Q2 2014 adidas AG Earnings Conference Call
Aug 07, 2014 AM CEST
ADS.DE - adidas AG
Q2 2014 adidas AG Earnings Conference Call
Aug 07, 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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* Julian Easthope
Barclays Capital - Analyst
* Jurgen Kolb
Kepler Cheuvreux - Analyst
* Antoine Belge
HSBC - Analyst
* Louise Singlehurst
Morgan Stanley - Analyst
* Vic Mohan
ISI Group - Analyst
* John Guy
Berenberg Bank - Analyst
* Michael Kuhn
Deutsche Bank - Analyst
* Andreas Inderst
Exane BNP Paribas - Analyst
* Rogerio Fujimori
Credit Suisse - Analyst
* Cedric Lecasble
Raymond James - Analyst
* Andreas Riemann
Commerzbank - Analyst
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Presentation
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Editor [1]
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Presentation
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Operator [2]
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Good day and welcome to the adidas Group conference call for the first half year 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 [3]
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Thank you, operator, and good afternoon, ladies and gentlemen. Our presenters today are adidas Group CEO Herbert Hainer and Robin Stalker, Group CFO.
To allow for ease of comparison, all sales and revenues related growth rates will be discussed on a currency-neutral basis unless otherwise specified. So, let's get started and over to you, Herbert.
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Herbert Hainer, adidas AG - CEO [4]
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Yes. Thanks, JP, and good afternoon, ladies and gentlemen.
It is with disappointment that, after such a great summer of sports we had to announce last week that our Group has not been able to meet your and our high expectations as laid out in our Route 2015 agenda. While there is no doubt that our Group has endured external pressure over the past 18 months, missing our goals is something we take very seriously as a management team and we definitely reflect critically on it.
We clearly recognize that part of this underperformance is due to our executional mistakes and we take full responsibility to rectify our shortfalls swiftly and to
return the Group to stronger earnings growth. On this note, I am convinced the fundamentals of our business model remain fully intact and, as I take you through our second quarter results and the strategic measures we are taking, this will become more apparent.
Overall, we had a good second quarter with increasing momentum across most of our business units and markets as expected. Sales increased 10% in Q2. Of particular note, sales increased in all regions during the period. The emerging markets continued to be a strong source of market share gains with sales in Latin America, European emerging markets and Greater China increasing 33%, 14% and 11%, respectively.
In Latin America, we saw significant sales growth across the brands, with adidas up 35% and Reebok up 26% during the quarter. Our investments in controlled space also yielded strong results with comp store sales up 42% in the second quarter.
In Greater China our business continues to go from strength to strength, driven by strong growth in key performance and lifestyle categories. Our retail expertise is also paying dividends in the markets with comp store sales in China up 18% in the second quarter.
In European emerging markets sales growth was broad based across the various countries with strong double-digit increases in the Middle East and Africa. In Russia/CIS, sales in the quarter were up 13% with comp store sales almost on par with the prior year, down only 1%. And in addition, we also saw some further improvement in our business in the developed markets.
Western Europe is back to winning ways with sales growing 13% in the quarter, driven by double-digit increases in several key categories with running, football and basketball all growing at rates above 20%. And Originals and Styles are up 12%. By country, Germany, the UK, Spain and Italy all grew at double-digit rates during the quarter.
In North America Group sales also increased as solid growth of 8% at adidas offset modest declines at Reebok and the 10% decline at TaylorMade-adidas Golf. Football and running were standout categories, growing 52% and 13%, respectively. Originals, however, remained challenged, declining at a high single-digit rate. Nonetheless, I am optimistic this trend will improve as new product hits the market later this year and into spring 2015.
Finally, from a regional perspective, in other Asian markets our trends are also improving. Sales for adidas increased 7% during the quarter and Reebok continued its strong momentum in the region, growing 20%. Our biggest challenge in Asia was, and still is, TaylorMade-adidas Golf, where sales were down 37% in the quarter.
By brand, adidas delivered a powerful performance with sales increasing 14%. And it goes without saying that adidas dominated the summer of football on and off the field. Sales in the football category climbed 41%, confirming we will reach our aspiration of EUR 2 billion, extending our lead over our major competitor.
There is no doubt that the 2014 FIFA World Cup will go down as one of the most captivating and memorable sporting events in history. The visibility of adidas and the commercial success we captured for the brand is a timely reminder of just how effective we can be when we are focused and committed.
We sold more than 8 million World Cup jerseys, celebrating record sales for the jerseys of the winning German national team with fans buying more than 2 million units. Further bestsellers were runner-up Argentina, Mexico and Colombia, with more than 1 million units sold each.
With Brazuca we delivered one of the most successful and best-selling Official World Cup Match Balls ever with more than 14 million balls sold. Having its own twitter account with over 2.4 million followers, Brazuca was one of the most engaging twitter accounts of the World Cup, bringing amazing attention to the brand and showing just how innovative and effective we are in new forms of digital marketing.
And to round off our success, our counter-attack in football footwear shows just how agile we can be when we go all in. Our Battle Pack World Cup Footwear collection, which was part of many of the finest moments in the competition, inspired the next generation of footballers back to the original football boot brand. The eye-catching designs made sure our shoes were the most recognizable on the playing field. Our adizero f50 boot ranked as the number one top-scoring boot of the tournament, with Lionel Messi, James Rodriguez and Thomas Mueller, three of the top scorers, all wearing it.
While football was clearly a highlight, we also had several other notable successes which provide plenty of reasons to be optimistic about our future potential. Momentum in adidas Running continued thanks to the further rollout and evolution of our breakthrough innovation, Boost, to new silhouettes and price points. Sales in the category increased 16% in the quarter with all regions growing at double-digit rates. Our sell-in in the US and our performance in owned retail were particularly strong, with product launches such as our Pureboost running shoe resonating extremely well with the American consumer.
Our adidas Originals & Sport Style business, which missed some trends over the past year, also markedly improved with Originals returning to growth, up 8% globally in the quarter. The Originals ZX Flux is taking the market by storm, currently being the number one selling shoe at Foot Locker Europe and I am fully convinced this will evolve into a big commercial opportunity for us. Sport Style maintained its strong growth trajectory, increasing 21% in the quarter, driven again by the adidas NEO label.
At Reebok, we recorded our fifth consecutive quarter of growth, with currency-neutral sales increasing 9%, driven by double-digit growth in most regions. The quarter was again all about strengthening Reebok's credibility in fitness. The brand continued to roll out its new brand mark, the Reebok Delta, and deepen its connection to the fitness community hosting spectacular fitness events and grassroots activities around the globe. This drove Reebok's training business up 26%, propelled by the ZSeries and CrossFit Nano, where sell-through rates across all channels exceeded our internal expectations. Reebok Classics also continued to build on last year's solid momentum, with strong growth of 24% in the quarter.
Finally, our retail business enjoyed another outstanding quarter of growth, increasing 22% currency neutral. This was driven by a strong 10% comparable store sales growth rate in Q2. Also, e-commerce grew robustly with an increase of 59% in the second quarter.
