Q1 2014 adidas AG Earnings Conference Call
May 06, 2014 AM CEST
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Q1 2014 adidas AG Earnings Conference Call
May 06, 2014 / 01:00PM GMT
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Corporate Participants
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* John Paul O'Meara
adidas AG - VP, IR
* Herbert Hainer
adidas AG - CEO
* Robin Stalker
adidas AG - CFO
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Conference Call Participants
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* Matthias Eifert
MainFirst Bank - Analyst
* Antoine Belge
HSBC - Analyst
* Jurgen Kolb
Kepler Cheuvreux - Analyst
* Chiara Battistini
JPMorgan Cazenove - Analyst
* Julian Easthope
Barclays Capital - Analyst
* Michael Kuhn
Deutsche Bank - Analyst
* Rogerio Fujimori
Credit Suisse - Analyst
* Chris Svezia
Susquehanna Financial Group - 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 Q1 2014 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 - VP, IR [2]
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Yes, operator. Thank you very much and good afternoon, everybody. Our presenters today here in the room are Herbert Hainer, our 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, let's get started and over to you, Herbert.
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Herbert Hainer, adidas AG - CEO [3]
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Thanks, JP, and good afternoon, ladies and gentlemen.
Our financial results for the first quarter reflect the challenging start to 2014 that we had expected. However, looking in depth through our results, there are many positive underlying trends. Therefore, we can look forward to an accelerated period of growth and momentum for our Group for the remainder of 2014.
The key financial results of the first quarter were as follows: sales were stable currency-neutral, but declined 6% in euros to EUR3.5 billion; gross margin decreased 1.0 percentage point to 49.1%; operating margin declined 3.2 percentage points to 8.6%; and net income attributable to shareholders was EUR204 million.
Two factors in particular had significant financial impacts in the first quarter. The first is related to strategic changes we are implementing at TaylorMade-adidas Golf. We are in the process of realigning key shipment and product launch cycles to more appropriately mirror market demand patterns. The goal of these changes is clear; to extend and drive higher margins throughout the product cycle and to reduce inventory risk by shipping closer to key retail selling periods. This change, as well as the continuing challenges in the underlying golf market where rounds played were down a further 5% in the US in the first quarter, resulted in a sales decline of 34% at TaylorMade-adidas Golf. In total, this impacted Group operating profit by around EUR80 million.
Secondly, we continued to suffer from sharp and unfavorable movements in several currencies versus the euro and the US dollar, such as the Argentinean peso, Russian ruble, Brazilian real, Turkish lira and Australian dollar. This again put a significant strain on our reported sales and achieved margins.
Our sales were reduced by EUR235 million from adverse currency translation, or the equivalent of 6 percentage points of growth. Gross margin was negatively affected by the devaluation of the Russian ruble as well as by less favorable hedging rates. Taking the translational and transactional effects of currency together, we estimate that these impacts reduced our operating profit by around EUR50 million.
While these two issues dictated the Group's financial result in the first quarter, they mask some very encouraging underlying developments which we are seeing from our business units around the globe. So, let me give you a few examples.
From a geographic perspective, we continue to dominate in the emerging markets where sales in European emerging markets, Latin America and Greater China grew 28%, 19% and 5%, respectively.
In owned retail we saw a significant acceleration in growth with comparable store sales increasing 8%. In addition to the first roll-out of our new store formats HomeCourt which we installed in Beijing and BlueWater UK, and Neighborhood, which we installed in Berlin, was a key highlight in the quarter, ushering in a new era of retail experience for the consumer.
Adidas sales increased 5% with growth in every region except for North America, which I will come back to.
This is a year of football, a key competitive battleground where we are clearly back on the attack. Our football category sales were up 27%, demonstrating once more our leadership position and innovative strength in the category with impressive double-digit growth rates in Western Europe, Latin America, Russia and North America.
Key to it all has been a firework of product launches. We brought the beauty of the Brazilian rain forest and the tradition of Carnival to the pitch with both our Earth and Carnival footwear package. We introduced the world's first knitted football boot, the Samba Primeknit, featuring an upper that is knitted from heel to toe providing a bespoke second-skin fit that retains the strength of a conventional boot.
And just a few weeks later, at the beginning of March, we unveiled another ground-breaking innovation, the Primeknit FS, the world's first all-in-one knitted football boot and sock hybrid, giving players a glimpse of the football boots of the future.
We celebrated Lionel Messi's new all-time club record of 371 goals for FC Barcelona with a limited edition of the adizero f50 Messi 371 boot, which thrilled Messi's highly-engaged fan community in the social media world.
We introduced our adizero f50 Crazylight concept with Gareth Bale resulting in a huge media pick up, especially in the world of social media. Weighing just 135 grams, this game-changing shoe is the lightest football boot ever.
Our running business also remains strong. We had a good start to the year, with sales in the category up 7% driven by strong double-digit growth in Western Europe, emerging markets and Japan. We shipped one million pairs featuring our Boost technology in the quarter, which continues to set the pace in major marathons and thrill running consumers around the world. As our volumes build throughout the year, this growth rate will accelerate in the coming quarters.
