Q3 2013 adidas AG Earnings Conference Call
Nov 07, 2013 AM CET
ADS.DE - adidas AG
Q3 2013 adidas AG Earnings Conference Call
Nov 07, 2013 / 02:00PM 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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* Antoine Belge
HSBC - Analyst
* Jurgen Kolb
Capital Cheuvreux - Analyst
* Matthias Eifert
MainFirst Bank - Analyst
* Andreas Inderst
Exane BNP Paribas - Analyst
* John Guy
Berenberg - Analyst
* Chiara Battistini
JPMorgan - Analyst
* Andreas Riemann
Commerzbank - Analyst
* Cedric Lecasble
Raymond James - 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 nine-month 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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Good afternoon, ladies and gentlemen and welcome to our nine-month results conference call. Our presenters today are Herbert Hainer, Group CEO; and Robin Stalker, our Group CFO. To allow for ease of comparison, all sales and revenue-related figures today will be discussed on a currency-neutral basis unless otherwise stated.
So, let's get started and let me hand you over now 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. It has been a busy, exciting, but also challenging first nine months for the adidas Group. While I am obviously disappointed we had to reduce our 2013 full-year guidance in September, on balance we continue to make good progress on our most important Route 2015 strategic initiatives.
Despite the mounting headwinds from negative currency movements, as well as a softer than originally expected performance in some of our key markets and segments, I'm pleased to report that we delivered stable earnings for the first nine months.
The key financial highlights of the first nine months were as follows. Sales remained stable, currency neutral or declined 4% in euro terms to EUR11 billion. Gross margin increased 2.1 percentage points to a nine-month record level of 49.8%. Operating margin increased 40 basis points to 10.5%. And earnings per share was virtually unchanged at EUR3.81 or [EUR796].
Starting with the negatives. Three areas in particular obstructed our initial growth plans in the quarter and also for the year as a whole. Firstly and most severely, the persistent weakening of several currencies versus the euro throughout 2013, such as the Japanese yen, the Brazilian real, the Argentinean pesos, the Turkish lira, the Russian ruble and the Australian dollar. This puts a significant strain on our reported results in euro terms.
In the third quarter alone group sales suffered a 7 percentage point negative impact from currency movement. Accumulated for the first nine months, currencies wiped out EUR500 million from our top line result.
Secondly, in one of our most important Route 2015 markets, Russia and the CIS, we had an unexpected short-term distribution constraint in Q3 as a result of the transition to our group's new distribution facility in Chekov, which is close to Moscow. This significantly impacted the quantity of new product deliveries to stores, which was a major contributor to the double-digit comp store sales decline we saw in that market during the third quarter.
Our global operations and local management teams have worked speedily to rectify the matter and I am pleased to report that we're making good progress on returning the shipping quantities back to normal levels.
And thirdly, due to the continued softness in the global golf market where TaylorMade-adidas golf is the dominant leader, we took the decision in the third quarter to be more consequent in accelerated rebalancing of inventories to help sale levels in the marketplace. As a result, sales declined 16% in the segment in the third quarter and cross margins decreased over 10 percentage points due to additional markdowns and incentives. This alone had a 70 basis point negative impact on the group's gross margin performance in the third quarter.
Again, here our actions have delivered the desired result. I'm confident we will see a solid fourth quarter, which will be driven by recent product launches such as the SLDR driver and fairway woods, as well as our new Speedblade family of irons.
Quick and focused actions like these show our group's determination to always be at the forefront of creating consumer excitement in our industry. And while we had our challenges in the period under review, these were definitely outnumbered by considerable and broad based successes in many of our categories and regions. And these successes include A, the continuation of our industry leading momentum in key emerging markets, with sales in Latin America and Greater China increasing 15% and 7% respectively.
B, the strong growth in our focused adidas performance categories, where running revenues in particular were up a healthy 14% with growth in all regions due to groundbreaking product innovations such as Boost and Springblade.
And C, continued success in sport lifestyle with originals in sport style sales up 4%, driven by strong market share gains in the action sports category where sales jumped over 60%.
Indeed, the further distribution rollout of our highly successful teenage label adidas NEO, where sales expanded 12%.
D and finally, strong improvements again in the quality of the Reebok business. Sales grew 5% in the third quarter and gross margin expanded 6.4 percentage points to 40.4%, the highest level we have achieved with the brand.
Excluding the NFL license impact, Reebok revenues are up 3% year to date and I can confirm that Reebok will grow for the year as a whole.
These positive developments clearly highlight the effective execution of our strategy to fundamentally improve the long-term sustainable profitability of our brands and our group.
