adidas AG
Q2 2021 Earnings Call Transcript

Published: 5 Aug 2021

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the adidas AG Q2 2021 Conference Call. Throughout today’s recorded participation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. And I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead.

[Sebastian Steffen:]

Good evening, good afternoon, or good morning, wherever you’re joining us virtually today, and welcome to our Q2 2021 Results Conference Call. Our presenters today, our CEO, Kasper Rørsted; and our CFO, Harm Ohlmeyer. As always, we will kick it off in a second for prepared from Kasper and Harm, which will then be followed by the Q&A session. As always during the Q&A session, I would like to ask you to limit your questions to two. I know you can count to three, and even beyond, but please limit your questions to two to allow as many people as possible to ask a question. And now without any further ado, to you, Kasper.

[Kasper Rorsted:]

Thank you very much, and welcome to our call. I will first share a high-level view on where we stand and, afterwards, I’ll provide you an update on business progress made in a certain quarter. And subsequent, Harm will take you through our Q2 numbers in further detail. And finally, I’ll discuss the outlook and, while civil challenges persist, our line is filled with exciting new products and will drive successful first year -- and will drive successful first year of our strategic cycle. We have a very clear strategic direction until 2025, and we are already in execution mode. The strong second quarter results are past and proof of that. Own the Game is a growth investment strategy that’s rooted in sport, and that’s one of the reasons why it was so fantastic to see that sport is finally center stage again, and we really see sport is back on the center stage. I think many of you and all of us have really been longing for this, and we can see also the enormous interest there is for sport, whether it’s the Copa Americas, or the tennis Grange Lane Cup , or the Olympics. And I, personally, had the opportunity to go to a number of Euro games. It was a relief and a joy to be in the stadium again, and also see the excitement coming back. And no matter if football is coming home or coming to Rome, it’s back for everyone who loves this game at that stage, and we can see the sheer excitement that is across the globe. And, of course, we’re using this stage to showcase our brand when it comes to major events, but also smaller events. While our strategy in our brand is rooted in sports to help people to bring them to life, I’m excited that we continue to make a lot of progress in our diversion, equity, and inclusion ideas, and we’re making good progress on hiring targets for our black and employees in the U.S., and most recently, we had our former Olympic champion, Jackie Joyner-Kersee, who was with us in Herzo this week during our supervisory board. We celebrated pride months internally and externally with our consumers with dedicated adidas Pride collection, and we’re not stopping there. We continue our DNI journey, whether it’s having a DNI activation week in September, or the DNI managers that we have employed in our various countries to make sure we have the right focus. I’m very confident that with the release of our people strategy of Own the Game, which we communicated internally today to our employees globally. We’re making the right progress on our DNI journey beyond 2021. As you know, the consumer is at the heart of the game, and that’s why we like to start the business update with some consumer highlights. The euro, which was a fantastic determinant, and 35% of all employers were wearing our equipment. We had tournament like Donna Romar and the young player in the tournament, a pitcher from Spain, so great to see the progress that we’re making in football. On the outdoor side, we saw Timothy Olsen run the fastest time on the Pacific Crest Trail running 52 marathons in less than 52 days. Huge impact on the media that we’re seeing here. And also, really credibility profile to our Outdoor business. We’re showing training Spain play campaign and the proof offering with strong consumer engagement with more than 40 million views, increasing our credibility with women. And the immerse launch of the jersey, which was a party jersey, drove four times the sales in 2019. On the experience side on the member week, we added more than 4 million members during that week. And our sustainability, we continue to make a lot of progress in innovation, whether it’s collaboration where we created the running shoe with the lowest carbon footprint. The UltraBOOST made to be remade. The Stan Smith, Milo, an industry first with a layer substitute made from mushrooms or run for the ocean where we had more than 5 million people participate. Let me give you a bit more detail on some of these elements. When it comes to credibility, that means we deliver ground-breaking innovation in sport, and in running, winning is the most tangible currency for innovation. We create industry-leading footwear innovations like our new cushion platform, Lightstrike Pro that empower athletes to win and break records. The Adidas Pro enables our athletes to security three world records in a few months and reclaim credibility in the running community. The second generation of the shoe was just launched at the Tokyo Olympics. We now bring these innovations and performance benefits to more runners globally by broadening the franchise with Prime X, Boston 10, Aereo6 and inhibition. Even beyond the asero franchise, we continue to make running accessible by diversifying for every runner. More to come when I discuss our product pipeline later on. When it comes to experience, our Members Week in May provided a number of experiences in delivery except . The week offered different experiences and rewards including opportunities to win. Match ball use in the euro or one of only 100 pairs of the ADS All Brit sneaker. Not only did we acquire four million new members during the week alone, we also generated revenue of more than $100 million during that period. In total, we have significantly more than 200 million members today. Compared to the prior year, the number of buying members who access our digital ecosystem grew by 80%. And if this wasn’t enough, just last week our program had been recognized by U.S. consumers as the best in the industry according to 2021 loyalty program. A lot to report. And when it comes to stores, we just opened our first Halo store in Toberg with 58 digital touch points and the largest retail area globally dedicated to sustainability. And talking about sustainability, as you know, we gave a strong commitment that 9 out of 10 articles offered will be sustainable at 2025, and we’ll be achieving this type by scaling our three loop offering while also working with strategic partners. And we have now invested the in two of them. Together, we’ll push boundaries in the use of renewable raw materials such as wood fiber. And in partnering with Infinite Fiber, we’re driving the mainstream of circular process to convert one apparel into new fabrics that looks and feels like cotton. And we’ll continue to raise the bar when it comes to sustainability because it’s the right thing to do, and it’s the mind of our consumers. 70% of our consumers claim it is important as a purchase driver. Moving onto the store opening trend. And let me briefly provide you with an update on our current retail economics. As a reminder, 89% of our global store fleet were open at the end of March. 44% were open in Europe. The opening rate increased above 90 during the month of May as COVID-related lockdowns in Europe got lifted. When lockdown materialized in APAC, the positive opening trend was somewhat halted at a high level. At the end of June, 97% of our global store fleet was open. Our efforts to revitalize retail has led to continuous improvement of traffic in the stores that we opened. However, traffic across our retail fleet continues to be significant below pre-pandemic levels due to the reduced opening hours, social distancing guidelines and changed shopping behavior. On the other hand, we continue to experience strong increases in conversion rate and reopen stores as consumers that visit stores turn to a clearer buying incentive. And this is lastly to compensate for the lower. On the strengths and weaknesses side, let me start with the weaknesses side. The external factors like the geopolitical situation, industry-wide supply chain issues and the apex lockdown remains a significant drag on our supply and development. Lower growth in footwear also due to major footwear that’s driving revenues and apparel and hardware. On the positive side is we experienced a better-than-expected top line recovery with sales well above the 2019 level, driven by stronger than expected demand for our products. Our momentum is strong across all markets that are operating without disruption. Revenue in strategic markets like EMEA are 99% up and America is 87% up. So almost doubled, driven by exceptional growth in our retail stores and wholesale. And our business in Latin America was up triple digits. So very strong growth in a number of regions where we have a somewhat normalized economic environment. On the P&L at a glance, revenue we recorded was exceptionally strong and so was the profitability improvements. The revenue increased 55% in the second quarter, achieved against the background of the geopolitical situation and extended lockdown in the Asia-Pacific region. Excluding these external factors, our growth would have been in the mid-60s. Both growth and operating margin almost fully recovered to pre-pandemic levels. Harm will comment more in detail on our major P&L development side. We also seeing the top line acceleration. The brand strength and better than expected product demand grow the top line acceleration in the second quarter. Let me remind you that the revenue increase of 27% in Q1 was achieved despite a high single-digit drag from external factors