We also enjoyed great momentum in training where sales increased 8%. Apparel is a big focus area for us this year as we look to build a new period of sustained growth in the category and reassert our leadership in the space. A great example is the ClimaChill concept, which is already resonating extremely well with consumers and retailers. Endorsed and supported by a digital marketing campaign with David Beckham, we have already had 4.6 million views on YouTube making ClimaChill our most successful apparel technology launch through digital marketing ever.
In lifestyle, while we are still trading through some softer trends for Originals in North America and Western Europe, our Originals and Sport Style business grew by 3%. Double-digit growth in all of our emerging markets offset softer trends in Western Europe and North America due to weakness in Originals. However, I believe we are approaching the tipping point in these regions. Product launches, such as the Originals ZX Flux are enjoying encouraging early signs from Western Europe with sell-throughs clearly outpacing our major competitor at Foot Locker Europe.
We also have had strong response to our new collaborations with TopShop and Farm, as well as record conversion from the Stan Smith relaunch. And as you know, we have an array of hotly anticipated initiatives in the pipeline, be it Kanye West or Pharrell Williams, amongst others, to bring momentum back to the category.
Speaking of momentum, another area of outstanding growth in the quarter was at the adidas NEO label where sales increased by 24% with double-digit growth in all regions. Our Selena Gomez collaboration took on a whole new dynamic in its second year with over 500,000 conversations on Twitter in the first two days after the collection launch.
We also continued to roll out our store test phase, opening two stores in Poland and one in Germany, right here close to our headquarters in Erlangen.
And finally, at Reebok we recorded our fourth consecutive quarter of growth for the brand with sales increasing 3%. More importantly, we also achieved a further solid gross margin increase of 50 basis points to 39.6%, despite the currency headwinds we faced throughout the Group.
Reebok continues to build strong consumer loyalty with the evolving fit generation. No other brand in our industry has embraced this rapidly growing consumer demographic. As we drive a high level of grassroots brand engagement through our strategic collaborations with CrossFit, Spartan Race and Les Mills, our commitment to fitness as a sport is clearly resonating.
To broaden our offering, we launched promising new footwear concepts such as ZQuick for running and training, the All Terrain series for obstacle racing, and the Skyscape shoe, an extremely comfortable walking shoe for women. Our visually striking and activity-specific apparel offering for a growing number of fitness activity is also going from strength to strength with growth of 14% during the quarter. And we also continue to see nice momentum in Classics, where sales increased 19% in the quarter with strong demand for retro basketball products as well as the GL 6000 series.
All of these successes that we are seeing from adidas and Reebok underpin our confidence in the direction of our business. Over the last weeks, as more of our new concepts are hitting the market, we are hearing and seeing firsthand from retailers that we are not only maintaining momentum where we are strong, but also turning the corner in our most challenging markets and categories.
In Western Europe, where we have been under competitive attack in the last 12 months, we have stabilized our position with adidas and Reebok growing at a low-single-digit rate in the first quarter. With Germany and Poland up at strong double-digit rates, good comps in our owned retail and visible improvements in orders for our latest innovations, you will see a good acceleration in the region in the coming quarters. And don't forget that this year we will be completing our ONE Europe project, where I definitely expect benefits and synergies as we plan and build for 2015.
On that note, let me also come back to North America, where Group sales were down 20% in the first quarter. While TaylorMade-adidas Golf accounted for more than half of the sales decline in the region, adidas and Reebok also had a slow start to the year, declining 13% and 8%, respectively.
For adidas, the decline in the quarter was mainly due to Originals and basketball. In Originals, we acknowledge that we missed some fashion trends in the market over the past 12 months while, in basketball, footwear sales declined in the first quarter due to the comparison with the ramp-up for the Derrick Rose return in the prior year. At Reebok sales mainly declined due to running footwear in the wholesale channel. Importantly, though, all of our other fitness-related products, as well as Classics, are doing extremely well.
Obviously, my board colleagues and I definitely are not happy with our performance in North America, but let me assure you of one thing; we are fully committed to driving long-term success for the Group in this market. When it comes to our brand positioning, we are convinced that we are focusing on the right areas. Nonetheless, our biggest obstacle has been, and still is, the quality of our execution, particularly in the wholesale channel. When I look at our owned retail, sales were up 13% in the quarter, clearly showing the strong consumer desire and conversion of our brands when they are presented in the right way.
Therefore, in North America we are accelerating change internally with the completion of the joint operating model for adidas and Reebok and the appointment of Mark King, who has been responsible for taking TaylorMade-adidas Golf to the top of the golf industry. Under the guidance of my colleague Roland Auschel, who will take over responsibility for the market at the board level, as well as the strong support from Eric Liedtke and his brand management team, we are putting our top minds and talents fully behind this market as we build towards our next strategic plan.
While this team will focus their attention on building a more robust Group executional strategy for the market in the long term, in the short term we already see improving trends for both brands in North America and I expect adidas and Reebok to reverse the negative trend from the first quarter and to grow in North America for the full year.