To ensure we continue to drive these kinds of results in all of our key markets, we have been working diligently behind the scenes on the first implementation of organizational measures to drive fast and more efficient decision making processes as well as ensuring we more fully leverage the power of our group.
As such to continue to lead the game on our home turf we recently announced our decision to go forward with one aligned strategy for Western Europe. There is no question that Europe is changing. Country borders are becoming less relevant for both our consumers and customers. They are looking for the best product and they want it fast. And this strategic initiative therefore will harness even more the potential of our initiative brands by driving higher levels of excellence in our routes to market and back office functions.
Similarly, to maximize the potential of both adidas and Reebok in North America, we are uniting both organizations under one management team. Our goal is to strengthen, invest and enable faster growth for both brands following the good work of the past three years, where we have been winning with our key consumers, namely the High School Kid for adidas, the Fit Generation for Reebok and the avid sports fans through our sports licensed division.
To ensure our brands remain focused on their respective objectives, Portland will remain the home of the adidas brand in the US and the Reebok brand will continue to be based in Canton. Each location has a unique and powerful culture grounded in the respective brands' values and goals. And we want to continue to foster the positive effects of this energy and at the same time harness the collective power of both brands. The dual location approach will also enable us to have a strong East and West Coast presence for our customers.
I'm convinced that both of these initiatives will drive our competitive position to new heights over the coming years and will give us a stronger and more effective platform to further improve and extend our market shares.
In terms of current rating in these important markets, both have started to trend in the right direction. In Western Europe, where revenues were down 6% in Q3, sales were again impacted by the comparisons with last year's sports events, in particular products related to the London 2012 Olympic Games accounted for approximately 2 percentage points of the decline.
However, in core countries, such as Germany for example, revenues have turned positive during the third quarter with running and NEO being particularly strong. Moving into the fourth quarter and on into 2014, I am sure the positive trend will gather pace and become more widespread.
Moving over to North America, sales decreased 1% in the first nine months and 5% in Q3, mainly due to the sales declines at TaylorMade-adidas Golf. For adidas, sales remained stable in the first nine months, as growth in sports performance, led by training, was offset by declines in other categories.
At Reebok, sales in North America excluding the NFL impact are up 2% year to date. Just like in Western Europe, also in North America, trends are picking up for both brands, particularly adidas which saw running deliver double-digit growth in the third quarter. With more volume of Boost and Springblade hitting the market in the next few months, as well as the current above expectations sell-throughs we are seeing on the D Rose 4, I'm also confident we will see momentum accelerate in North America as we turn into the new year.
So I will come back to the fourth quarter in more detail in a moment, but before that, let me hand over to Robin that he will go through the rest of the nine months financials in more detail.
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Robin Stalker, adidas AG - CFO [4]
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Great. Well, thanks very much, Herbert and a good afternoon, ladies and gentlemen.
When looking into our key financial KPIs, let me reiterate what Herbert has said, that our group's discipline and focus on improving the fundamentals of our business continue to show that we are making good progress.
These fundamentals are best represented by our gross margin, which increased a strong 2.1 percentage points to 49.8% in the first nine months, and 1.9 percentage points in the third quarter to 49.3%. This performance was driven again by product and pricing mix, as well as regional and channel mix, which more than offset negative effects from a less favorable hedging rate as well as lower margins at TaylorMade-adidas Golf.
The negative hedging effect amounted to 50 basis points in the third quarter and 70 basis points in the first nine months, while the impact of markdowns at TaylorMade-adidas Golf reduced the group's gross margin by 70 basis points in Q3 and 40 basis points year-to-date. And with the exception of TaylorMade-adidas Golf, gross margin increased in all brands and channels.
By channel, gross margin for the wholesale segment was up 2.7 percentage points for the quarter and year-to-date, driven by pricing as well as a more favorable product and regional mix. Retail gross margin increased 2.5 percentage points to 61.5% for the third quarter and 1.6 percentage points to 62.6% in the first nine months, mainly due to more favorable pricing and product mix.
And looking at our operating expenses, other operating expenses as a percentage of sales were up 2.6 percentage points for the third quarter and 1.9 percentage points for the first nine months. This was due to firstly the accelerated pace of own retail rollout, secondly investments in the group's infrastructure and thirdly, the decreased leverage due to the lower top line growth than originally expected.
Sales and marketing working budget as a percentage of sales increased 90 basis points to 11.7% for the third quarter and were up 40 basis points to 12.1% for the nine-month period. Nevertheless, due to the strong gross margin development year-to-date, group operating margin expanded 40 basis points to 10.5%. In the third quarter, operating margin improved 10 basis points to 11.9% compared to a year ago.
