Q2 2013 adidas AG Earnings Conference Call
Aug 08, 2013 AM CEST
ADS.DE - adidas AG
Q2 2013 adidas AG Earnings Conference Call
Aug 08, 2013 / 01:00PM GMT
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Corporate Participants
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* John Paul O'Meara
adidas AG - Head of Group IR
* Herbert Hainer
adidas AG - CEO
* Robin Stalker
adidas AG - CFO
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Conference Call Participants
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* Michael Kuhn
Deutsche Bank - Analyst
* Matthias Eifert
MainFirst - Analyst
* Andreas Inderst
Exane BNP Paribas - Analyst
* Andreas Riemann
Commerzbank - Analyst
* Allegra Perry
Cantor Fitzgerald - Analyst
* Antoine Belge
HSBC - Analyst
* Rogerio Fujimori
Credit Suisse - Analyst
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Presentation
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Operator [1]
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Good day and welcome to the adidas Group conference call for the first half-year 2013 financial results. Today's conference is being recorded.
At this time, I would like to turn the conference over to John Paul O'Meara. Please go ahead, sir.
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John Paul O'Meara, adidas AG - Head of Group IR [2]
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So thanks, Operator, and good afternoon, ladies and gentlemen. Our presenters today are Herbert Hainer, adidas Group CEO; and Robin Stalker, our Group CFO. To allow for ease of comparison, all sales and revenue-related growth rates will be discussed on a currency-neutral basis unless otherwise specified.
So, with that, I'll hand the call over to Herbert.
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Herbert Hainer, adidas AG - CEO [3]
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Yes, thanks, JP. And good afternoon or good morning, ladies and gentlemen, wherever you are. I'm very pleased to report that we were able to deliver record earnings per share for the group of EUR2.29 for the first six months, which is an increase of 6% compared to a year ago.
The financial highlight of the first half has to be our strong gross margin development, which increased 2.1 percentage points to 50.1%. This result is a clear measure of the success of our Route 2015 strategies to drive quality growth across all of our business activities. It shows that we are focusing on the right categories and that our innovations are resonating with the consumer, all of which is supporting considerable improvements in our product and price mix.
It also shows that we are improving execution across all of our channels of distribution. The strengthening of our operational KPIs in own retail and the strong growth of eCommerce are particular standouts in this respect.
And finally, this strong gross margin performance shows that our industry-leading inventory management is again proving to be a winner.
For the first half and the second quarter, sales were flat compared to the prior year. In reported terms, sales declined 4% in the second quarter and 3% year-to-date. Considering the material challenges we faced from currency headwinds, the difficult comparisons related to last year's major sporting events and the continued soft trading environment in Europe, this is a solid result, including many highlights which underpin the strength and potential of our business globally.
None more so than the emerging markets, which continue to be a fantastic source of opportunity for our Group. In general, while economic growth rates have also slowed in many of these economies, conditions for our Group have remained very strong, as these nations become more and more consumer driven.
In fact we even saw some modest acceleration in several of these markets in the second quarter, with Latin America at the top of the list. Supported by the 2013 FIFA Confederations Cup, sales growth in the region accelerated to 21% in the second quarter.
We have been investing constantly in our brands in the region over the past few years, raising our game at the point of sale in anticipation of a strong reception to two of the world's biggest sport events -- 2014 FIFA World Cup and the 2016 Olympic Games. And the results are paying off as our brands connect and resonate perfectly with this consumer base known for its high energy and passion for sports.
Another bright spot for our Group continues to be Greater China, where sales were up 6% in the quarter. Comparable store sales also remain very strong, up 11% in the second quarter and 9% in the first half. The Chinese consumer has clearly voted that adidas is their preferred sports and sports lifestyle brand. And this is leading to significant market share gains as we once again close in on market leadership in the region.
In a recent survey by Millward Brown of more than 60,000 consumers in China, adidas ranked the highest of all clothing and footwear brands in the top 20 most powerful international brands.
However, everything in the emerging markets hasn't been perfect in the first half. In European emerging markets, we have had some issues to overcome due mainly to softer conditions in Russia and the CIS. Firstly, given the rapid pace of overall retail space expansion, with many new malls coming on stream every year, we have seen traffic dynamics deteriorate in some locations. On top of a cooler consumer environment, this has negatively impacted our comp store sales growth performance in the first six months.
On a positive note, however, due to improvement in our operational performance, we have seen a strong margin development in this already highly profitable market.
With trends beginning to stabilize in recent weeks, and given the strong product pipeline for the second half, I expect comp store sales growth to move back towards positive territory by the end of this year. In addition, our entire store network will also begin to benefit from considerable IT and infrastructure investments we have been carrying out in Russia in order to speed up and improve our operations. We will see this coming through more powerfully in 2014.
The recently opened 49,000 square meter distribution center in Chekhov, close to Moscow, which will ultimately consolidate six warehouses into one location, is a great example of the potential upside we still have operationally in this market.
Staying on the subject of trickier markets, Western Europe has also proven more challenging this year, with sales for the first half down 9%. While there were some bright spots such as France, Poland and the Nordics, sales were down in most other major markets. The UK, Spain and Italy were particularly weak, down strong double-digits.
But ladies and gentlemen, let's not forget that this region benefited the most from last year's major sporting events. While it is hard to isolate all of the football-related event sales, products related to the London 2012 Olympic Games definitely had a considerable impact, accounting for approximately 3 percentage points of the decline.