[Harm Ohlmeyer:]

Thank you, Kasper. And always, we support the revenue growth by market segment. Top line expansion in Q2 was driven by increases in all markets except as we heard from Kasper already, revenues declined despite a steady business recovery and potential stand-out improvements throughout the quarter. Sales of both female and almost doubled versus the prior-year period, and revenues in Latin America grew by more than 200%. This reflects strong double-digit growth for the 2019 level and shows that our momentum is strong across all markets that are operating without disruption. Sales in Asia-Pacific increased 66%, but remain below the 2019 level due to the negative impact from our standard lockdowns and lower rhythm in the region. Let me call out that the top line increased across all markets except Greater China were also complemented by exceptional profitability and margin improvements. I’ll especially call out 19.3% in North America, up a very profitable quarter already in 2020. I’ve always said that North America, over time, will get close to a mature market like Europe. You see that development and similar developments also in Latin America with 18% profitability. Turning also to the P&L; our strong product momentum drove an impressive top-line recovery with sales well above the 2019 level. Currency neutral revenues increased 55%, despite the geopolitical situation and APAC lockdowns reducing top line growth at a low double-digit rate. Our gross margin improved 50 basis points year-over-year. Given there is a lot of puts and takes in this development, I will provide more details on a separate slide in a minute. Our operating expenses were up 5% compared to the second quarter 2020. The increase reflects higher marketing and point-of-sale expenses which increased 17%, or almost 100 million euros compared to the prior year. Kasper mentioned it, the return of sports marked an important moment for people around the world. We are making sure that we are leveraging these moments and have been connecting with our consumers in a meaningful and emotional way through our digital channels but also physical platforms and events. Operating overheads reflect at a level of around €1.5 billion excluding the temporary credit costs in the amount of around €60 million related to the Reebok divestiture. Overhead costs would have been down at a mid-single-digit rate year-over-year. This also reflects the efficiency improvements that we gained last year and that we will continue to benefit from going forward. Our operating profit was up to €543 million while the operating margin almost fully reached this pre-pandemic level and recovered to 10.7%. Let’s now take a closer look at the gross margin development in the second quarter 2021. I’m also providing Q2 2020 impacts to put things into perspective. In terms of pricing impact, the drag from higher discounting in the prior year almost fully recovered this year as we were able to increase our share of full price sales significantly year-over-year and quarter-over-quarter. The positive mix impact in Q2 2020 related to the exceptional growth in e-comm and last year’s recovery in China was fully offset in Q2 2021 amidst a normalization of our channel mix as well as an unfavorable regional mix. Sourcing costs on the other hand increased in the second quarter 2021, a direct result of supply chain challenges we are currently faced with and which have led to higher freight and logistics costs. Kasper will talk about these challenges in more detail in the outlook section. The non-recurrence of last year’s inventory allowance balance out a negative effect experience in the second quarter 2020. Looking at FX, which was slightly positive in the second quarter 2021, as we slowly start to see our hedges improving. Nevertheless, we still experience a very significant negative currency effect of more than 200 basis points relative to 2019 level. So excluding this unfavorable FX impact, our gross margin is already back at the 2019 level, which just like the top line development, clearly speaks to the speed and quality of our recovery. During the second half, we expect currency to remain a drag on our gross margin with both to 2019 and to 2020 level. This is mainly due to unhedged currencies and will only turn into tail wind in 2022. While lower discounting and a better channel mix will support our gross margin development in the second half, higher freight and logistics costs will act as additional headwinds especially as we will work on mitigating the supply chain challenges in order to ensure we can meet as much of the strong demand for our products as possible. Kasper will speak about this in more detail. Let’s also look at our net borrowings or equity position. Let’s have a more detailed look at the balance sheet. Adjusted net borrowings amounted to €3.1 billion at quarter-end. This represents an improvement of €1.8 billion compared to the position one year ago and underlying increased financial strengths we have gained over the past 12 months. Our equity ratio remains very solid at 32.5%. To look at the operating working capital, first, both inventories and operating working capital decreased year-on-year. Inventories were down 22%, currency neutral and this development was of course supported by the exclusion of Reebok inventories as the prior-year restatement of the balance sheet is not permitted under IFRS. Let me emphasize that on the like-for-like basis including Reebok, our inventories were also down at a double-digit rate year-over-year with 14%. We are happy with the progress made over the last 12 months reducing our inventory to this healthy level. If anything, we wish we had more stock given the strong demand for our products on the one hand and industry-wide supply chain challenges on the other hand. Again, Kasper will give you some more details how we are dealing with the situation in a few minutes. But I’m definitely happy for every t-shirt and pair of shoes that we have on stock right now. Demand is definitely not our issue at the moment. It’s supply side of things but we have been making great progress over the past few weeks in mitigating these impacts. Just finishing up on the balance sheet. Receivables were up 26% currently neutral year-over-year reflecting the broadbased top line increases especially on the wholesale side. Payables were down 16%, currency neutral year on year, as our payment terms with vendors continue to normalize compared to prior year. Look at our cash returns to shareholders. Kasper and myself will talk about increasing our investment into our brand, our direct to consumer channel, as well as the digital transformation. We have talked about the €100 million year increase in marketing spend in Q2 alone and the hiring of almost 1,000 digital experts in 2021 so far. All the game is not only of growth, but clearly also an investment strategy. At the same time, we are becoming a more free cash flow generator for business than ever before. As a result, we plan to return between €8 billion to €9 billion to shareholders through either dividends or buybacks during the five-year strategic cycle of on the game. And we hit the road running in 2021. Given our strong financial profile, our positive outlook for the year and, the successful start of our new strategy, we have made the decision to resume our share buyback activities. As a result, the dividend payout of €585 million in May is complimented by share a buyback program with a volume of up to €550 million until the end of the year. Since the beginning of July, we have already bought back shares worth more than €130 million as of today. This means that in total we will return around €1.1 billion through a combination of dividend and share buyback to our shareholders in 2021. And rest assured, this is just the beginning. Just a couple notes on Reebok. Currency neutral sales grew strong, double digits compared to both the 2020 and 2019 level. So 94% over 2020 and 13% over 2019. And the profitability improved significantly. The divestiture process is well on track, and we expect signing until the end of the summer, as I mentioned also on previous calls. We will, of course, make an official announcement once we have come to a final decision. And with that, over to you again, Kasper.

