Full Year 2014 adidas AG Earnings Call
Mar 05, 2015 AM CET
ADS.DE - adidas AG
Full Year 2014 adidas AG Earnings Call
Mar 05, 2015 / 02:00PM GMT
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Corporate Participants
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* Sebastian Steffen
adidas Group - VP, IR
* Herbert Hainer
adidas Group - CEO
* Robin Stalker
adidas Group - 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
* Fred Speirs
UBS - Analyst
* Ashley Wallace
BofA Merrill Lynch - Analyst
* Cedric Lescasble
Raymond James - Analyst
* Louise Singlehurst
Morgan Stanley - Analyst
* Adrian Rott
Deutsche Bank - Analyst
* Ingbert Faust
Equinet Institutional - Analyst
* John Guy
MainFirst - 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 the full-year 2014 financial results. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Sebastian Steffen. Please go ahead, sir.
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Sebastian Steffen, adidas Group - VP, IR [2]
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Thank you very much, Rhonda. And good afternoon, ladies and gentlemen, and welcome to our 2014 full-year financial results conference call. I'm Sebastian Steffen and, as most of you may already have heard, I am now heading the IR activities at the adidas Group. Our presenters today are Herbert Hainer, adidas Group CEO, and our CFO, Robin Stalker.
To allow for ease of comparison, all sales and revenue-related growth rates will be discussed on a currency-neutral basis unless otherwise specified. In addition, all figures will refer to the Group's continuing activities due to the planned divestiture of the Rockport business segment. Lastly, all figures will be discussed excluding goodwill impairment losses unless otherwise stated. Robin will deal with these two topics specifically in his presentation.
So let's get started now and over to you, Herbert.
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Herbert Hainer, adidas Group - CEO [3]
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Thanks very much, Sebastian, and good afternoon or good morning, ladies and gentlemen.
2014 was without any question a year of ups and downs for our Group. While I am as disappointed as you are that we did not reach all our financial goals set out at the beginning of last year, there were also many bright spots in our performance throughout 2014. And please allow me to start with those.
We reached our updated top- and bottom-line goals despite some tough macroeconomic headwinds at the end of the year. We grew revenues for the full year by 6% and had a very strong fourth quarter, ending the year with double-digit growth in Western Europe, Greater China, European Emerging Markets and Latin America.
Our core brand adidas, by far our largest business, grew double digit for the full year, reaching a new record sales of EUR 11.8 billion.
We clearly won the 2014 FIFA World Cup, being the most visible and most successful football brand. Our football business delivered record sales, even beating our own expectations with EUR 2.1 billion sales.
Reebok now has 7 consecutive quarters of growth under its belt.
Our retail revenues increased 21% with double-digit growth rates across all regions and supported by 9% comp store sales increases.
We generated more than half of our revenues from controlled space initiatives, well exceeding our initial goal of 45% by 2015.
In addition to this, if I look at our core brands, the momentum we see at adidas and Reebok gives us every confidence that we got back on track very fast. Adidas sales grew 11% currency-neutral for the full year with double-digit growth in each of the last 3 quarters and Reebok revenues increased a robust 5% in 2014.
Let me give you now a more detailed update on some of the areas that performed particularly well. The World Cup, by far the biggest and most-watched sports event in the world, was an excellent platform to demonstrate our leadership in football. We grew our football business by more than 20%, achieving new record sales of EUR 2.1 billion.
On the field of play adidas outperformed all competitors with World Champion Germany, finalist Argentina, and adidas athletes Lionel Messi, James Rodriguez and Manuel Neuer as best player, best scorer and best goalkeeper, respectively. With more than 3 million German national team jerseys and more than 14 million footballs in the brazuca design sold, we have reached new heights. And we were by far the most talked about brand with an increase of almost 6 million followers across all major social media platforms; more than any other sports brand.
And our momentum reaches way beyond the football category. In running, adidas continues to grow double digit with revenues up 17% in Q4, marking the fourth consecutive quarter of double-digit growth. At the same time, adidas dominates the world's marathon scene based on the strong success of our boost technology. At the Berlin Marathon adidas athlete Dennis Kimetto ran the fastest marathon in history wearing the super-lightweight adizero Adios Boost. Since its launch, the adizero Adios Boost alone has won 27 major marathons, completing the double at the New York Marathon with Wilson Kipsang and Mary Keitany.
In addition, adidas Originals and sports style continued its strong performance from the prior years with revenues up a strong 19% in Q4 and 12% for the full year. This is supported by a 27% sales increase at adidas NEO, which in the meanwhile has grown to meaningful business with revenues of more than EUR 800 million. At adidas Originals we have seen a strong comeback in the second half of 2014 resulting in a 17% increase in Q4. This development is based on successful product introductions like the ZX Flux and Stan Smith, as well as [creative] new partnerships with celebrities such as Rita Ora or Pharrell Williams. Following a highly successful reintroduction last year, our Stan Smith shoe became the best-selling sport shoe of all time with a total of over 40 million pairs sold since its initial launch.
Turning now to Reebok. The progress at Reebok is clearly visible. At the end of 2014 Reebok recorded its 7th consecutive quarter of growth and ended the year with revenues increasing 5% versus the prior year. Brand positioning in fitness is resonating extremely well with consumers around the world, particularly in markets where we are driving our own controlled-space agenda. As a result, important markets such as Russia, South Korea, the UK and Spain, just to name a few, grew at double-digit rates in 2014.
Throughout the year we made significant progress in deepening Reebok's connection to the fitness community, hosting spectacular fitness events and grassroots activities around the globe which helped sharpen our brand position as the fitness brand and we continue to see plenty of potential in that business.
But granted, 2014 also brought some major disappointments. Midway through the year, in light of the various challenges we were facing, we recognized that we wouldn't be able to achieve our original goals for 2014. It never feels good if you don't reach all the targets that you have set out initially, either in sport nor in business, but it's all the more painful when this is brought about not only by external circumstances that we cannot influence, but also by execution and mistakes on our part. So let me go into more detail on the various factors that resulted in not meeting your and our high expectations last year.
Let me start with golf. TaylorMade-adidas Golf showed a significant business decline in 2014 with sales decreasing 28% and operating profit deviating by around EUR 200 million compared to the prior-year level. This was partly our own fault as we misjudged the market situation at the beginning of the year. A decline in the number of active players, as well as high levels and slow liquidation of old inventories caused immense problems in the entire industry and, as a market leader, this hit us particularly hard. However, we reactive decisively to these challenges and took some painful measures to restructure and stabilize TaylorMade-adidas Golf. This included taking a leading role in the clean-up of excess inventories in the golf market by allowing markdowns of existing product and postponing the timing of new product introductions.
In addition, we implemented an extensive restructuring program which has involved the closure of one of our facilities in the USA and the 15% reduction in the global TaylorMade-adidas Golf workforce. As a result, the retail environment in golf is much healthier today and so is our organization. Building on these significantly better foundations and thanks to the numerous promising product launches, TaylorMade-adidas Golf will be back on track for growth and profitability this year.
Russia/CIS, on the other hand, is a very different story. Here, the political and macroeconomical problems caused us to be victims of our own success. We have a strong and enviable position in the Russian market with adidas being the clear market leader and Reebok a strong number three. Both of them belong to the most established and desired consumer brands in Russia. We have built this market rapidly and successfully over the last 10 years with the rollout of our own retail network that now counts more than 1,000 stores.
In 2014 we grew our business there by 19%, but lost all of the growth in currency translation. In addition, the highly-promotional environment as a result of the deteriorating consumer sentiment and our efforts to clean inventories significantly impacted our margin. Altogether, the negative translation and transaction effects resulted in a profitability shortfall of around EUR 130 million in 2014 against our initial expectations. But also here we took swift action. By reducing our net store opening plan, carefully controlling inventory levels and optimizing our cost base we were able to secure profitability levels above the Group's average, even in such a lackluster environment and we will continue to work on that going forward. I will tell you more about that in a moment, but let me make one point clear. We fully believe in the long-term potential of the market and we are in it for the long run.
The significant devaluation of the ruble and other emerging market currencies obviously really impacted our P&L last year. Negative translation effects [bite] more than EUR 550 million of our top-line last year. In addition, unfavorable hedging rates negatively impacted the Group's gross margin by 60 basis points. In total, foreign exchange movements reduced our operating profit by roughly EUR 170 million last year. But none of this changes our underlying strength in the developing economies in general and our excellent market position in Russia in particular.
