Q3 2015 adidas AG Earnings Call
Nov 05, 2015 AM CET
ADS.DE - adidas AG
Q3 2015 adidas AG Earnings Call
Nov 05, 2015 / 02:00PM GMT
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Corporate Participants
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* Sebastian Steffen
adidas AG - VP IR
* Herbert Hainer
adidas AG - Chairman & CEO
* Robin Stalker
adidas AG - CFO
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Conference Call Participants
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* Antoine Belge
HSBC Global Research - Analyst
* Zuzanna Pusz
Berenberg - Analyst
* Adrian Rott
Deutsche Bank Research - Analyst
* Chiara Battistini
JPMorgan - Analyst
* Jurgen Kolb
Kepler Cheuvreux - Analyst
* Cedric Lecasble
Raymond James Euro Equities - Analyst
* Andreas Inderst
Macquarie Research - Analyst
* Volker Bosse
Baader Helvea Equity Research - Analyst
* Graham Renwick
Exane BNP Paribas - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the adidas Group conference call for the nine months 2015 financial results conference call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Sebastian Steffen. Please go ahead, sir.
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Sebastian Steffen, adidas AG - VP IR [2]
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Thank you very much, Suzanne. Good afternoon, ladies and gentlemen, and welcome to our nine months 2015 financial results conference call.
With me today are, as always, Herbert Hainer, adidas Group CEO, and our Group CFO, Robin Stalker.
First, I would like to remind you that, as always, to allow for ease of comparisons, all revenue related to growth rates will be discussed on a currency neutral basis. In addition, all figures will refer to the Group's continuing activities and be discussed excluding goodwill impairment losses.
As you know, and as you've seen today, we have a lot of topics to cover so, without any further ado, over to you, Herbert.
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Herbert Hainer, adidas AG - Chairman & CEO [3]
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Thanks very much, Sebastian. Good morning or good afternoon, ladies and gentlemen. I'm very pleased to report to you today a very strong set of financial results for our Group. And what is even more important, they didn't come just by chance. They are the direct consequence of our relentless focus on the consumer.
The third quarter shows that this, in combination with our excellence in execution, is the perfect game plan to drive brand desirability and generate strong top- and bottom-line growth.
So let's have a look at the highlights of this stellar financial performance in Q3.
Sales growth accelerated with Group revenues increasing a strong 13%. In euro terms sales were up even an impressive 18% to EUR4.8 billion, the highest quarterly turnover the Group has ever generated.
Gross margin increased 1 percentage point to 48.4%, driven by the positive effect from a more favorable pricing and channel mix, which clearly reflects the strength of our core brands.
The Group's operating margin was up 70 basis points to 10.6%. And the net income improved 20% to EUR337 million.
Clearly, this quarter had many highlights so, therefore, allow me to briefly focus on three clear standouts before Robin goes into more detail.
Firstly, it is the strong momentum the adidas and the Reebok brands are enjoying around the world.
The second is how we are delivering on our commitment to drive brand desirability in the long term by bringing our marketing investments to the next level.
And thirdly, it is the further progress we are making in North America, one of our strategically most important markets. The adidas revenue growth accelerated significantly in Q3.
Let me start with a closer look at the development of our brands.
At adidas, brand heat is blistering, propelling sales up 14% in Q3 and 11% year to date. The gross margin improvement, 160 basis points in Q3 and 100 basis points year to date, is also proof positive of the strength the three stripes are enjoying around the globe.
The development in the third quarter is even more impressive if you take into account the difficult comparison the adidas brands faced in some markets following the German team's victory at the 2014 FIFA World Cup in July last year.
Talking about football, sales increased a strong 19% during the third quarter, with double-digit growth in key markets such as Western Europe, North America and Latin America, just to name a few.
We continue to see very robust momentum on the footwear side following the successful introduction of our new football footwear franchises, ACE and X. Q3 saw not only the retail launch of these product families, but also the introduction of future colorways and customizable versions of the shoes.
In addition, we also debuted knitted versions, ACE and X Primeknit, bringing one of adidas's key technologies into both franchises to give the game's most explosive players a next-generation fit.
In apparel, football revenues increased at a double-digit rate, driven by the highly anticipated and very prolific launch of our two new partnerships with Juventus Turin and, of course, Manchester United.
Particularly, teaming up with Man United has yielded unprecedented success so far with both a record-breaking first day and first week launch. Figures in the club's channels delivered over a month's worth of forecasted sales within the first five days.
Many adidas global retail partners have reported a 200% increase in day 1 sales, compared to the last year's kit launch, experiencing phenomenal demand across the globe and declaring the adidas Manchester United kit launch as the biggest ever launch of replica products.
And in our own retail stores and online shop, we have been experiencing similar success with outstanding demand.
But football was definitely not the only standout category. In running, our growth accelerated in the third quarter with sales rising 9%, driven by increases in nearly all markets. In particular, North America, Greater China and Japan were standout markets, generating double-digit growth in the quarter.
We remain encouraged by the strong performance of our Boost franchise. Year to date we have sold almost 8 million pairs of Boost running shoes alone. As a result, footwear revenues increased double digit in the third quarter.
At the same time, the track record of Boost in the world's marathon scene speaks for itself. In total, Boost running shoes have been on the feet of the winners in 64 major marathon races since we brought the franchise to the market.
On two occasions during the past couple of weeks, in Beijing and Amsterdam, once again both the male and the female winners wore the best running technology out there. We also dominated the Berlin marathon. Of the six runners on the podium, four competed in Boost, including women's champion, Gladys Cherono. And just last weekend adidas elite runner, Mary Keitany, won her second straight New York city marathon title wearing the adizero Adios Boost.
Looking at our lifestyle business, the momentum we are seeing at the adidas Originals, and also at adidas NEO is just amazing. In originals, the strong performance from the first half continued right into Q3, with revenues increasing 33% during the three months period, representing the [third] consecutive quarter of double-digit growth. During the first nine months, revenues were also up 33% versus the prior year period.
The powerful global reach of adidas Originals is reflected in the strong and broad-based sales growth seen across our various geographic areas as all markets, with the exception of Russia/CIS, posted double-digit sales increases in the third quarter.
We are seeing unprecedented demand for our major footwear franchises, Superstar, Stan Smith, ZX Flux and Tubular. Just to give you one example, year to date we sold over 1 million pairs of our ZX Flux at Foot Locker Europe, and this is in a year where the focus has mostly been on our Superstar franchise.
At Reebok, with top-line growth of 3% in the third quarter represented the 10th consecutive quarter of growth, clear testimony that the brand is resonating well with the fit generation. With the exception of North America and Russia/CIS, sales increased in all markets, with particularly strong growth in Japan, EMEA and Latin America, where sales grew at double-digit rates each.
To add to this, revenues in Greater China, although on small scale, doubled in Q3. Revenues in North America continued to be negatively impacted by our efforts to streamline the factory outlet business.
From a category perspective, Reebok's growth during the third quarter is directly linked to key fitness categories, with double-digit growth in the studio category, as well as robust growth in training and running. The classic business continues to show strong momentum and increased at a double-digit rate.
So what's behind all these successes? To me there is absolutely no doubt that the key driver of this strong top-line development is the unparalleled consumer appeal of our brands. With the introduction of creating the NEO back in March, we told you that, at the end of the day, it all comes down to winning the hearts and the minds of our consumers. And I'm telling you, we are winning big time.
Both adidas and Reebok are enjoying great momentum across the globe, as our product and marketing initiatives are resonating extremely well with the respective target audience, both in the lifestyle and the performance arena.
Our increased brand investments, up almost 20% during the first nine months, have raised the bar when it comes to creating consumer excitement by establishing industry leading product franchises and cutting-edge communication.
