Q3 2016 adidas AG Earnings Call
Nov 03, 2016 AM CET
ADS.DE - adidas AG
Q3 2016 adidas AG Earnings Call
Nov 03, 2016 / 02:00PM GMT
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Corporate Participants
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* Sebastian Steffen
adidas AG - VP of IR
* Kasper Rorsted
adidas AG - CEO
* Robin Stalker
adidas AG - CFO
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Conference Call Participants
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* Fred Speirs
UBS - Analyst
* Andreas Inderst
Macquarie - Analyst
* John Guy
MainFirst - Analyst
* Antoine Belge
HSBC - Analyst
* Jurgen Kolb
Kepler Cheuvreux - Analyst
* Adrian Rott
Deutsche Bank - Analyst
* Geoff Lowery
Redburn - Analyst
* Piral Dadhania
RBC Capital Markets - Analyst
* Jamie Bajwa
Goldman Sachs - 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 quarter three 2016 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 AG - VP of IR [2]
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Good afternoon, ladies and gentlemen, and welcome to our Q3 2016 financial results conference call. Our presenters today are Kasper Rorsted, adidas Group's CEO, and Robin Stalker, our CFO.
I know that you've all been anxiously waiting to hear it from Kasper and Robin, of course. But before I will hand over to the two gentlemen, let me quickly remind you that, as always, all revenue related figures that we will be discussing today will be discussed on a currency-neutral basis, and that all figures will refer to our continuing activities and will be discussed excluding goodwill impairment losses.
And now, without any further ado, I would like to hand it over to Kasper, please.
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Kasper Rorsted, adidas AG - CEO [3]
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Thanks, Sebastian, and good afternoon to everybody. It's a pleasure to participate today in my first call as CEO for adidas. I think many of you have been following our company for many years and know it quite well. And some of you might know me also from my time at Henkel. While I do look forward to my role as CEO of adidas, but equally important to get to know all of you over the next coming months and quarters.
I started back in August and took over the CEO position in October, so the numbers that we're discussing today were done under the leadership and produced under the leadership of Herbert. And I'd like to thank him, and of course the entire team, for producing what we think are very strong Q3 results.
I'm really excited to take over the lead of a company that is doing so well, because it also gives me ample time to make certain that we can take the right decisions for the future. For me, I have always admired adidas, from when I was a kid when I was doing sport. And of course, being CEO of such a company is really a dream come true, because I am dealing with products that I truly like and love.
I'd like to thank our Chairman, Igor Landau, and the Supervisory Board for giving me the opportunity and the trust to become the new CEO following Herbert's many year tenure at the company.
So, what did I do the first couple of months? I really wanted to gain a holistic picture of the entire situation. And that's why I spent a lot of time traveling the world and meeting our key people and spending time in the key cities like New York, Shanghai, London, Moscow, Berlin, Boston, and Portland, to name a few.
In all of those cities, I met employees and, of course, partners of other kinds. I met approximately 6,000 employees in one-to-one and one-to-many or town hall meetings. And I spent extensive time with my Board colleagues and senior management not only here in Herzo but across the globe where I visited adidas.
I've also met our most important customers, be it Foot Locker in the US or, in Europe INTERSPORT, SportsDirect, and Zalando, or in China [WiWi] and Bell, to name a few. I've also met our key sports marketing partners like FIFA, UEFA, MLS, NBA, and the German Football Federation.
I saw a lot of suppliers very recently here in Herzo. And a couple of weeks ago I was in China and met up not only with our suppliers but also our key customers. And I'll continue my travel. Later this month, I will go to Vietnam, along with Glenn Bennett, to meet our key manufacturers in Asia, and then go back again to the US.
So, what have been my key takeaways after the first three months with the group? I think that the group is in excellent shape. We are, in many ways, a role model in the industry when it comes to innovation, sustainability, and product operations. We have extremely passionate and committed employees, which I've never seen this extent in any other industry.
Our products resonate extremely well with consumers around the world. And we have a great momentum worldwide across all major markets and categories. And I think that's what you're seeing reflected in our third quarter numbers, but of course also in our first nine months this year.
Our ongoing brand momentum has led to strong top and bottom line improvements. And despite one-time costs, which we'll come back to, our underlying net income will come out at the upper end of our guidance, between EUR975 million to EUR1 billion. So, we expect that to come out at the upper end. 2016 will be a record year for the adidas Group.
I think that the past momentum proves really that creating the new strategy that was launched approximately two years ago is really paying off. The consumer centric approach has increased our brand desirability and relevance with the consumers. And you can see that not only in our markets or in our revenue numbers, but also in the market share gains in the key categories and markets where we are active.
So, we believe that Creating the New is delivering superior results. And I want to be clear on this point because I know many of you will ask or have asked, we will continue to be fully committed to Creating the New. And that has my full support. We'll focus further on execution and fine-tuning wherever and whenever we need -- we see that needed.
And I believe it's great to have had the opportunity to join a company when the company is in great shape. But I want to be clear on this; like any other company, there are also areas that we can improve. And my job, along the rest of the management, it to make this company even better along with everybody, whether it's my management team and/or all employees globally.
So, what are some of the initial priorities? First and foremost, of course, is to ensure that we continue sustainable growth. We will make sure that we remain a growth company and, at the same time, deliver significant top and bottom line improvements. We need to win with the consumer with the most innovative products and also the most engaging experiences.
But we also, at the same time, need to manage our business in a disciplined manner to ensure sustainable success. So, one of my first priorities is continuing the launch and growth trajectory. Other priorities are drive the digital transformation within our organization and continue the turnaround in North America.
Let me start spending just a couple of minutes on digital in North America. On digital, it is a great opportunity to up our game. Digital is changing our lives and businesses in almost all kinds of ways; how consumers shop, how we communicate with them, how we design, develop, and manufacture a product, and of course also how we communicate internally. Adidas.com is our largest and fastest growing shop today globally. It's, by the way, also the only global shop that we have.
So, it's not about digital. It's not about what we want to become. It's how fast we can create competitive advantages through digital. And I'll give you a lot, with the rest of the management team, the details to our plan when we reconvene in March next year.
The next part is to continue our US turnaround. US, or North America, is of key importance. It is the single largest consumer market in the world, and we have made major progress over the last 18 months, which is reflected in the 29% adidas growth in year-to-date 2016. And I'd like to congratulate Eric Liedtke, Roland Auschel, and Mark King for winning the consumer.
But winning in North America is a marathon, not a sprint. We have our set of challenges in the last 10 years. And while we have had a great run for the last 18 months, it's very important that we continue this momentum that we currently have in the US.
And to win in the long run, we need the best infrastructure setup in the US. And for that reason, we have taken two major important -- or two very important decisions. Firstly, we have redefined our strategic setup in the US and the role of our key locations. Portland will remain our adidas headquarters in the US and the extension of our group headquarters here in Herzo, and all other North America related functions will be hosted in Portland. Boston becomes the global home of Reebok in a new and vibrant location.
Secondly, we have looked to define and assess the situation at Reebok. Reebok is today well positioned to become the best fitness brand, and we have transformed Reebok from a traditional sports brand to a purely fitness brand. And we have made major progress, which is fueled by consumer feedback, and also continued top line growth in the last 14 quarters.
At the same time, we have to be realistic. Reebok is growing slower than adidas and our competition, and we have seen no growth in North America in the past three years. And lastly, the profitability is significantly below the group average. It's time to get back to the gym and redouble our efforts on Reebok.
And what are we going to do? We will be following our brand leadership principles that we apply to the rest of adidas. We'll be streamlining our Boston-based organization, and will create a global brand team 100% dedicated to do only Reebok. To allow for a new beginning of Reebok, we will move to a new home in Boston in 2017. We have started the search for a new location, and we've initiated the sales process for a Canton building that we've been in for many years.