As you have seen, 2014 had its challenges for us. For me, however, one thing is certain. True champions come out and show (inaudible) after defeat. Only those who analyze their mistakes learn from them and work intensively on their own weaknesses and have what it takes to be true champions and this is exactly what we have done. We reacted like a true athlete, worked hard and adjusted our training, thus laying the foundation for coming back even stronger.
We have taken the right measures to stabilize underperforming areas of our business, particularly the TaylorMade-adidas Golf space. We have adjusted our investment plans to account for current market risks, with Russia being a key focus. We have complete realigned our marketing and sales activities to be better able to focus on consumers and the brand experiences we create for them. We have added new talent, both internal and external, to revive momentum and growth in North America. And we have increased marketing spend, particularly in the developed markets. And while the full results of our work over the last months will only become visible over time, I am proud of how hard our organization and our employees have [worked] themselves in the past few months in order to take up the fight for gold. As a result of our fast and decision action, we have reached the first milestone, achieving our updated top- and bottom-line goals for last year.
So, before I provide you with more detailed insight into our outlook and priorities for 2015, I would like to hand over to Robin to give you some more details on the financials first.
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Robin Stalker, adidas Group - CFO [4]
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Great. Well thank you very much, Herbert, and a very good afternoon, ladies and gentlemen.
As you've just heard, 2014 was a bumpy ride for our Group. While Herbert has addressed the most important operational developments of the year, I shall now spend a few minutes explaining how those ultimately have impacted our key financials in 2014.
Let's start with the top-line development where revenues grew 6% in 2014 with a strong sales growth in all regions except North America. Once again we've seen very good performances in emerging markets with European emerging markets, Latin America and Greater China growing at double-digit rates each.
In Western Europe we ended the year with an impressive 13% growth in Q4, which is a great achievement considering that we were comparing against the positive effects from the sell-in of World Cup related products in the prior year. Many important sports performance categories such as football and running, as well as adidas NEO, grew at double-digit rates. From a market perspective, our Group has seen double-digit growth in important geographical areas such as the UK, Germany, France and Poland.
In Latin America the Group was able to keep the strong momentum from the previous quarters, with revenues up 12% in the fourth quarter on top of a 32% increase in the prior-year period. This was driven by a 13% sales increase at adidas and an 11% growth at Reebok. Full-year revenues in Latin America grew 19%, with double-digit sales increases in all major markets, in particular in Argentina, Mexico and Brazil.
Revenues in Greater China were up 11% during the fourth quarter resulting in a 10% increase for the full year. In particular, the adidas brand continues to enjoy very strong momentum in the Chinese market with revenues up 12% in the fourth quarter and 11% for the full year, supported by double-digit increases at adidas Originals and adidas NEO.
To finish on the regions, revenues in North America were down 4% during the fourth quarter as sales growth of 4% at adidas was more than offset by double-digit declines at Reebok and TaylorMade-adidas Golf. And while our wholesale segment in the region ended the year with revenues down 9% in Q4, our own retail activities were up a strong 16%, supported by comp store sales growth of 8%.
In the fourth quarter Group gross margin decreased 2.6 percentage point to 44.9%. This resulted in a gross margin of 47.6% for the full year, down 1.7 percentage points versus the prior-year period and below our guidance of a gross margin of between 48.0% and 48.5%. The main reasons for the decline in the full year was similar to the first 9 months. Firstly, lower margins in Russia/CIS related to the high levels of promotional activity, as well as the negative effects from the ruble devaluation resulted in approximately a 60 basis point headwind. Higher input costs negatively compacted the margin by around 50 basis points. Less favorable hedging rates accounted for around 30 basis points of the Group's gross margin decline. And last but not least, lower product margins at TaylorMade-adidas Golf as a result of increased clearance activities also impacted margins by 30 basis points. Now, these impacts were partly offset by an improved product and channel mix.
If we look at our operating expenses, other operating expenses as a percentage of sales were up 0.3 percentage points to 42.7% for the full year. This was due to higher expenditure related to the expansion of the Group's own retail activities, as well as an increase in the sales and marketing working budget expenditure. Sales and marketing working budget as a percentage of sales increased 70 basis points to 13.2%. Group and Group operating margin therefore decreased 2.1 percentage points to 6.6%, primarily due to the negative effects from the lower gross margin, as well as higher other operating expenses as a percentage of sales.
For the fourth quarter other operating expenses as a percentage of sales decreased 1.3 percentage points as a result of solid operational leverage in that quarter. Nevertheless, operating margin for the quarter was down 1.4 percentage points to 1.1% due to the gross margin decline.
As a result of our annual impairment test we have impaired goodwill and recorded a EUR 78 million pretax charge as at December 31, 2014. Looking at the specifics, which will probably not come as a surprise, this charge was related to the retail cash-generating unit, Russia/CIS, and was mainly caused by adjusted growth assumptions due to the significant deterioration of the Russian ruble. As a result, the goodwill of this cash-generating unit is now completely impaired. As in the prior year, when we impaired goodwill of EUR 52 million related to several cash-generating units, the impairment loss of EUR 78 million is non-cash in nature and does not affect the Group's liquidity.
Looking briefly at the non-operational items, net financial expenses decreased 29% to EUR 48 million for the full year. This decline was primarily due to low and negative exchange rate variances which decreased to EUR 3 million from EUR 18 million in the prior year. In addition, net interest expense was down 6% versus the prior year, thus contributing to the positive development of net financial expenses.
As a result of the operating profit decline, net income from continuing operations was down 22% to EUR 642 million. The full-year tax rate increased 50 basis points to 29.7%, mainly due to a less favorable earnings mix.
In 2014 the Group incurred losses from discontinued operations of EUR 68 million related to the Rockport operating segment which is planned to be divested during the course of 2015. This reflects a book loss in the amount of EUR 82 million, which was partly offset by income from Rockport's operating activities of EUR 14 million.
Excluding the impact from the planned Rockport divestiture, net income attributable to shareholders reached a level of EUR 650 million in 2014 which is inline with the adjusted earnings target we communicated over the year.
Let me now spend a few minutes on our segmental performance, starting with our wholesale segment. Wholesale revenues grew 5% during the fourth quarter and 6% for the full year with sales increases in all regions except North America. Of particular note is our strong momentum in Western Europe where revenues increased 13% in the fourth quarter with both adidas and Reebok growing at double-digit rates.
For the full year the wholesale gross margin decreased 1 percentage point to 41.7% as the positive effect from a more favorable product mix was more than offset by negative currency effects following the devaluation of currencies such as the Argentine peso and Brazilian real, as well as a less favorable pricing mix.
Moving over to the retail segment where revenues grew 21% to EUR 3.8 billion representing now 26% of total sales. This was driven by a robust comparable store sales growth of 9% with every region posting at least a mid-single-digit comparable store sales growth. By brand, adidas comp store sales were up 10% for the quarter and also for the full year, while Reebok comp store sales grew 1% both in Q4 and in the full year.
Our e-commerce business continues to do extremely well with sales increasing 62% in the fourth quarter and 72% for the full year to more than EUR 420 million. In this context, I have every confidence that by the end of this year we will exceed our own expectations of e-commerce revenues of at least EUR 500 million by [2015].
Gross margin in the retail segment decreased 2.8 percentage points to 59.4%. The positive effect from a more favorable product mix was more than offset by a less favorable pricing mix related to increased clearance activities in Russia/CIS. In addition, the devaluation of the Russian ruble was a major headwind for the retail gross margin in 2014.
Looking at our store base, during the fourth quarter we added 91 stores net to our retail portfolio bringing our net openings for the full year to 173 in total. This is well below our initial plan of around 250 net openings, underlying that we have reacted swiftly to the changing market conditions in Russia/CIS and adjusted our store opening plan accordingly. At the end of 2014 our retail segment operated 2,913 stores. Of the total number of stores, 1,616 were adidas and 446 were Reebok branded. In addition, we operated 851 multi-branded factory outlets. In 2014 we opened 409 stores, 236 stores were closed and 145 stores were remodeled.