On the latter, we continue to connect with the consumer by bringing the third chapter of Sport 15 to life. During the third quarter, we introduced create your own game and unfollow. Both [spots], which underlined the adidas brand leadership and passion for sport, were launched globally in August across all social channels, featuring some of the world's biggest football assets such as Lionel Messi, James Rodriguez, Gareth Bale and Thomas Muller.
Both Euro spots had a fantastic social media reach with over 45 million and 43 million views on YouTube respectively.
In addition, August also saw the launch of creating the New Speed. The newest chapter of Sport 15 celebrates and inspires athletes and those who challenge the status quo in sport. The spot features, among others, Timmy Graham, DeMarco Murray and Sammy Watkins, all US sport icons and influences who are redefining a position at team of sport and the concept of speed.
During the third quarter, we also continued our momentum of partnering the most talented and influential players and teams in sport. These partnerships give us the opportunity to not only gain valuable insights from athletes, but also to activate our brands and their values.
In September, we proudly announced the multiyear partnership with the reigning NFL MVP quarterback, Aaron Rodgers of the Green Bay Packers. One of the most prolific passers in league history, Aaron debuted in adidas cleats this season, and will collaborate on future product development or our footwear, training apparel and equipment. Aaron will also take a leading role in upcoming adidas brand marketing campaigns.
A few weeks later, at the beginning of October, superstar shooting guard, James Harden of the Houston Rockets, one of the NBA's best scorers and most recognizable players, joined the adidas family. Initiatives to activate this long-term partnership will include exclusive on and off court signature collections, product design collaborations and marketing involvement.
In fact, James will play a leading role in future brand communications and help to raise awareness for adidas basketball. In fact, James will take center stage together with some of our key other basketball assets in the last episode of our Sport 15 campaign, which will create a lot of buzz in December, with a clear focus on the US.
And there is, of course, Manchester United. I had already mentioned this reunification of two of the biggest names in football, which clearly underlines adidas's position as the world's number one football brand. Manchester United is one of the most popular and successful sports teams in the world, having won 62 trophies in its 137-year history.
In addition to record breaking sales, the launch also saw the campaign break expectations around fan engagement across both adidas and club channels. Our campaign launch was a film that hugely resonated with the fans of the club and quickly became the most shared motion picture from adidas in 2015, with more than 2 million views within only a few days.
The club website and social channels also experienced outstanding engagement with far more than 200 million content impressions in the following days, and a total of 7 million cumulative interactions.
The campaign went globally on Twitter and was exposed to millions of football fans via the social channels of adidas, Manchester United, and the nine players that featured in the campaign, including Juan Mata, Ander Herrera and the new signing, Bastian Schweinsteiger.
Our social accounts, both globally and in the home market saw immediate follower growth with Manchester United fans subscribing to the brand in huge numbers.
And with that, Man United is a prime example of the benefits of our new marketing approach as it shows the different dimensions of how we can make use of promotion partnerships, and the vast opportunities that such partnerships offer us to connect with our consumers.
This is, of course, essential for us everywhere around the globe, but it is particularly important in the US market. And here we have, for too long, been lacking visibility and relevance in American sports. We have made major inroads over the last couple of months to establish platforms to connect with the US consumer.
Through grassroots events at the high school and college level, much higher visibility in all of the major US sports and highly emotional marketing campaigns, we are authenticating the adidas brand, vis-a-vis consumer, as the true performance brand.
In addition, through the hugely impactful partnerships with Kanye West and Pharrell Williams, we are making sure people understand that adidas is a brand that can make the kids look cool on and off the pitch.
And while we have always emphasized that our turnaround in the US is not a sprint but a marathon, we see that our efforts are clearly paying off. The progress is also reflected in our top-line development with sales of brand adidas in North America growing at a double-digit rate.
But that's not the only proof point for the progress which we are making in this all-important market. A few examples; at Foot Locker we have multiplied the number of our a-Standard shop-in-shop installments across the US almost tenfold over the past 12 months.
With DICK'S sporting goods, we have successfully launched 600 soccer shop-in-shop solutions for back to school. As a result, we increased our market share in DICK'S in this category by 10 percentage points in Q3.
Our 10 newly opened HomeCourt stores, which are part of the 55 new own-retail shops we're want to open across the US by the end of 2017, are experiencing significantly higher than expected sell-through rates due to better in-store communication, improved customer service and superior merchandising.
And last, but certainly not least, we are seeing brand strength and market share improving in those areas where we are investing. In American football, for example, we have seen significant market share gains, especially in the Eastbay, where the high school athletes are shopping.
And while I am far away from suggesting that we have solved all our problems in the US, these examples, just like our performance during the third quarter, clearly prove that we can be successful in the US. And I promise you, we will be.
So let me now move over to our golf business. TaylorMade-adidas Golf took center stage on the PGA Tour over the last couple of months with some of the most prestigious tournaments being won in three stripes and with TaylorMade equipment. Jason Day's win at the PGA Championship was a clear standout, as it not only paved his way to become the world's number one, but also made our brand shine in front of millions of golf and sports fans.
The third quarter has also seen the successful global media launch of our revolutionary M1 product line. With the M1 family, TaylorMade is returning to its roots as the lead name product innovation. And while the retail launch only took place at the beginning of the [first] quarter, I can tell you today that the product has been very well received so far. In fact, due to the strong early demand and quick sales rate retail, our Q4 launch quantities for the M1 are already sold out.
Unlike as in the past, we have decided not to push further volumes into the market in order to keep the product fresh and the demand high.
Jason Day's win at The Barclays in September was the 10th win on tour this year for the adidas Boost technology, which is one of the key drivers of the success of our soft goods business with adidas Golf, which grew at a high single-digit rate during the third quarter.
Overall, revenues at TaylorMade-adidas Golf increased 6% during the quarter. And while this year-over-year and sequential improvement also reflects a cleaner trading environment and first operational improvements, it is, to a large degree, also the result of easier comparisons with the prior year.
And this is why, no matter what the outcome of the strategic review will be, which we expect to be concluded during the first quarter of 2016, we continue to press ahead with our far-reaching restructuring plan. The project team is already working on more than 40 identified initiatives and with these, we are aiming to achieve operating efficiencies across the four pillars of manufacturing, assembly, margin and marketing working budget.
In addition, we will focus on only a few key strategic markets globally, such as the US, Japan, South Korea and the UK.
TaylorMade's organizational redesign, which started earlier this year, continues to focus on streamlining its processes and global business to create a leaner, faster and more efficient operation. A difficult yet necessary and important part of these cost saving efforts includes the further reduction of personnel expenses by reshaping the organization to be in line with TaylorMade-adidas Golf's future business expectation.
As a result, by the end of this year, we will have reduced our global workforce by 14%. While this will negatively impact profitability by a low double-digit EUR1 million amount in the first quarter, the immediate result will be a more nimble organization, which will have a positive effect on the Group's profitability from 2016 onwards.
Further initiatives aimed at reducing our cost base are a consolidation of warehouses around the globe, the optimization of the shipping policies with our retail partners, as well as the creation of shared service centers.
So while there is still quite some way to go at TaylorMade-adidas Golf, we are making major progress with our restructuring. These activities, combined with our industry leading product lineup, will bring TaylorMade-adidas Golf back to the top of the golf world.
And with that, let me now hand you over to Robin to take a closer look at the individual market performance and walk you through all the financials.
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Robin Stalker, adidas AG - CFO [4]
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Great. Thank you very much, Herbert. Good afternoon, ladies and gentlemen. Now, as you've just heard, within this strong set of numbers we've reported today for the first nine months of 2015, our Group witnessed remarkable sales growth during the third quarter. Let me, therefore, spend a few minutes on our top-line development first, before going into more detail on how this ultimately impacted the rest of the P&L.
In the third quarter of 2015, combined revenues for the adidas and Reebok brands grew in all markets except Russia/CIS. Even more importantly, our growth accelerated in most regions, compared to the previous quarter.