In addition, we will move most of the group functions and SLD to other group locations. And let me try to be specific on this. We have approximately 950 positions in our current Reebok headquarters. 650 of those will move to the new location. 150 of the remaining 300 will be relocated mostly to Portland in the US, and the remaining 150 positions will be eliminated.
We will also accelerate the streamlining of our store network. We'll be reducing the number of Reebok US factory outlets by half, and we'll limit the number of FitHub stores, as the focus is on wholesale. Matt O'Toole will take full responsibility for Reebok in North America.
We have and will assume one-time costs of approximately EUR30 million in our second half, which is all including the numbers that we are speaking about. We'll give Reebok more freedom to operate globally, and more responsibility in the US. We'll get a more focused organization, and that will enable us to continue the momentum we have right now of adidas in the US and it will make Reebok stronger.
We are committed to accelerate growth and sustainable profit improvement. Reebok is an important member of our group. But it's clear, like in sports, every member has to contribute to the success, and that is also our expectation to Reebok. And we'll be further focused to ensure that that will take place.
Now let me move on to our golf business. We'll continue the divestment process for TaylorMade, Adams, and Ashworth. It is strategically the right decision that's been taken. And we are fully committed, including myself, to execute that. It's best for the group to exit the golf equipment market.
We expect an agreement by the end of 2016, and the divestiture is expected to trigger a loss at disposal. This will, however, not change our underlying profitability.
Looking upon 2017, of course we will give an in-depth briefing when we meet in March, but let me just give you a couple of comments. It's clear our plan is to continue a long term growth path also in 2017. At the same time, we would not expect a similar level of revenue and profit growth as we compete against an exceptional year, 2016, with 20% revenue growth and 40% profit growth.
2017 will be more in line with our long term growth objectives that we also outlined under Creating the New, with a robust top line expansion, continued operating margin improvement, and also continuing to drive the bottom line improvements. We will, of course, also invest in our business where necessary in digital and infrastructure, because these investments are necessary to elevate our long term profitability.
As outlined before, we'll give you full details of our 2017 guidance on March 8th. We'll also host an investor day on March 14 next year in Herzo and more details around the evolution of Creating the New. In December, I'll be spending some time with you in New York and London and Frankfurt for our first informal get-together, which I very much look forward to.
Robin will now take you through the numbers in detail, and then we'll have a Q&A session. Now over to you, Robin.
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Robin Stalker, adidas AG - CFO [4]
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Great. Thanks very much, Kasper, and good afternoon, ladies and gentlemen. And after hearing about our business from a more strategic point of view, let's move back to the fiscal year 2016 and discuss our Q3 figures in detail.
As Kasper already mentioned, we can report another strong quarter, in line with our expectations. Against the background of tougher comparisons following the accelerating business development in last year's third quarter, group revenues yet again increased a firm 17%, adding up to EUR5.4 billion.
Adidas continued its successful course from the previous quarters globally, increasing 20% in Q3 with double digit growth rates across all regions with the exception of Russia/CIS, where sales grew at mid single digit rates. Reebok was also able to maintain its top line growth trajectory, showing another quarter of robust top line expansion, as revenues increased 7%.
The group's gross margin declined 90 basis points to 47.6% following the predicted pressure from magnified currency headwinds, whereas operating margin declined a limited 20 basis points to 10.4%, supported by strong operating leverage. This adds up to an increase in underlying net income of 15% to EUR387 million.
Now, as always, I will discuss all P&L items in more detail later in the presentation. But before that, let me share a little bit more color on the brands and categories driving our strong top line development during the third quarter.
And let's begin with our sport performance business, which continued its strong momentum from the previous quarters, delivering a revenue increase of 13% in Q3. This development was driven by double digit increases in nearly all key categories, with running leading the way, growing 17% in Q3.
Now, while running as a sport is certainly enjoying increasing popularity globally, our energetic performance is largely driven by our great running franchises. Not only has the nearly introduced AlphaBounce been very well received by consumers, especially in North America and China, equally important is that our various BOOST franchises got an extra thrust from the introduction of the ULTRABOOST Uncaged and the colored BOOST.
Furthermore, our much stronger focus on women, underpinned by the successful introduction of the PUREBOOST X earlier this year, is driving an accelerated rate of sales in the women's business.
While the training category sustained its double digit growth trajectory with sales up 13% in Q3, revenue growth in the football category, up 5% in the quarter, was somewhat more moderate. This development, however, was expected as it was solely due to a strong base effect from last year's Q3, where we not only launched the jerseys of one, but of two major teams in global football, namely Manchester United and Juventus Turin.
As a result, football apparel sales were down year-over-year. At the same time, footwear sales increased a strong 27%, supporting by the launch of the Speed of Light package line, confirming our underlying momentum in this important category.
Now let's move over to our lifestyle business, where we recorded our sixth consecutive quarter of over 30% growth. Revenues in the third quarter increased 42%, driven by both adidas Originals, up 41%, as well as adidas NEO, up 51%. At adidas Originals, we continue to record amazing growth rates in the footwear business, up almost 50% in the third quarter. And this, by the way, is on top of a 47% increase in Originals footwear sales in last year's third quarter, which I believe speaks for the sustainability of this growth trend.
Now, while our iconic silhouettes such as the Stan Smith and the Superstar remain popular around the globe, the Tubular is gaining more and more traction with consumers, especially in the US and in China. And we continue to see incredible hype around our NMD franchise, which we launched at the beginning of the year.
And not to forget our unique collaboration with Kanye West, where Q3 has seen the expansion of our YEEZY franchise into the world of competitive sports as we launched the first cleated football boots designed by Kanye. The success around the shoe launch was once again overwhelming, as it has been the fastest selling football cleat in adidas history, being sold out in hours, or let's say even minutes at Eastbay.
Ladies and gentlemen, this is the perfect example of the indistinct boundaries between sports performance and lifestyle. And this example leaves no doubt that adidas is the brand with the ultimate dedication to sport on and off the field of play.
Now Reebok, as you heard from Kasper, remains a key priority for us. Revenues in Q3 increased 7%, driven by growth in all market segments. And while this indeed is promising, we are expecting more from Reebok, both in terms of revenues and in terms of Reebok's contribution to our bottom line.
As for brand adidas, the US plays an important role here also for Reebok. And efficient and effective distribution will be key to the Reebok brand's future success in this all important market. We are, therefore, accelerating our initiatives to streamline Reebok's store base in the market.
By the end of the year, we will have closed another 20 factory outlets and almost half of our Reebok FitHub concept stores. And we will see an even higher number of store closure in 2017. As Kasper mentioned, the initial costs of around EUR10 million are already reflected in our third quarter results.
To conclude on the brands and categories, let's have a quick look at TaylorMade-adidas Golf, which continued its top line recovery in the third quarter, growing 6% driven by robust 13% growth at TaylorMade and a 6% increase at adidas Golf.
At TaylorMade, growth is supported by ongoing strong sell-through rates of the M series metalwoods and iron product categories. TaylorMade continues to dominate the metalwood category, strengthening its market leadership position through further market share gains globally and, notably, in the UK, one of the world's biggest golf markets.
So, as you can see, ladies and gentlemen, the turnaround program we commenced in the second half of 2015 for TaylorMade continues to be very successful, with the result that our golf business is much better shape today than was the case a year ago.
Let's now have a look at our market segment performance. In the third quarter, we were once again able to grow revenues at a double digit rate in each market, the exception being Russia/CIS, which nevertheless also accelerated its growth momentum for the third consecutive quarter, growing 7% in Q3.