While all of this all highlights our solid and improving competitive position, we nonetheless faced some material challenges in the first 6 months, which had a particular impact on our profitability levels. The first is currency, which negatively impacted our top-line result by around
EUR 250 million in Q2 and by over EUR 450 million year to date.
Our gross margin was negatively affected by 60 basis points due to less favorable hedging rates. In addition, our gross margin suffered a further 50 basis point negative in Q2 and 30% basis points in the first 6 months from the devaluation of the Russian rouble. In total, currency impacted our operating profit by over EUR 100 million in the first 6 months.
Secondly, the golf industry is weathering an extremely difficult year and, as market leader, this hurts us severely. TaylorMade-adidas Golf sales were down 18% in Q2 and 27% year to date. This amounts to a EUR 236 million sales decline in the first 6 months compared to a year ago. The significant sales decline and lower gross margins resulted in a EUR 120 million negative
operating profit swing compared to a year ago.
And thirdly, our retail segmental profitability, particularly in the second quarter, was heavily influenced by our performance in Russia/CIS. Gross margins in the retail segment declined 4.9 percentage points, almost 4 percentage points of which relate to that market. This was mainly related to an extended period of promotional activity through the summer months, as well as the
impact from the year-over-year devaluation of the Russian rouble. Taking these challenges into consideration and the improving momentum that we are seeing from adidas and Reebok, we undertook a review of the various scenarios and strategic choices for the remainder of 2014 and for 2015.
We know driving higher levels of profitability is absolutely critical to our long-term success and we will get there. But we will not get there if we are not constantly winning in the marketplace. With this in mind, my board colleagues and I were unanimous in our view that we need to be more decisive and faster in dealing with our challenges. We must act to strengthen brand leadership to be more impactful in the marketplace and bring more diversity to our earnings streams. This starts with completing our initiatives to strengthen brand leadership. Since taking over their new responsibilities, our new board members, Eric Liedtke and Roland Auschel, have been looking into the future and the organizational requirements needed to take our brands and our consumer experience to the next level.
With this initiative we are transforming our current marketing organization to be more consumer focused, brand driven and agile, with clear empowerment and accountability. The new set up empowers our category business units to take responsibility for all marketing processes end to end. In addition, we have added key expertise in the areas such as concept-to-consumer, innovation and strategy, to ensure we drive our brand agenda more professionally in the marketplace and stay ahead of the game. All organizational changes are effective from August onwards. We believe the new set up will help us bring our concepts to the consumer in a more efficient and effective way.
Secondly, we have made a new commitment to invest into our brands, to drive more balanced growth across our entire portfolio of categories and markets. On this front, this has been one of the shortcomings of our Route 2015 agenda. We won many of our key battles where we had a well-resourced offensive focus. Greater China and NEO are good examples. However, we left
our brands exposed to attack in some markets which has cost us market share; Western Europe being an example.
Given the rebound in brand momentum for the adidas and the Reebok brands that we saw in the first half of 2014, now is the right time to increase investment. You saw the first indication of this with the World Cup where we clearly won by all indicators. We know consumers love our brands when they hear our stories. Therefore, we will be bringing even more of this to life on
the streets, screens and stores in the future to ensure consumers constantly hear what we have to say.
Our recent partnership announcement with Manchester United, our active participation in signing the best from this year's NBA draft, as well as the new collaborations we will start in the next months in Originals confirm our intent. In 2015 we will launch our most ambitious brand campaign yet, which will once and for all tell the world why adidas is the best sport brand in the world.
In total, we will increase our marketing spend target range by 1 percentage point to between 13% and 14% of sales from our Route 2015 corridor of 12% to 13% of sales. And I expect within our next strategic planning period we will compensate for this through more consistent global growth and tighter overhead leverage, but we will share much more on this and our 5-year strategic plan to 2020 in the first quarter of 2015. However, we will already begin now in the rest of this year to ensure we sustain the momentum we have in key categories and markets, and here there are several initiatives to look forward to.
In football, while the World Cup may be over, we certainly are not done yet for 2014. With the new Predator Instinct we are following up fast on the Battle Pack to keep the heat on our competitor as the new club football and back-to-school season kicks off.
In basketball we expect to accelerate growth as we build into the 2014-2015 season. Together with our expanded portfolio of high-caliber partnership assets, we are also bringing our game-changing Boost technology to the category with the Crazylight Boost and the D Rose 5 Boost.
We will also further push the cross-category rollout of Boost, bringing the technology to the baseball, training, snowboarding and the kids business. With our new editions and colorways in key running franchises we will also further propel the great momentum we have in adidas Running during the second half of the year.
For adidas Training, the introduction of ClimaHeat, a ground-breaking warming technology, will continue to reinvigorate the Clima franchise following the success of ClimaChill this spring. The concept will launch in the fourth quarter and will contribute growth to our business in several
categories.
adidas Originals will launch new colorways and models for ZX Flux in Q3, supported by a back-to-school campaign, especially in the US. An introduction of a photo-based product customization app which allows consumers to print their own photos on their ZX Flux will ensure this franchise remains the talk of the town. Furthermore, our collaboration with Rita Ora, which already created great hype amongst consumers globally, will hit the market in September, followed by our highly-anticipated adidas Originals Pharrell Williams and Kanye West collections.
And finally, we are confident that the progress we have seen at Reebok in the past months is set to continue. Our key CrossFit and Spartan Race partnerships are showing tremendous long-term growth potential, and this is confirmed by all the positive media attention we received around the Reebok CrossFit Games that took place at the end of July and the strong demand we are seeing for the latest CrossFit Nano 4.0 training shoe.
While this will ensure we again deliver good growth for adidas and Reebok in the second half, we also have decided to take strategic measures to tackle our profitability challenges at TaylorMade-adidas Golf and in Russia/CIS.
At TaylorMade-adidas Golf, given the inventory that is still in the market, we will carefully look at new launch and introduction timings. In addition, we will begin a restructuring program at TaylorMade-adidas Golf to align the organization's overhead to match lower expectations for the golf industry's development. Combined, I expect these measures will impact second-half operating profit by EUR 50 million to EUR 60 million. As the dominant market leader, we take this initiative now to secure our lead and to be the first mover in reinvigorating the market. Our innovation pipeline is full and we are set to go whenever we feel the market is ready.
In Russia/CIS, given the downward pressure visible in retail trends in the market over recent months, as well as the increasing risks to consumer sentiment and consumer spending in the region, we have decided to reduce our net store opening plan in the market for 2014 and 2015. In total we will now add only 80 stores in the market this year compared to our original plan
of 150 and are planning with a similar figure for 2015.
These steps, which are short-term in nature, are aimed to reduce risk and protect profit, as well as to drive a faster implementation of new inventory management principles for that market. This, as well as the current more promotional environment, means that we will have an operating profit shortfall of around EUR 50 million compared to our plan in the second half.