Of particular note is certainly the strong development of our two biggest markets, that's Western Europe and North America, where creating the NEO, without a doubt, is starting to reveal its enormous potential. So let's start with those regions and have a look at the performance in detail, starting with our biggest market, Western Europe.
Currency neutral sales increased 18% in the quarter, driven by a strong 19% increase at adidas. This increase is even more impressive if you consider the difficult comparatives with the prior year, given the additional sales we generated after Germany's World Cup victory in Brazil when the new four stars jersey was literally flying off the racks.
The strong increase in the third quarter was fueled by a double-digit growth at adidas Originals, as well as well as in the football category. The latter is due to the successful introduction of our new football footwear franchises, that's ACE and X, as well as to the outstanding partnerships with Manchester United and Juventus Turin.
At Reebok, sales increased a robust 6%, driven by double-digits sales increases in the training and studio categories, as well as high single-digit growth in running. For the first nine months, revenues at Reebok grew a strong 10%.
From a market perspective, the main contributors to the segment's sales increases were the UK, Italy and France, where revenues grew at double-digit rates each during the third quarter.
Based on the strong top-line performance, we were also able to leverage our sales and marketing investments. The segmental operating margin increased by 350 basis points to 24.6%. This, ladies and gentlemen, is evidence for us that we are pulling the right triggers with our strategic choices.
The performance in North America is clearly another proof point for our successful measures and initiatives which we are driving within the framework our new strategic business plan. Sales for the region as a whole accelerated during the third quarter, up 6% versus the prior year period.
Now, while Reebok revenues were below the prior year level, as Herbert has already mentioned, revenues at adidas were up 11%. The strong momentum at adidas was driven by double-digit increases, not only in our lifestyle business, but also in the important performance categories, running and football.
In addition, the training category, our biggest category in this important market, grew at a high single-digit rate. Hence, there's no question that we are seeing the first positive signs of our turnaround strategy, fueled by strong partnerships such as James Harden, Aaron Rodgers and Kanye West. And our increased visibility in US sports in general, which is clearly helping us to authenticate the brand, vis-a-vis the US consumer.
Additionally, after achieving our goal of leading North America back into profitable territory in the second quarter of this year, we're happy to report a strong improvement in operating margin of 70 basis points despite further increases in marketing and point-of-sale investments, which grew more than 35% in Q3.
In Greater China, our strong momentum from the previous quarters continued right into Q3 with revenues up 15%. Both brands posted strong growth rates, with adidas revenues up 14% and Reebok sales even doubling in the third quarter.
The increase at adidas was driven by double-digit growth in key performance categories, such as training, running and football. On the lifestyle side, adidas Originals and adidas NEO also grew double digits. The sales increase at Reebok was driven by significant growth in all key categories.
These strong growth rates are nothing but proof of our strong positioning in the Chinese market. Let me, therefore, reiterate one more time that, based on the very strong momentum which adidas and Reebok brands enjoy in the marketplace, our Group will be, without a doubt, in a position to withstand the negative trend in the Chinese economy.
Indeed, we remain absolutely encouraged by the highly visible trend in China towards living a healthier life, as sports participation and the interest in sport in general, continue to trend upwards. With our highly desirable brands, we have the right forces to leverage the values of sport in this growing marketplace.
Let's turn now to Russia/CIS. While we are still waiting for the Russian economy and, indeed, consumer sentiment to start bottoming out, we are right on track with our commitment to keep our Russian operations in profitable territory this year.
An operating profit of EUR55 million at the end of September clearly reflects our successful cost management. This includes an additional 58 store closures during the third quarter, which led to a further 29% decrease in operating expenses in the third quarter.
In addition to our cost control measures, the process of cleaning inventories continues and is bearing fruit. In the third quarter, we were able to reduce our promotional activities and start earlier into full price trading, which also had a positive effect on revenues.
Currency neutral sales were down only 7%, a sequential improvement compared to the previous quarter, while comp store sales even showed the lowest decline since the beginning of the year, down 2% during the three month period.
Currency neutral sales in Latin America were up an impressive 20% on the third quarter as a result of double-digit sales growth at both adidas and Reebok. Growth at adidas was supported by double-digit sales increases in the training and football categories, as well as at adidas Originals and adidas NEO.
At Reebok, sales increases were driven by double-digit growth in the running, training and walking categories, as well as high single-digit sales growth in classics. From a market perspective, the segment's top-line development was driven by double-digit sales growth in Argentina, Mexico, Colombia and Chile.
In Japan, sales in the third quarter returned to solid growth with revenues up 6%, supported by mid single-digit growth at adidas and double-digit increases at Reebok. While growth at adidas was driven by double-digit increases in the all-important running category, as well as at adidas Originals, sales increases at Reebok were mainly due to significant increases in running as well as in classics.
As a result of the positive third quarter performance, nine month revenues in Japan also turned positive, up 2% for the period.
Middle East, Africa and the rest of Asia maintained its positive momentum during the third quarter, with currency neutral revenues up 14%. This was due to double-digit sales increases at both adidas and Reebok. Growth at adidas reflects double-digit sales increases at adidas Originals and adidas NEO, as well as in the football category. In addition, high single-digit growth in the running category also contributed to this development.
Growth at Reebok was driven by double-digit sales increases in classics, as well as in training and running. From a market perspective, the main contributors to the segment's sales increase were South Korea, the United Arab Emirates, South Africa and Australia, where revenues grew at double-digit rates each.
Last, but not least, let's have a look at the other businesses, which also saw an acceleration compared to the previous quarters. Currency neutral sales increased 10% in the third quarter, with revenues up 6% at TaylorMade-adidas Golf, 9% at Reebok-CCM Hockey and 17% in other centrally managed businesses.
Now while the performance at TaylorMade-adidas Golf was also supported by the successful launch of our M1 product line, it is important to note that, for now, the sequential improvements in sales and profitability are mainly due to easier comparisons with the prior year period. As Herbert mentioned already, it is crucial that we continue to make all necessary efforts and investments that are needed to get our golf business back on track.
Gross margin of other businesses increased 2.1 percentage points to 34.4% during the third quarter. This is a direct consequence of the strong gross margin improvements at TaylorMade-adidas Golf in Q3 following the robust top-line development, as well as lower levels of promotional activity.
As a result, the operating margin for other businesses improved from a negative 11.8% in the previous year to a negative 6.7% in the third quarter of 2015.
Let's turn now to our Group performance, starting with the P&L. Our Group gross margin increased a very strong 100 basis points in the third quarter to 48.4%, or 10 basis points in the first nine months to 48.6%. A strong achievement considering the significant pressure we continue to face from currencies and input costs.
The gross margin improvement during the third quarter was mainly due to a significantly better pricing mix, as well as a more favorable channel mix, and reflects margin improvements in most market segments including, of course, Western Europe and North America.
Moving over to operating expenses, which increased 18% in the third quarter or 15% in the first nine months, partly as a result of negative currency effects. This development is due to higher sales and marketing investments, as well as higher operating overhead costs, reflecting our commitment to invest in our brand and businesses, as Herbert has already mentioned.
While operating expenses as a percentage of sales were up 0.1 percentage points for the third quarter, we were able to achieve significant leverage during the first nine months, with operating expenses down 0.4 percentage points year over year.
Sales and marketing investments as a percentage of sales increased 50 basis points to 12.7% for the third quarter and were up 20 basis points to 13.4% for the first nine months. Taking all the aforementioned factors together, third quarter operating profit increased 26% to EUR505 million, while year to date, operating profit was up 19% to EUR1.1 billion.
This translates into an operating margin of 10.6% for the quarter, up 70 basis points versus the prior year, and 8.6% for the first nine months, an improvement of 20 basis points versus the last year's nine month period.