In terms of the underlying trends, I am confident we will turn the corner in Western Europe in the second half. Already in the second quarter, we have seen some good signs of an inflection point, as for example, our own-retail comparable store sales increased 2% after being down 4% in the first quarter. Discussions with our wholesale partners have also moved into more constructive territory as excitement builds ahead of the 2014 FIFA World Cup and the strong reception to our latest products in Running and Originals as well as at Reebok.
Moving over to North America. Although I would have liked to have seen better growth rates, I am satisfied that our brands continue to move in the right direction. Group sales in North America were up 1% in the first half and down 2% in the second quarter. The latter was mainly due to sales declines at TaylorMade-adidas Golf owing to a more challenging golf market, and I will come to that in more detail in a few minutes.
For adidas, sales were flat in Q2 and up 3% in the first half, as strong growth in running and training was offset by declines in basketball. The latter was mainly due to lapping strong growth in footwear from the prior year. At Reebok, sales in North America in the quarter excluding the NFL impact were up 1%. As we move into the second half of the year, I fully expect trends to improve for both brands, with a strong line-up of new innovations hitting the market in time for the back-to-school and the holiday seasons.
Finally, to complete a look at the global picture, in other Asian markets, Group revenues improved considerably from the first quarter decline and were up a healthy 7% in the second quarter. This was a result of strong growth in South Korea, India and Australia.
Earlier this year, I called out the significance of 2013 as a year where we will define what ground-breaking innovation really means. Looking at our results by brands, there is clear evidence that we are fully on track, which in turn has allowed us to deliver such strong improvements in product and pricing mix.
At adidas, running personifies exactly this, with the category taking on a whole new dynamic spearheaded by our mission to create products that give the highest level of energy return to the runner. With Boost, which we spoke about extensively last quarter, we know we have something special. Following its highly successful launch and the continued strong performances in our other key running franchises, such as Supernova, Response and ClimaCool, sales in the category are up 14% year-to-date and 16% in the second quarter.
Outdoor is another great example, where several years of award-winning innovation continues to drive our position up the league table of the leading outdoor brands in the world. In the second quarter, sales in the category were up 25%.
And even in football, despite tough prior year comparisons, we were able to build on last year's success with strong growth of 6% in football footwear, as Nitrocharge has already become the newest 1 million unit adidas franchise.
And finally, for adidas, innovation transcends more than just technical product, it is also the basis for continuously challenging ourselves to create the unexpected for today's highly demanding lifestyle consumer. And here, with adidas Originals, we have the longest and most consistent track record of any brand in our industry. And once again in Q2, sales did not disappoint, increasing 8% driven by strong growth in the emerging markets and high demand for our action sport styles, where sales almost doubled.
In addition, adidas Sport Style sales increased 9% driven by strong growth of 12% at the adidas NEO label. With NEO, we are really encouraged with the strong fan base we're gathering rapidly for the label across the globe.
So now moving over to Reebok. We enjoyed a solid return to growth in the second quarter, with sales increasing 11%. This means brand sales are now down only 4% in the first half. Excluding the NFL impact, sales are up 1% in the first six months. But even more important, the brand's gross margin again improved considerably, expanding 4.1 percentage points to 39.4% in the first half, which is also the highest first half gross margin that we have achieved since we acquired Reebok in 2006.
Although we still have some considerable work to do to turn all markets around, I am confident Reebok will show currency-neutral sales growth for the full year. And key to this success is the strong product foundation and the close connection we are creating with the fitness consumer as we gain credibility by building on our existing partnerships, such as with CrossFit, and through new associations with exciting grass roots events like the Spartan Race or The Color Run.
Also through the significant improvements in the brand and product architecture we have implemented over the past 18 months, we are delivering a more consistent brand look and feel to our key target consumers. This is also visible as growth becomes much more diversified, with Fitness Training and Classics growing 13% and 21% respectively in the quarter, and solid growth in both footwear and apparel.
So finally, let's take a look at TaylorMade-adidas Golf, which endured a slightly more challenging second quarter. Here, there are a few things to note. Firstly, the golf market has been considerably weaker this year due to a late start to the season in many countries. As a result, rounds played around the world have declined on average at a double-digit rate.
With golfers starting to play later this has had a knock-on impact on trends at retail. Right now, this is particularly visible in metalwoods where retail sales are down at a high single-digit rate in the first half. As the dominant market leader in the category with a market share of close to 40%, we are unfortunately not immune from this.
Secondly, considering our growth of 20% last year and 16% the year before, we were expecting that this year would be more about consolidating our position before the next push forward. And that push forward is not too far away and I look forward to coming back to this and some of the other exciting plans we have for the rest of 2013 in a few minutes.
But before that, let me hand over to Robin to complete our discussion on the first half.
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Robin Stalker, adidas AG - CFO [4]
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Great and thanks very much, Herbert, and good afternoon ladies and gentlemen. As you have just heard, our Group delivered a solid performance in the first half of 2013. And so for my comments today, I want to focus on three topics. Firstly, an update of our key financial KPIs for the Group. Secondly, a review of the performance in our various channels. And finally, I'll wrap up with some further details to help you better understand the various currency impacts affecting our results this year.
So let's start with what is clearly the key financial highlight of the first half, our gross margin development. As you've already heard, our Group gross margin increased 2.1 percentage points to 50.1% in the first six months or by 1.8 percentage points in the second quarter, also to 50.1%.