While uncertainty in the market is high right now, we believe this is the right decision for the short term. Nevertheless, we remain fully committed to the market. Right now we are very encouraged by increasing brand momentum for both adidas and Reebok as a result of local marketing investments, as well as improving store operations.
In summary, while we have delivered notable achievements with our Route 2015 plan, we also accept that we need to lift our game to drive more consistency and dependability in our financial performance. With momentum returning in key markets, we are taking consequent and necessary decisions now to put the Group on a firmer footing to build for the future. By cleaning up markets, investing with more conviction in our growth opportunities and driving more agility through our new organizational setup, we will return the Group to a higher and more consistent level of earnings growth in the mid to long term.
That's it from me. Let me hand over you to Robin to give you some more details on our Q2 and half-year results and our updated outlook for the remainder of the year.
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Robin Stalker, adidas AG - CFO [5]
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Very good. Thank you very much, Herbert, and good afternoon, ladies and gentlemen.
I will start with our gross margin development. Our Group gross margin decreased 1 percentage point in the first 6 months, or 90 basis points in the second quarter, to 49.2%. Similar to the first quarter, gross margin development in the first 6 months was primarily driven by the following negative effects: Firstly, less favorable hedging rates. I'm not talking about the dollar and euro here, I'm talking mainly about the Japanese yen, British pound and Canadian dollar. They accounted for around 60 basis points of the Group's gross margin decline.
Secondly, the rapid currency devaluation year over year led to transactional negatives on the unhedged portion of our US dollar exposure. The significant decline in the Russian rouble on its own had a negative impact here on the Group gross margin of around 30 basis points.
Thirdly, lower gross margins at TaylorMade-adidas Golf as a result of a highly-promotional environment in golf negatively impacted the Group gross margin by 40 basis points.
And finally, higher input costs impacted the gross margin by 20 basis points.
In the second quarter these same four factors compressed the Group's gross margin by 60, 50, 30 and 20 basis points, respectively.
Moving over to the operating expenses, other operating income and expenses increased 1% in euros or 7% currency neutral in the first 6 months. 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 17% currency neutral and 12% currency neutral for the second quarter and the first half, respectively. This was primarily due to higher marketing expenditure at adidas related to the 2014 FIFA World Cup, as well as initiatives to support Reebok's expansion in the fitness market.
The decline in gross margin and the increase in operating expenses resulted in Group operating profit declining 25%, or EUR 170 million, to EUR 523 million. This translates into an operating margin of 7.5%. That's down 2.2 percentage points compared to a year ago.
Turning now to the non-operating items of the P&L, net financial expenses decreased 6% in the first half compared to a year ago driven by a 12% increase in interest income. The first-half year tax rate increased 150 basis points to 29.0% as a result of a less favorable earnings mix. As a result of all this, net income attributed to shareholders for the first 6 months decreased 27% to EUR 348 million. Second quarter net income attributable to shareholders declined 16% to EUR 144 million.
Looking now at our segments, wholesale revenues increased 10% in the second quarter and 5% for the first half, mainly due to sales growth at adidas Sports Performance, led by the football, running and the training categories. Sales at Reebok were slightly above the prior-year level driven by sales increases at Fitness Training, Walking and Classics.
Gross margin for the segment was up 20 basis points for the quarter and down 20 basis points for the first half as the positive effect from a more favorable product and pricing mix was more than offset by negative currency effects following the devaluation of currencies such as the Argentine peso and the Brazilian real.
In the retail segment revenues continued to grow at a strong double-digit rate, up 22% in the second quarter and the same for the first half. Comparable store sales accelerated during the second quarter, up 10% for the quarter and 9% for the first half, with growth across all regions and store types.
By brand, adidas comp store sales were up 12% for the quarter and 10% for the first 6 months. Reebok comp store sales remained stable during the second quarter and grew 2% for the first half.
Our e-commerce business continues to grow strongly with sales up 59% in the second quarter, bringing the first half to a growth of 65%. Retail gross margin decreased 4.9 percentage points to 60.5% for the second quarter and 3 percentage points to 60.2% in the first 6 months. And our performance in Russia/CIS heavily impacted these results with the impact of promotional activity and product mix, as well as currency devaluation in that market, accounting for almost 4 percentage points of the decline in Q2 and 2.3 percentage points of the decline in the first half.
Segmental operating expenses as a percentage of sales increased 1.2 percentage points to 41.7% in Q2 and 70 basis points to 44.0% in the first 6 months. The increase was almost entirely related to higher marketing spend to drive strong point-of-sale execution for the World Cup and new product concepts. Excluding this, overhead as a percentage of sales in retail remained stable.
At the end of the second quarter we operated 2,825 stores, a net increase of 283 stores versus June 2013. Of the total number of stores, 1,590 were adidas and 427 were Reebok branded. In addition, the adidas Group retail segment operated 808 factory outlets. During the first 6 months, we opened 199 new stores and closed 114 stores and 64 stores were remodeled.
In our other businesses, revenues in the second quarter decreased 11% driven by an 18% decline at TaylorMade-adidas Golf, as Herbert already discussed. For the first 6 months revenues of other business was down 19%.
The segmental gross margin decreased 4.8 percentage points to 38.5% in the second quarter. For the first 6 months gross margin was down 5.2 percentage points to 38.8%, due mainly to lower product margins at TaylorMade-adidas Golf as a result of the highly-promotional environment in
golf resulting in ongoing clearance activities.
Finally, let me refer to our balance sheet and cash flow development. At quarter-end operating working capital as a percentage of sales increased 1.2 percentage points to 21.6% due to a 16% currency-neutral increase in inventories. As stated in our previous calls, we expect inventory growth rates to come down to a level more in line with projected sales growth as we approach year-end.
In terms of cash flow development, we ended the quarter with net borrowings of EUR 454 million compared to EUR 94 million a year ago. Higher capital expenditure, which amounted to EUR 265 million, as well as the dividend paid to shareholders of EUR 314 million, were the main drivers of this development.
Finally, ladies and gentlemen, let me give you some more detail on the changes to our outlook which we announced on July 31. We now expect mid to high single-digit sales growth on a currency neutral basis for the year. While our top-line growth expectations for adidas and Reebok remain virtually unchanged, given the challenges at TaylorMade-adidas Golf we now expect a double-digit decline in other businesses compared to our previous projection of a stable performance.
In terms of our gross margin, we now expect a decline to a level between 48.5% and 49.0% compared to our original expectation of 49.5% to 49.8%. This is obviously mainly due to the TaylorMade-adidas Golf segment, as well as lower margins in Russia/CIS from more extensive promotional activity as well as rouble and other currency devaluation impacts.
The Group's other operating expenses as a percentage of sales are now expected to increase -- the previous guidance was around the prior year level -- compared to the prior level of 42.3%. Sales and marketing working budget expenses as a percentage of sales are projected to increase to a level of around 13% -- whereas the previous guidance was to increase modestly -- compared to the prior year level of 12.4%.
As a result, the Group's operating margin is expected to be at a level between 6.5% and 7.0%, whereas the previous guidance was between 8.5% to 9.0%.