Of particular note, in our core markets of Greater China, North America, and Western Europe, where revenues grew 25%, 20%, and 15% respectively, we continue to outgrow our most important competitors. This, ladies and gentlemen, is following an already significantly accelerated third quarter performance in the previous year.
But let's move on from the big picture and dip into some of our market segments in more detail beginning with Western Europe, where we were able to grow our top line by 15% in the third quarter, as already mentioned. Keep in mind that this is on top of an almost 20% increase in Q3 2015, which means that over a two year period we've increased our business by one-third in a more or less mature market environment.
Adidas revenues grew 15%, driven by double digit increases at adidas Originals and adidas NEO. Now, despite the missing initial jersey sales from MU and Juve last year, our football category was able to grow by another 9% in Q3. This reflects strong double digit growth in footwear and shows that adidas is the winner of this year's major football event.
Beyond football, mid single digit growth in the running and training categories also contributed to the overall improvement at adidas. Reebok revenues also increased 15% in Q3 due to double digit sales growth in the training category as well as in Classics.
From a market perspective, the main contributors to the sales development were the UK, Germany, France, Italy, Spain, and Poland, where revenues grew at double digit rates each.
As pressure from negative currency effects intensified as anticipated during the third quarter, gross margin in Western Europe saw a decline of 4.1 percentage points to 43.4%. However, we were again able to partly offset the negative effect from the gross margin decline through operating leverage of 0.9 percentage points, therefore limiting the decrease in operating margin to 3.2 percentage points and ending the quarter with a robust segmental operating margin of 21.4%.
Moving over to North America, where we maintained our strong double digit growth momentum, increasing revenues by another 20% in Q3. And while the most encouraging development is and remains the fact that brand adidas is resonating better and better with the US consumer, I do not want to leave unmentioned that Reebok, for the first time since 2013, positively contributed to the market's growth.
Let's dig into the brand's development in a little more detail starting with adidas, which was not only the strongest selling brand during the back to school season this year, materializing double digit growth at adidas Originals and adidas NEO, but it further gained significant traction with US athletes and sports fans.
Our US sports business increased a phenomenal 30% in Q3. Supported by strong growth in our running and training categories, our sports performance revenues grew at a double digit rate in the third quarter. All of this has helped us to increase our market share in the all important footwear category from 5% a year ago to 10% in September 2016.
This, ladies and gentlemen, makes me extremely proud of what we have achieved within the last one and a half years since the kickoff of Creating the New. But this can only be the beginning. We are far away from being done here. And as Kasper has just recently said, the turnaround in the US is a marathon and not a sprint.
Over to Reebok, which, as I've already mentioned, was able to grow its business in North America for the first time since 2013. Revenues in the third quarter increased 2%, reflecting improvements in the brand's wholesale business, both at the longstanding customers such as Dick's and Academy, and also with new partners like Champs, Macy's, or Journeys.
The strong revenue growth in North America led to significant operating leverage in the third quarter. Combined with a gross margin increase of 10 basis points, the market's operating profit improved by 70 basis points to 7.7%.
In Greater China, Q3, with its 25% revenue growth, marked the 10th consecutive quarter of double digit growth. And I can once again confirm that we do not see any weakening in the market. The strong structural trend towards a healthier lifestyle as well as sports inspired leisure products is still absolutely intact. Inventories in the market are clean, and the cooperation with our business partners continues to be highly successful. A closer look at the drivers from a category perspective will definitely further underline my statement.
Adidas revenues grew 25% due to strong double digit growth in the running, training, and football categories, as well as at adidas Originals and adidas NEO. With growth of 40%, the running category is the strongest performer in the quarter, illustrating the big running trend in China as well as the Chinese consumer's confidence in our product and in our brand.
Reebok revenues increased 19%, driven by strong double digit growth in the training category. In addition, mid single digit growth in the running category as well as Classics contributed to this development.
The ongoing strength of our brands can also be witnessed in the further acceleration in gross margin expansion in the third quarter. Gross margin in the market segment increased 1.5 percentage points to 56.8%, while operating margin grew 2 percentage points to 34.6%, supported by further operating leverage of 0.5 percentage point.
As if the great financial development isn't enough already, I can also announce another tremendous milestone for Greater China, as we just opened our 10,000th mono branded franchise store a few days ago. There is no doubt that we are continuing to expand out footprint in the marketplace, and we are moving at full speed towards reaching our 2020 targets both financially and operationally.
Moving over to Latin America, where revenue growth has turned into double digit territory following a somewhat distorted sales performance within the first half of the year, largely due to timing situations. Strong double digit growth in the region's biggest market, Argentina, as well as further improvements in brand desirability in Brazil, supported by our successful brand activation activities around the Rio Olympic Games, contributed to this development.
Consequently and as we assured you during our quarter two call, revenues returned to double digit growth and increased 16%, driven by broad based growth in major sport performance and lifestyle categories. While adidas' revenues increased 18%, driven by double digit sales growth in the running and training categories as well as at adidas Originals and adidas NEO, Reebok revenues were up 4% due to double digit growth in the training categories as well as in Classics.
From a market perspective, the main contributors to the increase were double digit improvements in Argentina, Peru, and Colombia, as well as high single digit growth in Mexico and Chile.
While the gross margin remained under severe pressure from currency headwinds, declining 3.9 percentage points to 40.1% in Q3, the strong top line growth led to significant operating leverage, resulting in overall operating margin expansion of 2.0 percentage points to 14.6%.
Now let me close the discussion on our operating segments with a quick look at other businesses, where we saw significant top and bottom line improvements in Q3. Revenues grew 7% in the third quarter, driven by a 27% increase at other centrally managed businesses, following double digit sales growth of most sub-brands, in particular Y-3, as well as a 6% increase at TaylorMade-adidas Golf, as already discussed earlier.
At CCM Hockey, the overall challenging market conditions in the US hockey market continued to weigh on the brand's performance during the quarter, as reflected in declines in the licensed apparel and equipment business. Consequently, revenues at CCM Hockey were down 7% in the third quarter.
However, a strong expansion in gross margin by 3.4 percentage points to 37.8%, supported by higher product margins at TaylorMade-adidas Golf, as well as a decline in operating expenses at a percentage of sales by 5.5 percentage points, led to a significant improvement in segmental operating profit. At 2.2%, segmental operating margin grew 8.9 percentage points compared to the prior year period.
Now let me turn to the major P&L items of the adidas group and start with the group's gross margin, which is for sure a topic of particular interest to all of us. As expected and communicated throughout the year, the group's gross margin saw the expected decline during the third quarter, down 0.9 percentage points to 47.6%.
This decline was solely the result of significantly stronger currency headwinds in Q3 compared to the first two quarters of the year. When directly comparing the gross margin drivers of the first half of 2016 with those of the third quarter, the reason becomes very obvious.
While negative currency effects added up to 380 basis points for the first half of 2016, the third quarter alone experienced a significantly higher negative FX effect on the group's gross margin, in total 490 basis points. In contrast to this, the underlying improvement from our various mitigation initiatives, including a more favorable pricing, product, and channel mix, continued with almost identical strength in Q3 compared to the first half of 2016. And this clearly underlines the ongoing strength of our brands.
So, ladies and gentlemen, let me make it very clear that this 90 basis points decline during the third quarter, A, did not come as a surprise to us, as we were expecting this since the beginning of the year, as reflected in our full year guidance; and B, it is simply due to the more severe FX hedging and headwinds.
Looking at the gross margin development for the first nine month, the group's gross margin remained fairly stable at 48.6%, a great achievement in light of the overall FX environment we are facing and as I've just explained.