Turning briefly to the non-operating items of the P&L, in the first nine months of 2015 net financial expenses decreased to [EUR19 million] versus [EUR35 million] in the prior year. This development was due to positive exchange rate variances as well as the non-recurrence of negative exchange rate effects from the prior year.
The first nine months' tax rate increased to 3.1 percentage points to 31.9%, mainly due to the non-recognition of deferred tax assets related to TaylorMade-adidas Golf, for which the realization of the related tax benefit is not now considered probable. As a result of that, we now also expect the full-year tax rate to be at around the current level of 32%.
Net income from continuing operations, excluding goodwill impairment losses, increased 17% to EUR737 million in the first nine months of 2015. This translates into basic and diluted earnings per share of EUR3.62, up 21% compared to the prior year.
Third quarter net income from continuing operations excluding goodwill impairment losses grew 20% to EUR337 million, translating into basic and diluted earnings per share of EUR1.67, up 26% versus the prior year.
Looking specifically at the retail part of our business, revenues grew 9% in the third quarter. For the first nine months, sales grew 10% on top of a 21% increase in the prior year period, mainly due to double-digit growth at adidas. Reebok revenues grew at a low single-digit rate.
While revenues from concept stores and factory outlets both increased versus the prior year, sales generated in concession corners were down due to a reclassification of a number of concession corners into the wholesale business. Comparable store sales were up a solid 3% during the third quarter with growth across all regions except Russia/CIS.
For the first nine months, comparable store sales were up 2%. By brand, adidas comp store sales grew 3%, while Reebok's comp store sales were down 5%.
Our ecommerce business continues to grow at strong double-digit rates, with sales up 25% in the third quarter and 44% for the first nine months.
The retail gross margin increased a strong 3.7 percentage points to 61.8% for the third quarter, up 2.4 percentage points to 61.8% in the first nine months. In this regard, the positive effect of a more favorable product and pricing mix more than offset headwinds from the devaluation of the Russian ruble.
As a result, the operating margin for our own retail operations was up more than 200 basis points to 22.7% during the third quarter and 340 basis points to 21.0% for the first nine months, benefiting from the increase in gross margins and leveraging lower operating expenses as a percentage of sales.
In terms of our store development, at the end of the third quarter we operated 2,679 stores, compared to the prior year level of 2,913 stores. This represents a net decrease of 234 stores, reflecting the reclassification of 154 concession corners to the wholesale channel, as well as the net closure of 80 stores. The latter mainly related to Russia/CIS.
During the first nine months of 2015, the Group opened 192 new stores, 272 stores were closed and 74 stores were remodeled. Looking out to the remainder of the year, we will continue to rigorously manage our store base. In total for the year, we plan to close around 50 adidas and Reebok stores net in 2015, around 150 stores will be remodeled and, in addition, as already mentioned, around 150 concession corners will be reclassified to the wholesale channel.
Finally, ladies and gentlemen, let me spend a minute on our balance sheet and cash flow development. At quarter end, operating working capital increased 14% as both inventory then accounts receivable grew on a currency neutral basis, reflecting our expectations for growth in the coming quarters.
As a percentage of sales, however, operating working capital decreased 1.6 percentage points to 20.7% as our operating working capital grew obviously at a slower pace than the Group's top line. In terms of cash flow development, we entered the quarter with net borrowings of EUR903 million, an increase of EUR359 million versus last year. This development is mainly utilization of cash for the share buyback program. As a result, the ratio of net borrowings to EBITDA increased to 0.6 versus 0.5 in 2014.
Ladies and gentlemen, let me briefly wrap it up. Our strong financial performance during the first nine months means we will finish 2015 exceeding our initial expectations for the full year and we are, therefore, increasing our top- and bottom-line guidance. Based on the strong momentum at both adidas and Reebok, we now expect sales to increase at a high single-digit rate on a currency neutral basis in 2015.
Group sales development will be driven by double-digit increases in Western Europe, Greater China, and MEAA. Additionally, higher sales expectations in North America and Latin America will further support the Group's revenue growth.
Our Group gross margin is now forecasted to increase to a level between 48% and 48.5%. The improvements we saw during the third quarter, as a result of the more favorable pricing and product mix at both adidas and Reebok, together with the more favorable channel mix, are expected to further support our gross margin development for the remainder of the year. This will more than offset the adverse effects from the higher input costs and less favorable currency movements.
Given the strong financial performance during the first nine months of the year, we have also decided to further increase the planned marketing and point-of-sale investments for the fourth quarter to leverage the current momentum and drive long-term brand desirability.
This, coupled with the measures Herbert has elaborated on to redesign our golf organization, will result in an increase in the Group's other operating expenses as a percentage of sales, which are now expected to grow moderately in 2015, compared to the prior year level of 42.7%.
Last, but certainly not least, we now anticipate net income from continuing operations to increase at a rate of around 10%, thus outpacing the Group's expected top-line development.
So as you can see, ladies and gentlemen, our Group is enjoying very strong, top- and bottom-line momentum in 2015 and there are many achievements we can be very proud of. With this in mind, let me hand back to Herbert who will give you more details on how we plan to build on this momentum, and what you can expect from us over the next couple of months.
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Herbert Hainer, adidas AG - Chairman & CEO [5]
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Thank you, Robin. Ladies and gentlemen, I'm just as excited as Robin is about the Group's financial performance in the first nine months, and the stellar momentum our brands are enjoying across the globe. And I have every confidence that this momentum will continue throughout the coming months.
Let me share my confidence with you by laying out some of the many activities and product launches that will impact not only our fourth quarter, but also our future in the long term. And I have some exciting initiatives and news to share with you here.
Our product and innovation pipeline is as strong as it can possibly be, and we are well prepared as we enter the upcoming holiday season. So let me start on the innovation side, as innovation is at the heart of everything we do, and key to the long-term success of our Group.
Just a few weeks back, at the end of September, we launched a game-changing innovation project called Sport Infinity. Without any doubt, Sport Infinity will influence the future of our industry in the most sustainable manner, as it will bring the days of throwing away football boots to an end. Instead, every pair of boots will not only be recycled, but used to produce fully customized sustainable and recyclable products in the future.
Sport Infinity is led by the adidas brand, supported by our key football asset, Lionel Messi, and funded by the European Commission. It brings together a variety of industries and academic experts, and combines broken down sports products with excess materials from other industries. Representing the next step in our commitment to innovation and sustainability, the project will close the sustainability loop, creating a high performance product that can always be recycled.
Equally exciting is our Futurecraft series, another initiative launched on the innovation side. Futurecraft is a forward-looking initiative to drive innovation across all elements of the production process. At the beginning of October, we presented the first ground-breaking innovation of this series, Futurecraft 3D, a unique 3D printed running shoe midsole, which can be tailored to the individual cushioning needs of an athlete's foot.
This is such an important milestone for us in the area of 3D printing. Just think about it; who would have imagined one year ago that we will be able to introduce to the sporting goods industry a 3D printed functional midsole that will enable athletes to perform at their very best.
The second launch under the umbrella of Futurecraft is Futurecraft leather, which was unveiled today. It combines a high-tech manufacturing process with additional materials to create a completely seamless upper that enables ultimate comfort in one single piece of material. With Futurecraft leather, consumers will choose their own piece of leather to be tailored into made-to-measure footwear in front of their eyes.
We are all very excited about the Futurecraft initiative as it will drive our innovation pipeline further, and strengthen our industry leading position when it comes to innovation.
Now, these are clearly just two examples that show impressively our commitment to creating the future of sport. The future of sport will, for sure, also be impacted by our Speedfactory initiative in which our Group, together with other companies, and under the umbrella of the German Government, explores the future of manufacturing.
And I'm proud that we have just signed a cooperation agreement with German engineering company, Manz, one of the world's leading high-tech suppliers of production systems, that will help us to explore on that front.