[Kasper Rorsted:]

Thank you very much, Harm. I’m going straight into the outlook. Our number one priority remains driving brand head with exciting new products and global campaigns and celebrating major sport events. We’ll also continue to invest in digital capabilities to engage and win members, our most loyal and profitable consumers, as you know. And the next member week will take place later this month. A dedicated action plan will drive the mitigation of industry-wide supply chain challenges as our products remain high in demand. And we are executing on the game as one team and continue to accelerate top line momentum, fueled by innovative product pipeline. Our broad portfolio of product innovations continue to drive brand heat. We fuel brand credibility by executing all arching brand campaigns and showcasing our brand on both major and smaller stages through our athletes and teams. Major sporting events, including the Olympics and the Paralympics in Japan, the start of the club football season in Europe and the NFL kick off in the U.S. as well as grassroots activities around the world, provide ideal platform to bring our brand and product stories to life. Against this backdrop of significant brand awareness, we’ll have an array of product releases that will cut through and continue to drive growth momentum. And now I’ll take you through some of our brand initiatives and product launches in more detail. There is probably no other sport events that affect our brand attitude better than the Olympics. Everyone could feel over the last weeks how important it was for the athletes to be able to compete. And so far, more than 20 adidas athletes have already taken home gold medals. And there are four more days to go. Our top two Olympic teams, Great Britain and Germany, are performing very well, showcasing adidas’ latest performance products to a worldwide audience. And so are all the 650 participating athletes that we equip. But the Olympics are not just a great platform to showcase our brand. They’re also, the perfect stage to introduce our latest innovation to the global stage. British tri-athlete Johnson Brownlee not only wore the adidas during the triathlon race, but also together with his teammates also accepted their medals wearing our brand new 4D4. And as you can see, the Olympics provide the ideal platform to start scaling our 4D4 franchise. After two very successful limited quantity drops, which sold out quickly, we actually launched -- we’re actually launching the 4D4 today with seven days early access for D2C. Next week we’ll expand the launch to our sport wholesale partners in all our locations around the world. 4D4 will continue to retail at €200 with a strong increase in volume. At the same time, we’ll be making running accessible by diversifying and commercializing our offer for every runner. As part of this, we’ll introduce the 44Pulse at a price point of $160 and open this up to a wider selection of retail partners, including the of our distribution. As you can see, we’re driving impact in the biggest sporting category, running, through strong franchises and innovative technology platforms that address different consumer needs. In football, or soccer if you will, both professional and amateur teams are excited to return to the pitches around the world. And we’re fueling this excitement with the launch of mater jerseys, and today we’re launching the Rail Madrid away jersey. I can’t wait to see the stadiums across Europe being filled with spectators again, cheering for their team and being united in the passion for the game. And the passion for the game is uniting fans across continents, and this will be evident during the MLS All-Star game in Los Angeles at the end of this month. In anticipation, we created a jersey that sparked exceptional consumer attention in the U.S. While football apparel increases triple-digit during Q2, we remain equally excited about the opportunity in footwear and key franchises X Cover and Predator. The latest pack is made up of the franchises with the jewel in the crown being the new X Speedflow, endorsed by Lio Messi, who would bring a new proposition to the important speed segment of the football/footwear market. Speed is also relevant in other key categories, and let’s take a closer look. With the Ultra, we’re taking performance in speed to the outdoors, so cocreated by the best trail runners, and it will debut on the upcoming Ultra-Trail Mont Blanc race. For us, performance does not mean cutting down sustainability. The shoe is made in part with recycled material and no virgin polyester used. One of the most exciting new launches comes from the lifestyle category. We will be reintroducing the NMD, one of adidas most successful and iconic franchises in recent history, with a completely new look and feel. The new NMD S1 has a broad appeal with iterations for sneakerheads and the broader lifestyle community. And we’ve seen exceptional engagement on social media, who are seeing the product a few weeks ago and look forward to the member exclusive drop in our confirmed deck next week. On top of that, our ZX franchise will be further diversified through the addition of new styles led by the ZX 5K Boost. The ZX 5K will provide this franchise a new, premium identity that elevates the ZX to a new audience and higher price points. This is part of the strategy Originals, which we told you about before. Our form has developed into after the successful incubation throughout the first two quarters, will now quadruple the franchise in size between the second half of the year driven by several dedicated marketing, and exciting partnerships, and as always, we’ll offer members early access to campaigns, product drops, and personalized PFC experience. In lifestyle does not start with footwear, we explained our successful apparel portfolio, combining the DNA of adidas Originals with a luxury fashion lens. Blue version represents a collection of our most iconic apparel pieces recorded for today. And we are expanding our successful collaboration with Beyonce and released latest FLEX PARK. The swimmer capsule includes beach-ready styles, like swimsuits for both men and women, as well as athletic tops and shorts, many of which sold out quickly. We’re also taking preparations with products to the next level and launched La Luna ROSSA 21 in two color waves. These great color waves a version of the sneaker worn by legendary Luna ROSSA Prada in a team as they won the Prada Cup. Hyped releases like that continue to drive brand-heed, and offers, in many cases, member-exclusive VR. We continue to diversify our collaboration and bring newness to well-established franchises, such