Moving on, revenues in other businesses decreased 19% in 2014 due to a 28% decline at TaylorMade-adidas Golf, as Herbert already mentioned. Sales at Reebok-CCM Hockey grew a healthy 7%. For the fourth quarter other businesses were down 16% as a result of TaylorMade-adidas Golf's ongoing efforts to clean retail inventories and the timing of new product introductions compared to the prior-year period. This resulted in a sales decline of 24% for TaylorMade-adidas Golf. The full-year gross margin for other businesses decreased 5.1 percentage points to 34.7%. This is mainly due to significantly lower product margins at TaylorMade-adidas Golf as a result of the reasons outlined before.
Let's move over to the balance sheet. And operating working capital as a percentage of sales grew 1 percentage point to 22.4% compared to the prior year. This was mainly due to the increase in accounts receivable reflecting the growth of our business during the fourth quarter of 2014, as well as lower accounts payable at the end of 2014. At year end inventories increased 2% reflecting our strong focus on inventory management. In the latter case, I'm encouraged by the strong improvements we have achieved during the year considering the higher-than-normal inventory levels we were facing at the beginning of 2014.
In terms of capital structure, we ended the year with a net debt position of EUR 185 million compared to a net cash of EUR 295 million last year. Higher capital expenditure, which was mainly related to investments in the Group's logistics infrastructure as well as the further expansion of our retail segment, negatively influenced this development. Nevertheless, taking everything into account, our equity ratio remained at a strong level of 45.3% at year end.
And as a result of that strong balance sheet and our confidence in the strength of the Group's financial position and long-term aspirations, at our Annual General Meeting in May we will again propose a dividend of EUR 1.50. Based on the number of shares outstanding at the end of 2014, this reflects a payout ratio of 53.9%. Now, while this is indeed above the Group's dividend payout corridor of between 20% and 40% of net income attributable to shareholders, it does reflect our commitment to a reliable dividend policy aimed towards continuity.
As you also heard this morning, we announced the continuation of our shareholder return program with the start of a second tranch of the share buyback program. Just like during the first tranch which we completed during the fourth quarter of last year, we again aim to buy back shares in an amount of up to EUR 300 million in the period until July 3, 2015. As you already know from the first tranch, we will report regularly on the progress of the share buyback on our Group website.
So ladies and gentlemen, let me wrap up by saying our results were significantly impacted by a challenging golf market, negative currency effects and a weakening of consumer sentiment in Russia/CIS. We are very encouraged by the underlying momentum of our brands. Given the strong pipeline of products and the positive effects from increased brand-building activities, tight control of inventory levels and strict cost management, we have every confidence that we will be able to master the economic challenges and continue to grow in 2015. To give you more details on that growth, let me now hand back over to Herbert.
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Herbert Hainer, adidas Group - CEO [5]
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Yes. Thank you very much, Robin.
Before we provide you with more details about our financial aspirations for 2015, let me now spend a few minutes highlighting our top priorities and initiatives for the year to come.
As we are enjoying strong growth in most regions around the world, our focus in 2015 will be on the region in which that growth has been elusive up to now, namely North America. And you can be sure that this market will be a key priority for us in 2015. As a Group, we underperformed in North America and we are all disappointed when we look back over the last 12 months. For us, however, one thing is clear; we want and we need to win in that market. And this is why we carried out the significant change in leadership in our North American organization last year, building a high-performance team from various parts within our Group, as well as adding key external talent, particularly in design. This will help us to develop the right product for the market and become more relevant to US consumers, which his crucial for our future success in this all-important market, as is our execution at the point of sale. We definitely need to increase brand presence and improve the presentation of our products.
We will also become more visible on pitching sports that matter most to the young American athletes, basketball, American football and baseball. Our strong portfolio of outstanding basketball icons such as Derrick Rose, John Wall, Andrew Wiggins and Damian Lillard is a very good basis and we will continue to sign top talent in the draft.
In addition, during the NFL combine the most important pre-draft event in the US sport, the adidas brand was already the most talked about brand, well ahead of any of its competitors. Our adizero 5-star American football shoe was worn by the top six fastest athletes. This however is only the beginning. We will increase visibility at the grassroots level, grow our college portfolio and better utilize epic moments in college sports with the ultimate goal to be credible for our young target group.
As mentioned earlier, 2014 was a challenging year for the entire golf industry and for TaylorMade-adidas Golf in particular and we took some painful measures to fix this. As a result, the retail environment is much healthier today and so is the organization. Supported by our strong product pipeline we will see top-line growth together with a significant swing in profitability into positive territory in 2015. This confidence is underpinned by strong product launches we have had since the start of 2015, the R15 and the Aero Burner. While the R15 driver provides the highest level of [mass] adjustments with a double-sliding weight front sole system, the Aero Burner is made for speed, being our fastest and most aerodynamic driver ever. Both drivers are doing extremely well, as you can see in the market share data where we have strongly gained traction year to date. And let me make it very clear; TaylorMade-adidas Golf is and will remain the number one golf company in the world.
In Russia we will continue to manage the business in a very prudent manner in the short term and close around 15% of our store base net this year, but we still fully believe in the long-term potential of the market. This is why we will increase our store footprint in Moscow and accelerate the installment of our new store concepts, HomeCourt and Neighborhood. The upcoming 2018 FIFA World Cup will be a great platform for adidas and our preparations for that global event already in full swing. We are in Russia for the long run; no question about that.
In order to be more impactful in the marketplace, in the second half of 2014 we turned our entire marketing organization upside-down. We have built an organization and model centered on the consumer with clear roles and responsibilities, lower levels of escalation and clear accountability so that we can make more and faster decisions. A new set of balls empowers our category business units such as running, football, training or Originals. We take responsibility for all marketing processes end to end and will help us to bring our concepts to the consumer in a more efficient and effective way. And I am convinced that, based on a clear business unit strategy and a consumer-focused organization across all marketing functions this will help drive engagement and provide a clearer framework for decision making on all levels.
We know that consumers today use several different channels simultaneously. And because consistent messaging across all these channels is crucial for enhancement of the consumer experience, we have also realigned our sales strategy. Thanks to our omnichannel approach, we will integrate all sales channels and marketing activation activities, utilize cross-selling opportunities and align pricing across all channels. As part of initial pilot project we have given consumers in some markets the option to order online and then pick up their products in the store. The first feedback on our click-and-collect offer is very encouraging. Therefore, we will continue to invest in infrastructure and processes that will enable us to implement the omni-channel approach globally.
Based on the robust brand momentum of adidas and Reebok that we saw in the second half of 2014, the time is right now to increase investment into our brands. We know consumers love our brands when they hear our stories. Therefore, we will be bringing even more of these to life on the streets and screens and in stores this year to ensure consumers constantly hear what we have to say.
In 2015 we will go out bold and show the world that sport is at the heart and soul of adidas. As many of you have witnessed, in February we started the global rollout of a series of films called Sport 15. Throughout the entire year and across all channels, TV, social media and via our unique adidas global newsrooms, we will be telling brand stories that motivate and inspire young athletes. We know them and their sports better than anyone else and we will make sure that everyone gets it.
In addition, we have launched the There Will Be Haters football campaign, creating a fundamentally different tone of voice to anything adidas football has ever delivered. Featuring players such as Gareth Bale, James Rodriguez, Luis Suarez and Karim Benzema, the campaign is resonating extremely well with its key target consumers, the 17-year-old football player.
In fact, the success of both of these campaigns is tremendous. At the end of February adidas led the weekly viral video chart which tracks online use of marketing campaigns. This time we even took the two top slots, a rare feat with Take It, the first film in our Sport 15 campaign at number one, and the There Will Be Haters coming in at number two, putting other prestigious global brands in the shade. In addition, as a result of these campaigns we have seen a huge surge in traffic on our websites and engagement rates significantly above industry average. Also, in social media our campaigns are creating a lot of buzz with Take It and There Will Be Haters accounting for more than 30 million and 50 million views on YouTube, respectively.
And Reebok's Be More Human campaign, which is a rally cry to live up to your full potential, is also resonating extremely well with the target consumer. And fitness is a niche Reebok owns, but it's a lifestyle not always understood. The campaign, which aired during the NFL Super Bowl pre-game coverage, celebrates and supports every day athletes who embody the tough fitness lifestyle which is more than just a physical activity. The feedback we have received so far is absolutely overwhelming and has exceeded our expectations by far with more than 8 million views on YouTube. Athletes realize and Reebok shares their passion, understands their motivation and supports them in their ultimate goal, to Be More Human.
While each of these campaigns will help us to create lots of noise in the marketplace, 2015 will also see a number of significant product launches and I am glad to share with you that our pipeline is full of new, exciting product launches which will help us to more than compensate for the non-recurrence of World Cup related football sales.