The Group's tax rate is expected to be between 29.5% and 30.0% -- the previous guidance around 28.5% -- and thus less favorable compared to the 2013 tax rate excluding goodwill impairment losses of 29.0%.
Finally, net income attributable to shareholders is expected to be at a level of around EUR 650 million as already communicated.
With that, ladies and gentlemen, let me echo Herbert's comments that we are disappointed we are not in a position to bring more to the bottom line this year. However, we are steadfast in our view of the fundamental strength in our brands and the opportunities we have to drive long-term growth and value for the Group.
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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Thank you. (Operator Instructions) Julian Easthope, Barclays.
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Julian Easthope, Barclays Capital - Analyst [2]
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Yes, hi. Good afternoon, everyone. Just got actually one question, really, which it concerns the -- obviously the margin guidance now is for 6.5% to 7.%, which is basically 400 to 450 basis points below where you were hoping it was going to be for next year. Now, clearly that's a big disappointment so I was just wondering how -- if any of the declines this year were actually one-off in nature and what the underlying sort of level was actually trading at. And if you take into account there's going to be an increase, a step increase in marketing spend next year, whether we'd actually see any progression in 2015 on the margin for next year. Thank you.
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Robin Stalker, adidas AG - CFO [3]
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Thank you very much, Julian. Yes, it's, as we said, clearly disappointing that the margin's at that level, but I think we've explained in some detail as to why we are there. And we're not obviously in the position at the moment to give full guidance on the 2015 expectations, but clearly our improvements and profitability are the goals, to continue to improve profitability remain in tact and we're working diligently to get our operating profit improved.
What I can say is that we expect to continue with our growth. And so if we -- once we grow again we also expect our profitability to over-proportionally grow. So in our outlook for 2015, clearly our profitability is going to growing higher than our sales will be growing. I think that's about the best guidance I can give at the moment and we'll give more guidance on 2015 when we talk to you in November.
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Julian Easthope, Barclays Capital - Analyst [4]
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So you're looking at a sort of marching guidance at the third quarter figures like normal.
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Robin Stalker, adidas AG - CFO [5]
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Yes. We would be looking to do what we've normally done in giving guidance for the next year in the third quarter of the previous year.
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Julian Easthope, Barclays Capital - Analyst [6]
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Okay. Thank you very much.
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Robin Stalker, adidas AG - CFO [7]
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You're welcome, Julian.
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Operator [8]
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Jurgen Kolb, Kepler Cheuvreux.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [9]
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Thanks very much. A couple of questions here. In terms of the guidance that you've provided us with for the second half, you indicated that TaylorMade, somewhat like EUR 50 million to EUR 60 million down, Russia about EUR 50 million. What are your expectations for the currency impact for the second half? What shall we model in here, first of all.
Secondly, Mr. Hainer, you indicated in your speech that you expect going forward that higher marketing expenses, but also the operational issues will be more than compensated by sales growth and--.
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Robin Stalker, adidas AG - CFO [10]
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Jurgen, you're breaking up. We heard the first question. We can't hear the second question. Can you repeat--.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [11]
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Okay. I'll -- can you hear me? I'll try again, then. On the comments that higher marketing expenses as of next year are expected to be compensated by increased sales and operating costs were -- leverage of costs, what sales level would you be looking at? What sales level would be necessary for the Group in order to cover these higher marketing expenses? And then on the operational cost side, where do you think you can get better in order to compensate for higher marketing? That would be the--.
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Robin Stalker, adidas AG - CFO [12]
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Jurgen, I'm going to have to interrupt you. We've got a little bit of it. The first question was about currency impact for the rest of the year. The second question was about marketing spend.
Answer the first question, I mean the major currency impact at the moment is basically in Russia with the risk of a further deterioration of the Russian rouble, or the depreciation I suppose, and the impact that this has on our retail margins in Russia. Otherwise, we're not saying anything different about the development of the currencies. That is pretty much in the guidance that we gave at the beginning of the year.
To the marketing question, I guess you're after what are we spending on or what we're -- what the marketing plans are. But if I'm wrong with that interpretation, please try again.
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Herbert Hainer, adidas AG - CEO [13]
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So, Jurgen, let me try the question as Robin has indicated it, why are we spending or intend to spend more next year. I think when you go back a little bit in 2013 we have become under pressure in several markets, especially here in Western Europe, and on the football side. And I think the World Cup was the best estimate that if we are focused behind our key initiatives and our product initiatives and concepts in spending the right amount of money, then we can be extremely successful. And I think there is no doubt that the football World Cup 2014 was a tremendous adidas presentation through all the different channels, be it digital, advertising. All the consumers we wanted to reach we reached. And obviously, our products were selling very good.
So, we're bringing momentum back into the brand speed, adidas and Reebok. This is clearly visible around the world, even by the disappointing results. But you can feel the momentum which is coming back, so we're growing with the adidas brand everywhere in the world. Originals is coming back. ZX Flex is the best selling shoe for [local] Europe in the moment. Therefore, we definite do believe that it is the right time to spend. But on the other hand, all this additional spend, we will have to take it out from our operating overhead costs and gaining the leverage to operating profit through growth in the next years. So, we definitely don't want to sacrifice our operating profit, but we do see a good opportunity because of the momentum of the brands to attack now and to get market shares back where we have lost it.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [14]
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Okay. Do you hear me now or is that difficult still?
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Herbert Hainer, adidas AG - CEO [15]
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It's better. It's better.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [16]
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Better? Okay. Then the final one on Russia. Please help us to better understand what the problem really is in Russia, because we don't hear the similar comments from other companies. So what is -- how do you see the situation in Russia currently on an operational basis; not rouble -- not currency, just the operational side.
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Herbert Hainer, adidas AG - CEO [17]
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It's quite simple, Jurgen. There is definitely a decreasing consumer sentiment in Russia. And I promise you, if you haven't heard it from other companies you will -- we will hear it relatively soon because we are one of the biggest retailers in Russia and we know first hand what's going on.
We still increase our sales there. There is appetite for our brand, but there is definitely much more price consciousness from the consumer because of the uncertainty which is created within the last few months and this is what we are seeing. And therefore, we -- there is a very much promotional environment out in Russia and obviously we have to follow all of the others; not only sporting goods brands, because we are the dominant leader, but also all the other fashion brands, you name it, and this obviously is decreeing our margin besides of the rouble devaluation and this is the situation in Russia.
We definitely do believe we will further grow, but we are more conscious that we bring in the right level of inventory by opening less stores, opening it in the right locations and closing stores which are still profitable but not meeting our expectation in terms of profit level and this is the way going forward. But we definitely believe furthermore in the market. I mean this is the biggest markets for us in Europe. As you know, we do over EUR 1 billion there and we definitely will invest also further, but with more caution as we have done it in the past.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [18]
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Okay. Alright. Thanks, understood. Thank you.
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Operator [19]
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Antoine Belge, HSBC.