Our new Originals initiatives, which I have already mentioned, higher volumes of Boost running shoes and the introduction of our award-winning Boost technology into basketball, are all driving increasing demand and orders for adidas for the second half of the year.
At Reebok, as we increase the depth and scale of our fitness offering and introduce more volumes of our latest running products during the summer months, we also see growing momentum in the region. And not just in North America. At the global retailer event we held for Reebok in Canton at the end of April for our most important retail partners and key accounts around the world we have also received unprecedented feedback on our ranges, collections and concepts for spring/summer 2015. While up to now Reebok's successes have been driven mainly from controlled space related markets and channels, I firmly believe this will be a turning point to unlocking the wholesale potential of the brand.
Therefore, ladies and gentlemen, as I stated earlier, I am looking forward to increasing momentum for our Group in the coming months. As a result, I can confirm our full-year guidance as given in March with only some minor changes. The weak start to the golf market in 2014 is likely to mean that TaylorMade-adidas Golf sales will be moderately below the prior year level on a currency-neutral basis. This, however, will be offset by owned retail, which we now expect to be at the upper end of the currency-neutral range of high-single-digit to low-double-digit growth initially expected for the year.
While we still have to be wary of currencies and (technical difficulty) effects on our financials, the first quarter will be the low point of our performance this year. I expect a strong second quarter to point the way forward. And after all, with the 2014 FIFA World Cup taking center stage, it will definitely be an adidas quarter.
Later this month we will unleash our largest football offensive ever ahead of the 2014 FIFA World Cup. The energy and intensity of our campaign and product concepts will be a clear statement and sign of things to come from our Group as we drive towards the realization of our strategic goals and our 2014 financial guidance.
Also, watch out for even more Boost as we unleash more volume of the most innovative technology, driving to more than 9 million pairs across all categories for the full year. And watch out for a host of great new products and collaborations from Originals as we reclaim growth and stamp our authority as the most desired and authentic streetwear label in the world of sport.
With that, ladies and gentlemen, let me now hand you over to Robin to take you through the financials in more detail.
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Robin Stalker, adidas AG - CFO [4]
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Thanks a lot, Herbert, and good afternoon, ladies and gentlemen.
As you've just heard, our financials in the first quarter were significantly impacted by the changes we are implementing to the business model at TaylorMade-adidas Golf, as well as by negative currency impacts. Throughout my comments today, I will therefore focus on those topics and how they impacted our financial results throughout the various P&L items.
So, let's start with the gross margin development. The Group's gross margin decreased 1.0 percentage points to 49.1%. Now, this development was mainly due to the following negative effects: firstly, while our euro/US dollar hedging rate is at a similar levels to 2013, hedging for most other currency pairs were at less favorable rates, amongst others the Japanese yen. Altogether, less favorable hedging rates accounted for 70 basis points of the Group's gross margin decline.
Secondly, on top of this, due to the rapid currency devaluation seen since the beginning of the year, we endured significant transactional negatives in the gross margin. This is mainly related to the sharp decline in the Russian ruble, which on its own had a negative impact on the Group gross margin of about 30 basis points. Thirdly, lower gross margins at TaylorMade-adidas Golf impacted the Group margin by about 40 basis points. And finally, higher input costs impacted gross margin negatively by about 20 basis points.
These negatives were partly offset by positive mix effects from strong growth in owned retail, a solid improvement in the Reebok margin of 50 basis points and a better overall product and pricing mix.
Turning to the operating expenses, other operating income and expenses were flat in euros or increased 5% currency-neutral. This was mainly as a result of the higher number of stores compared to a year ago, as well as an increase in sales and marketing working budget expenditure which increased 6% currency-neutral. This was in turn primarily due to higher expenditures of Reebok. As a percentage of sales, the Group's sales and marketing working budget grew 90 basis points to 12.6%.
Group operating profit declined 31%, or EUR139 million to EUR303 million. This translates into an operating margin of 8.6%, down 3.2 percentage points compared to a year ago. The majority of this decline, or EUR80 million, relates to TaylorMade-adidas Golf and roughly EUR50 million relates to currency translation and hedging impact.
Turning briefly now to the non-operating items of the P&L. Net financial expenses decreased 9% while net interest expenses were down 14%. This good progress was partly offset by negative exchange rate variances.
The first quarter tax rate increased 140 basis points to 48.9% (sic - see press release, "28.9%"), mainly due to a less favorable earnings mix. This, however, is in line with our guidance for a full-year tax rate at a level of around 28.5%. As a result, net income attributable to shareholders decreased to EUR204 million in the first quarter of 2014 from EUR308 million in the prior year. This translates into basic earnings per share of EUR0.98 and diluted earnings per share of EUR0.96. Now, the dilutive effect results from additional potential shares that could be created in relation to the Group's outstanding convertible bond, the details of which and the interest effect and number of shares are available in the notes to the accounts.
Let me now spend a few minutes on our segments. Wholesale revenues increased 1%, mainly due to growth at adidas Sports Performance, led by the football, training and running categories. Revenues at adidas Originals & Sport Style were below the prior year level as growth at adidas NEO was more than offset by sales declines at adidas Originals. Sales at Reebok declined as growth in fitness training and Classics were more than offset by sales declines in other categories.