The contract builds on the successful development of the new automated production technology for sports equipment. With this technology, the design of custom tailored shoe components, textiles, and accessories, can be transitioned into production data and produced on a fully automated basis in the future. This is a huge step towards automated production.
Let me now turn to our categories and share some of the many exciting product launches and upcoming initiatives that will fuel our success over the holiday period, starting with football, where we will build on the very strong momentum going into Q4.
As I already mentioned earlier, we revolutionized football with the introduction of our new footwear [styles], ACE and X. We also had tremendous success in reuniting with Manchester United and seeing Juventus playing in three stripes.
Just recently, we launched the Messi 10/10 limited edition cleat, with just 100 pairs produced worldwide. The release marks the start of a new tradition of collector's edition Messi boot launches, which will drop every October 10 as an homage to Lionel, the greatest number 10 in the history of football. As in the past, these limited editions will continue to create hype for adidas football.
Last week, we brought our key cities approach to football with the launch of our City Pack, including three unique editions of ACE and X, taking design cues from Hackney in London, New York's Brooklyn, and the Berlin district of Kreuzberg.
Our football revolution will also continue in 2016 as we will bring laceless, a game-changing design innovation in football, to life. We have seen its first information in our laceless football boot this week, and will continue to build desire for these boots in the upcoming weeks and months.
Talking about 2016, I'm excited to announce that we are already gearing up to kick off the UEFA Euro 2016 hosting, a big launch event next week in Paris. And we will take over Paris and present to the world's media, influencers, creators, and fans, the official match ball and the six home and away kits of our main federations, including the current World Champion, Germany, and the reigning European Champion, Spain.
We will start creating huge excitement for the tournament and our football products and make a bold statement underlining our market-leading position.
Let's shift our focus from Europe to the US for a moment, where we will continue to increase our visibility in US sports throughout Q4 and going into 2016. This will be sustained by strong product launches in key categories, such as baseball, American football and, obviously, basketball.
In baseball, we recently presented our adizero Afterburner uncaged collection at the beginning of Q4, featuring nine new cleats created for the game's fastest players.
In American football, October saw the launch of the Dark Ops cleat collection inspired by the footwear and accessories worn by the elite forces of the US military.
And in basketball, we have just presented a customizable version of the D Rose 6 basketball shoe, together with a new signature version of D Rose 6. Inspired by his will to never break, the D Rose 6 is designed to elevate Derrick's aggressive game and complement his cold and confident demeanor.
Last, but certainly not least, as I already mentioned at the beginning, the first quarter marks the beginning of a game-changing partnership of adidas and the Houston Rocket superstar, James Harden. Without a doubt, the launch of this partnership moves the game forward and bears a message that change is certainly coming and the future of basketball starts right now. Whenever James is on the court, he will lace up the Crazylight Boost 2015 in a variety of Houston Rocket colors.
Let me now turn to lifestyle, where we have every confidence we will maintain the strong momentum, thanks to our unrivalled partnerships and product franchises.
Following the very successful launch of Kanye West's Yeezy Boost shoe in the first nine months of 2015, adidas Originals has just introduced Yeezy Season 1, a collection of apparel and footwear that was presented at the New York fashion week earlier this year and now hits stores globally.
The collection features a line of high quality essentials that can be freely combined and will be followed by the new Yeezy 350 Boost shoe launch later this month. The collaboration with Kanye West has clearly exceeded our own expectations so far. And we're looking forward to bringing the spirit of our partnership to new heights in 2016.
However, at adidas Originals, the best thing is yet to come. At the beginning of December, we will launch a completely new footwear franchise, revolutionizing the technical lifestyle running market, subverting the relationship between style and technology. While I cannot say too much here yet, you can for sure expect the next big thing on the streets globally in just a few weeks from now.
At the same time, and as a result of our thorough lifecycle management, we will limit distribution somewhat for our other highly successful footwear franchises in the [fourth] quarter. This will allow us to move the focus to the newest kid on the block, while at the same time building the hype for the other four key franchises globally into 2016.
Turning over to Reebok, the brand will continue to pursue its chosen path in Q4 by focusing on key footwear franchises, such as CrossFit Nano for functional training, The Pump for running, Cardio Pump Fusion for studio and SkyScape for walking.
In addition, Reebok will continue to activate its key collaborations, such as the UFC, CrossFit, Spartan Race, as well as Les Mills. On the classics side, Reebok will continue to work the superstar, Kendrick Lamar, as its key asset.
Lastly, let me give you a brief outlook for TaylorMade. As mentioned before, TaylorMade successfully launched its M1 franchise during the third quarter, the brand's longest driver and most suitable product line. In one offers the golfer TaylorMade's first ever unmetalwood line of drivers, fairways and rescue clubs that enable more ball speed, forgiveness and distance.
Even though M1 was only just launched, the driver immediately became the number one played model in its first week on both the PGA tour and the European tour, although TaylorMade asset, Justin Rose, brought home the third title worldwide for TaylorMade's new M1 driver in October, by winning the UBS Hong Kong Open.
The successful launch of M1 will be the fountain for the coming quarters because, as mentioned before, we are moving towards an annual release for metalwoods around the fall, satisfying the early adopters, as well as our wider audience looking to buy in the spring. We're absolutely convinced that this launch will be one of our best and will provide golfers of all abilities with a product that really performs.
So, ladies and gentlemen, before I come to an end, let me spend a minute on 2016, for which we expect momentum for our brands, and the Group as a whole, to continue.
Given the strong product lineup and the full marketing calendar, we are confident that we will, again, be able to increase currency neutral Group sales at a high single-digit rate, making 2016 another record year for the adidas Group.
And while we expect gross margin to be negatively impacted by significant currency effects, we have all the levers in our hands to generate enough operating leverage to grow our operating profit at a high single-digit rate as well, and to keep our operating margin at least stable, compared to the 2015 level.
We understand that there are quite some uncertainties at yearend around next year's profitability development in general, and the gross margin progression in particular. In order to provide you with more insights, and to allow you to gain a better understanding of the different drivers and levers, we would like to invite you to our second IR Tutorial Workshop on December 9, 2015 here in Herzogenaurach.
During this half-day workshop, we will tell you more about our global sourcing structure, our hedging policy and how we will be mitigating next year's currency headwinds.
And with that, ladies and gentlemen, I thank you very much for your attention and Robin and I are now ready for all your questions.
==============================
Questions and Answers
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Operator [1]
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(Operator Instructions). Antoine Belge, HSBC.
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Antoine Belge, HSBC Global Research - Analyst [2]
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Three questions, if I may? First of all, with regards to the gross margin, could you be maybe a little bit more specific about the different levels in Q3? I imagine there were also some negatives in terms of input costs and already FX in Q3 and what were the offsetting factors?
And when you look at 2016, I appreciate that you didn't give a precise guidance for gross margin, so I'm not expecting one. But in terms of at least just the FX impact that you've mentioned, is it possible to have some information on your hedging rates for 2016 or any information that you would like to give?
My second question is more relating, actually, to the women's business. I think recently during their Investor Day, Nike mentioned that they wanted to double their women's business in five years to $11 billion. So what are the key initiatives that you have for this fast-growing segment?
And finally, there is one region that you did not really mention too much, which is MEAA, which is characterized by very high profitability. Could you maybe mention which are the main market? I think Korea is a big one. And why is margin so high? Is it sustainable? Is it because of maybe a bit less competition in those markets? Any qualitative comments as well. Thank you.
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Robin Stalker, adidas AG - CFO [3]
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Okay, Antoine, let me start with your first question and Herbert will take numbers two and three. It's the normal moving pieces in our gross margin. The third quarter we saw again, obviously, the ruble year over year, and a significant amount from [FRB] increases, almost a percentage point. But our pricing increases and product mix also has obviously given us more than enough to compensate for that.