as UltraBOOST, to stay highly relevant for the consumer. The latest version of our legal collaboration uses the UltraBOOST DNA platform with a brick-inspired texture and is available in several new color waves. And while it’s still early days, we’ve been experiencing very strong sell-through, particularly in North America. As you know, we are looking into having an Innovation Day. And I just covered our Q3 product in stores, but there is much more to come, of course, and we remain very confident about the brand and product momentum. We will host a dedicated day in mid-December to do our high-quality innovation pipeline justice. This will be a purely physical event to provide you an exclusive and comprehensive preview of unreleased future platforms and products. We’re going to share more details with you soon. Our unique world of sport experience awaits you, and we can’t wait to have you here on December 13 and 14. Now let me speak about some of the global supply chain challenges that the world is experiencing. While our product pipeline provides us some strong tailwinds going into the second half, we are also faced with some industry-wide headwinds. There are four aspects of supply chain challenges due to the long-lasting pandemic that the global economy is currently confronted with. The drop in demand in first half of 2020 has led to significant capacity reduction in both vessels and containers and led to a hike in freight rates. In addition, a significant production reduction at the ports due to the health and safety measures have led to congestion in key markets such as U.S. West Coast and UK and Europe, causing additional delays. These challenges have been leading to significant delays and additional logistics costs, particularly as we’ve been making more use of airfreight. Since July, we’re now experiencing an additional challenge within our sourcing network due to a surge in COVID-19 infections in southeast Asia. Most impacted country is Vietnam where the government mandated large-scale factory lockdowns. And as a result, the vast majority of supplier factory capacity in the country has been unavailable since the middle of July, with current restrictions lasting until August 15. While other countries have been impacted as well, we are currently not seeing any major interruption outside Vietnam. While we of course are supporting all measures taken by the authorities, as health and safety remain a top priority, we have identified five key actions to mitigate the impact from the shutdowns in Vietnam. Number one, we are making use of the proven sourcing flexibility and are reallocating production to other regions. Number two, we are making use of our excellent relationship with our suppliers and are securing additional production capacity. So far, we’ve already been able to secure additional capacity for 30 million pieces. Particularly for high-priced products, we will use airfreight. Number three, we are prioritizing key campaigns and product launches as essential to continue driving top line and brand momentum. And number five, and not least, we are redeploying existing marketed inventory, creating new sales packages utilizing existing stock, which will allow us to reduce cancelation rates and discounting. We remain optimistic the disruption will only be temporary, and our mitigation efforts will help us to reduce the overall impact. We expect the current situation to start improving later this month leading to a largely operational sourcing network at the end of the third quarter. And while the current interruptions will have a negative impact on our business in the second half, as we’ll not be able to fully cater to the strong demand for our product, the expected impact is already built in to our full-year guidance. In total, external factors did weigh on our top line in the magnitude of more than €500 million in the first half of the year, and our current guidance already fully accounts for a similar negative impact on our top line in the second half due to the supply chain challenges, the lockdowns in certain countries, as well as the impact from the geopolitical situation. Despite these challenges, we are confident that the strength of our brand, the strong momentum we are experiencing across all markets that are operating without disruption and our innovative product pipeline will drive sales acceleration in the second half of the year. As a result, we now expect currency-neutral sales growth of up to 20% year-over-year for the full year 2021. This increased outlook implies 7% growth year over year, during the second half. Compared to 2019, this translates into a growth of up to 6% in the second half which reflects an acceleration compared to the 3% increase we reported in the first half. Given the acceleration of the top line momentum, we also increasing our bottom line outlook for this year. While the gross margin guidance remains unchanged given the unexpected increase in sourcing costs, we now expect an operating margin increase to 9.5% to 10%. Consequently, we are expecting net income to increase to between €1.4 billion and €1.5 billion. This outlook is based on a number of assumptions. The last year operational store fleet, reflected in our store opening rate at least 95% throughout the second half of the year. And let me remind you, we were running at 97 in the second quarter. Improving factory capacity starting the second half of August leading to a large-scale operational sourcing network at the end of the third quarter, and a continuation of the steady recovery in China. Being able to increase our outlook despite various sources of uncertainty and another potential $500 million drag on sales clearly underlines the mention they’re currently going. We delivered a successful Q2 despite being restrained by factors. Driven by the strength of our better-than-expected demand for our products top-line acceleration and will continue to do so in the second half. Sales in our strategic growth areas EMEA and North America almost doubled. Revenue in key franchise categories football given . The share of increased strongly, fueling exceptional profitability improvement. And this momentum gave us the confidence to increase our full year despite the external challenges that our industry continues to face. On the game is in full execution mode across the entire company and I’m actually convinced that 2021 will be a successful start of a new strategic cycle. And with this, Harm and I now look forward to take any questions you may have.

[Sebastian Steffen:]

We’re happy to take questions now.

[Operator:]

The first question is from the line of Graham Renwick of Berenberg. Please go ahead.