Gross margin for the segment was down 50 basis points to 43.8% as the positive effect from a more favorable pricing mix was more than offset by negative currency effects following the devaluation of currencies, such as the Argentine peso and Brazilian real.
Segmental operating margin for wholesale declined 40 basis points to 35.6% as a result of the gross margin decrease, which more than offset the positive effect of lower segmental operating expenses as a percentage of sales.
Looking at retail, revenues increased 22% as a result of double-digit growth at both adidas and Reebok. Comparable store sales accelerated significantly during the first quarter to 8% with growth across all regions and all store types. By brand adidas comp store sales grew 9% and Reebok comp store sales increased 4%. Our eCommerce business continued to grow at strong double-digit rates with sales up 72%.
Retail gross margin decreased 80 basis points to 59.9%. The positive effect from a more favorable product mix was more than offset by a less favorable pricing and regional sales mix. In particular, the devaluation of the Russian ruble versus the euro and the US dollar was a major headwind and negatively impacted the segmental gross margin by about 90 basis points.
Segmental operating margin for retail was down 80 basis points to 13.2% as a result of this lower gross margin in the first quarter of 2014. Segmental operating expenses as a percentage of sales have remained stable at 46.8%, which does show a good leverage considering we have opened 283 stores net since the first quarter of 2013.
Coming back to the 8% comparable store sales growth, retail trading was particularly robust in emerging markets where our brands enjoyed strong traffic and consumer sentiment. This resulted in double-digit comp store sales increases in European emerging markets, Greater China and Latin America.
In terms of our store development, at the end of the first quarter we operated 2,741 stores, a net increase of 1 store versus the end of 2013. Of the total number of stores, 1,558 were adidas and 411 were Reebok branded. In addition, the adidas Group retail segment operated 772 factory outlets. During the first quarter we opened 70 new stores and closed 69, while 41 stores were remodeled.
As in the prior year, the number of store openings is expected to accelerate throughout the year. As a result, we continue to forecast the number of store openings in 2014 to increase by 250 stores net compared to the end of 2013.
Let me now spend a minute on other businesses, where revenues decreased 27%, driven by a 34% decline at TaylorMade-adidas Golf. The pronounced decrease at TaylorMade-adidas Golf is mainly due to a change in the timing of product launches as we have strategically pulled forward product launches in the fourth quarter of 2014 to quickly re-establish key price points in the market after a heavy clearance period in quarter three. This, as well as continued weakness in the golf market, resulted in double-digit sales declines in metalwoods and irons in the first quarter of 2014.
The segmental gross margin decreased 5.5 percentage points to 39.0% as a result of lower product margins at TaylorMade-adidas Golf due to a lower volume of new product, which more than offset higher product margins at both Rockport and Reebok-CCM Hockey.
Segmental operating margin was down 11.8 percentage points to 19.5%. This was a result of the gross margin decrease, as well as the negative impact from higher segmental operating expenses as a percentage of sales.
Finally, looking at the balance sheet, operating working capital as a percentage of sales grew 80 basis points to 21.1%. Now, this was mainly caused by an increase in inventories, up 18% on a currency-neutral basis as a result of our expectations for growth in the coming quarters as well as the higher inventories in Russia/CIS compared to a year ago.
In terms of capital structure, we ended the quarter with net borrowings of EUR254 million compared to EUR180 million last year. Now, this development is mainly a result of higher capital expenditure during the first quarter of 2014. In addition, currency translation had a negative effect of about EUR12 million.
Our equity ratio remains at a very strong level of 48.8% at the end of the first quarter, compared to 49.7% in the prior year.
So all in all, ladies and gentlemen, to sum up our comments for today, yes, the first quarter has been a challenging start to the year with currency effects being a major drag on our Group results. Nevertheless, the solid underlying trends we are seeing in the business give us every confidence in achieving our full-year 2014 guidance.
And with that, let me thank you for your attention and Herbert and I are now happy to take your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions). Matthias Eifert, MainFirst.
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Matthias Eifert, MainFirst Bank - Analyst [2]
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Yes. I'm Matthias Eifert from MainFirst. A first question would be about brand adidas and the running business in the US. How was that going and, in particular, Boost and Springblade, how that it is selling through in the market there? And secondly, also about running, but here on the Reebok side. You mentioned there were too many running shoes in the market which caused the weakness in the Reebok US business in the quarter. What exactly happened there?
And related to the whole running topic, you said more than 9 million Boost shoes should be sold this year. Does that include what you expect from the basketball business and how much in the basketball business and launch in the third quarter is related to D. Rose and about him coming back to the game?
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Herbert Hainer, adidas AG - CEO [3]
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Okay, Matthias. This is Herbert. Let me start with the first one, the running business in the US. It was slightly down in the first quarter. Springblade and Boost are doing very well. Unfortunately, we had not enough Boost for the first quarter because, as you know, we had during 2014 a higher demand than what we could deliver and we had some other markets where we started first. But now we are delivering also to the US market and we will first improve our situation there, as I already said during my presentation.