In terms of looking out into 2016, yes you're right, I'm not going to give you any specifics today. We will continue to do what we do in terms of leaving the specifics until the beginning of next year where we can finalize exactly what our situation is with hedging rate.
But quite obviously, the hedge rate that we've been enjoying for 2015, which is around the [1.33], is clearly not going to be able to be repeated. It is a significant negative that we're looking at for 2016 and, therefore, we are saying yes, our gross margin is going to be under pressure in 2016. The price increases that we're doing and the reengineering of products and working with the factories, all those things that we're doing, probably will not be enough to be able to hold the gross margin for us.
But we are very confident that, because of the significant progress we've been making on the cost base, and the leverage we can get out of our operating overheads, we will be able to compensate for the negative on the gross margin. And, therefore, we've been able to call out today that we're very confident that we'll be able to at least maintain our operating margin at the level of 2015.
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Herbert Hainer, adidas AG - Chairman & CEO [4]
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So, Antoine, coming to your second question on the women's business, yes, women's business is definitely a focus for us as well, but not only just recently. We have started, you might remember already, 10 years ago when we started to work together with Stella McCartney to give us a better insight into the women's business and to help us to create a collection with resonate more with the consumer.
And then we continued with our NEO collection, where we especially go to a younger consumer group which is definitely also much more female driven, and you know all the successes which we celebrate with NEO. And just recently, we have partnered with Christine Day, the former CEO of Lululemon; she is consulting us in our overall women's business. So a lot of initiatives are going on, on our side, and not just recently.
To your second question, MEAA, you are right, it is Korea but this is also the whole Middle East part. And here, we have the biggest part of our business with our own store and this, obviously, gives us a better margin. We have very good sales force there. We have an extremely high rewarding image from the consumer base and this, together with a very efficient organization, helps us to achieve these margins which we enjoy.
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Robin Stalker, adidas AG - CFO [5]
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And, Antoine, [as to that], let me remind you also what Herbert said about the workshop, because if you want to know more about the gross margin, we have this tutorial workshop here in Herzo, which will also be webcast, about the gross margin development December 9.
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Antoine Belge, HSBC Global Research - Analyst [6]
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Yes, maybe just a follow-up actually just on pricing, which will be one of the levers, I imagine. So is your confidence based on the fact that other competitors are also planning to increase prices, or have you seen a weakness from the consumer to trade up when the product is right?
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Robin Stalker, adidas AG - CFO [7]
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Both, absolutely. And you've seen it also what we're seeing in the third quarter. We covered price increases as well.
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Antoine Belge, HSBC Global Research - Analyst [8]
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Thank you very much.
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Operator [9]
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Zuzanna Pusz, Berenberg.
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Zuzanna Pusz, Berenberg - Analyst [10]
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Just a couple of questions from my side. First of all, I was wondering whether you would be able to comment on the price unit growth for the adidas brand.
Secondly, maybe on NEO, I understand it was another quarter of strong growth for NEO with [32%] FX neutral growth, but I was just wondering, would you be able to provide the split of like for like and space growth for the brand, because I understand you're probably also expanding your store network.
And maybe just a final question on the 2016 guidance. I appreciate it's just a kind of preliminary outlook, but the leverage you are expecting is it just coming from the strong top-line growth, or are you also expecting maybe some initiatives on the costs side? It would be interesting to hear a bit more detail on that. Thank you.
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Robin Stalker, adidas AG - CFO [11]
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Well, I'm not sure, Zuzanna, that you're going to be very happy with my first two answers because basically no, we don't break down the price and unit, we don't publish it at least. And second with NEO, I don't have those figures in front of me. The fact is, as Herbert said in his speech, NEO has been going extremely well and this is also where we're seeing it also in comp store growth.
In terms of your third question about comps level on the 2016 operating and overheads leverage and what have you, let's put this into context of -- a lot of things we've been doing over the last few years, you will recall even back into some years ago when we were talking about all the investment we're doing through route 2015, to consolidate warehousing, bring services above market, also consolidating our operating units.
If you think of the significant amount of work we've done over the last 18 months here in Europe, putting our five major units together under one area, we're starting to get all this leverage. And so we have a lot of initiatives which we are very confident are going to give us operating overhead leverage. And I think I take the opportunity to point out I'm talking about operating overhead leverage, I am not talking about any sort of marketing leverage.
We continue to spend and invest in our brands through marketing. We are not expecting to reduce the level of marketing as a percentage. You'll see absolute numbers of marketing, obviously, also going up in 2016.
And we saw also, if you're looking for evidence of our confidence in our operating EBIT, if you think of where we are at the end of the year in 2015, we have increased our marketing spend as a percentage of sales, about 20 basis points, and yet the operating expenses are down 40 basis points. So there's obviously been leverage of about 60 basis points on the operating overheads there.
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Zuzanna Pusz, Berenberg - Analyst [12]
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Thank you very much.
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Operator [13]
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Adrian Rott, Deutsche Bank.
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Adrian Rott, Deutsche Bank Research - Analyst [14]
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Three questions from my side, please. Firstly, on gross margins and the measures you have taken. So we understand that you've pulled all levers available, and I was just wondering whether there's a chance that you've maybe even overshot in some respect when it comes to talking to suppliers and de-specking product choice there.
Do you see any risk that there might be quality issues in certain categories next year, seeing that you're trying to really fight off the currency pressures?
And then secondly on retail, and just looking at the new guidance for net store closures of around 50 stores this year, which implies that you are opening some 30 stores in Q4 net, so I was just wondering where those openings will happen.
And the last one also in retail, rather than the economics of retail, so this has been the second quarter now with really strong profitability increases. Can you just split up a little bit to which extent those improvements in margins in retail are due to closing unprofitable stores in Russia, or elsewhere? And to what extent that is due to better like-for-likes and ecommerce outperforming within retail? Thanks a lot.
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Robin Stalker, adidas AG - CFO [15]
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Okay, Adrian, thanks. Firstly let me be very clear, we are a collection of brands and obviously we're very, very cautious to make sure we support the brands in the eyes of the consumer. And there is nothing that we have undertaken in managing our margin exposure that I believe would compromise our high levels of quality, and the desire to satisfy our consumers with the products.
I don't believe there's any risk in that whatsoever. We are passing on as much as the price increases we can, but I'm acknowledging that we're not able to pass it all on and, therefore, we have to get it through the operating overheads.
In terms of retail, yes that's right, it'll be a net growth of shops in the fourth quarter of 2015. They're coming from China, North America, and Middle East, Africa and the rest Asia.
And your third question was about the profitability of retail, and you may recall, over a year ago, we were talking about the initiatives we are taking to now really improve profitability in our retail shops. And this is something you should expect to be a natural process of the learnings that we've had out of running now so many shops ourselves.
And certainly, there will be, in the profitability improvements, some impacts from the closure of the less profitable shops. That I understand is a normal part of retail business; we'll presumably be doing some of that also in future periods.
But basically, we are getting better also at execution in retail, and that, with the increase in economies of scale, and getting the right sort of product in the market now, and improving that with our supply chain, that's bringing us these better margins, better sell through and, therefore, better profitability.
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Adrian Rott, Deutsche Bank Research - Analyst [16]
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That's clear. Thank you.
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Operator [17]
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Chiara Battistini, JPMorgan.
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Chiara Battistini, JPMorgan - Analyst [18]
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Three questions from me, please. The first one on golf; you are continuing to put investments into TaylorMade, so what are your latest thoughts about the disposal process? Are you still considering that for TaylorMade and what's the update there also for the smaller brands, please?
Then on Originals up 33%, so another great quarter with exceptional growth. Could you please tell us drivers of this growth in terms of new doors and increasing penetration in new markets and new retailers, and what's the replenishment really in existing doors? And how do you think about the Original sustainable growth going into next year and the year after?