During the third quarter, we added 69 stores to our retail portfolio, bringing our net openings for the year to 165. At the end of the third quarter, our retail segment operated 2,611 stores. Of the total number of stores, 1,483 were adidas and 369 were Reebok branded. In addition, we operated 759 multi-branded factory outlets. During the first nine months, we actually opened 375 new stores, 210 stores were closed and 86 stores were remodeled.
Now while on retail, revenues in the third quarter and first nine months grew 6%. Comp store sales however were down 3% for the quarter and 2% for the first nine months. Beyond Russia and CIS, retail trading was however quite robust during the third quarter, as most other regions posted comp store sales increases, with Latin America and Greater China being particularly strong. By brand, adidas comp store sales were down 2% for the quarter and 1% year-to-date. Reebok comp store sales decreased 7% and 4% for the quarter and the first nine months, respectively.
Our eCommerce business continues to do extremely well, with sales increasing 57% in the third quarter and 67% for the first nine months to EUR166 million.
Moving back over to the P&L, looking briefly at the non-operating items of the P&L, net financial expenses decreased 7% in the first nine months. Now while net interest expenses were down 21% due to lower gross borrowings, this good progress was partly offset by higher negative exchange rate variances which increased to EUR13 million from EUR6 million in the prior year. First nine months tax rate decreased 10 basis points to 27.7%.
Looking at the balance sheet, operating working capital as a percentage of sales increased 50 basis points to 20.6%, due mainly to an increase in inventories. At quarter end, inventories were up 12% on a currency-neutral basis, which reflects an increase in goods in transit given our group's expectations for accelerated growth in the coming quarters, as well as higher inventories in Russia/CIS due to our recent distribution center issues. To rectify the latter, we have adjusted our 2014 inventory buy accordingly, and I expect our inventory levels in Russia to normalize in the first half of 2014.
In terms of capital structure, our operational performance over the last 12 months led to another period of good cash flow generation resulting in a further reduction in net debt and an increase in our equity ratio. At quarter-end, this is reflected in the 47% year-over-year decline in net debt to a level of only EUR180 million and to an equity ratio increase of 80 basis points to 49.3%.
So, to wrap up ladies and gentlemen, we are showing disciplined progress on our journey towards long-term sustainable value creation. This starts and finishes with creating desirable brands and driving quality growth. And our margins show we are doing just that. This together with our strong control of inventories, particularly in our most challenged markets, ensures we can readily exploit our opportunities in the coming quarters.
Therefore on that note, let me hand back to Herbert who will give you a sneak preview of some of the exciting initiatives we have planned.
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Herbert Hainer, adidas AG - CEO [5]
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Thanks very much, Robin. As I mentioned earlier, with strong demand for our highlight concepts and innovations, upcoming initiatives around the 2014 FIFA World Cup and positive customer feedback to our spring/summer 2014 collections from all of our brands, momentum is clearly returning to our business.
We already see some notable improvements in several key markets. Therefore I can reconfirm the guidance we gave you in September where we expect low single-digit currency-neutral sales growth for the year and earnings per share to increase at the rate between 4% and 7%.
Driving these improvements will be our relentless pursuit of creating premium experiences for our athletes and consumers, and I can assure you there is plenty more in the pipeline in the coming months to be excited about, all of which will fuel a much stronger result in 2014.
This starts with football where yesterday we kicked off a fully integrated global attack which you will see us build on each and every month up to and including the 2014 FIFA World Cup in Brazil, across footwear, apparel and hardware.
This will consist of our most comprehensive footwear offensive ever, which was the centerpiece of yesterday's campaign launch. The campaign kicked off with all four of our key football boot silos being featured in a creative World Cup theme pack called the Samba collection. This will be followed up next week with the launch of the Federation jerseys, and in December the always highly anticipated official match ball introduction.
In the fourth quarter, we will also continue intensifying the rollout of our industry disruptive award winning Boost technology by extending the technology into a broader range of adidas running franchises, as well as the further drops of Springblade, which is one of the hottest products in the US market right now.
And speaking of eye catching and disruptive technologies, we will further unleash the potential of our interactive training and coaching technologies, where our miCoach SMART RUN is certainly a game changer. SMART RUN is the most advanced and most intuitive wrist-based running device on the market today, completely eliminating the need for cables, straps and additional sensors. Activated commercially for the first time at the New York City Marathon, which by the way, was won by adidas star Geoffrey Mutai in the adizero Adios Boost, this is the beginning of a wave of new miCoach technologies that I am sure will grow in prominence throughout 2014.