In terms of Reebok, we are running against some comparables from previous year within the running category with Quick and Flex. This is why we are down on the running category but, as I said, we are already up on all the others and the running category will come back with the series when we run out of the comparables.
Basketball; we will bring Boost in the third quarter to basketball back. Obviously, this is a smaller part. The biggest part, the 9 million Boosts by far running as you can imagine, but basketball is included in this 9 million pairs. And obviously, we're all hoping that Derrick Rose is back on the court. He most probably will play during the summer months for the American National team and then obviously play for the games.
And in addition, you might definitely have seen that some of our players, John Wall and Damian Lillard, developed well during last season and still in the playoffs. John Wall brought the Washington Wizards against the Chicago Bulls to the next round, which we are extremely happy. We do believe that with the next draft where three key guys are in we have already won, as you might have heard, so we are definitely very optimistic about the basketball business going forward. Still competitive in America as you know, but we are definitely optimistic.
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Matthias Eifert, MainFirst Bank - Analyst [4]
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Great, that's helpful. Thank you very much.
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Operator [5]
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Antoine Belge, HSBC.
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Antoine Belge, HSBC - Analyst [6]
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Yes, good afternoon. It's Antoine Belge of HSBC. Three questions, if I may. First of all, regarding the growth market, I understand that you are expecting much more innovation in the following quarters, but is your expectation of growth resuming here is still based on the assumption that the market itself will recover somewhat?
A second question regarding the World Cup. Can you explain to us if the timing of deliveries is different from the two previous World Cup for instance? I don't recall that so many deliveries had been in advance in Q4 in previous edition and also not all the reordering happening in Q2, so was there any difference in timing compared to the previous World Cup?
And finally, regarding Originals, what gives you the confidence that we should be seeing an improvement for the remainder of the year? Is it based on your wholesale orders? Can you maybe give us a bit of backup there? Thank you.
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Herbert Hainer, adidas AG - CEO [7]
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Okay, Antoine, starting with the first question on the growth market. Honestly, I don't see a big improvement in the growth market in 2014. Obviously, second, third and fourth quarter will be better because the weather has turned. And you might remember that the first quarter, it was very cold, especially on the East Coast in America, which is by far the biggest market.
Yes, we are bringing on a constant basis new products to the market. We also can remain our market leadership in metalwoods and in irons. But unfortunately, the markets are going down as we have seen on the rounds played and this is causing some higher inventories in the market with all the players and this is why we didn't ship so many products in the first quarter to the market. So overall, I don't see -- I don't think that in 2014 we will see a big boom in the Golf market. Obviously, as I've said, we're bringing a lot of new products to the market which will help.
Secondly, the World Cup. It is, as in the previous World Cups, the biggest shipping month are Q4 the year before and then Q2 which we are now in and now the World Cup fever starts. We're shipping all the jerseys again, the balls, etc., etc. Therefore, as I?ve said before, the second quarter is definitely a football quarter and is definitely an adidas quarter.
And finally, back on the Originals, on the Originals it's two-fold. On the one hand it's the product side. As I said, we have -- and you might have seen it. We relaunched Stan Smith after we took it away from the market for quite some time. Huge success. And then we are bringing in other new products in collaboration, like TopShop or the Farm collection, which is Brazil inspired by a Brazilian designer. But the biggest success by far is ZX Flux shoe. This is the fastest sold shoe in the last two weeks at Foot Locker Europe, outpacing, as I said, our competitor's best shoe, which was the Roshe, and we are selling better than this.
But this is one part. The other part is that you also have heard that we made some extremely exciting collaborations with a lot of stars and celebrities in the music scene, be it Kanye West, be it Pharrell Williams, which you see him prominently in adidas jacket with three stripes in front of Oscar nomination or on some other TV programs like (inaudible). But we also have made collaboration with Nico, the Japanese designer with [retail aura]. And this we see already coming back in the market and bringing momentum back to our Originals business.
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Antoine Belge, HSBC - Analyst [8]
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Thank you. Just as a confirmation, so nothing special this year compared to previous -- I know that always the balls were delivering in Q4, but I don't recall that as much jerseys from the national team were like pre-delivered ahead of them, but maybe my memory is failing me.
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Herbert Hainer, adidas AG - CEO [9]
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No, no, but there are some specifics, Antoine. So the ball is always launched beginning of December. And also, the new jerseys ahead of Christmas because this is always a big business on Christmas. But then in the first quarter it slows down. And then when the momentum for the World Cup comes, which is starting now off with the Champion's League final, then we will bring a complete new football footwear package, the Battle Pack, which you might have heard, we are bringing the ball for the final, besides of all the other Brazuka derivatives. As you know, Antoine Hadjimanolis the new fan-based merchandising program Antoine Hadjimanolis. So therefore, the second quarter in terms of football related product is definitely stronger than the first quarter.
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Antoine Belge, HSBC - Analyst [10]
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Many thanks.