[Graham Renwick:]

Hello. Good afternoon, everyone. Thanks for taking my questions. Just firstly on Exane events and from the quarter, just a clarification from the presentation, really. Is it correct that you said the sales for the whole China business in June were flat versus 2019, and are you also able to provide the same June growth or exit rate for total group sales versus 2019, and how is that developed into July if possible in each, directionally? And then secondly on wholesale, a key part of your strategy or streamlining wholesale distribution and cutting undifferentiated wholesale doors, particularly in the U.S. and Europe. Something I’ve seen as accelerated faster through the pandemic. So when we think about the sales growth in 2021 versus the 2019 phase, has exiting wholesale doors been a headwind at all to your revenue growth, at least a temporary one, before you recapture those sales through D2C or better-quality wholesale partners. Thank you.

[Kasper Rorsted:]

I will try to answer the second question, and Harm will do the first one. We did see exceptionally strong growth in wholesale in the second quarter, but you have to take it on the back of what we’re comparing to because, of course, wholesale shut down overnight and we stopped shipping to them. So you have an abnormal comparison. As you know, for 2025, we expect the vast majority of our company growth -- approximately 80%, if I remember correctly -- to come from our D2C channel over that period, so you are going to see a normalization of the growth rate as we move forward. We’re also seeing a continued consolidation within our wholesale partners. So the likes of Dick’s, JDs, et cetera, in course will get an increasingly larger importance within our portfolio also due to the capability. And there is no doubt there has been an acceleration of the, I would say, slow going away from smaller wholesale partners that have either no wholesale capability -- no digital capability or have a very generic character. So we’re seeing acceleration of that, but we’re also seeing a consolidation around the big ones. As I said, you should assume that we -- that the growth rate we saw on wholesale in the second quarter is not the real run rate. It is simply a comparison to what we saw due to the lockdown in the second quarter last year.

[Harm Ohlmeyer:]

Yeah. And on your first question, Graham, you’re absolutely rightly stating your assumption on China. So revenues, as you saw in the presentation, we’re already running back to growth, and we also had a kind of flattish exit rate versus 2019 overall in China in June. And when it comes to the total company, as you’ve seen in the presentation, the first quarter was 1% over 2019. The second quarter was 5% over 2019. And growth in the second quarter was the highest in June. And actually, would have been double digit in the quarter versus 2019 excluding the headwinds we are facing. So also, there a good strong exit in June for the quarter.

[Operator:]

The next question is from the line of Zuzanna Pusz of UBS. Please go ahead.

[Zuzanna Pusz:]

Good afternoon. Thank you for taking my questions. I have two. So the first question would be on your weakest channel. Could you please comment on the performance in the channel on a two-year stack in Q2 versus Q1? Just to estimate that there was some acceleration sequentially. And the second question is on the footwear category. So it looked a little bit weaker relative to the rest of the business at flat, 38%. So would you be able to discuss maybe specifically reasons for that? Obviously, there’s been maybe jerseys or some shipments around that. But any color on that would be very helpful. Thank you.

[Kasper Rorsted:]

Can you repeat the second part of the question? I simply did not understand it.

[Zuzanna Pusz:]

The second question is on Footwear. So footwear was flat 38% versus higher growth at the group level. Is there any specific reasons for weakness in Footwear?

[Kasper Rorsted:]

No, there’s no specific reason for it. Of course, what we have mentioned on the presentation, given the events, para growth was faster overall given the events and the returning football on the pitch, and that’s what we saw in apparel, and that’s a consequence, of course, in the Footwear is below the average growth of the company. That’s the main reason for it. It’s a mathematical calculation.

[Harm Ohlmeyer:]

Also, Zuzanna, keep in mind that a lot of this franchise that Kasper has talked about that we’ve started to introduce in the first half of the year will be scaled in the second half of the year. So we talked about the Adidas AdiZero Pro which we’ve only had in very low quantities in the first half of the year, and we’re adding not only quantities to that product family, but also adding additional franchises to our Running category. The same applies to the 4D which we’ve only launched in very low quantities. And as we’ve said, we’re actually launching in higher quantities today. So that’s definitely also something that is adding to the growth rate that you’ve seen.

[Zuzanna Pusz:]

Perfect. Thank you for the question.

[Kasper Rorsted:]

Yeah. And on your first question on region, of course it’s difficult. We definitely don’t talk about comps, given so many closures and not easily comparing your quarter-over-quarter or even prior year. But rest assured, in the second quarter we had strong double-digit growth in the key markets like EMEA and also North America, and that gives us confidence going into the second half, as well that consumers are returning, of course, not with the same traffic that we had in the past, but with a higher conversion. But, again, comparison quarter-by-quarter is really difficult. It’s not something we are focusing on. We want to make sure that the product is there, and we are there when the consumers are returning.

[Operator:]

The next question is from the line of Piral Dadhania of RBC Capital Markets. Please go ahead.

[Piral Dadhania:]

Yeah, hi. Thanks for taking my questions. Two, as well. Firstly, on OpEx. You touched on the cost savings you found through COVID and operating efficiencies. But when I try and look at your OpEx lift between your segmental costs and then your central costs, your central costs are down 17% versus 2019. I just wanted to understand how sustainable that cost structure is going forward. Is that the type of cost base that you can operate with on a run-rate basis into 2022 and beyond? Or should we expect some reasonable cost at the center going forward? And then secondly on CapEx, actually. Your run-rate CapEx for the first half of the year is well below historical trend. There’s obviously good reasons for that caution, given COVID, et cetera. And looking backwards, I appreciate you had some big projects in terms of expanding your HQ and your logistics footprint. But going forward, could you just help us understand what a sensible CapEx number would be? I think in the past, you used to guide to CapEx, but we don’t seem to see that guidance anymore. Thank you.