Many of our innovations have changed the game for good. And I'm not talking downstream innovation, meaning just taking an existing material or manufacturing technique, adding a nice design and a fun campaign to make people buy it. I'm talking upstream innovation, innovation that improves athletes' performance. This goes back to the studs in football boots, it's the Miracle of Bern, to introducing Boost, a material that has completely changed running and now has permitted other categories as well such as basketball and even golf. So stay tuned for more. With Ultra Boost we just launched our best running shoe ever in February. We are making a difference and we need to capitalize on it by shouting out loud.
On the lifestyle side we also enjoyed a fantastic start to the year. To re-launch the iconic Superstar shoe, adidas Originals kicked off its global campaign, which throughout 2015 will question what it means to be a superstar. It launched with a 90-second film in January featuring David Beckham, Pharrell Williams, Rita Ora and Damian Lillard. Then [sneaker heads] from all of the world were thrilled by adidas Yeezy, our first shoe created together with Kanye West which has caused long queues in front of key sneaker stores. The shoe was sold out well before its launch as consumers reserved a pair by our unique adidas confirmed reservation app. Even before that launch, adidas was the talk of the town at the Grammy's in Los Angeles staring Pharrell Williams and Kanye West. And at the Paris Fashion Week with our Y-3 show, our strong fashion [corporations] and the Stan Smith shoes being on the feet of nearly every visitor at the shows.
On the apparel side we will first build on the success of our Glamour franchise by introducing the new ClimaCool Aeroknit Apparel collection. The new gradient burnout pattern that provides breakthrough breathability, creates more ventilation, helping athletes stay cooler and train longer.
For Reebok, together with the new Be More Human campaign, as well as our strategic collaborations with CrossFit, Spartan Race, Les Mills and the UFC we will see great product launches to match these great activities. Yesterday, for example, Reebok introduced its newest running show, the ZPump Fusion, in New York City. Featuring Reebok's iconic pump technology, ZPump Fusion is the first running shoe that provides a locked-in custom fit. Unlike a traditional running shoe that is often made up of many individual parts, the Reebok ZPump Fusion is made up of just three, working together to deliver unprecedented fit and control. ZPump Fusion is Reebok's largest product story for the year and will be supported with significant above-the-line media and retail excellence in all markets.
In any sport, to reach your goals tactics and desire are critical to compete and win and we are here to do both. For 2015 we project top- and bottom-line improvements in our Group's financial results, despite a high degree of economic uncertainty persisting in Russia/CIS and the Middle East and the non-recurrence of the positive effects related to the [2000] FIFA World Cup. Our extensive pipeline of new and innovative products in all brands and the positive effects from increased brand-building activities, tight control of inventory levels and strict cost management will spur our growth.
As a result, we forecast adidas Group sales to increase at the mid-single-digit rate on a currency-neutral basis. Group sales development will be favorably impacted, significantly improved top-line development at TaylorMade-adidas Golf, as well as ongoing robust momentum at both adidas and Reebok. We expect growth at all brands and in all geographical areas except Russia.
Given the recent strengthening of major currencies versus the euro, most notably the US dollar and the Chinese renminbi, currency translation is expected to have a positive impact on our top-line development in reported terms this year.
While Group gross margin will benefit on the one hand from lower levels of clearance activities, as well as more favorable pricing and product mix at both adidas and Reebok, on the other hand it is expected to be significantly impacted by adverse currency movements. Therefore, we forecast Group gross margin to be at the level between 47.5% and 48.5%. Group operating margin will be at the level between 6.5% and 7%. Finally, net income from continuing operations will grow at a higher rate than Group sales and is expected to increase at the rate of 7% to 10%.
But it's not only the financial figures that matter. Whatever we do needs to benefit our consumers. That's why the consumer's perception of our brands will be included as a new KPI into our internal performance review. With our unmatched heritage in sport, the unique breadth of our innovative product offering and innovative sales and marketing concepts, we have all pieces in place to succeed by winning the hearts of athletes around the world. No matter which sport you do or in which -- or on which level, adidas, Reebok and TaylorMade-adidas Golf, we have the right and the best product for you.
To close, allow me to say that we have everything it takes to be successful going forward. Our brands are enjoying great momentum, our product pipeline is full and our campaigns will make our brands even more desirable. We know what our priorities are. We have drawn up our plan accordingly and we will now work in a consistent, resolute and bold way to implement it. At the same time, we will remain vigilant in order to be able to react quickly and resolutely to any changes in the market environment. The roadmap for the future is clear. We will significantly improve our business and grow our top and bottom line in 2015.
But ladies and gentlemen, that's only just the beginning. At the end of March we will present our long-term strategy for the period up to 2020 and I am looking forward to welcome you all here in Herzo.
And with that, let me thank you for your attention and now Robin and I are happy to take all your questions.
==============================
Questions and Answers
------------------------------
Operator [1]
------------------------------
(Operator Instructions). Julian Easthope, Barclays.
------------------------------
Julian Easthope, Barclays Capital - Analyst [2]
------------------------------
Yes, hi. Good afternoon, everyone. Just a couple of questions from me. First of all, is it possible to sort of give us a better understanding as to your gross margin guidance for the year? There's kind of so many moving parts between dollar, euro, rubles, input prices, the wage costs of the various different people within your suppliers. And I just wonder how it sort of pans out during the year by quarter.
And the second question really comes down to products. You've kind of dominated the market with Boost over the last couple of years and I just wondered whether or not the fact that Puma has decided to have its Ignite product coming in, to actually start competing on sole technology, whether this is going to be a new era of competition in terms of soles rather than the uppers and whether or not that's -- it's ultimately not going to be great news for margins. Thank you.
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Robin Stalker, adidas Group - CFO [3]
------------------------------
Good afternoon, Julian. Let me start with the gross margin thing. And I very much appreciate the desire to have this. We don't break it down by quarter. You are absolutely right. There are so many moving parts to this. I would point out, however, that with the FOBs that's more something near the end of the year, as you correctly pointed out with the labor increases; in the spring/summer 2016 probably, but we're very confident about the growth of the margin, particularly in the TaylorMade unit. And also that we have much less -- as Herbert mentioned Russia's -- clearance to do in Russia. Certainly the negative there is the weakness in the Russian ruble, but that's why we've given you this guidance, which is the best we can give you at the moment, of the range of 47.5% to 48.5%.
------------------------------
Herbert Hainer, adidas Group - CEO [4]
------------------------------
So coming to your second question on Boost, I mean Boost is a technology which really changes the way our running shoes will be made in the future. And as I have outlined in my presentation already, we have won 27 marathons in the last year, more than ever before in our new Boost shoe technologies, and also the world record, the fastest runner, etc., etc. And this is just the start. We have done around 6.5 million to 7 million pairs of Boost in 2014 and we will double this in 2015. And this will continue as we bring more and more Boost to individual footwear products. So this is definitely the technology for the future. There is no doubt.
------------------------------
Julian Easthope, Barclays Capital - Analyst [5]
------------------------------
Okay. Thank you very much.
------------------------------
Operator [6]
------------------------------
Jurgen Kolb, Kepler Cheuvreux.
------------------------------
Jurgen Kolb, Kepler Cheuvreux - Analyst [7]
------------------------------
Thanks very much. Three quick questions. First on -- could you give us an update on the current status of the three new designers that are coming into the Brooklyn office there, the design office, what the situation is and when you expect these guys to come live to work on design for especially the US part of the business, I guess.
The second thing, again on gross margin. Understand that -- your guidance for 2015 now. Looking a little bit further out to 2016 when some of the positive factors, i.e., lower discounting from TaylorMade and obviously the Russian situation that is falling by the wayside, but now the hedging rate is obviously kicking in. And being the euro/dollar where it is, just maybe a little bit of an indication as to how you think you have to react on the 2016 situation and how you think that's going to impact gross margin there.
And then lastly again on the Rockport disposal. Proceeds that you've taken in, I think EUR 240 million if I'm correct, how do you plan to spend those? Will they be going into share buyback or could you actually think about maybe a special dividend or something like that? Thanks very much.
------------------------------
Herbert Hainer, adidas Group - CEO [8]
------------------------------
Okay. Let me start with the first one and Robin is taking the other two. So the three new designers will start off the summer holiday period in America, so this means around September/October. I don't know the exact date, but this demands when they start.