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Operator [11]
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Jurgen Kolb, Kepler Cheuvreux.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [12]
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Thanks. Three questions also from my side. First, on TaylorMade, when did you make the decision to change the pattern of deliveries here and how shall we see the coming quarters? Shall we see a major ramp up in the second quarter in terms of product innovations and product launches? And do you also see other competitors following your shift in product cycle? That's all on TaylorMade.
Then secondly, you talked about the football business which apparently was up 27% in this quarter. Can you break it down a little bit into apparel and footwear, please? Have you seen similar growth rates specifically on the footwear category?
And then lastly on the US, which seems to be an ongoing topic here, I guess. What do you think you can do differently in order to present the brand much more successfully at the wholesale level? I mean I think in the past you've tried various things, but so far we haven't really seen the breakthrough. So, what are you thinking about how to really get the brand stronger in the US market? Thanks.
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Herbert Hainer, adidas AG - CEO [13]
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Okay. And let me start with the golf market. We announced this already, you might remember, during the summer months last year, that we start in the fourth quarter shipping higher volumes because we want to get them a longer life cycle from January then to April, May, June. But unfortunately, the first quarter, as I said, was, weather-wise very bad, rounds were played down again. But we started already last year. I mean, we are by far the leader in the golf market and I definitely do believe that others will follow, because if we are the earliest one who are bringing new product in, then everybody will follow. Yes, we do bring new products during the course of the year into the golf market and this will help us to get close to a similar sales result as last year. But this is a hell of a lot to go still as we are with $1.7 billion by far the number one, as you know.
The second point was on football. So apparel was stronger growth than footwear.
And the last one was on US and this is a good one because this gives me an opportunity also to make a statement on the US. I mean, yes, we are by far not growing as fast in the US as Nike, but we have been growing in the last two years; don't get it wrong. So we were growing double digit in 2011 and in 2012. But what is even more important, we have clearly increased our margin in the US market and this is what we played in the last three years. We have -- as you might have seen, we have raised prices. We worked with the retailers on all the trade terms, how we go to market and, therefore, we increased our profitability in the US market significantly, which obviously helped us to get to our numbers for the total Group.
Where I do see opportunities in the future is quite clearly, as I said, we were nicely growing in our owned stores by 13%; even more so in our concept stores. And this clearly shows me, when we have the opportunity to showcase a collection to the consumer in the width and the depth and the concepts holistically, then we have a better chance. And this will be one of our focus points with the key retailers in the future, going forward and making sure that we get with all the key retailers in the sporting goods in the mall, that we get the presentations in the future. Obviously, this depends on the in-store visuals which we are providing and working together with them, how we bring products to market, etc., but this will definitely be the key to success for us in the US.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [14]
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Okay. And one quick follow-up on the Originals. You indicated that you may have missed some trends. Any learnings from that? We all know that you have scouting people on the ground, but for some reason and for some time, obviously, you must have missed some trends. So any changes to that so that doesn't reoccur?
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Herbert Hainer, adidas AG - CEO [15]
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Yes. First and foremost I think, Jurgen, it's fair to say that we have had such a nice ride on Originals for the last 10 years, I guess, up to EUR2.7 billion or EUR2.8 billion. And yes, we missed the trend a little bit, especially in US where there was a trend to more athletic running silhouette for the leisure product and not back to the old styles, all the brackets like light trainers, etc. But as I said, we have adapted relatively fast to that. As I said, we see tremendous success already in Europe. And I'm sure you are out in the market and asking one or the other retailers who see it. And I?m sure this will relatively soon happen in the US as well. So therefore, we are quite optimistic back for the Originals.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [16]
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Very good. Thanks so much.
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Operator [17]
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Chiara Battistini, JPMorgan.
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Chiara Battistini, JPMorgan Cazenove - Analyst [18]
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Hello. Good morning. Just a couple of questions for me, please. First of all, just to follow up on the workup, you mentioned quarter one up 27% and you mentioned quarter two should be stronger than quarter one, so should we expect an acceleration there?
And then, question number two on the inventories up 18% ex-FX so we're on the high side. So I was wondering whether you could give us some more color on the breakdown of these inventories and to what extent these are related to build up ahead of the growth that you're expecting in the second half of the year and to what extent this is excess inventories that you still need to clean up, in Russia especially. Thank you.
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Herbert Hainer, adidas AG - CEO [19]
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Coming back to football, I didn't mean that we are growing faster in the second quarter than the 27%. I said that the growth this time, because of the workup, will be -- the second quarter will be bigger than the first quarter.
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Robin Stalker, adidas AG - CFO [20]
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And Chiara, for the --.
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Herbert Hainer, adidas AG - CEO [21]
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For football. Sorry.
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Robin Stalker, adidas AG - CFO [22]
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Chiara, for the inventories, yes, as I said, we have a large increase in the inventories due to goods in transit, which gives me confidence that this is product that we are anticipating is going to be sold in the next few quarters. We still have, however, as a part of this growth year over year the Russian inventories, which you will recall we really only had a growth in the Russian inventories in the second half of last year. And the release of those or the better comp only really comes in the second half of this year, also. But from a trend and from the aging [when everything's], very good. It is the anticipation of increased sales over the next two quarters.