Let's move further down the P&L and continue with other operating expenses, which increased 12% both in Q3 and year-to-date. As mentioned before, during the third quarter we initiated restructuring measures at Reebok, which had an impact on our group's operating expenses of around EUR10 million in Q3. In addition, our Q3 results reflect a negative impact from the Golfsmith/Golf Town bankruptcy in the low double digit million euro range.
Now, in spite of these one-off expenses, the group was still able to generate robust operating leverage, and as other operating expenses as a percentage of sales decreased 0.8 percentage points to 38.0% in Q3 and to 40.5% in the first nine months.
Consequently, the operating margin decline in Q3 was limited to 0.2 percentage points, translating into a strong 10.4% operating margin, or EUR563 million operating profit in the quarter. This adds up to an operating profit of EUR1.5 billion in the first nine months, or an increase of 1.4 percentage points to an operating margin of 10.0%.
While net financial expenses increased from EUR10 million last year to EUR18 million in the third quarter of 2016, net financial expenses for the first nine months declined slightly to EUR16 million compared to EUR19 million in the prior year period.
Following a 2.8 percentage points lower effective tax rate in Q3, or 2.6 percentage points in the first nine months, our net income from continuing operations increased a strong 15% to EUR387 million in the third quarter, adding up to a 39% increase to EUR1.028 billion for the first nine months.
As a result, diluted earnings per share from continuing operations amounted to EUR1.88 in the third quarter, reaching EUR5.01 in the first nine months of 2016, representing an improvement of 13% in Q3 and 38% for the first nine months.
Lastly, let's have a look at the most relevant items of the group's balance sheet, as always starting with operating working capital. With inventories growing 18% on a currency-neutral basis, supporting our revenue growth expectations going forward, accounts payables grew 15% currency-neutral, reflecting the increase in inventories. Accounts receivable were up 9% on a currency-neutral basis.
Therefore, average operating working capital decreased 0.4 percentage points to 20.3% as a percentage of sales. I think you'll agree that this is a great evidence of sustainable and healthy growth.
Net borrowing at the end of September amounted to EUR769, representing a decrease of EUR134 million compared to the prior year. This development was driven by an increase in cash generated from operating activities. As a result, our ratio of net debt to EBITDA also decreased from 0.6 times in 2015 to 0.4 times in 2016. And last but not least, our equity ratio remains at a strong level of 43.0%.
And this, ladies and gentlemen, now concludes the review of the financial developments for the third quarter and for the first nine months. But let's now take a look at the remainder of the year, starting with a brief overview of what you can expect from us operationally in the upcoming months.
So, let me start with our global brand campaign, Sport 16, which represents a massive shift since the beginning of the year in how adidas communicates with our customers and our consumers. Driven by the brand's mission to be the best sports brand, the campaign has since then strengthened adidas's position within the creator community, celebrating athletes who embrace creativity on and off the field of play.
Football Needs Creators is the latest chapter of the adidas Sport 16 that build upon the belief that all athletes are here to create. The new spot follows the recent launch of Sport Needs Creators, featuring athletes such as the world's most in demand football player, Paul Pogba, Super Bowl 50 MVP Von Miller of the Denver Broncos, two time NFL MVP Aaron Rodgers of the Green Bay Packers, or four time NBA All Star James Harden of the Houston Rockets.
Talking about Paul Pogba, Man U's star midfielder, also takes center stage when it comes to promoting our newest football footwear release, the Stellar Pack. Together with some of the world's most influential football players, including Gareth Bale, Luis Suarez, and Mesut Ozil, he will assure that our newest football boots continue to enjoy broad attention and on-pitch presence in the months to come. With the Stellar Pack, we continue the successful journey which started earlier in the year with the release of the Mercury and Speed of Light Packs.
Turning to running, where we are determined to drive and strengthen our momentum in the months to come, and we have every confidence that our consistent focus on key footwear franchises, together with their strategic positioning, brings us closer to the running consumer than ever before. Our key running silhouettes allow us to service different types of consumer with different preferences at different price points.
While our Cloud and AlphaBounce silhouettes target the more price sensitive consumers, we have our Energy Boost and Pure BOOST franchises addressing performance orientated runners on a more premium level. And at the very top, as you know, we have our Ultra Boost models for the professional runner, featuring an excellent combination of comfort and support as well as the latest fashion trends.
Our franchise strategy, together with our marketing initiatives tailored to the profiles and needs of consumers, allows us to continuously fuel demand around our running shoes. In this regard, we recently launched the Reflective Pack around our Ultra Boost and Ultra Boost Uncaged franchises. The pack, which features reflective yarn and an all-white design, will ensure we keep the excitement up during the winter season.
And this is just the beginning, as Q4 will see further exciting innovations in the running category, such as the first commercial footwear product launched by adidas and Parley for The Oceans.
This brings me to our next category, training, where we have also just recently launched a completely new and exciting product offer, adidas Athletics, which addresses the crucial period pre- and post-competition. The highlight product of this newly created product line is our Z.N.E. hoodie, a fresh take on traditional pregame outerwear using unique design elements, making it a very recognizable silhouette that we can build on in the future.
Athletics apparel will be a key driver for the training category in Q4 and, indeed, beyond. The recent launch was supported by key athletes such as Gareth Bale, James Harden, and Caroline Wozniacki as a far-reaching digital campaign, also including outstanding activations across our most important key accounts and retail stores. First sell-through rates are highly promising.
Turning to basketball, where we are proud to present the first James Harden signature shoe, the Harden Vol. 1, paying homage to where James's champion journey began back in 2007. The shoe marks the beginning of a co-created footwear and apparel signature line from adidas and James Harden, reflecting our strategic open source approach.
The shoe will be supported by our biggest basketball campaign in the past two years, activating all key consumer touch points including a TV campaign and further media activations in the US and China from November onwards. Additionally, there will be an extensive retail introduction in 2,500 stores globally, starting in some of our key cities in December.
On the lifestyle side, we will continue to pursue and accelerate our footwear franchise strategy, putting a special focus on building and investing into the various footwear franchises, starting with our iconic silhouettes from the past such as our well-known Superstar and Stan Smith, through to newly created modern franchises such as the NMD or the Tubular.
A broader, more diverse footwear franchise portfolio will support our broad ambitions in lifestyle, while at the same time helping to diversify our portfolio through every changing fashion trends. As you know, during Q3 we brought back the iconic Gazelle franchise, thus reintroducing another member of our footwear family, while in the months to come we will be launching exciting products for our Tubular and NMD franchises. Q4 will also see our first global endeavor behind our EQT franchise in the buildup to the Christmas season.
Let me now turn to Reebok, where we have exciting brand and product initiatives upcoming, aimed at further strengthening and positioning Reebok as the leading fitness brand in the global fitness market. Only a few weeks back Reebok joined forces with Australian fitness professional Emily Skye as its newly global fitness ambassador, as well as with global style icon Gigi Hadid, both of which -- both of them brings along an impressive social media footprint, with Gigi Hadid having over 24 million followers on Instagram.
Both partnerships aim at engaging and motivating women around the world to unlock their potential through fitness. Rebook will have Gigi Hadid telling the mixed phase of the brands Be More Human campaign, asking women around the world to celebrate the beauty of imperfection and promoting Reebok's message of self-betterment.
On the product side, similar to the adidas brand, Reebok is also making further strides when it comes to the future of manufacturing. Only a few days ago Reebok presented a groundbreaking manufacturing innovation, the Liquid Factory, which has to potential to fundamentally change the process and speed of footwear creation in the future.
This new manufacturing process uses software and robotics to literally draw shoes in three dimensions. A proprietary liquid material created especially for Reebok by BASF is used to draw shoe componentry in three dimension layers, creating totally unique footwear without the use of traditional molds. With great media coverage, Reebok just presented the first concept shoe emerging from the Liquid Factory, creating hype for the brand and its pioneering innovation, with great potential for the global fitness market.