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Antoine Belge, HSBC - Analyst [20]
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Yes, hi. It's Antoine Belge at HSBC. I've got three questions. First of all, I think this morning, according to Reuter's you said -- and I'm going to quote you and correct me if I'm wrong. You said that you left your brand exposed to attack in the southern markets, especially in Europe. So could you maybe elaborate a little bit on this? Which product category? What did you executed not as well as you would have expected?
The second thing is back to this question about the marketing effort. Could you maybe put the new contracts with Manchester United in that context? And if so, if we look at these new levels of spending and if we look at around Madrid, for instance, what are you expecting in terms of potential inflation in terms of sponsorships, cost (inaudible)?
And thirdly, on your new guidance, in terms of the shape of the growth market in Q3 and Q4, I think you mentioned a slow procedure in terms of getting inventory out of the market, of letting your retailers actually doing that effort. So how are you seeing the sort of sequential decline, maybe (inaudible) and when do you expect sort of going back to like a flattish market for golf? Thank you.
------------------------------
Herbert Hainer, adidas AG - CEO [21]
------------------------------
Okay. Let me start with the first question. As far as I understood it, you were asking where we have been attacked and in which category. As I said before, in 2013 we had been heavily attacked by our main competitor in Western Europe and it was mainly in the football footwear and in the running area. And I think we have fairly nicely rebalanced our Boost technology as we introduced it last year in the market and you see it on our running successes. And now we are coming back on the football footwear side.
Battle Pack was the first heavy attack. The Predator Instinct, which is out now by the way, in the first two weeks has very good sales rates. This is an next attack on the football side and this is what will continue. And as I said before, if we focus all our activities behind concepts like that and put the right spending into it, then we are very successful.
The second question was on MANU. There is no doubt that football is by far the biggest sport in the world and club football is the one which is out 365 days. A World Cup is great, but it's only every four years. And national teams are great, but they also play only every four years, or European championships included every second year in a tournament, but the club competition is out 365 days during the year. And with MANU we have now three out of the four biggest symbols in the football club world with [Real, Bryan] and MANU and this gives us definitely a huge reach to all the football consumers around the world.
In addition, we also do believe that with the three key symbols having their shirt in our own stores, this will definitely help us also to drive traffic into our stores because this is something where the consumer wants to have it. And all the studies show that you can sell around 25% to 30% on other branded products from our brand around these key symbols.
And last but not least was, I think, on TaylorMade. And maybe, Robin, you might help me a little bit, but let me start.
So what we see in the market is that the market is completely over-inventoried and this has two negative effects. On the one hand, that we have to help the big retailers and markdown many to flush through the consistent or the existing inventory. And secondly, obviously we cannot bring that many new products into the market, which is a shortfall on revenue and a shortfall in margin, so a double hit. But we definitely don't want to oversell the market again in 2014 and then running with the same problem in 2015.
We do believe that, as the market leader, we have a responsibility for the market and for the longevity of our TaylorMade brand and, therefore, we do two things. First, we help the retailers to clean the market and our inventory and, secondly, to be careful in what we -- in how much we introduce in 2014. But what I can promise you is that our pipeline of new innovative products is full and we will launch it as soon as we see that the market is ready and the inventories are back to a normalized or healthy level.
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Robin Stalker, adidas AG - CFO [22]
------------------------------
Yes, absolutely. I have nothing else to add on that. I think that answered your question, Antoine.
------------------------------
Antoine Belge, HSBC - Analyst [23]
------------------------------
Okay. And then just maybe in terms of -- obviously when we spoke on your last call, you were actually expecting real sequential improvements. So I mean, could we expect that, I don't know, the rate of decline will be more moderated in Q3 and then improving slightly in Q4? Any sort of quantification or at least how you -- what assumption you've taken when you came up with this new overall guidance?
------------------------------
Robin Stalker, adidas AG - CFO [24]
------------------------------
I think, Antoine, if you're talking about golf we don't see any improvement in the next two quarters.
------------------------------
Antoine Belge, HSBC - Analyst [25]
------------------------------
Okay. Thank you.
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Operator [26]
------------------------------
Louise Singlehurst, Morgan Stanley.
------------------------------
Louise Singlehurst, Morgan Stanley - Analyst [27]
------------------------------
Hi. Good afternoon, gentlemen. I've got two questions for Herbert, please, and then a last one for Robin.
Herbert, you've spoken a lot about the organizational structure and there's clearly been quite a few changes made, the exciting move of JP most recently and also Mark King in the US. Can you just talk about if there are any other gaps that you want to fill or we should be expecting any other changes for the management team to bed down for this new organizational structure going forward?
Secondly, just in terms of the marketing point, I know we're probably not going to get the numbers that we're after today as we're going to wait for the next -- or the five-year plan next year, buts can you help us understand the areas of the marketing, i.e., is it US college athletic teams, is it key personnel such as Derrick Rose going forward?
And then my third question for Robin, could you just help explain what's happening in retail, the gross margin, because I noticed that was fairly weak at both adidas and Reebok down around 500-600 basis points in the second quarter? Thank you.
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Herbert Hainer, adidas AG - CEO [28]
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Okay, Louise, let me start with the first one, the organizational structure. Obviously America we spoke already and you mentioned it with Mark King, bring him up to Portland and running adidas and Reebok.
I think the most significant ones we did here at headquarter with our new organizational structure for marketing and for sales where we clearly have given much more responsibility to the marketing guys. They have now full P&L responsibility and can handle the products and the concepts end to end. And we want our sales forces out in the markets to fully concentrate and focus on execution. Because what we have seen during the World Cup, when we execute to the highest professional level, that we bring our products to life in store by visual marketing, by presentation, by training also staff that they can explain our products in the right way and be extremely successful. And we want the sales guys to completely concentrate on that and execute the concepts which they get from marketing to the highest level. And as I said, marketing has full responsibility and we will make them also accountable then for what happens in terms of margin, sell-through, product introduction, etc. And this -- by the way, this organized structure is finished now from August onward. This new organization is in place.
On the marketing numbers, you asked whether this will be more individual athletes or more teams or whatever. Yes, it will be a little bit a mix of everything, but we definitely will invest the biggest part of the money in digital media, talking to our consumer directly. Because as we have told you, we had new initiatives at the World Cup in Rio de Janeiro. Our so-called newsroom where we had a little bit over 20 people who were just talking dailies, hourly, minutely with our consumers what happened around the World Cup, what happened with our players, with our teams, etc., and this was extremely successful. We have been by far the most talked about brand during the World Cup by this initiative and this is the area where the most money will go in. But we also will increase our money in regional merchandising, that we look better at the shelf space in our own stores or in our wholesale partner stores at the point of sale.
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Robin Stalker, adidas AG - CFO [29]
------------------------------
And Louise, the third question about what's happening in the retail margin is very definitely to do with Russia. I mean, the most significant part of the decline is simply because in Russia we have the highly-promotional environment. In the moment, about two-thirds of the total client in Russia is because of the promotional nature. And then there's the other element, which is about one-third of the client Russia, which is because obviously they've been having through the devaluation of the rouble, because we don't hedge the rouble, having to buy the product in dollars at a more expensive rouble rate and it obviously has impacted the margins, also. And that is true for the adidas and Reebok business because Reebok is also quite strong in the Russian market.