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Chiara Battistini, JPMorgan Cazenove - Analyst [23]
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Perfect. Thank you.
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Operator [24]
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Julian Easthope, Barclays.
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Julian Easthope, Barclays Capital - Analyst [25]
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Yes. Good afternoon, everyone. Of course I have three questions. First of all, starting off on Russia. Given all the issues that have been going on there, I just wondered if you'd seen any sort of changes toward the end of the quarter or how that's actually progressing. We hear from our partners here that there's been strength within St. Petersburg and Moscow, but other areas have been weaker. I just wonder if you could sort of give a bit more of kind of detail on the Russian business.
Second is the distribution center in [Osterbrook]. I think it's been up and running for a quarter now with all the products going through. I just wondered how that was actually performing relative to expectation and whether or not you can see some inventory benefit for that by the end of the year.
And lastly, a thing that came up on (inaudible) earlier on and saying that you'd actually received some bids for Rockport and were considering selling it. I just wondered if you could confirm that. Thank you very much.
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Herbert Hainer, adidas AG - CEO [26]
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Okay, Julian, let me start with Russia. As you have seen, we had a very strong first quarter in Russia with plus 29%. And obviously, all the turmoil in the Ukraine is not, how should I say, strengthening the confidence of consumers in the Ukraine because in Russia we don't see it at all. But you also should have in mind that Ukraine is less than 10% of our total Russian business. So far, knock on wood, we haven't seen a negative impact. But obviously, we are watching it very careful and our management is working diligently with the whole situation and hopefully it will be peacefully resolved soon.
The second question was regarding to CDC. No converts again. It works well. We brought it to life last year and so far we don't have any issues. And I mean this Russian thing, I think which -- as you related, this is now working flawlessly and we definitely have learned our lesson at (inaudible).
And the Rockport. Yes. I mean I think I have said it already several times that Rockport is not the strategic asset for us in the Group. Nevertheless, we worked hard to improve the products, improve the distribution and, therefore, we are growing the Rockport business last year by 6%. It will grow again this year. And I think this is one of the most attractive brands out there. Therefore we get a lot of inquires and interest and we as the management, we think that it is our duty to listen to these people and therefore we have asked Guggenheim, our financial advisor, to help you to talk to these people and see what the situation is at that and this is exactly where we are in the moment.
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Julian Easthope, Barclays Capital - Analyst [27]
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Thank you very much.
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Herbert Hainer, adidas AG - CEO [28]
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You're welcome.
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Operator [29]
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Michael Kuhn, Deutsche Bank.
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Michael Kuhn, Deutsche Bank - Analyst [30]
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Good afternoon. Also three from my side. Firstly on China, growth of some 5% in the quarter. It was a little less than what we've seen over the recent quarters. Maybe some more details on that and what you would expect for the rest of the year.
Secondly, one follow up on TaylorMade and the new product lifecycles. Can we expect a more let's say stable trading pattern going forward? The brand was very volatile over recent quarters. Yes, so maybe kind of more stable growth there going forward.
And lastly on management responsibilities. If I understood you correctly, I think on board level Mr. Auschel will take over responsibility for the US market. I think in late 2011 you, Mr. Hainer, took over responsibility for that market. Now it seems it struggles a little and probably needs lots of care so I'm asking myself why we see that management change now. Maybe you can comment on that quickly. Thank you.
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Herbert Hainer, adidas AG - CEO [31]
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Yes. Let me start already with the third question and making sure that you don't have the impression I just want to get rid of US because it struggled in the first quarter, because then you would have to give me the benefit for the last quarter last year as well where we grew double digit.
Now, the reason is quite simple. We instrumented Roland in August or September last year as the board member for sales worldwide. And I said it already at that time. I just will finish in America with joint operating model and then Roland will take over America as well. And then he's responsible for sales worldwide for both brands, Reebok and adidas. So, we finished our [term] with the installation of the new president and therefore it's quite normal that Roland takes it over. As I said, this was already announced six months ago.
In terms of TaylorMade, when you ask for a stable grading pattern, honestly, I do believe it still takes 2014 until the whole inventory in the market has flushed through. And I don't speak only -- not only about the TaylorMade product, it depends on the whole market, and then we will come hopefully back to stable pricing patterns, as you said.
We will continue in bringing products, as I said, in the first quarter, early then for beginning of the new season that we give them a longer lifecycle and hopefully, therefore, achieve higher margins.
The first question was on China, the 5%. I must say I am quite happy with the 5% in China, because when you saw our growth pattern since the Olympic Games in 2008, where we then in 2009 first cleaned the market and then we said we will set up an information system with our two key partners that we know exactly what's going on in the stores, that we can drive down inventories with our retail partners and therefore bring fresh products on a constant basis and bring continuous growth to this market. And I'm sure that you have realized in the last few years that we are growing faster than our main competitor there. And I must say I am happy with this growth rate because this is healthy growth and a sustainable growth.
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Michael Kuhn, Deutsche Bank - Analyst [32]
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Thank you.