[Harm Ohlmeyer:]

Yeah. Thanks, Piral. First, on the OpEx. Well analyzed, and I’ve been on record for many years as we build a more professionalized procurement function as we’re rolling out our global business services. We’re looking to maintain the cost base as we’re driving the top line and rather be opportunistic on the brand investment. You’re absolutely right that we have reduced in the central function. And we believe that is largely sustainable. Of course, we are a little bit behind on hiring, given the COVID situation, as well. We would have loved to hire even more people. Even so, we hired more people a thousand people on the digital side. But also there, it will make us a more efficient company. So yes, largely, you should keep in mind that we retain that level by going forward, and it does show out in second quarter the discipline that we’ve put into the company to keep growing while we maintain the cost of that level. On the CapEx, it’s indeed -- we wish we would have spent more, but we have to be more cautious especially in APAC, also in some other markets given COVID. And of course, also in today’s environment, it’s not as easy to accelerate some of the retail openings that we had planned. And of course, given historical rates, we are not investing into significant corporate buildings anymore. We have been done with that one. And going forward, it’s still true to think about 3% to 4% over net sales as CapEx, so we had a guidance of around $700 million this year. I doubt we’re going to spend it all this year. But also going forward, there’s nothing we constrain. We want to keep investing into this company. And as we said, on the games, it’s not just the growth but it’s also an investment and a strategy. So 3% to 4% is still the right guidance for the future.

[Operator:]

The next question is from the line of James Grzinic of Jefferies International. Please go ahead.

[Piral Dadhania:]

Yeah. Good afternoon. I just had a quick one actually. Perhaps if you can nuance your guidance for an acceleration into your stack sales in the second half. When we look at where you’re coming from in the first half in the Q2 specifically, do you think there’s perhaps some macro context that needs to be taken into account when we look into the second half? I’m particularly thinking the U.S. stimulus.

[Kasper Rorsted:]

If you look -- we believe that the current guidance for the second half is appropriate because even if there is U.S. stimulus, I think the uncertainty that we are seeing and that you should be seeing is that COVID is by no means over. Supply chain constraints are by no means over. You still have a -- this week, there was 11 million people being tested in Wuhan. So, I think that you’re operating in an environment that, of course, you might have an upside in one region, but I think there’s so much volatility, and I also see a lot of companies that don’t even give guidance. We operate in a super, I would say, volatile environment. So, we think that the current guidance is appropriate under these circumstances simply because of the lack of transparency we have into what’s going to happen in the future. So even if you have stimulus in the U.S., you might have an upside there. But we have seen pretty much almost every month in the last 6 months or 12 months there’s been a downside somewhere else and that is, of course, what’s reflected also in the guidance that we have that we are running in a very volatile environment.

[Piral Dadhania:]

Can I perhaps ask a follow up, just my second one, I guess? That physical back-to-school in the U.S. actually happening this year, is that more of a help in Q2 or Q3? How does that fall within the business in terms of selling? I’m wondering.

[Kasper Rorsted:]

In both second quarter and third quarter.

[Operator:]

The next question is from the line of Warwick Okines of Exane BNP Paribas. Please go ahead.

[Warwick Okines:]

Yeah. Good afternoon. Thanks very much for taking my questions. I’ve got two on the supply chain, please. The first is thanks for giving us the sort of roughly 500 million top-line impact in the second half of the year from all the external factors. Could you just give us a rough sense of how much of that comes from the manufacturing lockdowns? Is it a quarter? Is it three quarters? Just some sort of sense on that, please. And then the second question is what sort of products are the most disrupted by the supply chain, particularly the lockdowns in Vietnam? And sort of how confident are you about introducing newness in that environment?

[Kasper Rorsted:]

So if you look upon it from the lockdowns, we’re probably 50/50. So you’re getting 50% from the current lockdowns, and it predominantly would be an impact in the fourth quarter more than anything else. And what you’re seeing is it’s predominantly footwear. It will have very little impact in us introducing new products. It will have kind of impact on the volume. But the introduction of new products, those that are coming out at this stage will not be impacted on that, so it’s more of volume than introduction of new. And of course, this is one where we are looking into a “FOB”. We assume that there’s going to be opening in August 15 because that’s what the government is telling us. So, we’re giving you the best estimate that we have but as I said, 50/50 and predominantly footwear related. And of course, what we are doing is, due to our large network, we are, of course, taking fairly precautious measures and saying, if the issue continues, what are some appropriate measures that we should be taking now so it doesn’t have a big impact on next year. But, of course, it depends on how long COVID will exist in one country because if you move things from Country A to Country B, and you have COVID in Country B, then it really helps as much as we can.

[Operator:]

The next question is from the line of Erinn Murphy of Piper Jaffray. Please go ahead.

[Erinn Murphy:]

Great. Thank you. Good afternoon. Two questions for me, as well. First on Women’s category. It was a very important callout at your Capital Markets Day. Could you just talk about how the Women’s business faired during the second quarter? Any proof points that you’re getting excited about there? And then secondly, on China, could you talk a little bit more about the current consumer demand environment between global brands versus local or national brands? Thank you.

[Kasper Rorsted:]

This year it’s been characterized on the Women’s side of introduction of a number of new products, and that’s why we’re still scaling our business on Women’s side. So we’re not getting growth this quarter from the Women’s that, of course, we expect to get, and that is due to product announcement and releases. And you’ll continue to see new product releases coming in, particularly around where we have a big set of launches. We’re still in scaling of it. So that is the reason why we’re not seeing a substantial growth come for Women’s as we speak. That is very much along the product pipeline that we’ve created. So we had some very exciting launches we believe in the second quarter with a lot of consumer excitement. We need to scale those now. And as I said, we have a number of launches coming up in the third and the fourth quarter. The second question was related to China. There’s no doubt that the overall demand in China is still very intact. I think that’s a starting point. You have GDP growth of 6%. You saw that the Chinese political setup announced its renewed focus on sport coming out yesterday. So we continue to see a strong demand for products in China. We believe right now that demand has been skewed towards local brands more than global brands. However, we’re also confident that there will be a rebalancing on that. We have absolutely no reason to believe that should not be the case. But the underlying demand in China is still very strong.

[Operator:]

The next question is from the line of Adam Cochrane of Deutsche Banc. Please go ahead.

[Adam Cochrane:]

Hi. Good afternoon. I’m wondering a question on something inventory. Is it possible for you to beat the 7% sales growth in the second half given the potential inventory that you’ve got or could get hold of, or is that a maximum number that would be achievable, assuming the conditions that you outlined earlier. Secondly, if inventory is running short, can you just describe how you allocate it between B to C, wholesale, by region. If you can give an idea on that, that would be great. Thanks.