And this, ladies and gentlemen, brings me to the last big and exciting announcement that I have for you. While all of you are familiar with our strategic aspirations for 2020 and our focus on key cities, with New York being one of them, I'm happy to announce the upcoming opening of our new adidas flagship at the heart of 5th Avenue on December the 1st. Without doubt, this store will set new benchmarks with regard to consumer focus and brand experience.
Our New York flagship will redefine sport at the point of sale. And we have set ourselves the ambition to create the best brand experience on the most frequented shopping street in the world. Make sure you have a look at it next time you're in New York. But bring some time, as you have to explore 4,236 square meters, making it the biggest physical adidas store ever.
So, concluding our Q3 results call, let me quickly elaborate on our financial outlook for 2016. Against the background of the outstanding financial performance in the first nine months of 2016, we confirm our financial outlook for the full year. We continue to expect revenues to increase at a rate in the high teens on a currency-neutral basis for the full year, with healthy double digit growth in Q4 as well.
The gross margin is projected to be at a level between 48.0% and 48.3%. Despite investments to spur our Creating the New strategic business plan as well as, during the second half, one-time costs for Reebok and at TaylorMade-adidas Golf in the magnitude of more that EUR40 million, we continue to project the operating margin for the adidas Group to increase to a level of up to 7.5% in 2016.
And we confirm our guidance for net income, which we now expect to come in at the upper end of the target range of between EUR975 million and EUR1 billion. And that is all in spite of the additional charges Kasper and I have explained to you before.
Now, before we take your questions, let me conclude my comments by saying we are more than satisfied with the achievements of the group in the first nine months of this year. Despite running against more significant comps and in spite of the severe FX headwinds, we have managed to sustainably grow the group's revenues and profitability. And without giving any detailed guidance for the next financial year, today's results make it clear that the adidas group remains a growth company.
And with that, ladies and gentlemen, Kasper and I will be happy now to take your questions.
==============================
Questions and Answers
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Operator [1]
------------------------------
Thank you very much, sir. (Operator instructions.) Fred Speirs, UBS.
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Fred Speirs, UBS - Analyst [2]
------------------------------
Hi, gentlemen; three questions, please. Kasper, hello. It sounds like you've been off to quite a busy start. I'd be very interested to hear your early assessment of how well the reporting lines are optimized to speed and efficiency of decision making, and also whether you think the operating structure will need to evolve much to help you execute on the vast transformation within digital.
My second question was on Reebok. You've talked about moving to a pure fitness brand that's more wholesale focused, but it does seem that perhaps the brand does not successfully appeal to a wide enough consumer base yet, especially in the US. So, where do you see the main opportunities for Reebok? Are those more focusing on brand, on product, or on distribution? And also, are you thinking about shifting how you think about the target consumer?
And the last one was on Boost. You've got a great platform there, which is clearly performing very strongly. With your latest news on the potential of Boost, could you talk perhaps about the levels of overall volumes for Boost shoes you're hoping to ship in 2017 and how that compares to 2016? I think the last disclosure I remember was 12 million volumes in 2015. Thank you.
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Kasper Rorsted, adidas AG - CEO [3]
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So, thank you for your questions, and some I'll answer quite directly and some I will not.
Of course I am looking upon the overall operating volume within our organization. And as our business evolves over time, including the digital transformation, I think it will be necessary to create a greater level of clarity, but when we get there we'll make the appropriate announcements.
But clearly a business -- any company in transformation will also have to evolve its organization over time, so we are not dogmatic about it. And at this stage, I don't want to go to a further level of detail. I'll be happy to, when we come to the March meeting, to outline any kind of changes that might occur in our organization.
When it comes to the transformation of Reebok into a fitness brand, I think we've gone through an evolution over time where we tried to just illustrate what I mean. For a given period of time, the brand was probably stronger than the products. Right now, I would argue our products are stronger than the brand, and we need to make sure that we reconnect our consumers with the brand that we have. And we have been able to do that outside the US quite successfully, which you have seen at least in the growth side.
So, when you look upon what is really at the top of the agenda in the US, one is, of course, reigniting the brand through a number of initiatives, and Robin alluded to those, and get a better quality distribution than we've had in the past, which is what you've seen in some of the changes we've announced by reducing the factory outlets.
So, getting the top line up to where it needs to be, particularly in the US, and clearly also getting the consumer to pay more for the products so we start getting an acceptable margin that we are not experiencing today. So, that would be my current assessment of the -- Reebok's position. And again, as I've said before, every member of a family or a team needs to contribute. And that is the assumption for being part of the team.
Robin?
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Robin Stalker, adidas AG - CFO [4]
------------------------------
And Fred, your third question about Boost, you'll appreciate we're not giving any guidance at the moment for 2017, and that includes any numbers for some of our franchises. But I can reconfirm the 12 million that you've quoted for expectations of Boost sales in 2016.
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Fred Speirs, UBS - Analyst [5]
------------------------------
Sorry, just to double check, I thought it was 12 million in 2015. Was 2015 a lower number then?
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Robin Stalker, adidas AG - CFO [6]
------------------------------
13 million, sorry. 13 million.
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Fred Speirs, UBS - Analyst [7]
------------------------------
Thank you.
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Operator [8]
------------------------------
Andreas Inderst, Macquarie.
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Andreas Inderst, Macquarie - Analyst [9]
------------------------------
Yes. Welcome, Kasper. Good to have you onboard. My first question is on Reebok. You quantified the one-offs. Can you also quantify the benefits of these measures and where they are actually booked? Are they booked in the North American region? And in this respect, in case the turnaround cannot be achieved, what then? Can you rule out a disposal of Reebok in the medium term, or what's the worst case scenario here? That's my first question.
The second one, there's a lot of talk about your motivation and interest to join adidas, at least within the financial community. Could you please provide some background here on your incentives? What is actually your first take on the sports industry? What do you find odd, interesting, and exciting in the sports industry and at adidas?
And my third question is related -- is addressed to Robin, because Robin made this comment. In terms of market shares, you reached now 10% in the North American market. It's a good achievement, but far away from the rest of the world. But you clearly highlighted this is just the beginning. Can you elaborate on that, please, Robin? What could be a reasonable midterm target for the US market? Thank you.
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Kasper Rorsted, adidas AG - CEO [10]
------------------------------
I will start with the first question, which is Reebok, and Robin will allude to where it's booked. In any kind of company, everybody needs to make the contribution. If not, they can't be part of that company.
Now, I think that is as clear as I can answer that question. So, there is no point in speculating, but it's clear that patience is not going to be around forever. And that goes for every country, every category, and every brand. And I believe that we will be very [consequent] when it comes to that.
That is not by any means saying that we're selling Reebok. We're saying we put a plan in place. We'll execute that plan. And should something different come out, we'll deal with that scenario when we get there.
My motivation for joining adidas is multiple. First of all, I love sport. Secondly, I -- adidas has been my sports brand since I grew up. Joining a company which is a sports company and the brand that I've used all my life was a purely emotional driven decision, and I've been extremely happy in the first 90 days that I've been here.
If you look my first or initial observations, it's probably an industry that is much more growth driven than I'm used to, but it's also an industry that might be less structured than I'm used to. And I think these are two observations that I have. And I think the big challenge is going to be how do we maintain the growth and get structure, because that's where a lot of the upside will lie for the company.
But it was -- these were the primary drivers. I really wanted, very emotionally driven, to join this company, because I think it's a great company. And I see my responsibility as CEO to, along with the rest of the management team, to make this company better. And I truly believe we can do that jointly, and that's why I joined the company.