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Operator [33]
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Rogerio Fujimori, Credit Suisse.
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Rogerio Fujimori, Credit Suisse - Analyst [34]
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Hi, Herbert. I was wondering if you could talk a little bit about Japan, thoughts on market conditions post VAT hike.
Also a follow-up on China. I was just wondering if you could talk a little bit about your wholesale sequential trends and how in particular adidas' performance is doing in China.
And my third question, just curious to hear an update on the development of miCoach smartphone watch and the potential for wearable technology for adidas. Thank you.
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Herbert Hainer, adidas AG - CEO [35]
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Okay. Let me first start with Japan. Overall, as we have indicated last year when we changed our [dry] term system in Japan we had a certain shift within our savings pattern. But overall, I'm quite happy with the Japanese market. You know that we are by far market leader in Japan. I think the World Cup or the next match will give us another opportunity with the Japanese team playing in Brazil. And as I said, I think we have a very stable position in the Japanese market with a close relationship to our retail partners and therefore I'm cautiously optimistic as the market is not growing that fast in Japan, as you know.
In China, I think your question was on wholesale pattern. I mean 95% of our sales in China are wholesale with the biggest customers [Bi Lee] and [Y-Y], but a lot of houses, as you know, but this is all wholesale related. We only have 150-160 owned stores out of the 8,000 which we have over there.
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Robin Stalker, adidas AG - CFO [36]
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Maybe could you repeat the third question? I think you had a question about miCoach?
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Rogerio Fujimori, Credit Suisse - Analyst [37]
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Yes, just an update on the development of your smartphone watch and the potential for wearable technology for adidas.
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Herbert Hainer, adidas AG - CEO [38]
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Okay. Yes, as you have seen that we had quite a successful launch of miCoach. The system, I would call it the Ferrari within all these systems. And our next step will be to bring it down from a EUR400 price point which we have in the moment to maybe a EUR200 price point or even a little bit lower, that we then can go into further volumes. You might have seen that we brought out in the meantime the Smart Ball. This is the next evolution of being smart and smart products and this is how we will continue in the future.
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Rogerio Fujimori, Credit Suisse - Analyst [39]
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Thank you.
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Operator [40]
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Chris Svezia, Susquehanna Financial Group.
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Chris Svezia, Susquehanna Financial Group - Analyst [41]
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Good afternoon, everyone. I have four questions. Number one, the UK, I'm just curious. I know it's been a pretty competitive marketplace there. Just your thoughts on that market as the year unfolds.
The second question is Reebok. Nice performance there. Just some color on the sustainability of the gross margin improvement, how we should think about that for the balance of the year.
Then the third question is when you talk about accelerating growth in the second quarter for the entire company, is that a linear growth rate? In other words is it continue to build, is it sustainable throughout the balance of the year or is second quarter really the strongest year-over-year growth quarter for the Company?
And lastly, just on TaylorMade. Channel inventory, margins were down in the quarter. I'm just curious about your thoughts about how we think about the margin profile at TaylorMade given how you're bringing product to market for the balance of the year. Thank you.
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Robin Stalker, adidas AG - CFO [42]
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Okay. Let me start with the Reebok gross margin. Yes, this is very definitely sustainable. In fact, one of our key operational goals with Reebok is not just obviously to grow the top line, but also to fundamentally improve the profitability of this brand. And you've seen us being able to do this. We were up even in the last quarter 50 basis points and that is despite significant negative currency trends, as you will be aware. And so we're still only at a level of about 39.6% and our aim was to be at a level of 40% by 2015. We're definitely going to achieve that and overachieve it and so my comment here is, yes, Reebok gross margin improvements are sustainable.
To the growth trends for the rest of the year, I mean traditionally our third quarter is always the strongest quarter or the most important quarter. That'll be the same I think, this year. But clearly, as Herbert said, we're looking at the second quarter also being a very good quarter, particularly in light of the poor first quarter, but it's the second and third quarters that will be the highlight quarters in 2014.
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Herbert Hainer, adidas AG - CEO [43]
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Coming to the first question on the UK, the UK was slightly down in the first quarter but is improving as we saw already during the month of April with the Originals push as I said before, the [aesthetic slacks] the TopShop collaboration I mentioned. But we also see business coming back at the football area with Chelsea in the Champions League (inaudible), so we definitely see an improvement in the UK business.
The fourth quarter wasn't TaylorMade on the margin. Yes, I do believe we will see an uptick in the margin going forward, but honestly it will not explode, as I said, because there is a lot of product in the market, not only from us, from our competitors as well. But yes, we definitely will see a better margin going forward in the rest of the year.
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Chris Svezia, Susquehanna Financial Group - Analyst [44]
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Okay, thank you. I'll go back.
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John Paul O'Meara, adidas AG - VP, IR [45]
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Thanks, Chris, and thank you, ladies and gentlemen. That completes our conference call for today. Our next event will be our half year results, which we will report on the 7th of August. And we wish you all a great summer and enjoy the World Cup, where I'm sure adidas will again be the winner.
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Operator [46]
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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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