Similar to the first quarter, this development was primarily driven by product and pricing mix, as well as regional and channel mix, which more than offset the negative effects from a less favorable hedging rate. Now the negative effect from hedging amounted to 1.3 percentage points in the second quarter and 70 basis points in the first half. For the second half of the year, I expect the negative impact to be even more pronounced than in the first six months.
Moving over to the operating expenses, again we showed good discipline in managing our costs considering further investments into the Group's own retail activities and infrastructure, where in particular we considerably expanded our store network globally. This resulted in other operating expenses increasing 1% for the quarter and year-to-date. Thereof, sales and marketing working budget expenditure decreased 5% and 1% for the second quarter and the first half, respectively.
As a percentage of sales, other operating expenses were up 1.9 percentage points and 1.5 percentage points, respectively. And also as a percentage of sales, sales and marketing working budget decreased 20 basis points to 13.2% for the second quarter and were up 20 basis points to 12.4% for the first half.
As a result of the modest growth of expenses and the strong gross margin improvement, Group operating profit increased 4% in the first six months to a new record level of EUR693 million. This translates into an operating margin of 9.7%, up 70 basis points compared to a year ago. In the second quarter, operating margin expanded 10 basis points to 7.4%.
Turning now to the non-operating items of the P&L, net financial expenses decreased 26% in the first half compared to a year ago. This mainly reflects a 33% decrease in interest expense due obviously to lower gross borrowings. The first half tax rate increased a slight 10 basis points to 27.5%, but well in line with our guidance for the year of a tax rate increase to a level between 28.0% and 28.5%.
As a result, net income attributable to shareholders for the first six months increased 6% to EUR480 million, which translates into basic and diluted EPS of EUR2.29.
Second quarter net income attributable to shareholders as well as basic and diluted earnings per share increased 4% to EUR172 million and EUR0.82, respectively.
Looking at the balance sheet and cash flow development, we continue to manage our capital diligently. At quarter-end, inventories remained on par with the prior year levels on a currency-neutral basis. As a result, the Group's operating working capital as a percentage of sales also remained at a very low level of 20.3%.
The combination of our tight control of working capital with our strong operational performance led to another period with significant cash flow generation. This is reflected in the 70% year-over-year decline in net debt from EUR318 million to a level of only EUR94 million. Now taking all of our results together, we have seen a strong increase in our equity ratio of 2 percentage points to 47.5%.
Let's look at the segments. The currency-neutral wholesale revenues decreased 1% in the second quarter and 2% for the first half, as sales growth at adidas Sport Style was more than offset by revenue declines at Reebok and adidas Sport Performance.
Gross margin for the segment was up 2.8 percentage points for the quarter and 2.7 percentage points for the first half, driven by pricing as well as a more favorable product and regional mix.
In the retail segment, revenues in the second quarter grew 5%. For the first half, sales increased 6% as a result of growth at both adidas and Reebok. Comparable store sales were down 2% for the quarter and 1% for the first half.
Now as in Q1, the decline in comp store sales is due to the difficult trading environment in Russia CIS at the beginning of the year given the overall weakness in traffic and consumer sentiment. Beyond Russia CIS, retail trading was robust during the second quarter, with all other regions showing comp store sales increases in Q2.
By brand, adidas comp store sales were down 1% for both the quarter and the first six months, while Reebok comp store sales decreased 3% and 1% for the quarter and the first half, respectively.
Our eCommerce business continues to do extremely well, with sales increases accelerating to 79% in the second quarter. For the first half, our eCommerce business was up 74%, breaking the EUR100 million level for the first time in a six-month period.
Retail gross margin increased 2.5 percentage points to 65.4% for the second quarter and by 1 percentage point to 63.2% in the first six months. Positive effect from a more favorable pricing and product mix as well as less clearance activities were the main contributors to the margin increase.
Our commitment towards the Group's Retail expansion is underpinned looking at the number of store openings during Q2, as we have added 84 stores to our retail portfolio during the quarter. This also explains the increase in the segmental operating expenses as a percentage of sales of 3 percentage points for the quarter and 2.5 percentage points for the first half.
At the end of the second quarter, we operated 2,542 stores. Of the total number of stores, 1,437 were adidas, 356 were Reebok branded and in addition, the adidas Group retail segment operated 749 factory outlets. During the first six months, we opened 248 new stores and closed 152 stores, while 55 stores were remodeled.
Let me now spend a minute on other businesses. Sales decreased here 4% in the second quarter, as a result of the difficult trading conditions in the global golf market which resulted in TaylorMade-adidas Golf sales decreasing in many regions such as Western Europe, other Asian Markets and North America. All other segments grew during the second quarter. For the first six months, revenues of other businesses were up 2%, driven by sales increases at TaylorMade-adidas Golf from the first quarter and from Rockport.
The segmental quarterly gross margin decreased 1.9 percentage points to 43.4%. For the first six months, gross margin was down 0.5 percentage points to 44.0%, mainly due to lower product margins at TaylorMade-adidas Golf, which more than offset the positive effect from higher product margins at Reebok and Reebok-CCM Hockey.
So wrapping up for today, let me comment on the significant challenge we are facing this year from currency movements and in particular currency translation. As I'm sure you are well aware, currencies such as the Japanese yen, the Australian dollar, Brazilian real, Argentine peso, British pound and the Russian ruble have all weakened considerably versus the euro in a relatively short period of time.