[Kasper Rorsted:]

Yeah, first, of course, it’s a good situation to have. You don’t have too much inventory to begin with. But it’s definitely not the inventory that we have and what’s coming in from a product point of view will be sufficient to deliver the 7% as we have guided. But of course, the situation could also improve in Asia, and maybe we ramp up some production faster as the demand is there. So I would not worry about the inventory, which is also leading to the second question. We’ve got to be smart about how we use the inventory. We need to make sure that we use less clearance. What we normally do, of course we have a lot of factory outlets, but, of course, we could do things smarter and saying, it’s not 30% off, it’s 25% off, or 20% off. We can be smarter on some commercial events that are happening in the fourth quarter. And we definitely want to make sure we are prioritizing D to C channels, as well, as we’re supporting our key aligned partners on the wholesale side, as well, during the holiday season. Overall, I’m not worried about inventory, but we need to make sure we take it as an opportunity being smarter how we sell the inventory that we have, and how we prioritize the inventory that is coming in and utilizing that for faster sell-through as inventory comes in that it doesn’t get stuck in the warehouse too long or do direct shipments to key accounts already.

[Adam Cochrane:]

And with inventory being short across the industry, is it possible to take pricing at all?

[Kasper Rorsted:]

Yeah. Absolutely. That is part of the smart measures where we can, of course, do that easily in our D to C business where we have easily done it with exclusive products. But also, in the interest of our partners, as well, to use it as an opportunity and say, for the one or the other launch, or the key franchise that we have in the market, there’s an opportunity to optimize the prices, either upwards or optimizing the clearance of the markdowns that we have on the products. So that is what I mean with smart inventory management. It’s definitely opportunity on pricing, not just in Q4 but also going into 2022.

[Operator:]

The next question is from the line of Cedric Lecasble of Stifel. Please go ahead.

[Cedric Lecasble:]

Yes. Thank you for taking my questions. I have two also. The first one, a follow up on the previous one. Do you expect -- with the normalization of the situation at the end of Q3, do you expect potentially a stronger Q4 than Q3? Are you capped in Q3 by the level of inventory and production issues? That’s number one. Number two, if you could give some color on your 4D technology. What is needed to have capacity price points to become mass market in that technology? What’s the profitability of this technology today? And how can we expand it in the future? Thank you very much.

[Kasper Rorsted:]

I’ll do the second. First of all, I think the best answer to give you is to get you to come to in December. The 4D technology was introduced about five years ago, four-and-a-half years ago, and we have significantly worked on the manufacturing costs to make them much more competitive. And what you’re seeing is we’re now starting to bring a number of different variations of 4D out. We’re coming from lifestyle into a very good running shoe, the 4D FWD, which was the best running shoe, which is running at €200 price point, and we’re taking it “down” to €160 price point. We’re not going to take this down to a full volume product. We have no intention of taking a 4D shoe down to €100 because we don’t believe that that is where this shoe is really. I think that the much bigger opportunity is the capability we have to create different, what do you call, platforms that we run on. So instead of having one or two, maybe having three, four, or five different 4D platforms that look different. So, one is for running, one is for walking, one is for training. So, you’re going to see probably a proliferation of that moving forward. It’s for us a very, very exciting platform, and that’s what you could see when I spoke through the products. And the 4D FWD, I was using it over the last couple of weeks and tried to run. It’s a fantastic running shoe. A couple years ago, it was a great leisure shoe. It really evolved. So, it’s a proliferation of different uses for this shoe and probably taking it down, as we said, to the €160. We do not want to have a mass market shoe. This shoe, we believe, that actually the production costs but also where the shoe is positioned is at a high-end running/training shoe, not a lower volume shoe.

[Harm Ohlmeyer:]

Yeah. And, Cedric, on your first question, firstly, understand that last year we moved the order book -- or part of the order book from Q2 into Q3 and made a strong recovery in Q3 than, I always told, into wholesale. And of course, we’re going to see in this year we have a different comp in Q3 relative to Q4 this year compared to last year. And clearly, you’ll not be kept from the inventory point of view in Q3, so it’s not kept from that point of view. Maybe it has slight impact more in Asia where the lead times are shorter to the production that we have in Vietnam. But again, overall, they’re not kept in Q3 from an inventory point of view other than maybe a little bit in Asia. And then in Q4, we will have easier comps again compared to last year relative to Q3.

[Operator:]

The next question is from the line of Thomas Chauvet of Citi. Please go ahead.

[Thomas Chauvet:]

Good afternoon. I have two questions, please. The first one on pricing. In the media interview this morning, you mentioned potential price increases for the supply chain pressures. What type of magnitude are you thinking about, which categories, which regions? And do you think you can pass on these price increase with limited price resistance from the consumer in terms of volume impact? And secondly, a question on the adidas product collaboration and a new collection launched a few weeks ago. That collaboration’s been going on for 18 months now. I think collaboration with luxury brands are not new to adidas. But given it seems to be a commercial necessity for many brands, I was wondering what you’ve learned from the product experience. How does it make you think about collaboration opportunities with other strong brands perhaps in other categories and thinkers, particularly I’m thinking about equipment and gear? Thank you.

[Kasper Rorsted:]

So, we were the first with open source, and we are looking into how we drive innovation into our products whether it’s on the technology side with Boost, or we just spoke about 4D and of course also with fashion brands. I think that it is not a commercial necessity. It is a brand opportunity, and that is what I think is very important that when we work with a product, we are positioning our products at a different level to potentially a different consumer. And we think that that space is very attractive for us. And also moving our original spaces in up market which we spoke about at our Capital Market Day in March. So the combination of having partnerships with either luxury brands, external partners like a Kanye or a Beyoncé or a Stella where we’re priced at a very different level, or moving it up also. It is where the sporting goods industry is partially also moving. We want to make sure that we take that space and move upwards, and not having somebody else coming upwards and moving downwards, and we think that there’s plenty of room in our brand to do so. So we’re very excited about that. And you will also in the future continue to see an expansion of our space with more collaborations and more products, and also more available products. So going from a pure brand position also to a mixed brand/business position. And the first question was?

[Harm Ohlmeyer:]

Pricing.