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Louise Singlehurst, Morgan Stanley - Analyst [30]
------------------------------
Thank you.
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Operator [31]
------------------------------
Omar Saad, ISI Group.
------------------------------
Vic Mohan, ISI Group - Analyst [32]
------------------------------
Hi, thank you. This is Vic Mohan in for Omar Saad. I was wondering if you could talk a little bit about some of the Boost extensions you're doing into new sports and new categories and how those are fairing.
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Herbert Hainer, adidas AG - CEO [33]
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Yes. As we have told you already in previous sessions that we started with Boost in running, but after successfully implementing it into the market we also will spread it out furthermore. The next one will be the Boost basketball shoes coming in October this year with the D Rose version in the second Boost shoe and then we will further bring it out into skateboarding, into kids and roll it out into other categories in the coming years as well.
We definitely do believe this is a technology which is first and foremost unique to us, but it's incredibly good. Everybody who steps into our shoe and feels the Boost technology is immediately convinced. And therefore, we would like to harness on this success and therefore bring it out to further categories, but always under the aspect that it has to work and the consumer has to feel it.
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Vic Mohan, ISI Group - Analyst [34]
------------------------------
Thank you. And one more question. How are you guys thinking about pricing going forward, especially on new products and in regions where you're facing some big FX headwinds?
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Herbert Hainer, adidas AG - CEO [35]
------------------------------
Yes. Obviously pricing is a sensitive topic and ideally we would like to stretch it as much as we can. And with new products we definitely have more flexibility, I would call it. But on the other hand, just as we spoke about, Russia was another market which are under more pressure from the consumer sentiment in the moment. Pricing is a sensitive thing and we have to be careful that we don't price ourselves out of the market. We have -- we do a lot of studies, also, with external help to find the right pricing and the price sensitivity on the consumer segment. But obviously, we are testing always the waters, how far we can go.
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Vic Mohan, ISI Group - Analyst [36]
------------------------------
Thank you very much.
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Operator [37]
------------------------------
John Guy, Berenberg.
------------------------------
John Guy, Berenberg Bank - Analyst [38]
------------------------------
Yes. Good afternoon, gentlemen. A couple of questions for me, please. The first, with regards to your estimates around the FX (inaudible) sales uplift that you had on the back of the football World Cup and the Sochi games, if you could maybe just quantify that during the first half of the year.
My second question is around the gross margin decline of around the 90 basis points. I know that you went through some detail talking about some of the negative impacts, but I was also interested to see whether or not you had any positive impacts around product, price, regional mix, etc., that you normally talk about in addition. There's usually an offsetting factor, but you just mentioned some of the negatives. Were there any positives in terms of the overall gross margin evolution across those five moving parts?
With regards to, Herbert, you comments around the jerseys and the association and the investments that you're putting into Manchester United, for example, if I just take Mike Ashley's quote -- and I appreciate this is a relatively basic quote, but he said recently if you don't want to play we'll come into your country and smash you to bits. And I know that that's a very basic quote that he made, but the inference is actually quite, I suppose, reasonably cautious with regards to companies that are looking to push replica kits into Europe and into other markets whereby pushing down pricing significantly and almost using those as loss leaders. How do you approach that kind of threat from a pricing and from a strategic point? Maybe we'll just start there. Thanks very much.
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Herbert Hainer, adidas AG - CEO [39]
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John, obviously when you refer to Mike Ashley's comment, this was regarding to some retailers around Europe if they don't want to work with him. And I don't want to comment further on that one.
In general, believe me, as we have done in the past we have a clear strategy of how we want to introduce our jerseys through our distributed or our distribution segmentation within the different channels. And yes, we are working nicely together with all the retailers around the world. But I think when you look what we have done in the last several years, we have shown a great discipline in how we distribute our jerseys and this is definitely what we want to go forward as well.
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Robin Stalker, adidas AG - CFO [40]
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And John, the first two questions were whether we would quantify the impact of the events in our top line and we don't normally do that. What we have, however, published is the significant number of products that we've been able to sell, the 14 million balls, the 8 million jerseys. So you can get a feel, I'm sure, from that.
And the second question about the margin decline in the second quarter being down 90 basis points, yes, very definitely we highlighted the negatives, but there's obviously a lot of positives in there as well. Because if you add up the negatives that I read out, there's about 160 basis points there. So, we must have 70 basis points of positives and that's in the same areas that we've mentioned in the past. It is the product mix, some pricing and also regional mix because, for the total Group, obviously we have the countries in there and some that's also the retail mix.
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John Guy, Berenberg Bank - Analyst [41]
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Okay, great. Thanks. And maybe if I could just follow up with regards to NEO. Saw that the second quarter sales improvement was a little bit slower than obviously in the first quarter. And when you're looking out into 2015 in terms of total NEO turnover, how would you see that progressing? And I guess, more importantly, are you thinking along the lines of moderating your store growth in Europe or even in China going forward in order to, I guess, get the right balance in terms of stores for NEO across the region? Thanks very much.
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Robin Stalker, adidas AG - CFO [42]
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Well, I can understand you being very ambitious with this, as we certainly are with our NEO growth, but we thought 21% growth in the second quarter was a good one.
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John Guy, Berenberg Bank - Analyst [43]
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Well, I didn't say that it was bad, but it slowed quarter on quarter so that was the point. But I mean, do you have any idea in terms of turnover ambitions for 2015 and stores and space that we can think about?
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Herbert Hainer, adidas AG - CEO [44]
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Well, we definitely have ambitions for our NEO brand; there is no doubt there. As we told you in one of the meetings, I think two years ago, that we want to get to EUR 1 billion with NEO and we are definitely on a very good way to get there. And the second point is, besides of the revenue generator, that we're reaching out to a more or less new consumer group, the young female consumer, which we didn't have so much in our portfolio in the past. And this is a consumer which we definitely want to get into the love for our brands, so therefore we will definitely continue to invest into NEO and further distribute it.
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John Guy, Berenberg Bank - Analyst [45]
------------------------------
Great. Thank you very much indeed.
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Operator [46]
------------------------------
Michael Kuhn, Deutsche Bank.
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Michael Kuhn, Deutsche Bank - Analyst [47]
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Good afternoon, gentlemen. Mostly follow-up questions from my side. First of all, once again back to the profit warning. You're cutting your EBIT margin guidance by 2 percentage points. That's worth about roughly EUR 300 million. You gave for the second half, golf EUR 50 million to EUR 60, Russia EUR 50 million. Obviously, you had some negative effects in the second quarter as well. But overall, it still doesn't fully add up. Is the remainder mostly marketing? Is there restructuring charges included as well? For example, for the reorganization of the golf business? That would be the first point.
A second point, just as a clarification, you mentioned that you are increasing your corridor for marketing spending by 1 percentage point. Is that more kind of a temporary thing or is that permanent?