As you can see, in the second quarter alone, this cost us 4 percentage points from our top-line growth. It also implies a considerable double-digit EUR1 million negative impact on our operating profit in the first half. Based on current spot rates, the impact from translation in the second half of the year is likely to show an even further deterioration, and I currently expect that we may see between a 5 to 6 percentage point impact on our reported top-line results relative to our achieved currency-neutral sales growth.
While this is a considerable headwind to our reported figures in euros, we should not let this detract too much from the strong underlying operational improvements that we have seen in our business this year.
And with that in mind, now let me now hand you back to Herbert who will go into more detail on how we are shaping up to accelerate growth as we move through the balance of the year.
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Herbert Hainer, adidas AG - CEO [5]
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Thanks, Robin. Given our solid start to the year, we can therefore reconfirm the majority of our full-year targets, with only some minor tweaks to reflect recent developments. Given the lackluster trading environment in Europe as well as the unfavorable development of several currencies versus the euro, as Robin just has mentioned, it is fair to say that our absolute goals for the year are more challenging to reach than when initially announced.
As a result, we have widened the range for our currency-neutral full-year sales forecast which we now expect to grow at a low to mid single-digit rate. In terms of phasing, we expect a stronger Q4 than Q3.
Given the health of our inventories in the market, the continued desirability of our brands and the strong first half improvement, we now expect to achieve a gross margin of 48.5% to 49% compared to our initial target range of 48% to 48.5%.
Due to the faster pace of new store openings, we also expect operating expenses as a percentage of sales to increase compared to our previous guidance of a modest decline. Nevertheless, due to the strong gross margin development, our operating margin target of approaching 9.0% for the full year remains unchanged.
Taking it all together, we continue to forecast net income attributable to shareholders to increase at a rate between 12% and 16% to a new record level of between EUR890 million and EUR920 million. This means, that while you should be wary of currency developments as Robin clearly explained, from a strategic and operational perspective, we can look forward to the beginning of a period of increasing momentum for the Group.
Our powerful brand engines, the clear market share wins in the emerging markets, and the excitement building throughout the world ahead of the 2014 FIFA World Cup are all fuelling a slow but steady improvement in market sentiment. And we will be doing everything possible to spur consumer appetite, leading from the front with an accelerated pace of product launches and marketing campaigns.
adidas Running will again be front and center. By now, I am sure most of you have already heard about our latest major innovation, Springblade. Featuring 16 forward angled blades made out of a high-tech polymer, it is the first running shoe with individually tuned blades engineered to help propel runners forward.
Springblade is truly another game changer in so many respects. Not only does it live up to the promise of explosive energy return, but its futuristic and iconic look is ideally suited for our long-term target to win with the high school kid.
Introduced at retail in the Americas last Thursday, the social buzz ahead of the launch was electric, and so are the early sell-throughs. Springblade has broken all of our eCommerce records and is already among the top-selling shoes with our retail partners. In fact, in the last week, traffic to our adidas.com site in North America has almost doubled.
Therefore, when I look at our capacity plans for Boost and Springblade combined for the next 18 months, I am convinced that this year of running is just the beginning of a long-term upward trend for us in the world's most important footwear category.
In other categories there is also plenty to excite. In basketball, while we had a rather quiet second quarter, momentum is set to return to the category. Throughout the summer, we have been busy activating the brand around the world with our growing roster of top NBA stars. On the Quick versus Fast tour featuring John Wall, Ricky Rubio, Damian Lillard, Jrue Holiday and Mike Conley, we were busy promoting the Crazyquick and adiZero Crazy Light 3 basketball shoes. Derrick Rose travelled the world exciting fans with the news that he is all in for day one.
In football, the new club season is kicking off, where we welcome many new teams and heroes to the brand such as Flamengo in Brazil and German star Mesut Ozil. And if you have not seen it yet, check out the new Speed of Light campaign capturing the football genius of Leo Messi like you've never seen before. The film captures and analyses Leo's movement to reveal the secret of his movement on the pitch as well as the light in motion design of the new adiZero F50 Messi boot, which he will wear for the first part of the season.
Over the coming months, you will be hearing and seeing a lot more on football as we accelerate our activations ahead of the 2014 FIFA World Cup. While we will be telling you more about it in the third quarter, be assured that we have a lot of fantastic innovations in store for 2014.
As one teaser, we recently announced that we will be introducing the adidas miCoach Smart Ball. The Smart Ball has been designed to improve technique, power, spin and accuracy through an automated digital coaching system. After three years of development, we created a ball with in-built sensors that track its movement and feeds the information back to the player through an app on their phone.
At Reebok, the pace of new product introductions has also picked up heading into back-to-school, including the Reebok One Series performance footwear and apparel collections, the ATV 19+ versatile running shoe, and strong updates in Classics, particularly the franchise five and the retro basketball.
In particular, our Shaq product has been flying off the shelves, and the campaign we created with Shaq and Tyga is the most viewed ever on Footlocker's YouTube channel, with 6.5 million hits to date. And we will continue to drive momentum in core Classics as we celebrate 30 years of the Reebok Classic Leather, which underpins the great heritage and authenticity of Reebok footwear.