Similarly, this winter sees a change in our pace of attack in the apparel category with the introduction of the new ClimaWarm+ range developed with adidas ambassador David Beckham. By using hollow fibers that trap air to create insulation, the technology not only increases warmth but also reduces the garment's weight, giving the athlete an optimized warmth-to-weight ratio to maximize comfort and performance when training in cold conditions.
In basketball, we will leverage the return of Derrick Rose as the centerpiece of our basketball offensive and we will continue to add depth to our opportunity by broadening our activities with our portfolio of next generation NBA stars to cultivate growth in apparel as well as in our key footwear technology silos such as Crazylight.
And finally for Reebok, we will continue to amplify the brand's holistic fitness positioning with the further global rollout of our FitHub concept through owned retail and shop-in-shops. Designed to inspire the fit generation and to showcase the brand's pinnacle footwear and apparel offering, Reebok FitHubs are changing consumers' perception of the brand by solidifying Reebok's image as the fitness brand.
In addition, we will also continue bringing energy to Classics, introducing several silhouettes in basketball as well as leveraging the current strength of the GL6000 franchise, which is one of the hottest products on the lifestyle scene, particularly in Asia, this year.
So in summary ladies and gentlemen, we have dealt swiftly and decisively with our challenges in 2013. Looking at the quality of our margin development, there is no doubt that our industry-leading innovations, strong partnership activations, and keen understanding of the global consumer are clearly enhancing our position as the premium multi-sports Company in the industry.
Great success is achieved by those with the ambition, desire and persistency to constantly improve, accept challenges as normal and openly embrace change. This mentality is at the core of the adidas Group's philosophy and why we are fully committed to the course we set out on with our Route 2015 strategic plan. I am confident in the plan and I am confident in our ability to execute against it. So I look forward to sharing more details on that front with you at our Investor Field Trip which will take place here in Herzog at the World of Sports on December 2nd and 3rd.
And with that ladies and gentlemen, Robin and I are now happy to take all your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Antoine Belge, HSBC.
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Antoine Belge, HSBC - Analyst [2]
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Three questions. First of all, regarding Russia, I think you had commented in the past that there was a lot of new surfaces being added, new malls, et cetera, which was putting pressure on traffic. Do you think that this phenomenon will continue for a couple of quarters? Can you elaborate on that?
And a second question on pricing. Obviously very strong impact at your gross margin level. It seems though, especially in the US, that maybe this aggressive pricing strategy may have led to a bit of pressure on volumes or that has been the acceptance from the consumer, but it is maybe some distributors like Foot Lockers to some of your more recent innovation and sort of the price increase associated to those innovation.
And finally, I think you rightly pointed to the evolution of -- on the cash flow generation on the cash position. So what's the outlook maybe for the share buybacks? Also in this year where there won't be much earnings growth, what will be the dividend payout this year?
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Robin Stalker, adidas AG - CFO [3]
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So I'll take the first and the last question. Yes, indeed, our traffic issue in Russia is likely to continue for a bit. We have highlighted also I think in recent communication that we know that in Moscow alone there's going to be next year also a further opening of new malls and new square footage of retail space. But we're working on that as we've said previously in closing the order shops and I think we'll get that a little bit better during the year of 2014. But it does remain pressure at the moment.
Just over the third point while I'm on. In terms of the generation of cash, yes it's one of the great talents of this group to be able to continue to generate cash. At the moment our emphasis is still to continue to pay down debt and to put the emphasis on our dividend payout. We do not have any plans to have a share buyback at this stage. We've got a very good and clearly communicated dividend payout ratio. We said we're going from 20% to 40%. We're up at over 35% at the moment in the last year and I think you can look to us looking to continue to show growth in the dividend payout ratio.
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Herbert Hainer, adidas AG - CEO [4]
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Your second question was regarding pricing and if I understand it correct, you were asking hey, haven't we priced our new innovative products in the US market too high and therefore don't get all the volume? No, definitely not because when you look to the sell-through rates which we have, especially when you look to Springblade, we have never had higher sell-through rates as we had with Springblade and Boost is doing very well all over the world. So we definitely think we have put the right pricing in for the value, which the product provides. And as you might have heard, people are asking everywhere around the world for more volumes, be it Boost or be it Springblade.
I guess we have explained already in the last conference call that we have some limitation on the Boost material because this is exclusive for BSF for us, but we continue to grow and I'm absolutely sure we have found the right pricing strategy.
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Antoine Belge, HSBC - Analyst [5]
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Maybe just a follow-up on this and again more in the US specifically. Is it maybe fair to say that some -- you have different retail channels in the US, that some are probably more active or acted more positively to others to those innovation on pricing on maybe for -- or it would take a bit longer to explain the rationale behind the price increase.