------------------------------
Robin Stalker, adidas Group - CFO [9]
------------------------------
And as far as 2016, firstly you'll appreciate that we're not giving much guidance for 2016 at the moment. It's a bit early for that. But I will acknowledge, obviously, that your right that the US dollar is a lot stronger. And our hedging rate, although we've really just started hedging, could be worse than what we've had in 2015. But because it's so early, we've also got lots of opportunities to mitigate this with the sort of exercise we've done in the past as well in terms of the product engineering, but also including potential price increases.
In terms of the Rockport proceeds, as you know we've got a fairly healthy situation with cash so we don't need a particular new injection of cash. However, this does not also change our overall strategy. I mean we've made it quite clear we've got a EUR 1.5 billion shareholder returns program out there. This does not change that or add to it. And you would have seen that we've continued to be extremely disciplined in use of cash. There've been no major acquisitions other than small technical or perhaps niche areas. And we have used our cash to further invest in opportunities of growing the business or take advantage of the market with the low interest rates where we for instance bought some of our logistics assets. But this injection of cash doesn't change any of those strategies.
------------------------------
Jurgen Kolb, Kepler Cheuvreux - Analyst [10]
------------------------------
Very good. Just one quick follow-up on Boost again. In which categories have you introduced Boost right now? Just a reminder, quickly. Sorry.
------------------------------
Herbert Hainer, adidas Group - CEO [11]
------------------------------
Yes. The main category is by far running. I think this is 85% of the Boost shoes, but we have it now in golf, we have it in basketball, we have it in snowboard and in a lot of other outdoor, for example, and a lot of others, but this is just the very first beginning. Running is by far obviously, the biggest category.
------------------------------
Jurgen Kolb, Kepler Cheuvreux - Analyst [12]
------------------------------
Very good. Thanks very much.
------------------------------
Herbert Hainer, adidas Group - CEO [13]
------------------------------
You're welcome.
------------------------------
Operator [14]
------------------------------
Antoine Belge, HSBC.
------------------------------
Antoine Belge, HSBC - Analyst [15]
------------------------------
Yes, good afternoon. It's Antoine Belge at HSBC. Three questions. First of all regarding golf, in your overall 2015 guidance, if I'm not mistaken, I think you're expecting double-digit growth for golf. So what makes you confident that we could get there? I'd assume -- is it something where (inaudible) during the year. Maybe start of the year is still a bit tough and then an improvement. Also, I think you mentioned the shift in EBIT, so I guess there was a loss in 2014 so can you maybe quantify the loss? And do you think that 2015 will see a return to profitability?
The second question is a follow-up on what you said about 2016 and the dollar being a bit more of a headwind. I think you mentioned price increases. So in your view, what's the environ for price increases? Are you considering because you think that all your competitor will still have to do -- to implement price increases? So do you see -- what would be the sort of magnitude for those increases?
And finally, you're about to launch a five-year plan, yet at the same time there is a succession or so going on. So this plan will be implemented, at least for part of it, by different management team. So how is it going to actually pan out in terms of maybe year one and year two and then near the backend of the plan? Thank you.
------------------------------
Herbert Hainer, adidas Group - CEO [16]
------------------------------
Okay, Antoine, let me start with the third question, the five-year plan. Please have in mind that this plan is not done just by me alone. This is done by the whole executive board. So we are five people and everybody was involved. And especially the marketing and the sales guys had the spearhead to develop this plan and these people will definitely be here to execute it. And on the other hand, you do not expect us now sitting here for two years and don't plan for the future until the new CEO is here. So this is a permanent, ongoing process which we do. And be assured that, as I said, the whole -- the full board was involved and you will see it on the presentation on the 26th of March.
Second question was 2016 price increases according to the dollar situation. I think we have different market situations. For example, in America it doesn't make any difference because we buy in dollar and we sell in dollar. In Russia we have a different situation. We increase prices already spring this year because of the situation with the ruble. And in general, as I said, we bring a lot of new product innovations to the market where we obviously try to get the best price for these product innovations. Of course, for just current products which you carry forward, to increase prices for the same product is not the best solution which we will not do. But as I said, we bring a full array of new product, and we just mentioned a few before, in to the marketplace.
And the first question was on golf, what makes us confident. First and foremost, let's not forget that we lost 28% of our business in 2014. So we definitely want to get back to growth. But the main important points are that our inventory is definitely clean. The inventory in the trade is much better than 12 months before. We have shifted a few product introductions from 2014 into 2015. We mentioned already the R15 and Aero Burner, which both do very well, though we gained I think already in January 8% market share in metal woods. Then the golf shoe with the new Boost technology was the talk of the PGA show in Orlando a few weeks ago. And this all with a much more disciplined execution in retail, which was one of our mistakes in 2014, that we brought too many products into the marketplace, this all makes us confident that we can get to a double digit increase in the revenues for golf.
------------------------------
Antoine Belge, HSBC - Analyst [17]
------------------------------
And maybe on the margin, the loss in 2014 and the return to profitability?
------------------------------
Herbert Hainer, adidas Group - CEO [18]
------------------------------
Yes. I mean as I have told you already in my speech, we have done a lot on the cost side. We closed Plano in Texas, the Adams factory. We took out 15% of our workforce in TaylorMade across the world. We have implemented the strict cost controlled system. We reduced our inventory, therefore we do expect much more full price sales in 2015 than in 2014. And you will also see that our margin will go up step by step in the next years, but also in 2015 already. And this makes us all confident that we will definitely be back to nice profitability in 2015 already.
------------------------------
Antoine Belge, HSBC - Analyst [19]
------------------------------
Okay. And regarding the succession, I mean there were rumors that it already had started. So in case things would -- I mean you would find your successor quicker than expected, could we envisage that, I don't know, for a period of 12 months there could be like a co-CEO structure or your working with your successor? How should we think about the most recent developments?
------------------------------
Herbert Hainer, adidas Group - CEO [20]
------------------------------
Yes. Antoine, that has not been rumors, that this was confirmed by us, that the supervisory board has started the search with the help of a search company, Egon Zehnder, which I guess you know. And they do it in a quite construction and professional way, visiting the market outside and of course the internal candidates and then find the best successor which is feasible to lead the Company into the future. And this is a process I -- my contract is still running for two more years, until March 2017, so you have to bear with me for another few conference calls.
------------------------------
Antoine Belge, HSBC - Analyst [21]
------------------------------
Thank you.
------------------------------
Operator [22]
------------------------------
Fred Speirs, UBS.
------------------------------
Fred Speirs, UBS - Analyst [23]
------------------------------
Hi, good afternoon. It's Fred Speirs from UBS. My first question was just on Russia. I think you said there'd been EUR 130 million negative impact in 2014 against your plan. Can you give us an idea of what your guidance bakes in in terms of the planned or projected decline in euro million [tons] for 2015? Also in Russia, could you give us a sense of the level of pricing you took for the spring collection, please?
The second question was just going back to golf. Just wanted to get a bit of a sense of how much of the growth is expected to be coming from volumes as opposed to price mix and all of that.
And lastly also on golf. I noticed a couple of comments around plans to increase the focus on direct-to-consumer business and opening some TaylorMade outlets in the US. Just on this, would be interested to know the scale of rollout you're planning here and also feedback from your key retailers about these plans to open outlets. Thank you.
------------------------------
Herbert Hainer, adidas Group - CEO [24]
------------------------------
Okay, let me start with Russia. We have increased our prices in spring/summer for the new products by 10% to 15% which we introduced into the market. And obviously this will give us a much better margin, but this will also slow down to a certain extent the revenues, but this is a strategy which we have implied and so far we see good success.
In general, for Russia in 2015, as we are sitting here today we are expecting Russia to be profitable. But obviously, you know this is the most wild environment; let's put it that way. But we expect Russia to be profitable in 2015.
On golf, so, yes, we definitely want to work more closely with our consumers directly in the future because the consumer, especially on the golf side, is somebody who is very keen on his product and what the product can -- and how the product can help them to improve his ability to play golf.
So, yes, we increase our CRM program, getting much more in direct contact with our consumers. We also started to have the direct-to-consumer activities online where we'll open around 8 to 10 outlets in the US. And this is all in accordance and in close cooperation with our retail partners, which we have outlined all our plans. Because we don't want in the future our retail partners to price down all the products. We flush clearance products more into the factory outlets and want to have much more full price revenues in the stores with our key partners, be it Dick's, Golfsmith, etc. And as I said, we have communicated all our plans with our retail partners before. And let me just make one quote. One of our retail partners clearly stated that he said we need a strong TaylorMade to be successful and to reignite the golf market again. And this will happen with our product innovation.