In addition, we will also continue ramping up our connections with the leaders and trendsetters in the fitness industry. Part of this strategy is to build long-lasting relationship with the best fitness instructors in the world. And a key enabler of this is the ReebokONE platform which is already proving to be a huge draw, already accumulating over 5,200 members.
Following up in the same context today, I am happy to announce another exciting collaboration for Reebok in this respect. Reebok has entered into a new partnership with the largest provider of group exercise programming in the world, Les Mills. This partnership will be an important component of Reebok's Studio category moving forward, which we kicked off in full this year with the launch of our yoga and dance franchises.
Les Mills has a history that dates back to 1968, and today has more than 100,000 instructors world-wide. Their products include programs such as BodyPump, BodyCombat and Grit, some of the most popular group workouts in the world. Reebok will have a lot more to announce in the coming months about the Les Mills partnership. But this is clearly another great example of how partnering with the very best in the fitness industry can ensure we are front and center where our target consumers are most active.
Also in terms of showcasing the new Reebok positioning and product range to the consumer, for those of you in Europe we will open our first Fit Hub store in London on September 12th, which is a continuation of the global roll-out of the Fit Hub concept, the anchor for all of our future controlled space initiatives for the brand.
Finally to come to full circle on the brands, I told you in the first part of my speech that the next push in golf is coming. And well, it is already here. At the end of July, we introduced our newest and longest driver ever, SLDR. Featuring more effective and easier-to-use moveable weight technology, it is already the number one driver on tour. And in addition, we also will continue to drive market share gains in footwear thanks to the extension of the adiZero and adicross platforms. And I expect an acceleration in sales growth from Adams Golf as the first fruits of our combined efforts come to life.
So ladies and gentlemen, to wrap up for today, the message is quite clear. From an operational and strategic perspective, our Group is in perfect shape. At adidas we are growing strongly in our key strategic categories and our pipeline is packed.
We have successfully brought Reebok back to growth and the path is set and clearly defined to drive sustainable long-term success. We are the undisputed leader in golf with an unparalleled track record, and we have everything it takes to drive it further. And we have a strong balance sheet giving us the firepower to invest organically in our operations and the long-term global megatrends of health, fitness and sport.
Although there are still a few speed bumps out there, our game plan is providing winning results. We are focused on the consumer and we are focused on the quality of our business. And in December, I look forward to welcoming you here to Herzo where we will have our final update session on Route 2015.
And with that, thank you very much and now Robin and I will be happy to answer all your questions.
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Questions and Answers
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Operator [1]
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(Operator instructions) Michael Kuhn, Deutsche Bank.
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Michael Kuhn, Deutsche Bank - Analyst [2]
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A few questions from my side. Firstly on pricing environment, you mentioned price increases in the first half. Would be interested in a quantification of that statement. And also looking into the second half and currency headwinds, price increases could be one part of the reaction. How do you see the environment at the moment and the potential for further price increases?
Then secondly, on your so-called key attack markets, Russia, China, US, all three with a relatively modest growth in the first half of the year. Maybe some impressions, what dynamics you expect into the second half of the year and what drivers you expect behind an expected recovery? And especially I would be interested in the performance of adidas in the US at the moment because there seems to be some weakness lately.
And finally, you mentioned the combined production capacity of Springblade and Boost into next year as one of the drivers for the running category. It would be interesting to get an insight on how many units you plan for those categories.
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Herbert Hainer, adidas AG - CEO [3]
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So, Michael, let me start with the first question on price increases. I guess your question was in the difficult environment are we able to bring price increases to the market and how will this look like? I think as you have seen with Boost, with Springblade, with ATV, just to name a few of the products, not to forget Nitrocharge, whenever we bring innovative products to the market are able to charge higher prices because the innovation is so strong that the consumers are demanding these products and ready to pay the price.
Of course we also have areas where we have to be more contrast on pricing and be more aggressive, but we definitely will play this mix according to the consumer needs and demands and we definitely will keep an eye on our strong gross margin going forward.
When you said in our key attack markets, US, Russia and you mentioned also China, the results are also good. Then let me first and foremost make it clear that in China I'm very happy with the result, plus 6%. And compared to all the others which you might've seen this is excellent.
In the US and in Russia, we have two different (inaudible). In Russia definitely there is an economic slowdown, there is no doubt. There are more malls built, this means more square meters and therefore traffic in some of the malls is down. And as we are by far the clear market leader and have more or less sold in every one of the key malls, this is impacting us.
But we have wrapped up our product offerings, bringing also more innovation to the Russian market, be it Boost, Springblade at the end of the month of August. We saw already in the second quarter and also the (inaudible) that we have already positive comp growth. And definitely to see improved trends in the second half.
In the US I think the second quarter was marked by the slower sales of the basketball market. Obviously since Terry Gross was not able to play in the first half of -- or the back round of the basketball season, this didn't help. We also had a lot of new products in the first half of 2012, which made the comparables a little bit tougher. But nevertheless, for the US the same count as I said for Russia.
We're bringing a lot of new product into the market. The second wave of Boost has already started end of June, now we introduced Springblade in the last week. The results I'm sure you have seen already, they are outstanding not only on the eComm, also with our retail partners where we launched. We will further continue with Originals and with basketball and then with football during the second half of the year.
In China I think we'll continue to grow even there. It also becomes a little bit more challenging but the research within the 60,000 consumers which I mentioned within my speech clearly showcases that since 2009 when the tough crisis was in the market, we are doing quarter by quarter the right steps to win the hearts and minds of the consumer in China back. And therefore we are going forward with much more success than most of all the other brands which are competing in the Chinese market.