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Herbert Hainer, adidas AG - CEO [6]
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First and foremost, I think Antoine, you always have it that with our distribution strategy that we have retailers in the US but everywhere around the world, who are very specific for some categories of our footwear offering. Obviously in running you have running specialty stores, you have some sporting goods stores, et cetera, where you put your running shoes for Springblade. Definitely Foot Locker is one of our key customers because this is a very attractive running shoe which goes not only for running but also for lifestyle wear. Young people are using it. So therefore we segment very clearly where we want to bring our (inaudible), but I can tell you once wherever had our Boost or our running product in it, the sales were great.
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Operator [7]
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Jurgen Kolb, Capital Cheuvreux.
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Jurgen Kolb, Capital Cheuvreux - Analyst [8]
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Three quick breaking up details here maybe. On the cost side first of all, could you give us some additional details as to how much the three reasons which led to the profit warning in September affected your third quarter, i.e. the Russian DC issue, the golf situation and currencies so that we got another idea of how much of the additional costs you already put into the Q3 numbers.
Then on the gross margin side, obviously a great performance. You indicated two factors, currencies, but also obviously the TaylorMade thing. Any additional breakdown as to what was the -- on the positive side broken down into individual factors?
And just a housekeeping one on the hedging side. I think you should largely be done for 2014. At what rate have you now hedged for 2014?
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Robin Stalker, adidas AG - CFO [9]
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Yes, we obviously had this negative impact largely in the third quarter specifically for Russia. I think we've already quantified that as being a contribution impact or an operating result impact of negative around EUR30 million. The TaylorMade one, we estimated a double-digit negative impact in the third quarter. We still have a bit of development left in this year.
The currency is difficult to quantify unfortunately. You have to do that sort of calculation yourself I think. We've been able to quantify obviously the top line. It's difficult to quantify it right down to the operating margin, but I think you can see from the significant negatives on the top line, that's obviously had significant impact on what we would have been able to generate as an operating result as well.
In terms of the gross margin, the regional and channel mix is the biggest impact there with -- and that's been the factor over the last few quarters also obviously. The rest is pretty much evenly spread.
And in terms of the hedging rate, for 2013 we're around the 132 and as we were hedging 2014 don't forget the euro was not too strong as it is at the moment. And so if we can get to 132 again in 2014, which is what we're sort of looking at at the moment, we're not fully hedged for 2014 yet, but we're significantly hedged, I think we'll be doing pretty good if we're around 132 also for 2014.
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Jurgen Kolb, Capital Cheuvreux - Analyst [10]
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And just on the Russian DC thing, all those costs have all been allocated into Q3 or is there anything else coming in the fourth quarter?
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Robin Stalker, adidas AG - CFO [11]
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The issue with the -- I mean the costs are obviously in terms of the additional and work we had to do to get the thing working again. And don't forget that one of our issues here is that we didn't have the right product at the right time in the market. And where we're working well to get this sorted out, there's still a bit of cleanup necessary.
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Herbert Hainer, adidas AG - CEO [12]
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Let me just add to what Robin just said. As I have said in my opening speech, we are happy that we see progress in the DC and that we will be back to the levels to ship what the market demands. But you should not forget that there is an effect of the third quarter because we didn't have full size ones, we didn't have the right quantities in the stores so it will still affect our fourth quarter going in and having the consumer excited by all the product lines as we had it before though there was still some work to be done in the fourth quarter and we will see it. But I'm happy, as I said, to say that we're really making progress on our DC.
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Operator [13]
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Matthias Eifert, MainFirst Bank.
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Matthias Eifert, MainFirst Bank - Analyst [14]
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My first question would be about the US wholesale business, which was down 5% in the quarter in your wholesale division. Can you go a bit more in detail? What were the negative drivers there?
And maybe a question related to that in terms of basketball. Can you give us an idea of the trends Q3 in the US for the adidas brand? And has there been -- how big is -- could be the impact in the fourth quarter of D Rose coming back playing again?
And then a question on your retail business. Would it be right to assume retail like for likes would have been positive excluding Russia? These are my questions.
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Herbert Hainer, adidas AG - CEO [15]
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I think the second one is easy to answer yes, they would have been positive, our retail like for likes. The first question is, as you indicated already, the US wholesale business is down because of basketball. But we definitely see improvement, as I have said already, with the D Rose 4.0, which has excellent sell through rate. And obviously that Derrick Rose is back playing is helping us a lot.