In terms of product mix and pricing, obviously, as I said before, we want to have more full price sales in the future. We do believe that we will achieve this, A, by better product and, B, by less inventory which we have on our side and on the inventory level -- and on the wholesale level.
------------------------------
Fred Speirs, UBS - Analyst [25]
------------------------------
Thank you.
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Operator [26]
------------------------------
Ashley Wallace, Bank of America.
------------------------------
Ashley Wallace, BofA Merrill Lynch - Analyst [27]
------------------------------
Oh, hi. Thank you for taking my question. I just have a few more on Russia. And I was just wondering if you could talk a little bit about the level of promotion in the market in the fourth quarter and also in the start of 2015. And just -- Puma mentioned that their Russia same-store sales had turn negative from mid-January and I was wondering if you could give us a bit of an update in terms of the trends that you're seeing in that market from a same-store sales point of view. Could we also get a sense of what ruble/US dollar assumptions you're using when assuming that you will be able to retain a level of profitability in that market in 2015? And what proportion of your US dollar lease liabilities are you expecting to be able to be renegotiated in local currencies?
Then just secondly on the US market. Yesterday Dick's Sporting Goods said that they are going to reallocate some of the adidas and Reebok shelf space to its own Carrie Underwood brand. This loss of shelf space for your brands continues to be an ongoing issue in the North American market. What gives you so much confidence that that market can be turned around in the near term? Thank you.
------------------------------
Herbert Hainer, adidas Group - CEO [28]
------------------------------
You're welcome. Let me start with the first part of Russia and the second one Robin will tackle.
We have already started beginning of 2014 to clean our inventory in Russia and therefore for us in our business, the fourth quarter was already a declining promotional business. Overall, the marketplace was relatively promotional, there's no doubt. And as you have seen on our inventory numbers, which Robin presented, we have a very clean inventory in general and this is especially true for Russia. So therefore, we do expect from ourselves that the promotional part will further be reduced. The marketplace will stay promotional, there is no doubt. But we bring a lot of new product into the market with our spring/summer collection and therefore I do expect from our side we have less promotional business. Overall it's still promotional, there is no doubt.
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Robin Stalker, adidas Group - CFO [29]
------------------------------
And the ruble that we fixed at the beginning of this year, which basically using the forward rates at that time, was around about the EUR 70 to the -- sorry, 70 ruble to the euro. And you're quite correct that we clearly manage our dollar exposures there by continuing to renegotiate leases. We've now got the vast majority of our leases in local currency. And that, together with our more conservative shop opening, or to be more precise more shop closing at the moment in Russia, that helps us manage this risk a little bit.
------------------------------
Herbert Hainer, adidas Group - CEO [30]
------------------------------
To your second question--.
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Ashley Wallace, BofA Merrill Lynch - Analyst [31]
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I think previously -- oh, I was going to say previously--.
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Herbert Hainer, adidas Group - CEO [32]
------------------------------
(Inaudible) Ashley--.
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Ashley Wallace, BofA Merrill Lynch - Analyst [33]
------------------------------
You said about 25% of your leases in Russia are US dollar linked. Is that still the case or is it less than that today?
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Robin Stalker, adidas Group - CFO [34]
------------------------------
No. It might well have been the status at some stage in 2014, but we've continued to improve the number in local currency, so it's definitely less than 25% now.
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Ashley Wallace, BofA Merrill Lynch - Analyst [35]
------------------------------
Okay, thanks.
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Herbert Hainer, adidas Group - CEO [36]
------------------------------
So coming to your second question, in the US you would know and you have seen that (inaudible) corrected already this message and they clearly stated that adidas is a large and very important partner for that. And you will see that we will get more shelf space with our retail partners in the future in the US. I mean when you go to some of the Foot Locker stores or when you went out some of the Foot Locker stores during the All-Star Week in New York you saw already our A standard format, for example on the Foot Locker store on 34th Street. We never had a better footwear presentation in Foot Locker than this one and this has continued to be rolled out. The same you will see for our sporting goods partner. For example, with Finish Line we are taking over a lot of their stores next week with the pump launch for Reebok. So I don't worry that -- with the more marketing, the more advertising, the better product introductions into the American marketplace that we will get the shelf space back, which we need it to drive our business.
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Ashley Wallace, BofA Merrill Lynch - Analyst [37]
------------------------------
Okay, great. Thanks.
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Operator [38]
------------------------------
Cedric Lescasble, Raymond James.
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Cedric Lescasble, Raymond James - Analyst [39]
------------------------------
Yes, good afternoon. Cedric Lescasble from Raymond James. Some questions have already been answered, but I have two left. The first one is on marketing initiatives in the US where the market has been tough for you over these last years. What would be really different this time and what makes you confident that you would grow in the US this year versus -- excluding the golf issue, thinking of Reebok, thinking of the adidas brand, how do you think you will regain share with the two brands?
And the second question is more global. On your marketing activity could you help us forecast your marketing expenditure, not only in 2015, but the kind of run rate for the coming years? Thank you.
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Herbert Hainer, adidas Group - CEO [40]
------------------------------
Okay. Let me start with our marketing activities in the US. First and foremost, I guess you have seen already what we did during the All-Star week and then before. And we started a week before with the Grammy's where you had Kanye West, Pharrell Williams, etc., shown extremely publicly with our product. Then we had the Fashion Week in Paris and then we went back to the All-Star week. And I think this was the best presentation during the All-Star week which we ever had. And I'm not sure whether you have visited, but you have seen the 3-stripes all over the place. Now, we have started with our Sport 15 campaign. And as I told you, we have already 30 million views on our first spot and this will continue and especially also in the US it's resonating very well.
For Reebok, the Be More Human campaign has definitely exceeded all our expectations so far. Extremely positive comments. And yesterday we had the PR launch of our Pump presentation, which will start on Monday. Also here we have got a lot of press and I'm absolutely convinced that this shoe will do very well. By the way, we just have introduced in Finish Line the Fury Light women's shoe, which has push rates of 10% to 13% in the first days.
So, there is definite traction coming back to America, no doubt. Of course, now this will not be overnight because America is a tough marketplace with strong competition. But all what we have done in the last six to eight months, definitely I see it coming to fruition and we will definitely step by step getting back market share and be much more relevant in the US market.
And then our marketing activities in general, of course you have to wait until the 26th of March when we then present our plan until 2020. Then we also will give a little bit more light on what we will spend on marketing in the future. For 2015 we have told you already that we step up our marketing and we spend more in 2015 to drive our product initiatives and concept and the brand images around the world.
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Cedric Lescasble, Raymond James - Analyst [41]
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Thank you.
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Operator [42]
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Louise Singlehurst, Morgan Stanley.
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Louise Singlehurst, Morgan Stanley - Analyst [43]
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Hi there. Good afternoon. Two questions for me, please. Firstly just on the marketing costs, so a follow up there. I wonder if you can just help us think about the different buckets of spend. Obviously we've seen a very good new campaign from Reebok very recently, but just in terms of priorities, you seem to have a lot more regional focus over the last 12 months for the Group. So are you thinking just more about the US versus Europe, China, adidas brand, Reebok Fitness? How differently are you thinking about it this year versus last? And are we still in the same range of the 13% to 14% for 2015 in your implied 6.5% to 7% margin?
And then just my second question, I wondered if you could talk a little bit and tell us how big NEO is today. Obviously that had a very strong end of the year, but just how many points of sale that you have in China and elsewhere in the world. Thank you.
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Herbert Hainer, adidas Group - CEO [44]
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So let me start with the second question. Our NEO business is a little bit over EUR 800 million and it will further grow double digit as it has done in the last several years. And I think we have close to 1,000 locations in China for NEO.
The first question was on our marketing. I think it's -- we might have given the wrong impression if you think that we are now much more regional. It's just the other way around. We have global campaigns, but we spend definitely more in America than what we have done in the past. For example, the There Will Be Haters campaign is a worldwide campaign. The Sports 15 is a worldwide campaign, but we definitely spent more in America. And obviously we have also a tonality which we do believe speaks definitely more to the young American athletes. But they are global campaigns.