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Robin Stalker, adidas AG - CFO [11]
------------------------------
So, Andreas, two points, one the Reebok. We booked in the third quarter related to shop closures about EUR10 million. That's in the North American region. And there's still coming, obviously, in the fourth quarter, which I've alluded to, about EUR20 million for the restructuring that Kasper was talking about a few minutes ago.
The second question about market share in America, well, I'm not, and I'm sure you're not expecting me to quote a goal for market share. The more the better. I mean, I've always said that there wasn't really a market around the world where adidas has a market share of under 15%. And that's a personal view, but I still think something close to that has to be a pretty good, realistic first goal for us.
But we'll give you more about our specific goals surely when we update the communication to you in March next year.
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Andreas Inderst, Macquarie - Analyst [12]
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Good. I'm looking forward to that. Thank you.
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Kasper Rorsted, adidas AG - CEO [13]
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You're welcome.
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Operator [14]
------------------------------
John Guy, MainFirst.
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John Guy, MainFirst - Analyst [15]
------------------------------
Yes. Good afternoon, gentlemen. And welcome, good luck, Kasper. My first question, with regards to gross margin by distribution channel, backing out the third quarter gross margin, Robin, it looks like retail/wholesale gross margin was down around 150 basis points, with other businesses off around 320 basis points. So, within that and your initial conversations around the pure FX impact, is it fair to say that the retail/wholesale deterioration quarter-on-quarter is again just driven by currency? You saw no incremental promotional activity in the North American market? I mean, a lot of commentators have been talking about, a lot of brands have been talking about a little bit more pressure, promotional pressure, going into the third quarter. So, that's my first question.
My second question is around working capital. We've seen the inventory increase by about 18% on a constant currency basis in the third quarter, your receivables up 9%, payables up 15%, great cash generation over the quarter. What can we expect in the fourth quarter? I appreciate it's a small quarter, but should we be looking at average working capital as a percentage of sales roughly in line with what we've seen so far over the nine months?
And Kasper, just a question for you in terms of sporting goods industry, an overview. You've been very busy over the last 90 days. How do you view the marketplace in 2017? I think with regards to some of the strategic positioning that we've seen around volume and value, certainly there's been a lot of price mix increases that have been pushed into the market to try and offset some of the FX and labor costs. As the FX impact dissipates going into 2017, do you think the market will be more of a volume driven market over a value emphasis in 2017? And if you could, maybe give us any views around gross margin expectations for 2017, although I'm probably pushing that. Thank you.
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Robin Stalker, adidas AG - CFO [16]
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John, let me take the first two questions. Look, you're talking about hedging effects in our gross margin. And I can confirm very clearly that the only reason we have this significant negative element on the gross margin is simply because of the hedging.
I mean, the purchasing of our products in dollars, you know we said we had a hedge rate last year of something around about EUR1.31, EUR1.32. For this season we're at EUR1.12. So, that's a significant difference. And that was the reason why I was guiding end of last year, beginning of this year even, to the gross margin for the full year being down as much as 1 percentage point.
That we've been able to mitigate a lot of that in the first half of the year, I think that's really positive. And we're still very positive. If you look at the graph we showed on the WebEx with the development of the product mix and price increases, around about 400 basis points being able to compensate for this.
And there's definitely nothing in here that relates to any sort of promotional activities or a heavy discount or anything like that. It is pure hedging. And I've just repeated the guidance of the full year for the gross margin, 48.0% to 48.3%. That should give you some confidence we're feeling reasonably well with the fourth quarter and what we're seeing on that.
Your second question was about operating working capital. You know we've spoken about it a lot of times. We keep a very close eye on inventory. And I can confirm here that the inventory development is -- it's very current, so we're in line with sort of business expectations to a large extent here.
Our operating working capital as a percentage of net sales is a good 20.3%. That's actually improved 40 basis points over the prior year. I expect, even though the fourth quarter is pretty small, nothing significant in the change in net operating working capital development. And that's all I could add about that at this stage.
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Kasper Rorsted, adidas AG - CEO [17]
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And to you last question, forgive me. I've been in the company for 90 days now, and CEO for 33, and I'd like to make sure I give good and content rich answers when I get asked. And I'll be happy to answer the question when we meet in March, but I think that would be the appropriate time simply because I want to make certain it's well founded, the answer.
Of course, I've spent quite a lot of time in the first 90 days really getting insight into the industry and, most of all, into our company, which I also think I am getting. But I would ask you for the patience, and then I'll be happy to give you an elaborate answer when we meet, either in person or virtual, in March.
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John Guy, MainFirst - Analyst [18]
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That sounds good. Thanks very much, Kasper. Good luck.
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Operator [19]
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Antoine Belge, HSBC.
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Antoine Belge, HSBC - Analyst [20]
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Yes, hi. It's Antoine Belge at HSBC. I have three questions, if I may. First of all, regarding Reebok that you identified as being one of your priorities, it's been a while since we haven't heard any idea of the operating margin at Reebok. So, is it a brand that is now loss making? Or at least what we know is that it's below the EBIT margin of adidas. So, what would be the sort of main structural difference? Maybe if I saw it in terms of gross margin and then in terms of operating cost and the initiatives that you've just announced, how do you think that they are going to solve part of that, or at least you'll narrow the gap with adidas?
And my second question is on the US, which is also a big priority for you. Under the 2020 plan, there is actually, I think in year one and year two, a big sort of step up in advertising. And then even in the US, there should be some leverage on advertising. Do you think that this has to be put under review? If maybe you want -- do you think that there is more advertising needed to support the US market?
And finally, a more sort of broader question about especially you are coming from a different industry, but still you are partly at least involved with the -- directly with the consumers. Have you identified some easy wins, or maybe an area where the sporting goods industry, and not to mention adidas would be, I don't know, a bit lagging behind other consumer type of companies? Thank you.
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Kasper Rorsted, adidas AG - CEO [21]
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So, let me just start on the commitment we made to the US. It was not a two year commitment. It was a three year commitment. So, we're entering into the third year, and I think you can see the progress that we have made in the last particularly 18 months.
It's important that we continue to make sustainable progress around the adidas brand in the US, because not only do we need a bigger market share position, which Robin alluded to, but then of course we need a greater contribution on the bottom line. And that will come through scale. So, you should expect to see the same kind of activities as in 2016 continuing in 2017, as we already indicated. What comes after 2017, we'll say at the appropriate moment of time.
On the Reebok side, I'll hand over to Robin. But let me just answer the last question you asked, about what are some of the easy wins or not easy wins. I think if you were to look upon the two main differences between the consumer goods industry I come from and the sporting goods consumer industry, if you were to call it that, the sport goods is a higher growth industry, which it's important that we continue to focus on maintaining sustainable high growth also in the future.
The consumer goods industry I come from is a lower growth industry, which has been very disciplined -- been run very disciplined. So, a lot of the earnings you've gotten, you have gotten out of getting through gearing of the organization and gearing through the entire business model also through leverage.
And of course, then you can put one and one together and say a challenge. We have this. How are we going to make certain we maintain a very strong top line, which we've seen and we expect also for next year, while looking upon gearing in the model and for combining the two? And that would be my observation of it.
I don't think in any business there is any easy wins. If there are easy wins and they wouldn't have been taken by management, they shouldn't have been there. And I think that that's why there are no easy wins, but it doesn't mean that there is no room for improvement.
I will repeat what I have said in the last eight years at my previous job. I think there are improvements to be done in every single company. And it's identifying those improvements and then execute them very diligently, which is also going to be the case in adidas.
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Robin Stalker, adidas AG - CFO [22]
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And Antoine, your first question was going in the direction of can we talk about profitability. Well, you know we -- since the joint operating model, we don't have anything to share on profitability of the Reebok or the adidas brand, other than comparing the gross margin.