And finally, on the China margin, on the EBIT margin, I have calculated the EBIT margin for China was down 370 basis points, despite gross margin being roughly flat. So I was wondering if you could tell us what's behind that decline in the margin, please. Thank you.
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Herbert Hainer, adidas AG - Chairman & CEO [19]
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So let me start with the first question and Robin will answer your third one. On golf, as we have said, we definitely will divest our Adams and our Ashworth brands. On the TaylorMade side, we have not decided yet what we will do in the future. As I said, we will keep all options open and have the help of Guggenheim, the investment bank where we finally will decide, in the first quarter 2016, what to do.
But anyway, we will have to restructure the business and bring it back to growth. And this is, on the one hand, making our processes more efficient, bringing our costs down, to bring it in line with the revenue development. And on the other hand, bringing money up to invest in innovative products, going forward, and this is exactly what we are doing.
By on the one hand, as you have heard, restructuring and laying off people, making processes more effective. But on the other hand bringing new innovative products to the market, as we have done with M1 just in October. And as I said in my speech, it's already the number one selling driver out in the market. And we're also continuing with the M family going into 2016. But we will keep you updated in the first quarter, as soon as we have decided what we will do.
Secondly to Originals, now the Originals growth is not coming just by expanding into new doors. This is coming because there is a high demand for our products in the market, and this is a lot to do with franchise management.
You might remember that we have, for a certain period of time, we have taken out Stan Smith off the market, we have taken out Superstar off the market, to make sure that we don't overshoot the market and to create the hype for the product in the market when they are not available.
And the same we will do, coming up with our new franchise in December, which we just have alluded to. We also will slow down our volumes which we bring in the market in the fourth quarter, just to make sure that the desire from the consumer will stay.
And you ask how we are continuing, going forward, to make sure that this brand, or these Original products are cool? As I just said, part is, of course, the lifecycle management of the franchised product. But also bringing new innovative concepts to the market. [Kanye West] is just one which helps us; the new franchise model which release in December is another one. And believe me, we are full of such kind of innovations and ideas for the coming months and years.
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Robin Stalker, adidas AG - CFO [20]
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And for the third question about the third quarter margin in China, yes, you're right, it's down, and this is due primarily here to timing of marketing expenditure. There was quite a lot of increase in marketing in the third quarter related also to football.
But, overall, don't forget China continues to have an extremely strong margin, and that strength we believe will continue in the future period as well.
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Chiara Battistini, JPMorgan - Analyst [21]
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Perfect. Thank you very much, very clear.
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Operator [22]
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Jurgen Kolb, Kepler Cheuvreux.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [23]
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Some questions here from my side. First, on the innovations, the new products, Herbert, that you mentioned, the leather manufacturing, Futurecraft. When can we expect more commercial impact of those shoes and when do you launch those, probably with a bigger marketing campaign, first of all?
Secondly, just a brief one on 2016. First indications out, thanks very much for that; just a quick one on the tax rate for 2016. Shall we expect that the blip, the uptick we've seen in 2015 is not going to last, and so we go back to, say, around 29%/30% for 2016?
And lastly on Reebok and here the US situation. Given that the consolidation of the factory outlets still ongoing and the effects we're still seeing, but when would you expect to see Reebok coming back into the positive territory on currency adjusted sales growth in the US specifically? Thanks.
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Herbert Hainer, adidas AG - Chairman & CEO [24]
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Hello, Jurgen. First and foremost, welcome back from the team here. Let me start with the first question on innovation in leathercraft. As you might imagine, there are some products which are still in, or some ideas, which are still in the science, how should I say, level, where we don't know yet what the outcome will be and how fast it will go. For example, the first one which is Sport Infinity, which is supported by the European Commission, this still might take longer time.
In terms of 3D printing, we are already able to make the first shoes and soles in 3D printing, but it's still much too expensive. So we have to work further to bring the cost down, that it is efficient to make it in big quantities.
On the other hand, when you look to our laceless football boot, which we just announced the other week, this is already one of the parts which are coming out of one of these Futurecraft things.
And last point on that one is the Speedfactory, where we will definitely already produce next year the first pairs here, close to Herzogenaurach in Ansbach, where we have here installed a prototype factory. And definitely, for 2017, you will see already production from there.
So a lot of things going on, different stages and, of course, we will update you. Some are coming within the next 12 to 18 months, but some might take longer.
And let me jump directly to the third question, Jurgen, then Robin will answer on the tax rate.
Reebok in the US; I think it's fair to say, first and foremost, that the US is definitely the toughest market, not only for adidas brand, but also for Reebok. And therefore, with all the competition which is going on in this market, it is more difficult for Reebok to resonate with the consumer, as it does already in more or less all the other parts of the world.
In addition to that, we're still closing factory outlets of Reebok, because I think they had much too many in the US and obviously this costs us also sales. But we definitely do believe that in 2016 we will stabilize our business for Reebok in the US and from there on, then further grow it, as we see the growth all over the globe.
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Robin Stalker, adidas AG - CFO [25]
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And, Jurgen, to the tax rate, as you know we give guidance on 2016 in detail in March, but let me give some confidence. We've clearly explained why we're at the 32% level for 2015. And if we look over the years what our tax rate's been around, I would hope that we would not disappoint with the guidance that we do give you in March. But I'm not going to give it to you at the moment.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [26]
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Very good. Fully understand, thanks very much. Good to be back.
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Operator [27]
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Cedric Lescable, Raymond James.
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Cedric Lecasble, Raymond James Euro Equities - Analyst [28]
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I have a question on the allocation of your marketing expenditure. Could you elaborate a little bit on how you see things between sportswear, which is booming, and performance, which has been underperforming sportswear for some time with some strong results and some weaker results in some segments.
How do you see things and what will be your focus in terms of geographies, probably the US, but between performance and sportswear? That would be the first question.
And the second one is a follow-up on the previous ones regarding your ability to stabilize your EBIT margin and to get this cost leverage, despite this gross margin pressure. Just, if you try to go on the big [cost savings] where would the biggest leverage come from? Would it come from golf, with this workforce reduction, or any other component; could you help us a little bit with that? Thank you.
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Herbert Hainer, adidas AG - Chairman & CEO [29]
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Cedric, let me start with the first question on sports performance and Originals. Yes, we definitely enjoying the moment the much stronger sales on the Originals side, but as I told you, we are also looking carefully into it, how we can guide it and how we make sure that it stays cool.
But this does not mean that we are not performing on the performance side. As you have seen, double-digit growth in football and not only in football apparel, because of Man United or Juve, also in football footwear we are growing double digit. We have a 9% increase in running, which is also quite good.
But there is no doubt that, going forward, and especially with 2016 where we have the European Football Championship, where we have Olympic Games, our focus will be clearly on performance. We want to be the best sports brand for the athletes and, therefore, it is quite important that we will be successful on the performance side by bringing new innovative products to the market which help the athletes to perform better.
But on the other hand, we also want to push further on the lifestyle side as consumers are heavily gearing for our products, but the focus is on performance.
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Robin Stalker, adidas AG - CFO [30]
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And Cedric, our operating overheads, I do think we're getting more centralized, more global; we're getting more efficient; we're executing better. And it's a range of areas, it's definitely not golf people. The combination of the five units in Europe into one European organization, as I called out in the answer to one of the previous questions, that's obviously significant for us.
But we've been doing this over the last couple of years. We've been investing, however, to get us into this situation, that's why we're so confident about being able to get the benefits now. They're starting in 2015 and they will accelerate obviously into 2016. Just to repeat what I've already said, it's the consolidation of warehousing, it's services above market and all those sort of things. Thank you.
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Cedric Lecasble, Raymond James Euro Equities - Analyst [31]
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Thank you.