And last but not least on volumes. So for Boost we have sold already around 500,000 pairs in the first half and planning another 1 million pair for the second half. And for Springblade we will give you the numbers later in the year for 2014, because we have a staggered approach. Now we are starting in America, we have started in Brazil, now we are going at the end of the month to Russia and then continuing 2014 in the rest of the world.
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Michael Kuhn, Deutsche Bank - Analyst [4]
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Just one quick follow-up on pricing. Any comment possible on the effects of price increases in the first half of the year?
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Robin Stalker, adidas AG - CFO [5]
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Michael, I think as we've seen over the last few quarters, we've obviously add some benefit from price increases, but it's also the product mix, it's also the regional mix or some of the country mix that is helping us maintain a good margin despite negative hedging development.
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Operator [6]
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Matthias Eifert, MainFirst.
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Matthias Eifert, MainFirst - Analyst [7]
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The first question is about Russia. Can you update us there about your store openings there at the moment? Where do you stand in terms of store count? And if I take your comments into account in terms of payoff from IT investments, consolidation of the warehouse infrastructure there, it sounds like you might be even able to increase the profitability there going forward. And I think you have already acquired a high level of profitability there. Or would it be already a good result if you're able to maintain your high level of profitability there? It would be interesting to hear your thoughts about Russia.
Second, about Reebok. I was quite surprised about the strong growth rate you've shown us already in the second quarter. From recent discussions and also discussions with (inaudible) I thought the progression would be a bit more -- the buildup would be a bit slower and the development more gradual. And the 11% growth for the US is already very remarkable. So where have been the super high growth rates to get to that number? And was there a bit of kind of selling ahead of your launches? And what should we expect going forward in terms of growth rates there?
And also related to Reebok I would be interested to hear why the wholesale gross margin at Reebok is just at the level of 26.6% in the second quarter compared to the adidas brand at nearly 43%? Is that a high share of just coming from the US or some effects like Latin America, where you still work with the distributor? Can you explain why there's still such a big difference there in terms of gross margin compared to the adidas brand? That would be my questions for you.
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Herbert Hainer, adidas AG - CEO [8]
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Let me start with Russia first. Yes, Russia is a very profitable market for us as you know and we are by far market leader. And we definitely think that there is still a lot of opportunities out by our internal work in optimizing what we're doing.
So therefore we have introduced a complete new IT system in Russia over the last 12 months which will help us to be better connected to all our stores to get faster the data what is selling. And therefore combined with that we have built a new warehouse that we can faster replenish. And we want to have a more or less never out of stock in our stores because we found out that this is something which can be optimized if we have the products permanently available in our stores, which was not always the case.
And we are permanently working further in investing in becoming more sophisticated and, even more professional in Russia. And this will definitely help us drive our growth and the profitability in Russia.
I think to store openings, Robin, do you have the exact number?
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Robin Stalker, adidas AG - CFO [9]
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We've had 96 stores open for the whole group net over the last six months and the majority of that will be in Russia. We have a total there at the end of the six months of about 990 stores, Matthias.
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Herbert Hainer, adidas AG - CEO [10]
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Including Reebok.
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Robin Stalker, adidas AG - CFO [11]
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Including Reebok.
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Herbert Hainer, adidas AG - CEO [12]
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That's including Reebok, yes. So this brings me to Reebok, to your second question in the second quarter. I mean, it's nice to see 11%, Matthias, but we shouldn't overestimate it. The second quarter is a smaller one. We are happy with the increase, there is no doubt. But what I'm even more happy is that we definitely see that the Reebok brand is coming back into the mind of the retailer and the consumer by the individual steps we are taking. And I elaborated in my speech to a lot of them, be it the ATV product, be it the Shaqnosis, be it now the Reebok one which we introduced.
But also, when you see that we are able to today that a Company like Les Mills is connecting to us, this clearly shows you that they have confidence in what we are doing and what the Reebok brand can do for them because you can be sure they have clearly analyzed before they went into a partnership with us.
So now we have crossed with -- we have Les Mills, we have Spartan brands, we have Color Run. These are the most spectacular and fastest growing development in terms of fitness in the US and starting to travel around the world and we are partnered with it. So therefore I am really happy about the way going forward.
I know that we still have a lot of work to do to bring this to life in all the markets around the world, but the signs which we see, which we get from the market, also from the retailers for our selling for 2014 is definitely encouraging.
And last question was on the (multiple speakers).
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Robin Stalker, adidas AG - CFO [13]
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If we look at the gross margin, Matthias, I mean for the total, including both terms we're a 39% which is excellent considering where they are and what Herbert's just said. Yes, there are differences between the wholesale and retail, but don't forget in the wholesale we've got the joint venture in Brazil and I think that would probably account for most of the difference.
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Operator [14]
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Andreas Inderst, Exane BNP Paribas.
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Andreas Inderst Exane BNP Paribas - Analyst [15]
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I have three questions. The first one on your visibility. How good is your top line visibility for H2? Maybe you can share with us your order back log for the second half of the year. And what's your expectations for the like for like development on own retail? That's my first question.
The second question on own retail, you seem to be quite confident in your own retail business, given your store rollout plans which doubled the number you initially planned. How come -- what has changed in your perception? Why do you double the number of retail stores in the current market environment?
