently 1 of the processes that we are going through is to rather open own and operated in China than wholesale doors. That is correct. And that, of course, has to do with the higher margin that we can do on that.

And secondly, making sure that we take good locations that we can then control except in what should I say, set of franchise partner that has many brands and maybe will give also a secondary or third location instead of the best locations. So that is part of what we are looking at, correct.

[Cedric Lecasble, analyst]

And if I may, just a follow-up. What's the health today of these partners selling international brands that have been suffering for all this time? Do you think there will be natural like rationalization of these partners?

[Bjorn Gulden, executive]

Two big ones are 2 big Chinese companies heavily financed, and I'm not worried about them. They are, of course, having a very tough time. And of course, right now, some of them are, of course, trying to take also Chinese brands on board and what should I say, not be so dependent on the 3 West brands and big brands. So there's quite some dynamics on that side. But I'm not worried about the financial health of those 2. There might be some regional players because, as you know, there are quite some franchise partners in China that we never talk about that are focusing on a province or 2 and that might be different.

But we are not exposed, in my opinion, to big losses of people having financial problems. I think for us, it's about A, having the what should I say, the time to do the changes that we should do at the same time, keeping the relationships, so reducing maybe some of the wholesale space to get the productivity up also in difficult times open our door ourselves where that makes sense. And then, of course, continue to try to do performance pushes so that we can establish ourselves also as a performance brand in a market that will grow in performance.

And then latest, of course, try every TV channel marketing to see how far we can push it before this whole difficult situation is getting sold. And I'm pretty optimistic. I don't know where I get it from, but I think after the Chinese elections in October, November that maybe some of these topics can disappear.

[Operator]

There are no further questions. With that, I would like -- we close the Q&A session and hand back over to Mr. Hoppe.

[Gottfried Hoppe, executive]

Thank you very much. Thank you very much for taking the time to participate in our today's earnings call. If you have further questions, you all know where to find us. You know how to reach us. Meanwhile, have a nice day. Talk soon. Bye-bye.