If you look at the gross margin, we're still very much in a situation where, although there were some quarters where Reebok improved its gross margin, we still have a deficit to the adidas brand of somewhere between 80, 90 -- sorry, 8 to 9 percentage points.
And that's an area where I think the emphasis Kasper was talking about, and having them focus more on what they can do with Reebok and making it the best fitness brand in the world, that we should be able to see improving as we get a product with higher price points that can sell-through better and generate better gross margins. And the rest will be also generating then further contribution to the group.
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Antoine Belge, HSBC - Analyst [23]
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And let me just follow up on Reebok. So, the EUR30 million, three-zero, that you are taking for 2016, how confident are you that it's going to be enough, or should we maybe expect some other restructuring charges that you could announce during the investor day in mid March?
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Robin Stalker, adidas AG - CFO [24]
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No, that is definitely not our expectation, Antoine. These costs are related to exactly what our plan is now, to strengthen Reebok and its positioning, get them into a dedicated office in Reebok, and going the changes in personnel or headcount as Kasper mentioned in his opening remarks. Nothing else is expected.
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Antoine Belge, HSBC - Analyst [25]
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Thank you.
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Robin Stalker, adidas AG - CFO [26]
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You're welcome.
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Operator [27]
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Jurgen Kolb, Kepler Cheuvreux.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [28]
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That was close enough. Thank you very much. Welcome, Kasper, to the company, to the industry, and to these conference calls. On Reebok, two questions on Reebok. First of all, you mentioned that you want to strengthen -- or the team wants to strengthen the wholesale business. If you could, just give us an indication how the breakdown of the distribution of Reebok is currently in the US in terms of mall based retailing, full line sporting goods, or other distribution areas, and where you plan to grow that business again.
Secondly, the joint operating model seems to have been broken up now in the US. And I was trying to understand why that is. I mean, I know it's not growing in the US, but what can you do different when you break up this joint operating model in the US as compared to all other regions where this model is still working?
And lastly, just as a teaser in terms of the digital that you put the focus on, where do you think the company needs some shot in the arm, or where do you think you have the biggest necessity to work on and to improve the digital side of the company? Thank you.
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Kasper Rorsted, adidas AG - CEO [29]
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So, let me just start with the joint operating model. And as you rightly said, we have disbanded the joint operating model in the US. And I think going back and understanding our position in the US and outside the US is fundamental for this.
And Robin spoke about it, actually, during this part, where he said that we need to have -- or he said in almost every country in the world we have a 15% plus market share. So, that means outside the US we have traditionally been extremely strong in adidas. And that has helped Reebok fundamentally in becoming successful, which is why you've seen 14 quarters of growth outside the US.
In the US, as you know, we have traditionally had a challenging position, and only in the last 18 months have we really moved sustainably forward. So, that meant that we have had a challenged adidas business and, at the same time, a challenged Reebok business. And putting two challenged businesses together is normally not a good thing.
Now we are in the position where adidas is really making great strides in the US. And we want to make certain on one side that the adidas management does not get distracted and gives full attention on continuing the journey we are right now on. And at the same time also for Reebok, that they get completely focused on only doing Reebok.
And I am convinced that in the US this is the right operating model, because we started from a very, very different origin in the US than we did in the other regions. And you can then say maybe we should have done it before. I find that completely irrelevant.
We've taken the position we now believe is the right one, and I can tell you we have a very, very well articulated plan in place that we will execute upon. And the management team will review this plan on a regular, ongoing basis driven by Eric Liedtke, but of course also Robin and I, and ensure that everything that we have set ourselves out to do we will do.
On the digital journey, I'll be more than happy to give you a lot of information in March. I think that would be the good way of answering that, and maybe the teaser has to then last until March. But I think there is plenty of opportunity to for us of expanding here. Despite the fact that we are not doing it, we are doing a good job.
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Robin Stalker, adidas AG - CFO [30]
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And Jurgen, you asked about the split between wholesale and direct-to-consumer for Reebok in the States. It's 60% wholesale, 40% DTC.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [31]
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Okay, very good. And just maybe a follow up for you, Robin. The hedge rate, the current hedge rate you have in your books for 2017 currently, roughly?
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Robin Stalker, adidas AG - CFO [32]
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Around the EUR1.11.
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Jurgen Kolb, Kepler Cheuvreux - Analyst [33]
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EUR1.11, wonderful. Very good. Thank you so much.
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Kasper Rorsted, adidas AG - CEO [34]
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You're welcome.
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Operator [35]
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Adrian Rott, Deutsche Bank.
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Adrian Rott, Deutsche Bank - Analyst [36]
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Hi, everyone. Welcome, Kasper. I've got two quick follow ups. Firstly, on gross margin trends in the quarter, can you please add a few comments on the full price share and category mix for adidas and Reebok, if any? Because if I look at North America, for example, and we've touched upon that before, with the gross margin up 10 bps following very strong improvements in the first half, I was just wondering whether you can provide some more color on what's been happening there.
And then secondly, another one on Reebok. Just curious to hear when that latest round of restructuring has been decided about and been initiated. And also, given that you have decided to reinvest some more group profits into Reebok rather than elsewhere, I was wondering whether and what kind of targets and checkpoints you've defined along the way. So, what sort of improvements at Reebok would you want to see achieved by, say, mid 2017, subject to which you decide about any future steps? Thank you.
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Robin Stalker, adidas AG - CFO [37]
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Okay, Adrian, thank you very much. So, yes, I mean, that's exactly what we're seeing in terms of improving full price sell-through. You know it's one of our strategic goals. And I think that if you think of that chart we've just shown on the WebEx, it says 400 basis points or something of improvement coming from the mix and increases in prices. We're also seeing less clearance. So, we're getting better at full price sell-through.
And you talked about the 10 basis points improvement for the US in the third quarter. But if you take the whole nine months, we got a 1 percentage point improvement there, and that is the quality of the product and the pricing that we're able to get for that.
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Kasper Rorsted, adidas AG - CEO [38]
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On the Reebok side, without mentioning a date, the decision has been taken very recently, so I want to answer that way.
And when it comes to the improvement plan, we have a plan in place, as I said, that we'll monitor with a number of milestones in. And we expect those milestones to be met. And as also I tried to indicate, we will be very disciplined in the way of following upon that to ensure that we can achieve what we need to achieve. And if not, then we'll deal with the matter when we get there. But right now we put in a plan in place that we will not disclose, but of course the plan expects significant progress in its contribution from Reebok.
What I do want to say also on this call is that Reebok is 10% of our overall business. So, while it's important that we fix Reebok, which we will fix, then the more important part is we continue to the growth trajectory at adidas particularly also in the US. And over time, as also indicated during our speech today, that will continue to have an expansion in our margin and our profitability.
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Adrian Rott, Deutsche Bank - Analyst [39]
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Okay, got you. Thank you and good luck.
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Operator [40]
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Geoff Lowery, Redburn.
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Geoff Lowery, Redburn - Analyst [41]
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Yes. Hi, team. Two questions, please. Firstly, can you help us out with the profit, or rather loss in the golf assets that you expect to be disposing of? And secondly, in terms of the non FX components of gross margin, which of those do you think can recur and in what sort of quantum next year and beyond?
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Robin Stalker, adidas AG - CFO [42]
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Okay, Geoff, I'm struggling a little bit to understand your second question, but I'll come to that in a minute.
Firstly, TaylorMade. Well, all we're doing is flagging, obviously, that we're getting close to doing a deal, we believe. We would hope to have something clear by the end of this year, and we're just highlighting that there is a chance that there may be a loss on disposal.