And my third question is on the lifestyle offering. Very pleasing development in the second quarter compared to some of your competitors. What is your plan to keep the momentum going in the second half of the year and in 2014? Maybe you can share with us a few initiatives.
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Herbert Hainer, adidas AG - CEO [16]
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So Andreas, first question, visibility for the second half year. Obviously we have good visibility because we have all our pre-orders for the second half in, but we don't give any backlog numbers since I think several years. But be aware what we told you in terms of sales development. You can be sure that we have brought the best thoughts into it.
Second question on retail business. Our perception has not changed, we are definitely encouraged several [years now] on retail business. Still we are learning day to day how to operate it better. But when you look around the world we have now close to 2,500 stores around the world and we are quite successful. And especially with I said before what we do Russia, that we get more visibility. We have started with our franchise partners in China.
If you might remember what I told you in 2010 that we get better visibility that we can faster react and harmonize our systems to have a better offering and less inventory. And this is what is encouraging. And obviously, when our opportunity is there for good locations then we take it. And we get more and more offerings from the big mall providers because they see what the other brand can do and therefore they're offering us their locations.
And this goes along the third question, the lifestyle offering. I think we will be able in the last seven, eight years to make especially the adidas brand very cool by focusing on the one hand on the performance side and being there the most innovative brand. But also capturing the lifestyle consumers through a lot of different activities, be it our collaboration with the big designers like Stella McCartney or Yohji Yamamoto or be it our original own store rollout plan where we go to the coolest and hottest places in the big cities.
And this obviously we will continue to do. We have seen it in our numbers plus 8% in the first half, so I think we understand this business in the meantime very well and this is what we will continue to do.
You see it also with our new offering now where we go to new consumer target groups and we are undefeated by of course great product but also by ambassadors like Selena Gomez or Justin Bieber and this resonates from (inaudible) consumer.
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Operator [17]
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Andreas Riemann, Commerzbank.
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Andreas Riemann, Commerzbank - Analyst [18]
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Coming back to retail again, a few questions here. Comp store growth was down significantly in Eastern Europe. You already mentioned less traffic. But my question would be is lower comp store growth also an effect of tough comps due to the euro 2012 in this region, i.e., could things actually look better in the second half because of this comp effect? And also given more competition but less traffic in Russia you mentioned, do you see the need to close some stores in Russia?
And another one on the 84 openings. That's a big number indeed. So my question would be in what regions did you open these 84 stores? And is this sustainable or should we expect fewer openings in the coming quarters? That's it for my side.
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Herbert Hainer, adidas AG - CEO [19]
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Andreas, your anticipation is right that we had tougher comp store sales in the first half, especially in Russia and CIS and mainly in the Ukraine where the European Championship obviously helped us a lot in the first half of 2012 as the European Championship was in the Ukraine, together with Poland, and we were the sponsor of the Ukraine national team. But as I have said, I see already positive comp store growth coming back in the last few weeks because we are activating our stores in a different way with new innovative product. As I said, the weather also turned nicer, which helps a little bit, but we definitely operated better.
Yes, we're closing stores of course because malls go out of fashion if new malls are coming up. This will be a permanent process. And I think (multiple speakers).
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Robin Stalker, adidas AG - CFO [20]
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That's exactly right, Herbert, because as I said in my prepared comments that we closed over 100 and something stores in this period. And of the stores that we opened, Andreas, about 80% of those were in the European emerging markets and others where there's a lot of activities, obviously Latin America. I think at the moment you should accept that we're probably going to be opening a little bit more than we had originally planned for this year, but probably not quite at the level that we've had the first half.
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Operator [21]
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Allegra Perry, Cantor Fitzgerald.
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Allegra Perry, Cantor Fitzgerald - Analyst [22]
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I have three questions please. Firstly, on the full-year guidance on the amendment to sales outlook, I was wondering if you could give us a little more detail around how that affects the various segments guidance that you given previously.
Secondly, on Reebok, you flagged the Strength and Fitness and Classics. I was wondering if you could update us on how much those categories represent and perhaps comment on what's still in negative territory.
And then lastly, if you could give us an update on where you stand interviewer hedging rate and position for full-year '14, please
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Herbert Hainer, adidas AG - CEO [23]
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Okay, Allegra, let's start it with one of the -- the last one, which is the hedging, right. I mean I think here last year we enjoyed a hedging rate of around about 138 and for this year we're probably around 132. And looking out we're fairly much along those lines for the next year. In any case, with the majority of that now hedged so there shouldn't be major differences in 2014 on that level.
Your first question was about sales outlook and whether this had an impact on the segments. Not really much of a change there. (Inaudible) know that all we did really was widen the range a little bit and I think there we're reflecting also on TaylorMade's development. That would probably be the only major impact there.
And your second question was something about categories, which I'm afraid I didn't quite hear.
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Herbert Hainer, adidas AG - CEO [24]
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I can help out. So it was on Reebok Classic and Training and I think your question was how much is it of our total business. It's approximately 50% of our total business.
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Allegra Perry, Cantor Fitzgerald - Analyst [25]
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So is that both of those categories together?
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Herbert Hainer, adidas AG - CEO [26]
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This is for both categories, yes.
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Allegra Perry, Cantor Fitzgerald - Analyst [27]
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And can you maybe comment on how the other categories perform that you didn't mention?