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Louise Singlehurst, Morgan Stanley - Analyst [45]
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Thank you. And just on the 13% to 14%, is that still relevant for 2015 in context of the 6.5% to 7% group EBIT margin?
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Robin Stalker, adidas Group - CFO [46]
------------------------------
Yes, Louise, that's absolutely correct. That's the assumption.
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Louise Singlehurst, Morgan Stanley - Analyst [47]
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Super. Thank you.
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Operator [48]
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Adrian Rott, Deutsche Bank.
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Adrian Rott, Deutsche Bank - Analyst [49]
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Hi. Good afternoon, everyone. First, two questions related to the segment contribution to your targeted top-line growth of mid-single-digit currency-neutral. So the outlook part in your Annual Report says that wholesale is expected to grow mid-single-digit after a 6% growth in 2014. Retail is expected flat due to the 17 net stock closures globally after 21% growth in 2014, if I read that correctly. And so given this setup, TaylorMade would have to contribute materially, I guess, and you're forecasting double-digit growth. So can you please elaborate on how retail splits up into space reductions and what sort of comparable store sets you're expecting?
And then juts on golf again, we've discussed this but just how confident are you in this double-digit growth? It's just that, if I recall correctly what Callaway has said, they're looking for 1% to 4% FX-neutral growth in 2015. So just if you have any sort of [cross rates] or any comments on what they're seeing versus what you're expecting.
And then thirdly, just on the sort of reorganization that has been taking place. I think you've had some management consultancies in and some new hires on the levels reporting to Roland Auschel, Eric Liedtke. So could you maybe quickly elaborate on how that sort of has changed internal processes and whether you expect any effects from that in the current year already? Thank you.
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Robin Stalker, adidas Group - CFO [50]
------------------------------
Okay. Well, I think you answered your own question, the first one, in terms of how does the segments contribute. You're right, we are very confident that TaylorMade will have a double-digit growth. I mean, as Herbert said, it's a question of where we've been in 2014, what have we deliberately done to also reduce the exposure at the latter part of 2014 and our confidence already on the product launches and how we see golf in 2015.
As far as the retail store openings, I mean we will continue to open stores in various parts. We've talked about growing stores and square meters in some of the key cities. But obviously, because of our very conservative approach to Russia at the moment, the net situation will probably be that we'll have more shops closing than opening and that obviously plays a role in the retail's top-line performance.
In terms of our confidence for TaylorMade, I'm not sure I can say much more than what Herbert's already told you. And he's also mentioned the product launches that give us this confidence. And don't forget that we are definitely a market leader in the golf business and that gives us a certain strength that maybe other competitors may be a bit jealous of.
In terms of the third item on the start of -- if I may, just don't underestimate the significant impact that the changes that we've done in our organization have on how we make decisions. And as Herbert said, we have changed a lot of the roles and responsibilities, and not just the marketing organization, but also in our sales organization to make it much quicker in terms of decision making, to make it much clearer in terms of responsibilities. All that aimed, obviously, at being able to recognize the needs of the consumers as quickly and as efficiently as possible.
We have to see how this all pans out in the next couple of seasons, but what we're already experiencing, because this restructuring was completed in about August/September of 2014, we're already seeing a significant uptick in the -- perhaps you could call it the attitude within the central organization. And I think it's a tremendous example of what we're bringing at the moment at the end of March. And you'll have to wait and see what we actually come out with, but I think have a look at that on the 26th of March and then you have a good view about why we think this is a very good move for our group.
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Adrian Rott, Deutsche Bank - Analyst [51]
------------------------------
Right, that's great. If I can just come back quickly to retail. So if we exclude Russia for a moment from retail, this sort of retail rollout is still pretty much intact in all the other regions and you would also still expect something like 9%, 10% comp store sales growth as in the previous year. So there has not really been any change to your view or how you expect things to pan out in the regions ex-Russia retail wise?
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Robin Stalker, adidas Group - CFO [52]
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Yes, I think that's a good observation. I mean obviously our retail segment is significantly influenced by Russia. But we've shown a considerably positive performance over the last year in the other retail areas and that's our view also for 2015. And we will grow, both in square meters in other countries and also very confident that we'll maintain a high-single-digit comp-store growth.
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Adrian Rott, Deutsche Bank - Analyst [53]
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That's cool. Thanks a lot.
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Operator [54]
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Ingbert Faust, Equinet Institutional.
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Ingbert Faust, Equinet Institutional - Analyst [55]
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Yes, thank you. I think there's one thing left. On the seasonality in 2015, could you help us a bit? If I'm correct, Q1 2014, despite the fact that it was run up to the Soccer World Championship it wasn't that strong. So is it fair to assume that probably the first quarter should look quite good and that it will fade down a bit to the rest of the year? And probably in the relation to that, we have already upcoming the next soccer championship in the mid of 2016 in France. Is there any impact on Q4 this year from this?
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Herbert Hainer, adidas Group - CEO [56]
------------------------------
Hello, Ingbert. So on Q1, as you know, and as I have said already a few weeks ago, we definitely had a strong start into Q1 and we definitely see good momentum for our branch. But don't forget, we also are spending a lot of money for our campaigns, which I have said before, be it for Reebok, for adidas. But definitely, as I said, we had a very good start into 2015, but stay tuned with that.
In terms of the Soccer European Championship in France in 2016, you're absolutely correct. We will start to introduce the new product in the Q4 2015. This starts with new footwear product and then continues with the new jerseys for the participating teams and then coming up in December with the new European Championship ball.
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Ingbert Faust, Equinet Institutional - Analyst [57]
------------------------------
Okay, thanks. And probably one follow up to the Boost statement earlier in the call. Is it correct -- I think I got you saying that it's doubling in 2015 on the units?
------------------------------
Herbert Hainer, adidas Group - CEO [58]
------------------------------
Yes, that is correct.
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Ingbert Faust, Equinet Institutional - Analyst [59]
------------------------------
Okay. And the basis is 8.5 million in 2014? Because so far I had 15 million as a target, so it's performing a bit better, yes?
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Herbert Hainer, adidas Group - CEO [60]
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I said around 6.5 million to 7 million (inaudible)--.
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Ingbert Faust, Equinet Institutional - Analyst [61]
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Oh, okay. Sorry.
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Herbert Hainer, adidas Group - CEO [62]
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In 2014.
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Ingbert Faust, Equinet Institutional - Analyst [63]
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Okay, thank you.
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Herbert Hainer, adidas Group - CEO [64]
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Yes.
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Operator [65]
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John Guy, MainFirst.
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John Guy, MainFirst - Analyst [66]
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Yes, good afternoon, gentlemen. Thanks for taking my questions. You mentioned, Herbert, that consumer perception of your brands was going to be a new KPI now. I appreciate that you'll probably talk more about that during the Capital Markets Day, but could you maybe give us a few examples as to how you're going to measure that KPI going forward?
My second question is with regards to the wearable rate. If we think about tie ups with Nike and Apple, Under Armour and HTC, I'm just wondering where you stand. Also, given Under Armour's pretty extensive investment in MapMyFitness and other areas here, where you stand in relation and what your plan is to move more aggressively into that market.
And finally, with regards to the retail net closures that you're going to see running through the year, what have you factored in from a gross margin mix perspective given the fact that clearly you take a richer gross margin coming out of your retail store? Thanks very much.
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Herbert Hainer, adidas Group - CEO [67]
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So let me start with the first one. There is a matrix out which is called Net Promoter Score, which is used in the industry, but also in other companies outside of the industry where you measure the image of your brand and whether your brand gets recommended by their friends or not. This is a quite objective measurement and this is what we have built in in all the reviews and the incentive plans of our key employees, that everybody has to make sure that our brand is in the center of what we do and that the consumer loves our brand.
Do you know what the Net Promoter Score is?
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John Guy, MainFirst - Analyst [68]
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I'm a little bit clearer on it now, thanks.
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Herbert Hainer, adidas Group - CEO [69]
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Yes. But this is, as I said, industry wide used, so this is not something which just we have.
On the variables, and I think there are two aspects of what you said. The variables on the one hand, but on the other hand what Under Armour did is they bought addresses, more or less, to build up their CRM base. You know there are two different ways; you either buy it or you do it by yourself. We have started already some time ago to build up our CRM base while the different activities during the FIFA World Cup in Rio de Janeiro where we had it posted on our newsroom and collected a lot of data for our CRM base. And this is what we will continue to do as we -- as I have said before also in the TaylorMade section, that we will do more and more communication directly with our consumer, then this is what we forego.