[Kasper Rorsted:]

Oh, pricing. Pricing we’re going to -- it’s not only because of the supply chain shortages. It’s simply that globally right now, pretty much all raw materials are going up in price and you can see that whether it’s oil or rubber or whatever. And we’ll be making use of that opportunity and see what we will do for pricing. It will be a product by-product, region by region. We’ll do it, of course, depending on product position and the price sensitivity of that product. But it’s something that we’re looking very much into due to the overall global increase in raw materials, along with supply chain shortages.

[Operator:]

The next question is from the line of Ann Marie Bismuth of HSBC. Please go ahead.

[Unidentified Analyst:]

Yes, hi. Thank you for taking my question. Actually, I have one. It’s about the expenditure. How should we think about H2? Do you plan to accelerate the investments and the expenses in H2? Should we expect a marketing to sales ratio up to the top end of the 12% to 13% range in terms of marketing expenditure for H2? Thank you very much.

[Harm Ohlmeyer:]

Yeah. Actually, it’s a good assumption. We will definitely accelerate in the second half, so around 12% to 13%. It’s a good ratio to work with. And rest assured, we keep investing to the brand to make sure that we have a healthy top-line development, not just in the second half, but also going into 2022.

[Unidentified Analyst:]

Thank you. In Q3 it was 12% of group sales, so which you closed out to 13% in H2.

[Sebastian Steffen:]

Correct. You’re welcome. Ellie, we have time for two more questions.

[Operator:]

And the next question is from the line of John Kernan of Cowen. Please go ahead.

[John Kernan:]

Excellent. Thanks for taking my question. I wanted to focus on North America. It’s a region which seems like, just based on the segment, reporting you’re giving us far above some of the other regions in terms of its recovery and growth off of the pre-pandemic base in fiscal 2019. Just curious how you’re thinking about North America in the back half of the year and the overall opportunity in North America. You have been running I think above your long-term guidance off of your 2019 base this year, so clearly, some momentum. Just curious what you’ve embedded in your guidance for North America for the remainder of the year? Thank you.

[Sebastian Steffen:]

Yes. So we continue to expect strong double-digit growth in North America this year. And as you can see, what we tried to do over the last, or trying, what we’ve done over last five years is built a stronger market share position, while at the same time, consistently increasing the margin of course with the exception of the Corona year because we really wanted to have a more even contribution from the three largest regions in the world when it came to top-line growth and profit contribution. And our expectation is that we’ll continue to grab market share short and long term in the U.S., while also making use of the scale that we’ve now built which we’ve spoken about for many years and continue to have a very solid margin contribution. We’re very excited about our position in North America, and we continue to see great opportunities for growth. And, also, with people coming back to the offices, we think that will actually be a positive. We opened up our Portland facility starting of July with approximately 20% to 25% of our people coming back. That number will increase over time assuming, of course, the right health and safety considerations. But we’re very excited about this opportunity in the U.S.

[John Kernan:]

And then maybe -- YEEZY I think has a very large U.S. around North America component. Any update on YEEZY and plans for product launches into the back half of the year?

[Sebastian Steffen:]

YEEZY Day, which we just had was a global event -- was exceptionally successful globally and oversubscribed and really shows that the high demand we have on a global basis for YEEZY. We continue to be very excited about an ongoing launch of not only YEEZY products but also collaborations with Beyonce. Jerry Lorenzo, which is on the basketball side. So we have a number of key launches coming. Not only with our partners but, of course, with also our own product launches. So we think we have a very active, very high products coming out in second half, and that’s why we continue to be bullish around our position, not only in the U.S. but globally. Particularly in the U.S. where we’ll continue to build our share base.

[Operator:]

Our final question is from the line of Jonathan Komp of Baird. Please go ahead.

[Jonathan Komp:]

Yeah. Hi. Thank you. Just one follow up on the second half guidance. When you think about the slight two-year growth acceleration you’re planning, can you maybe just comment a little more directly on which segments you expect to accelerate, and those that you’re baking in more conservative assumptions for relative the second-quarter trend? And then just a broader question on the order book trends you’re seeing. Are you seeing any signs of momentum for some of the new product you mentioned and any early reads as you start to sell in, theoretically, the sportswear product for 2022? When would we expect to see that?

[Sebastian Steffen:]

Okay. First, on the second half. Two-year stake versus 2019, it will be, of course, again coming from outer, especially as we move into the winter season. But definitely running will continue with good growth, as well. These are two categories I would mention. Of course, in Q3 we have some returning to football, as well. That was more in Q2, but we’re continuing Q3, as well. Then from a product segment point of view, it will be more balanced from a footwear and apparel point of view. And when you come to the order book, yes, of course, we have visibility for the second half. But we start to have the first visibility into spring/summer 2022, as well, as Kasper just mentioned on North America. We are not just excited about the second half and the strong double-digit growth of the second half. We’re going to get that momentum into 2022, as well. And that’s really important. That’s what we’re working towards and that’s why we keep investing to the brand, as well. When it comes to sportswear, that is definitely too early. This is not an order book built for spring/summer 2022. That is more going into the summertime in 2022, then, as well, when it comes to sportswear. But that is definitely something where we’ll talk more about on the 13 and 14 of December when we talk about our innovation day.

[Sebastian Steffen:]

Exactly. So thanks very much, Harm. Thanks very much Kasper. And, Jonathan, I can tell you that while the consumer might need to wait a little bit longer in order to see the first sportswear product, as Harm said, in the summer of next year, I can tell you if you jump a plane and come over in December to Herzo, you’re going to have the privilege of seeing the product here. And believe me, we’re all very excited about that.

[Sebastian Steffen:]

So, that actually concludes our Q2 conference call for today. I want to thank all of you for your participation. I want to thank you for your discipline in asking the maximum of two questions. If you have any further questions, and that can easily be three or four, I know, please don’t hesitate to reach out to any member of the IR team or myself over the next couple of weeks. We definitely look forward to being in touch and talking to you soon. With that, thanks very much again. Have a good remainder of the day, and for those of you who didn’t have it yet, have a nice summer break. All the best. Bye-bye.

[Operator:]

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