We cannot quantify that in any way at the moment, but we just wanted to flag it. That's all. And as Kasper said in his comments, this has no bearing on the underlying strength of the operations of the full business.
Your second question, you were asking about what are the parts in the gross margin excluding hedging of FX?
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Geoff Lowery, Redburn - Analyst [43]
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So, basically what I was trying to get at was, if your underlying gross margin is going to be up the best part of 400 basis points or so this year, could that number next year be 200 to 300 and then we take whatever view we want to on FX?
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Robin Stalker, adidas AG - CFO [44]
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So, Geoff, I'm going to have to refer you to the guidance for 2017 we're going to give at the beginning of next year.
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Geoff Lowery, Redburn - Analyst [45]
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Okay, thank you.
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Robin Stalker, adidas AG - CFO [46]
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I can't give you anything other than that at the moment. I think if you refer back to the question that I answered for Jurgen a minute ago, you can see we have great confidence in the improvement of the product offering to the consumers, in our ability to price, our ability to sell more and more full price sell-through. So, I think you should have some confidence in the overall development of our margin.
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Geoff Lowery, Redburn - Analyst [47]
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Thank you.
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Robin Stalker, adidas AG - CFO [48]
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You're welcome.
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Operator [49]
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Piral Dadhania, RBC Capital Markets.
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Piral Dadhania, RBC Capital Markets - Analyst [50]
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Yes, thanks for taking my question. Welcome, Kasper. So, if I could just start with the US apparel category, some of your peers have been flagging the expected slowdown in that category in the US market in particular. If we look at your apparel performance, it looks like there's about a 4 or 5 percentage point slowdown year-on-year on an underlying basis, notwithstanding the impact from the European football jersey sales in the base. So, I just wanted any comments that you might have on the US apparel market and how you're seeing that evolving.
Secondly, if I could just ask around your SKU offer, really, I think that your goal was to reduce SKU count by about 25%. Of course, it's very clear that the footwear silos that you have now are doing very well. And I just wanted to kind of get an indication of whether the reduction in the product -- the assortment of the product has been helpful in driving your overall top line within the adidas Originals and lifestyle franchises.
And finally, just on women's, I just wanted any indication you might be able to provide in relation to the contribution that women's has had on your organic revenue growth of 16%. Are you seeing that part of the business growing faster or slower than the group average? Thank you.
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Robin Stalker, adidas AG - CFO [51]
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Okay, Piral, thanks for those good questions. Allow me to take the first question to save Kasper, because, I mean, as he mentioned earlier, we're still getting up to speed with some of this.
But quite frankly, the point about the US with apparel, you may be quoting some other brands' experiences. This is not our experience. We are very satisfied with the overall growth of everything in the US at the moment, including apparel.
And don't forget we said that this is not a sprint. It's a marathon. We want solid, sustainable growth, and that's exactly what we're getting. It's this quarter again up on the good growth that we've already had in the previous quarter. I don't see anything in the market that's causing us, because we are so small there in any case, to have any particular slowdown in the apparel area.
SKUs, yes, definitely. That's exactly what's happening. We are on track to reduce our SKU offering by 25%. And it's the concentration also of the management of the franchises on our various products, not just in the leisure/lifestyle offering, but also in our performance offering and managing that, that I think is indeed helping us be more impactful in the market. And that is definitely a positive also for the leisure/lifestyle area.
In women's, I'd love to be able to quote a figure for you here. At the moment, women's is still a smaller part of our business. I can't confirm we're growing faster in this area. And I'm sure that at some stage we can start sharing information with you in that area. But it's a very manual process for us to identify that at the moment, and we don't have anything else to share with you today on that.
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Piral Dadhania, RBC Capital Markets - Analyst [52]
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Brilliant. Thank you.
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Operator [53]
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Jamie Bajwa, Goldman Sachs.
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Jamie Bajwa, Goldman Sachs - Analyst [54]
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Afternoon, everyone. Thank you for taking my calls and my questions. Just a couple of questions from me. First of all, just on your CapEx guidance for this year, I've seen this come down. I'm just wanting to understand what the driver behind that was.
And then second of all, just a slightly more strategic one related to digital. I know that it's going to be very limited that you can actually share at the moment, but I don't know if you could help us understand a little bit in terms of how this digital strategy will fit in in terms of your channel mix, particularly in terms of wholesale partners and what work you'll be doing there, because I know obviously you've got your partnership with Zalando, but how you kind of expect that to evolve going forward. Thank you.
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Robin Stalker, adidas AG - CFO [55]
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So, Jamie, to CapEx, well, over the last few years we've tended to come in a little bit lower than our guidance. Here at the end of the nine months, I think in CapEx we have only spent about EUR360 million. The reason we've now reduced the guidance from EUR750 million to EUR650 million for full year is just the practical one in terms of we are not finding the shops to be able to do all of the investment that had initially been planned.
But as I said, this is often the case. We do an optimistic plan, optimistic in terms of what we wish to open, but we've still got to find the locations, and it's the timing of them. So, it's really just the timing, and definitely nothing from a strategic point of view or a different decision.
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Kasper Rorsted, adidas AG - CEO [56]
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And related to your question about digital, without going into too much detail, but it's clear, at least to us, that digital is much more than just the dot com shop and will impact the entire organization, and of course have a fundamental impact on the overall speed projects that we have.
Maybe on the dot com and how it relates to our go-to-market route, I think it's clear that there is no one unique go-to-market route. Whether it's wholesale, own retail, or pure play online providers like Zalando, what is equally clear is, as a branded manufacturer of sporting goods, being the second largest in the world, a strategic challenge for us to market is our dot com. And that will play a fundamental role in moving forward for us.
And I don't see that it's in contradiction to any of our other partners. I think maybe five or 10 years ago that question would have been asked, but I think it is completely accepted by the marketplace and, much more important, by the consumer. There is an expectation from the consumer that he or she can transact directly with us.
And we need to ensure that we create the best possible transaction experience throughout our [com site], and while at the same time also ensure that we have very qualified wholesale partners and great retail stores. And one of them Robin has talked about, the opening of our store in New York coming in December. But clearly, as I said, this is the only global store that we have. And we need -- I've said that we exploit to the most, along with the other channels to market.
As I said, there is no inherent conflict. That would have been the case five or 10 years ago. That is not the case today because consumers expect multiple access to -- routes to market. But more on that when we hopefully met in March, but that was a -- I think somebody was asking for a teaser. Maybe that was a teaser.
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Sebastian Steffen, adidas AG - VP of IR [57]
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Okay. Thank you very much, Kasper. Thank you very much, Robin. Ladies and gentlemen, that completes our conference call today. As always, if there are any open questions, and I could imagine that there are a couple, please feel free to contact either Christian or myself, or any other member of the team.
Kasper has already teased our next event in March. That will be on March 8th, the release of our full year results, followed by the investor day on March 14th, which will take place here in Herzo. And we of course hope that we will see many of you here in beautiful Franconia.
We will also be on the road over the next couple of weeks on road shows and visiting some conferences, and look forward to meeting you there and catching up with you then. And while we are on that topic, Kasper also mentioned that he's planning to go to New York, London, and Frankfurt in December.
And I just want to make sure that we're all on the same page here. This trip, and Kasper mentioned that, will be purely of informal nature. So, that means that we're not going to discuss any business topics there. The purpose really is that Kasper wants to meet some of you guys and that some of you get the opportunity to meet him before we have the official investor day in March. But again, no business related topics.
And with that, I would like to thank you again for your participation today. I wish you a very good day, and look forward to talking with you. Bye.
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Operator [58]
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Thank you very much for you attendance today, ladies and gentlemen. You may now disconnect.
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