We also have been launched our (inaudible) players, as you might know. Dwight Howard, Damien Lillard, John Wall, Ricky Rubio, [Aki Noa]. So we are building it up and this we can see already, so yes we definitely do expect better sales in the fourth quarter.
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Matthias Eifert, MainFirst Bank - Analyst [16]
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In terms of direction, was there maybe double-digit decline in the third quarter and we can maybe expect a double-digit increase in the fourth quarter? Just a rough direction.
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Herbert Hainer, adidas AG - CEO [17]
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Well, let's be surprised. We will grow our business in the fourth quarter.
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Operator [18]
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Andreas Inderst, Exane BNP Paribas.
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Andreas Inderst, Exane BNP Paribas - Analyst [19]
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I have three questions. The first one on your 2015 target. You say a target of EUR17 billion, this implies high single-digit growth in the next two years. Do you expect this to be evenly spread in 2014 and 2015? And what will be the key sales drivers? That's my first question.
The second question is, Robin, you mentioned earlier we didn't have the right products at the right time. This seems to be the case in Russia. This seems to be the case in the US with the Springblade, with the Boost. What are you doing to, right now, in terms of operational processes to get the products quicker to the market, to get the products on time to the market? That's my second question.
And the third question related to the other segment was down 45% in the third quarter or almost EUR60 million in EBIT. Was it purely related to TaylorMade-adidas Golf or is it to other segments? And what would you expect in Q4 and in 2014?
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Robin Stalker, adidas AG - CFO [20]
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First on the sales, guidance that we give -- as with all the guidance we're giving for 2015 is a reconfirmation of the EUR17 billion and the 11. I think we've seen obviously with the performance in 2013 that it's clearly not going to be linear and that we'll obviously be expecting this growth to be significant in 2014, but also obviously in 2015. I mean I think 2015 is the year where we're clearly focused on getting that delivered.
In terms of the third question here in terms of the other business being done. That is just TaylorMade-adidas Golf. I mean we have the other businesses, Rockport and CCM slightly up in that period. So the significant negative is because of TaylorMade.
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Herbert Hainer, adidas AG - CEO [21]
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So coming to the second question, Andreas, I think there must be a misunderstanding because we never said for Springblade or Boost that we didn't have the right quantity at the right time in the stores. It's just the other way around, a product was selling through so fast that we couldn't replenish it. But this was already, as we said, from the very beginning, in Boost that we have a certain amount of pairs which we can bring into the market in 2013. Obviously much more in 2014, but this never had anything to do with the DC issue, neither at Boost or Springblade. It was just limited by the raw material for goods and for Springblade we have already said the quantities which we want to have in the market to really spark it and this is selling through very well. So this doesn't have anything to do with the DC.
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Operator [22]
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John Guy, Berenberg.
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John Guy, Berenberg - Analyst [23]
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Several questions for me please. First of all, with regards to the infantry, the 12% FX neutral increase, could you maybe talk about the splits there between the stock build ahead of the World Cup and what the split was for a little bit more stock than you would like within the Russian market.
And my second question with regards to the dividend payouts. You said that you're moving north of the 35% level last year up towards 40%. Why can't you take it up to 50% or even higher because even at 50% your dividend will be covered at around 2 times.
And my third question around the Boost status in terms of rolling out across the USA. Can you maybe just talk about how fully rolled out Boost is across all of the US states in all of your stores and whether or not Boost is now fully integrated in all the malls and all the channels? Or are there still more to do? I appreciate that you are limited by the raw materials.
Maybe just one more final one on distribution. Could you maybe update as to how may CDCs you have now compared to 2010 and where you think the headline cost savings might look like from the second half of 2014 and into 2015?
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Robin Stalker, adidas AG - CFO [24]
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I'll take the first couple and yes, that's right. Inventory's up 12% currency neutral year over year. But a good 50% of that is goods in transit. And I don't know how much exactly of that is related to World Cup, but obviously that does play a role. The whole point about the goods in transit increase however is that it's obviously fresh product and it plays into our expectations that obviously fourth quarter is growing and obviously the start of the next year. So that's the majority of it.
Russia did play a role. Clearly of the other 50%, Russia is a very significant part of that. But the rest of the markets are all very clean. There's a slight increase in -- or deterioration in the aging of the TaylorMade product, but otherwise everything's looking very good in an inventory point of view.
In terms of the dividend, well we articulated this policy some time ago and at the time we were very happy to get into the 20% range. And we're now obviously over 35% and it'll be great if we can move that up over the next few years. But have no intention at the moment of having to change that policy. We still think it's a very fair distribution of the earnings.