We also, of course, look into the market, what we can do to accelerate that. But we definitely will not make any acquisition just for the sake of an acquisition and buy everything. This is definitely not our place.
In terms of wearable, I think we are fairly good positioned with our miCoach system, which has brought out the new watch which you might have seen for EUR 199, now bringing down the price from the original miCoach from EUR 399, which is definitely, I guess, the best wearable watch which is out where you also can train yourself and can do your training regime.
Nevertheless, let me put it that way. This is definitely (inaudible) mobile the image then for your commercial business. Even we want to sell as many of our watches as possible, but compared to the overall business it is still a small part. And I think we'll--.
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Robin Stalker, adidas Group - CFO [70]
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And John, it's a good question. I'm not, however, going to tell you exactly how that's broken down, big surprise there, because it all comes into this Russia margin issue. And I think here what we should call out is that retail in the non-Russian markets has been continuing to improve its profitability in the more full-price sales and what have you with clearance and I think that's also a positive effect here. But basically, the closures of the shops in Russia are all tied up with that currency impact in the ruble against the euro. And I can't call it out any better than that at the moment.
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John Guy, MainFirst - Analyst [71]
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Thanks, Robin. Just on the Russia business, I know that you said that you still expect it to be profitable. I mean given the huge move in gross margin and markdown that we saw in 2014 coupled with these closures, I mean I find it hard to believe that -- or I'm not quite sure that I understand how you're still going to generate profitability in Russia in the 2015 year.
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Herbert Hainer, adidas Group - CEO [72]
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John, this means you're doubting my word. (Laughter) So let me tell you the (inaudible). We still have huge business in Russia, as you know. And we have worked on two fronts; one the one hand on the cost side, as I said before, and Robin mentioned that we turn more or less all the contracts into local currencies. We have worked on our cost base in Russia. We increase the prices in spring/summer, as I have said, which gives us a better margin. And if the ruble doesn't get worse or the whole sentiment, as I said before, we definitely will be profitable in 2015. Don't forget Russia was once one of our highest profitable markets which we had. But I also said this is quite a violent place. But as it is today and if it doesn't get worse we will definitely be profitable in Russia.
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Robin Stalker, adidas Group - CFO [73]
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And just one point just to add to that. I mean don't forget that a lot of them -- the decline in 2014 was because of the clearance that we did at the overhang of inventories, which we will not have in 2015.
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John Guy, MainFirst - Analyst [74]
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Yes. I think you mentioned that you had a double-digit clearance in 2014 and you were going to see anywhere between 5% and 10% clearance activity in 2015. Does that still stand or have you pretty much cleared it all?
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Herbert Hainer, adidas Group - CEO [75]
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Yes, it's definitely correct because you might remember that we had this warehouse issue in late 2013 and then we took a lot of product into 2014, which we then had to clear.
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John Guy, MainFirst - Analyst [76]
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That's very clear. Thank you very much indeed.
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Herbert Hainer, adidas Group - CEO [77]
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You're welcome.
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Sebastian Steffen, adidas Group - VP, IR [78]
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Rhonda, I think we have time for one more question.
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Operator [79]
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Chris Svezia, Susquehanna Financial Group.
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Chris Svezia, Susquehanna Financial Group - Analyst [80]
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Good afternoon, everyone. Thanks for taking my questions. I guess a couple of them here. First, with regard to the margin, just so I understand this, your gross margin flat to up 100 basis points and the operating margin flat to only up 50. Is the difference there just the marketing and branding initiatives?
The second question, Herbert, any update on Brazil? You seem to be doing reasonably well there. The macroenvironment is challenging and I think other brands are having some challenges there. So just sort of your viewpoint on what's going on in Brazil and your thoughts for 2015.
The third question, just on hedging and the euro for a second. When you think about the input/cost equation, I know you're beginning to hedge for 2016, but just what -- I mean that's a pretty big delta to make up 20% or so on the currency side. So I'm just curious. Outside of pricing, what else gives you confidence to make up the margin on that side?
And the last question -- sorry I have to ask this because I'm in North America, but just curious. When you step back and look at the marketplace here, you have a good relationship with Foot Locker and I know you mentioned Finish Line and the opportunity there with the new Reebok product, but you're still broadly losing market share as other brands grow faster. So I guess the question is, when can we start to see more consistent profitable growth out of the brands and what is Mark King hearing from retailers? What do they ultimately want? Do they want US-specific product? Just any color about that would be helpful. Thank you.
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Robin Stalker, adidas Group - CFO [81]
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I'll take question one and three and then Herbert can take two and four.
I think you should look firstly at our guidance for the bottom line. We've stated for some time now we want to be growing our bottom line over-proportionately. The top line we do that with a 7 to 10 on top of the single-digit top-line growth. And yes, the operating margin difference compared to our guidance for the gross margin is obviously the cost base, but we've been I think very clear that this is a range highly influenced by the currencies and I can't give you more detail on that at the moment.
In terms of hedging, well, we've already started hedging so we're not -- it's not as if we haven't got anything hedged. We're probably around 25% hedged, 16% at the moment or in first season. And I think here it is part of the business model. We've had over the various years significant movements in the dollar/euro. This is an area where we've I think been very good in the market and in our industry in terms of being able to improve the engineering of some of the product, in terms of our product miss and in terms of also getting better with our manufacturers and the efficiencies that we get there. And I'd just say that don't forget, of course, that this is -- this impact is something that the competitors have as well. I mean we are all basically producing in dollars and selling in other currencies as well.
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Herbert Hainer, adidas Group - CEO [82]
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To Brazil, yes, this is definitely correct. Brazil is a little bit of a challenging marketplace. First and foremost, I think we have a little bit of an off the World Cup depression there. But I must say we have definitely used the World Cup in 2014 to raise our profile in Brazil, to establish a closer connection to the consumer as we have been the big sponsor of the World Cup. And as I said before, luckily our players and our teams resonated well. So we still have good business in Brazil, but it is obviously a little bit more challenging than it was in 2014.
Coming to your last question to the US. I just mentioned Foot Locker or Finish Line. We have very good relationship with the sporting goods stores, for example, (inaudible) Dick's Sporting Goods or TSA, just to name a few. And they are definitely weighting that we are stronger in the marketplace. They don't want to just be dependent on one supplier. And we definitely have the product and the reputation that we can play a much more different role.
I think we have done -- made some executional mistakes in the past and we have not spent enough money. So we have a new team. We definitely will get better shelf space in the US. I just mentioned the Foot Locker example with (inaudible). The Finish Line for Pump. We will have a new shop-in-shop concept with sticks which you will see in the future which we are rolling out.
And you asked what do the retailers expect from us, what do they need. They need products which are selling through. And for that you have to do different things. You have to raise the image of your brand in the market, which we do with our campaigns, Sport 15 as I just said. You have to bring products to the markets which are selling through, which we do with our, for example, football product or soccer product. And there will be Haters campaigns. And then also bring products to the market which caters directly to the market. So for example, the football boot, and now I'm talking about the American football boot. As I said, in the combine they have more or less all had our -- those six fastest had our adizero football cleats, which are the best selling football cleats at the moment. This is a specific US product.
So we have a mixture of global products. Our soccer boots are definitely global. Our American football boots are much more local. And this balance and this harmony we definitely have to play much better in the future and the heavy investment with a better market execution though our team. This we do believe will help us in the future.
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Chris Svezia, Susquehanna Financial Group - Analyst [83]
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Okay, fair enough. Thank you and all the best to you in March.
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Herbert Hainer, adidas Group - CEO [84]
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You're welcome.
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Sebastian Steffen, adidas Group - VP, IR [85]
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Thank you very much, Chris, and thank you very much, Herbert and Robin.
So, ladies and gentlemen, that actually completes our conference call for today. As Herbert mentioned, we're very much looking forward to having you all here in Herzogenaurach on March 25 and March 26 for our Investor Day. You should actually have already received the Save the Date a couple of weeks ago. The formal invitation with more information will follow in the next couple of days. And of course if you have any questions, be it on the Investor Day or our releases today, please contact any one of us here in the Investor Relations team.
Other than that, I would like to wish you a very good day and I very much look forward to meeting you in a few weeks' time. Thank you very much. Bye-bye.
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Operator [86]
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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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