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Robin Stalker, adidas AG - CFO [28]
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In Reebok or in adidas or -- what do you need?
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Allegra Perry, Cantor Fitzgerald - Analyst [29]
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So yes, I was referring to Reebok, so besides these two strengths, can you just give us a sense for how the other categories are performing and how you're repositioning those?
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Robin Stalker, adidas AG - CFO [30]
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Yes, good. We don't have so many more categories. We're actually apparel business because under training we put a lot of apparel and footwear together as you know. But I can specifically talk to apparel, which is getting better and better. When you see the collections, especially Delta, the CrossFit collection, et cetera, this gets really traction. We still have to work there to get better presentations in the stores for our Reebok apparel collection, but the product are really, really great and getting better and better.
What else do we have then? ATV, I spoke already, which is a running category and with ReebokONE we're bringing new running products to the market. But I think this is it more or less what we have in categories.
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Operator [31]
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Antoine Belge, HSBC.
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Antoine Belge, HSBC - Analyst [32]
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Three questions if I may. First of all, in terms of input costs and in particular wages in China, what's the current run? Is it growing at a double-digit and what's your outlook for second half of and also 2014?
So you mentioned that second question, so this fourth quarter would be stronger than usual and can you maybe comment about the Life Cycle, especially for World Cup related products, especially maybe compared to four years ago to the previous World Cup? Is it that you compare it to the previous World Cup you will be delivering maybe a bit more in Q4 than you did? Or are there any sort of specific factors?
And finally my third question would be on China and more specifically on the Neo brand. Can you remind us what other -- what is Neo bringing to you in China specifically? Thank you.
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Robin Stalker, adidas AG - CFO [33]
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Okay, the import costs. Yes, obviously it's a significant part of our calculations for our future earnings. And I think for 2013 we've been very stable with what we had last year and that's obviously helping us to generate these higher gross margins.
There haven't been a lot of significant wage increases actually announced yet. You're absolutely right that when they come they're normally double-digit. We are on notice that there will be likely negative pressures coming in the second half of 2014, but I haven't got any other the details of that for you at the moment.
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Herbert Hainer, adidas AG - CEO [34]
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Let me just add to the wage increases, what Robin said. I mean this has a positive and a negative side. The negative side is that obviously costs are getting higher, but the positive side there's more and more Chinese consumers getting income which can buy our product, which on the other hand, will fuel the future growth.
You asked about the Life Cycle products for football. There is no general change in the Life Cycle, so we will introduce in the fourth quarter, the choices of all the teams which will compete at the World Cup. We count that we will have between eight and ten. Obviously Germany is in, Russia, Argentina, Colombia, Mexico, Japan, et cetera. And these jerseys normally run for two years, but obviously from October, November when we introduce them until the World Cup, this is by far the strongest period.
The same is true for the official match ball, which we introduce in December. And then we are permanently introducing on a monthly basis new football footwear on our different silos, the F50, the Predators, et cetera.
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Robin Stalker, adidas AG - CFO [35]
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But from a Life Cycle perspective, there is no major change. And last but not least, you asked about the Neo brand in China. The Neo brand in China is not different, that's what the Neo brand should be all around the world. This should excite the younger consumer, the 14 to 19, mainly female driven consumer, which we don't get access so far in a bigger way. And we do believe with this offering we definitely will open a new consumer group to us and also bind the consumer in an earlier stage to our brand, which also should help us when they grow up then. And getting to all the other different parts of our collection, be it style, be it performance, (inaudible) sport, et cetera.
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Antoine Belge, HSBC - Analyst [36]
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Maybe just a clarification. So maybe could you quantify how much is Neo in terms of your total sales in China?
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Robin Stalker, adidas AG - CFO [37]
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We don't give any specific sales number for Neo. I only can tell you that out of the 7,000 stores, around 1,000 is a Neo.
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Operator [38]
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Rogerio Fujimori, Credit Suisse.
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Rogerio Fujimori, Credit Suisse - Analyst [39]
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Two questions please. Robin, could you update us on the raw material costs inflation outlook versus where were earlier this year? And my second question is on football sales. Would it be possible to give us an idea of the revenue base in the first half just to help us to basically compare versus the 2 billion target you set for next year?
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Robin Stalker, adidas AG - CFO [40]
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So actually we've been, as I said in the previous question I think quite pleased. There's been a lot of stability this year over the significant increases we saw last year. Unfortunately it all stabilized at a fairly high level for the raw material and cost.
As I said also, for the first half of next year we think that stability continues but we are at risk of having raw material price increases or wage increases at least in the second half the year. But I have no significant quantification ability at the moment.
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Herbert Hainer, adidas AG - CEO [41]
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And Rogerio, your second question on football sales for the first half year, we don't give absolute numbers. What I told you I'm happy that we were able to increase our footwear football sales by 6% in the first year. Obviously apparel was down because we didn't have any new introduction on the jerseys which we had last year at the same time for the European football championship.
But what I definitely can give you is that our target for next year is to reach 2 billion in football sales and this will be by far the highest number which we have ever achieved.
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John Paul O'Meara, adidas AG - Head of Group IR [42]
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So ladies and gentlemen, that completes our call for today. We'll be reporting our Q3 results on November 7th and in the next few days you will receive an invitation to join us here in Herzog for what promises to be a very exciting event in December. And with that, enjoy the rest of your summer.
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Operator [43]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may disconnect at this time.
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