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Herbert Hainer, adidas AG - CEO [25]
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Coming to your third question of the Boost rollout and especially in the US. As you have seen, we did the homogeneous Boost launch around the whole world. And obviously we have selected to distribution channels, as I said before, the running specialists and the sporting goods stores, and then some other distribution channels where we think the consumer is buying key running shoes.
Overall with distribution in the US, we are happy we have reached the stores and the consumers. Obviously what we are lacking is the volume in each store, but this was clear from the very beginning, but we have created with this kind of strategy a lot of interest in the different distribution channels. So it's not just at sporting goods in the US, it's also at specialty, where we have great success with the Boost running shoes. And this is what we will continue. We will Boost first in large to more products within the running category and with bigger volumes going into the future and further more build-out in the distribution channels which we have defined with higher volumes in 2014.
So as I said, I'm very happy about the Boost success, Springblade as well and you can see it in our running numbers. But it's not only that we are selling the product in, they also perform very well in the competition level. As I have said, Geoffrey Mutai won the New York Marathon last week with Boost. The Chicago Marathon just two weeks before had the number 1, the number 3 and the number 4 guys running in Boost. And the Berlin Marathon was also won by a Kenyan runner in Boost. So the last three key marathons all have been won in our new Boost shoe, which we have never before.
And last question on the distribution centers. In 2010 we were at around 90 distribution centers and we are now down to 50. And obviously we will first consolidate going forward.
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John Guy, Berenberg - Analyst [26]
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Just to go back to your homogeneous biggest rollout throughout the world. I mean when we were around in China back in June, it seemed that certainly in Shanghai and Hong Kong they got Boost a little bit earlier than some other markets. I mean is there a slight phasing in terms of delivery as to when which market receives their product? Or do you try very much to keep it on a consistent rollout basis?
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Herbert Hainer, adidas AG - CEO [27]
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Yes, this was not our intention, John, when we started with Boost because as I said we had the rollout for Boost globally around the world on the same day. It could be that because of the distribution strategy, as I just said, that a few customers have taken it to the shelf a week or two weeks later, but in general, it was at the same time.
A little bit different on Springblade. Springblade we started in the US, went further to Brazil, to Russia and have the full rollout then in spring 2014 globally.
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Operator [28]
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Chiara Battistini, JPMorgan.
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Chiara Battistini, JPMorgan - Analyst [29]
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A couple of questions for me please. The first one on the golf market and how you're seeing it starting going quarter four and how we should think about it into next year for TaylorMade.
And then the second question, on the gross margin improvement to follow up on the previous questions. I mean the gross margin expansion continues to be very impressive. How sustainable is this and how shall we think about that going into next year please?
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Herbert Hainer, adidas AG - CEO [30]
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So to the first question, the golf market. Yes, we definitely do believe that we will grow in the fourth quarter and going forward in the golf market. Even there is no doubt it is a more challenging market. As I said before, the market is not growing, especially because of the first six months this year where (inaudible) play went down in the US by 9% and obviously this has an influence in the consumption.
But we are quite pleased with the market shares. We enjoy close to 40% on the metal wood side, clearly over 20% on the iron side. And we're making good traction, we just brought out, as I said, the SLDR driver in the third quarter, now the fairway woods, new irons and we have an array of new innovative products coming in 2014. So I do believe that we will win further market shares in the golf market, but obviously it would be much easier if the market would grow.
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Robin Stalker, adidas AG - CFO [31]
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And Chiara, talking about gross margin and its sustainability, we have to be very cautious. I'm not giving any guidance at the moment obviously on 2014. But fundamentally, the factors that are improving our gross margin have been very inconsistent over the last few quarters is also, that is that we are growing our retail business faster than wholesale. We are growing faster in some of the emerging markets. And they are positive impacts on the gross margin.
I think the key thing that really impacts gross margin outside of those things is what happens with FOBs? And for this year 2013, we haven't had much negative development in FOB, that's good. I can't say anything about 2014 at the moment.
Just from the short-term, be aware obviously that, and I'm talking here about fourth quarter, the hedging is at least something that's got a little bit more negative for us in the 2013 period compared to 2014. That's the only real negative we've had in the development of this at the moment. But otherwise, fundamentally good underlying gross margin improvement, which talks to our emphasis on the quality of the growth. The right sort of sales and the quality of this growth, and we would hope that to continue.
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Operator [32]
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Andreas Riemann, Commerzbank.
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Andreas Riemann, Commerzbank - Analyst [33]
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Three topics. Firstly I'm trying on the gross margin again. You speak about Springblade and Boost being sold at rather high price points. This does imply that in 2014 a favorable pricing should support the gross margin. Question number one.