And then lastly on golf. We heard from Dick's Sporting Goods, for example, that they are cutting the selling space allocated for golf because obviously they think that the potential of the category has come down. Do we expect a quick return to the peak sales levels in 2013 or do you expect rather a, I would say, slower recovery path? Thank you.
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Robin Stalker, adidas AG - CFO [48]
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Thanks very much, Michael. Obviously, I'll leave Herbert for the third question. The first two questions, there are a lot of factors and I believe we've taken into account -- well, you summarized most of them yourselves in terms of, yes, there's obviously increased marketing working budget, over EUR 50 million or something in the second half. There's definitely also in our guidance the impact of the weaker Q2, and particularly in golf, we obviously have to bear in mind as well. And yes, we've taken into consideration the restructuring. So that's the summary of why our guidance is down so much for the rest of the year.
The same impact in terms of MWB, the increase of 1%. Whether it's permanent, well, it's definitely our guidance at the moment. We've only talked at the moment about 2015, but that's the best guidance we have at the moment and it's consistent with what we've been talking about of investing further in our brands.
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Michael Kuhn, Deutsche Bank - Analyst [49]
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Just one quick follow-up on the restructuring. Can you give us a number in that regard? So in terms of, let's say non-recurring costs in the second half, which (inaudible)?
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Robin Stalker, adidas AG - CFO [50]
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Obviously, once we book it it'll be transparent to you. It's within the EUR 50 million, EUR 60 million that we've said, because that also includes the deterioration in the operating margin.
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Herbert Hainer, adidas AG - CEO [51]
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So, Michael, let me come to your third question on the golf market. And I mean, in general, yes, you can say we have reacted too late. But also, as you see in Dick's, he was thinking for 2014 that the growth market will rebounding off the bad 2013. Unfortunately, this has not happened and they are cutting back space now.
We do this the same with our organization, as we have already mentioned. Yes, we will prepare ourselves for a lower revenue line in the future in golf, but we definitely want to be as profitable as we have been in the past. Therefore, we will do a restructuring program in our golf section, which we will announce in the next few weeks, and then we will give you all the detail. And as Robin has said, the restructuring numbers, then you will see after we have booked it. But please understand that we first want to talk to our people internally before we then go out to the public. But there is no doubt that we will prepare ourselves in the golf side for lower sales, but we definitely want to be as profitable as we have been in the past.
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Michael Kuhn, Deutsche Bank - Analyst [52]
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Great. Thank you.
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Operator [53]
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Andreas Inderst, Exane.
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Andreas Inderst, Exane BNP Paribas - Analyst [54]
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Yes, hello. I have three questions, the first one on TaylorMade. I still don't understand exactly how severe the warning was related to TaylorMade. I guess from the original guidance on EBIT margin of 9.5% and now 6.5%, roughly 50% related to TaylorMade. So how could this happen from an organizational perspective? I mean I understand everyone underestimated the market weakness, but in your organization how could it happen and what are the measures to improve your flexibility, your responsiveness to weakness in the market? That's my first question.
The second question is on cash flow. It was very weak in the first half of the year. Robin, you mentioned that inventory should improve towards the end of the year again, but maybe you can give us a bit more insight what your expectations are for the full year. And also in this respect, your CapEx guidance has now increased from EUR 500 million, EUR 550 million to EUR 600 million. I don't fully get that given that you decelerate your store expansion in Russia. So why the CapEx expansion and what can we expect for 2015?
And my third question is, given the share price weakness in the last -- yes, basically since December, since your Investor Day, I believe you have been quite -- have become quite vulnerable. So what's your action to get -- or to win back investors' confidence in the Group and in the shares? Thank you.
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Herbert Hainer, adidas AG - CEO [55]
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Okay, Andreas, let me start with the third one. I think the answer here is quite simple, even if it is more complex in the execution, but we have to produce better results, then we get back the confidence of the investors and our stakeholders. I think in the first part of our Route 2015 we have delivered quite substantial progress but, unfortunately, we fell back in 2014 now. And as I said already in my speech, we will work damn hard to bring this confidence back, but I do believe the best thing is to produce better results and this is what we will do.
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Andreas Inderst, Exane BNP Paribas - Analyst [56]
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Yes.
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Herbert Hainer, adidas AG - CEO [57]
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Coming to--.
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Andreas Inderst, Exane BNP Paribas - Analyst [58]
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Maybe in this respect -- I mean your balance sheet is solid. Would you also consider some share buybacks?
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Herbert Hainer, adidas AG - CEO [59]
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But why haven't you asked this then in the first instance when you want to know that? But let me answer it. We don't have any plans at the moment. Obviously, we will not exclude it. As you have seen, we have done it in the past, but in the moment we don't have any plans.
So let me come back to the first question; TaylorMade. As I said before, yes, definitely somebody can say we have reacted too late, but let me also describe the situation a little bit.
2013 was not a good year for the golf market because it was very cold in the US, especially on the East Coast and the rounds played were down, but everybody was hoping, okay, this will come back in 2014; as we did, as our competitors did, as retailers did. Unfortunately, we don't have a preorder system in the golf business as we have in the sneaker business, so this is much more a replenish business. This is much more advanced. And we all had hoped and we had plans with our key retailers, and Dick's is definitely one of them, which is our biggest retailer in golf in the US, to further -- to rebound and to further grow our business and this didn't happen then in the first half.
And then, what I have said before, you have a double effect on the one end that you have to help the retailers with markdown to flush the existing inventory and then you can bring in less product. And this is why we are so-called late in our reaction, but now we definitely do the right things. We stopped bringing in too much volume into the market to further reduce prices and to further make it more promotional. And the second point is that we are restructuring our company and bring our cost base to a much lower level, then, going forward from 2015 onward so that we can be profitable again.
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Robin Stalker, adidas AG - CFO [60]
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And the second question, Andreas, was about cash flow and CapEx. Two elements there, obviously inventory and CapEx. Firstly, in terms of the inventory, I mean, that is the major impact, obviously. And up 16% is not in line with the business. It's pretty broad, but the major problem there, or the major issue there is again Russia, but we have plans intact that will definitely clear that over the next few months or bring it down at least to the level of business that we expect to continue there.
The point about CapEx is that we have been generating very good cash. We will continue to generate good cash. And at the moment, we felt that it's appropriate to look at the purchase of long-term strategic assets. And here I'm referring to things like buildings or warehouses and over the last few months we've bought two warehouses. And we continue to finance any extensions of those sort of things ourselves whereas, previously, we might have done that with the third party. So, that's the key driver for the increase in the CapEx, not the retail part.
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Andreas Inderst, Exane BNP Paribas - Analyst [61]
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And what would you expect for 2015, to slow this down or--?
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Robin Stalker, adidas AG - CFO [62]
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Well, we'll be running out of strategic assets probably to purchase, so I suspect that it would probably come down a little bit. We've done the biggest purchase, just the large warehouse in the States we did in the first quarter and so there's probably not those strategic assets and that volume for 2015.