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Operator [32]
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Andreas Inderst, Macquarie.
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Andreas Inderst, Macquarie Research - Analyst [33]
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My first question is on the marketing budget. You continue to increase that; it seems to work on the top line. In which areas do you intend to accelerate the marketing spend, by category and maybe also by region? And when can we expect actually a normalization in marketing spend? Would that be more in 2018/2019, maybe an indication on this one?
Then my second question is on the golf segment. You have already significantly reduced your headcount last year and in summer; what was the trigger for additional rounds of workforce reductions, and when can we expect actually a break-even for TaylorMade?
And my third question on automation; what's the vision for the Group? You come out with 3D printing, Futurecraft, local manufacturing. What can we expect, let's say, in five to 10 years' time, in terms of automation Thank you.
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Herbert Hainer, adidas AG - Chairman & CEO [34]
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Okay, Andreas. Let me start with the marketing budget, and I think the best example is the fourth quarter. The fourth quarter, obviously the basketball season has started and the NBA we have, with James Harden, a new ambassador on our roster with Derrick Rose being back on the game, you will see big basketball campaign in the US market in the fourth quarter because US is clearly a focus market for us.
Approximately 1% which we spent more on marketing and working budget goes mainly to the US and this is just one of the examples. Then we will introduce this new Original franchise in December, where we will give you more information in the coming weeks. This will also be backed by a big campaign also starting in the US and then going around the world.
And last, but not least, next week we will start our European Football Championship campaign by showing the new jerseys for all the participating adidas teams and releasing the new ball, the official match ball, for the European Championship.
So these are just a few examples where we spend our money, but definitely, the US is a focus of this additional budget to which we have told you a year ago. And in addition to that, you can expect that we still spend more in 2016, as we have already said, but want to go back to a normalized level in 2017.
Golf, yes, this is correct, we have already released and restructured some parts in 2014 bringing the Adams, or closing the Adams facility at [Texas] and bringing it down to Carlsbad.
But unfortunately, our sales have further gone down in 2015, as you have seen, and we definitely do believe we have to align our cost structure and our workforce to the revenue level. But we also think we can take out by efficiently more of the costs bringing new processes and concentrating on key countries, as I have said America, Japan, Korea and England which make 90% of the revenue, anyway.
And, therefore, we have done a further reduction and a further restructuring without going into all the details as I said this morning, over 40 initiatives we are working on, and you can expect a break-even in 2016 already for the golf business.
Last but not least, automation. Our vision, going forward, is that we can production bringing back to the market where the consumption is. This finally would mean that we could produce in Germany for the European markets, or in England for the English market, or in America for the American market which, obviously, would give us a lot of advantages, and especially under the light of one of our strategic choices for creating the new plan which is speed.
This definitely will be one of the key factors. And this is a vision, I don't know, will it be in three, four or five years, but as you can see, with Speedfactory, we are making the first attempts already, and we are working intensively that the faster, the better it will be.
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Andreas Inderst, Macquarie Research - Analyst [35]
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Okay. Thank you.
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Operator [36]
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Volker Bosse, Baader Bank.
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Volker Bosse, Baader Helvea Equity Research - Analyst [37]
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A lot of questions are answered already. Thank you very much for this. Two questions are left from my side. Could you please provide us some figures on your online sales trend? So how much online sales did you generate here in the third quarter, or how was the momentum?
And second, on NEO, what's your current view on the NEO store expansions throughout Western Europe? What are your plans in terms of opening stores here? Thank you.
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Robin Stalker, adidas AG - CFO [38]
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So the ecom sales are up 25% in the quarter; they're up 44% totally. And to Western Europe?
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Herbert Hainer, adidas AG - Chairman & CEO [39]
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The second question was to NEO, invest in Europe. So in general, Volker, we are creating the revenue growth with our franchise partners, for example, in China. We have started to operate some of the NEO stores here in Europe. But this is not our primary target, because we definitely do believe that we have so many wholesale partners which we can work with, with our NEO collection, and this is what the main part will be, going forward.
So don't expect a big expansion here in Europe and around the world with our own NEO stores.
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Robin Stalker, adidas AG - CFO [40]
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And probably just to complete my answer to the ecom, sales were about [EUR450 million] for the nine months.
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Volker Bosse, Baader Helvea Equity Research - Analyst [41]
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EUR450 million. EUR45 is it?
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Herbert Hainer, adidas AG - Chairman & CEO [42]
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Okay, EUR450 million.
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Volker Bosse, Baader Helvea Equity Research - Analyst [43]
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Thank you.
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Herbert Hainer, adidas AG - Chairman & CEO [44]
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[EUR450 million].
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Volker Bosse, Baader Helvea Equity Research - Analyst [45]
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Yes, I've got it. Thank you, perfect.
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Operator [46]
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Graham Renwick, Exane.
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Graham Renwick, Exane BNP Paribas - Analyst [47]
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I just have a couple of quick questions. The first one, just coming back to the golf business, how far are we away from seeing supply and demand rebalance in the golf industry?
And after we see the restructuring and self-help initiatives come through, what margin should the TaylorMade business achieve in a normalized demand environment?
And then, just on the US. Just looking at the US strategy, there's clearly a lot of positive commentary around the work you're doing there and a good performance this quarter. Just over what timeframe and from which key metrics do you think your US success should be judged?
And what competitive response do you expect to see from peers such as Nike and Under Armour as you push a lot deeper into certain sports in the US? Thank you.
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Herbert Hainer, adidas AG - Chairman & CEO [48]
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Let me start with the golf business. There is definitely, going forward, in my opinion, a much better situation in the golf market in terms of inventory levels on the supplier side and on the retail side, going forward, because I do believe that everybody from the supplier side, including us, have learned that there was too much product into the market, especially in 2013 and 2014, when the weather conditions were so bad that less rounds have been played and that oversupply was there.
I definitely do believe that there will be, going forward, a much healthier situation, as I have told you in my little speech before, that we will not push all the product into Q4, which we might, could sell on the M1, because we do believe we want to build these franchises for the long term.
In golf, on the margin side, and I think you talk about gross margin, mid-40% gross margin is definitely doable, and this we always have had in the past.
When it comes to the US in general, then, we don't want to talk that much, so what is our horizon, when will we achieve certain things, because we clearly said that we want to establish a sustainable healthy growing business in the US.
I think you have seen already that our growth in US is not coming from one or two categories. It is coming from football; it is coming from running; it is coming from [cleated] products on the American football side; on the soccer side; and it is coming also from the Original side. But it's broad-based and this is what we will be on.
As you can imagine, one of the next points will be basketball now with the roster we have with the activities we do. Our target is, quite clearly, to grow double digit again in 2016 with the adidas brand, and all the indications which we have because you know we sell six months in advance, give us all the confidence that we will achieve that, besides of getting better shelf presence in the stores, and I mentioned two examples with Foot Locker and with DICK'S.
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Sebastian Steffen, adidas AG - VP IR [49]
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Okay, thanks very much. Thank you very much, gentlemen. This concludes our conference call today. Our next results, as you will know, will be released on March 3 next year.
However, as Robin and Herbert have already mentioned, we will be hosting our second IR tutorial workshop on December 9 here in Herzogenaurach, and we'll explain to you more in more detail the drivers of our margin development in general and, of course, for 2016 in particular. You will receive a formal invitation within the next couple of days and we, of course, hope to see as many of you as possible here in Herzogenaurach in a month's time.
But as Robin mentioned, even if you are not able to make it to Herzogenaurach, we will, of course, make sure that all the content is also available through our website.
If you have any questions, be it on the tutorial or on the quarter results, please don't hesitate to reach out to the IR team. And with that being said, I would like to thank you for your participation and would like to wish you a great day and talk to you soon. Bye-bye.
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Operator [50]
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Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation and you may now disconnect.
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