Number two, on retail. You accelerated retail expansion this year. Is it about attractive rental conditions or what is behind this? And the second question is it is fair to assume that we will obviously run about 500 openings in the coming years? That is what you guide for in 2013.
And the third one, Reebok on wholesale. Reebok revenues were growing strongly in Q3, but like for like actually was down 7%. So it seems like sell in is better than sell out at Reebok. Can you shed some light on this divergence please?
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Robin Stalker, adidas AG - CFO [34]
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Well, I'm sure it's good to talk about pricing and the positives of the Springblade (inaudible), but I'm still not going to give you any guidance for gross margin development in 2014. Obviously it's great that we've got some good product that is able to speak to our strategy here to have good quality growth.
Your second question was about retail and the growth of retail. Yes, it's a bit higher than we had expected, but that's because of the fact that we mentioned earlier about Russia. We have been rebasing pretty much our retail base here. We've had to be opening in various new locations, when these malls are open, we have to be there. And that's a part of the growth for this particular period.
In terms of your third question -- sorry. You also asked about whether there would be 500 openings next year. I think we're looking at the 100 to 150 or so would be net opening. We're a bit higher than that in the nine-month period for 2013, but our guidance was around the 100 to 150 for each year and that should be without giving any guidance again for 2014. That should be the sort of area you should be looking at.
And the last question was about Reebok. That's a Reebok retail issue there. Clearly they started particularly heavily and compared to other countries, also in Russia. And because we have a very strong Reebok business in Russia and there's been some clearance in the factory outlet business in the US.
Otherwise, as Herbert said in his prepared comments, I mean we're very happy with the development of Reebok. It's going to grow this year and look at the gross margin and the positive development of that as well.
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Operator [35]
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Cedric Lecasble, Raymond James.
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Cedric Lecasble, Raymond James - Analyst [36]
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Actually I have three questions also. So first one is on China where you seem to continue to outperform the market. Can you tell us what is driving your good growth in China?
The second question on Western Europe. Did you see any country turning positive which was negative and turning positive? What kind of change in momentum did you see in the quarter?
And the last question is a follow-up on inventories. Could you go again through the inventory situation in the golf business? I understood there was heavy de-stocking. What makes you so confident that you would have a rebound as soon as Q4? Are your inventories in golf now extremely clean? Just to be sure I got the answer.
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Herbert Hainer, adidas AG - CEO [37]
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Let me start with China. And I have to go back to 2009. You might remember after the Beijing Olympics when we ran into some charges with high inventories, et cetera. And I told you already at that time that we will carefully build up the business in China for the long-term benefit.
We installed IT systems with our retail partners to get better information from the stores. What do we have to replenish, what is selling, what isn't selling. We are working very close on the market resale side to really understand what the Chinese consumer wants. And this altogether have helped us to outperform mainly our competitors on the Chinese market over the last two to three years.
We have (inaudible) inventory in the franchise stores around China and we are creating the best profitability for them, obviously because the sell-through rates are good and this is continuing. And I must also say here that I'm extremely happy with our management in China, how they have built up the business and how carefully they read the market and work together with the key franchise partners over there.
In Western Europe in the third quarter, Germany has been positive. Obviously football is helping here with Munich and the whole enthusiasm, which is coming up for the World Cup. But also running is doing very well. Once again, it's Boost, it's Springblade, it's the whole momentum which we built around -- or sorry. It is Boost and a lot of other concepts that we brought to the market on the running side. Springblade we haven't yet in Germany.
But I think these are the two main drivers here in Germany and we definitely do believe that going into the fourth quarter we see momentum in much more markets because we have Germany, we have Spain, we have Russia, they're all qualified. Football is coming alive, we bring the official match for, though we definitely look positive into the fourth quarter for a more challenged Western Europe environment.
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Robin Stalker, adidas AG - CFO [38]
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And the situation with golf inventories, we did a significant amount in the third quarter to rebound the inventories there, cleared a lot and that's why we have a negative development in the gross margin in other business in the third quarter also.
But at the end of the third quarter we're still a little bit higher than we were the same time last year, so the aging's a little bit worse, but our confidence about the fourth quarter is related a lot to the timing of the product launches and we're very confident that we're back into good growth in this fourth quarter independent of a little bit of aging in inventory.
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John Paul O'Meara, adidas AG - Head of Group IR [39]
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So ladies and gentlemen, that completes our conference call for today. As Herbert mentioned, we're very much looking forward to having you all here in Herzogenaurach on December 2nd and December 3rd for our Investor Field Trip. As places are running fast, please register as soon as you can in the next couple of weeks by contacting any of us here in the Investor Relations team. Other than that, have a very good day.
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Operator [40]
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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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