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Andreas Inderst, Exane BNP Paribas - Analyst [63]
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Okay. Thank you.
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Operator [64]
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Rogerio Fujimori, Credit Suisse.
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Rogerio Fujimori, Credit Suisse - Analyst [65]
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Hi, everyone. Thanks for taking my question. I have -- my question is about the US wholesale. It has impacted the performance in North America and I was wondering if you could talk about the latest market share trends and particularly your thoughts about basketball and Originals in particular. Thanks.
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Herbert Hainer, adidas AG - CEO [66]
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Yes. As I guess you indicate, Originals have not been our stronghold in the US in the first 6 months and they will also not be in the third quarter. Within the fourth quarter we are bringing new products to the market, and especially our collaborations with Pharrell Williams, with Rita Ora, with Kanye West are well paying dividends, but you will see more of that going into 2015 then.
And we see more momentum already on Originals in Europe and in Asia. As I said before, ZX Flex, we also bring this shoe now to the US and this will definitely give us some momentum in Originals back. But I think it's fair to say that, before the fourth quarter and then even more in the first two quarters of 2015, we will expect the rebounds of Originals in the US.
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Rogerio Fujimori, Credit Suisse - Analyst [67]
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And does your order book suggest any improvement versus the 11% decline currency neutrals in the first half in North America wholesale?
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Herbert Hainer, adidas AG - CEO [68]
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So going forward in wholesale for the second half, I don't see any improvement, to be honest. We see quite a nice development in our own retail business and this once again shows me when we show our brand and the depths and widths of all our assortments, then we definitely can attract the consumer to buy our products. And this is what we're working towards with our key retailers in the wholesale part in the US, that we get a better presentation in the future. And as I said before, I am much more optimistic for 2015 because we have shown our collections already for 2015, at least for the first quarter, to the key retailers and we have definitely got very positive feedback. I also do believe we see some improvement in the fourth quarter, as I said before, when we bring our new basketball shoes into the retail and wholesale part, but the biggest thing I see in the first half of 2015.
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Rogerio Fujimori, Credit Suisse - Analyst [69]
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Thank you, Herbert.
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Operator [70]
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Cedric Lecasble, Raymond James.
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Cedric Lecasble, Raymond James - Analyst [71]
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Yes. Good afternoon, gentlemen. I have a follow-up question on golf. And I just want to double check this restructuring issue impact on the EBIT line in question two and a third question on Boost.
A follow-up on golf, beyond the market conditions which are extremely tough, some competitors, because they were able to launch some new products, managed to have a stronger behavior for their top nine. So how do you reconcile this with your product launches and how could you limit the damage by introducing some new products despite the destocking of the old products? What is in the cards for the second half?
The second question is on restructuring. Just to be sure, this EUR 50 million charge roughly will be above the EBIT line? Just want to double check.
And a last question on Boost. You had quite aggressive initial targets in volume for Boost this year. Could you recall these targets and confirm to us or not that they are still on plan? Thank you.
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Herbert Hainer, adidas AG - CEO [72]
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So let me start with the first question on TaylorMade. Yes, to a certain extent this is correct what you're saying. Nevertheless, one of our competitors has just released their numbers I think last week which were down 9% or 7% in revenues in the second quarter. But obviously, we are by far market leader in golf and therefore we have the highest inventory in the market.
But what you also can see is that we are remaining our key leadership market share. For metalwoods, for example, 36%. The SLDR driver, which is in the market, is still since 1 year, or I think it's to be precise 11 months in the market, is still the best selling driver, but there is just too much inventory in the -- from our side and we have to clean it up now. It doesn't make any sense to bring further more inventory into the market in the second half of 2014 because we then want to bring our new products in 2015 when the market is clean and we can raise prices up to the normal level again and then selling it through.
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Robin Stalker, adidas AG - CFO [73]
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And Cedric, let me make it clear. When talking about the impact on TaylorMade for the second half of the year, we've said that the difference between our initial expectations for the second half of the year is about EUR 50 million to EUR 60 million and that includes a restructuring charge, but it also further reflects the promotional nature that's obviously more than we had initially anticipated and perhaps lower sales in that market. So the restructuring is included in that and it'll be part of the ordinary operating result.
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Cedric Lecasble, Raymond James - Analyst [74]
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And on Boost?
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Herbert Hainer, adidas AG - CEO [75]
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Oh, sorry. Boost, yes. We wanted to sell 8 million pairs of Boost in 2014 and we definitely can confirm this target.
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Cedric Lecasble, Raymond James - Analyst [76]
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Okay, thanks.
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Operator [77]
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Andreas Riemann, Commerzbank.
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Andreas Riemann, Commerzbank - Analyst [78]
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Good afternoon. Three questions from my side. The first one on the product mix. You speak about more brand marketing to gain market share. Does this imply that you'll reconsider also the product mix, i.e., could it make sense to offer more products at lower price points to gain share? The first question.
The second one, Russian retail. To clarify, you mentioned costs of EUR 50 million in H2 in Russia. So do I get it right, it's only related to store closures and additional promotions in Russia?
And the third one, given that the EPS will be down this year and also given the share price performance, are there any new plans regarding the payout ratio? Maybe it's going up so that we see dividend stability? Any thoughts from you on this one? That's it from my side. Thanks.
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Herbert Hainer, adidas AG - CEO [79]
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Okay. Let me start with the first question on the product mix. I mean, obviously we're always looking into our product mix and into the price points, which I guess you refer more to it, that we hit the demand in the regress of the consumer and through our selective distribution channel policy, bringing products into related distribution channels where we think the consumer can afford it. So for example, to a moderate channel we have a different product assortment than to specialty stores or to the sporting goods stores.
But in general, we definitely don't think that we want to win market share by lowering our prices and transferring (inaudible) products to the table because this first and foremost squeezes your margin and, secondly, it definitely doesn't enhance the image of your brand. We definitely do believe that by bringing in new innovative products to the market which really resonate with the consumer's demand, this is the way going forward.
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Robin Stalker, adidas AG - CFO [80]
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And your second question about clarification and the Russian impact in the second half of the year, again, here the -- what we're trying to say with this guidance is that we will be EUR 50 million at least below what we intended to be. And that includes the impacts of closing shops or not opening as many shops, but it also includes a further projection of the highly-promotional market in Russia and, therefore, the lower margins we've already started to experience in the first and second quarter and Herbert's already spoken about that part.
The third question about the dividend, we're obviously very keen to continue to have our shareholders participate in our success. The actual decision on dividend, however, is something that obviously is taken in the next year. But at the moment, I don't think we see any reason as management to see any change year over year in the dividend payout.
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Andreas Riemann, Commerzbank - Analyst [81]
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Okay.
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John Paul O'Meara, adidas AG - VP, IR [82]
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So, ladies and gentlemen, that completes our call for today. Our next set of results will be announced on November 6. And I'm sure we will catch up with you on road show over the next couple of weeks in Europe and in the US.
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