Q1 2017 Adidas AG Earnings Call
May 04, 2017 AM CEST
ADS.DE - adidas AG
Q1 2017 Adidas AG Earnings Call
May 04, 2017 / 01:00PM GMT
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Corporate Participants
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* Kasper Bo Rorsted
Adidas AG - CEO and Member of Management Board
* Robin John Stalker
Adidas AG - Former CFO and Member of Executive Board
* Sebastian Steffen
Adidas AG - VP of IR
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Conference Call Participants
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* Adrian Rott
Deutsche Bank AG, Research Division - Research Analyst
* Antoine Belge
HSBC, Research Division - Global of Consumer and Retail Research
* Cedric Lecasble
Raymond James Euro Equities - Financial Analyst
* Eric Thomas Johnson
Piper Jaffray Companies, Research Division - Research Analyst
* John David Kernan
Cowen and Company, LLC, Research Division - MD and Senior Research Analyst
* John Frederick Speirs
UBS Investment Bank, Research Division - Director and Research Analyst
* John Guy
MainFirst Bank AG, Research Division - Senior Analyst
* Jonathan Robert Komp
Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst
* Jurgen Kolb
Kepler Cheuvreux, Research Division - Analyst
* Louise Singlehurst
Morgan Stanley, Research Division - MD
* Piral Dadhania
RBC Capital Markets, LLC, Research Division - Analyst
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Presentation
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Operator [1]
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Good day, and welcome to the adidas Conference Call for the First Quarter 2017 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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Thanks very much. And good afternoon, ladies and gentlemen, and welcome to our first quarter 2017 results conference call. Our presenters today are Kasper Rorsted, adidas CEO; and our CFO, Robin Stalker. In addition, joining us here in the room is our Executive Board Member, Harm Ohlmeyer.
Before I will hand over to Kasper and Robin in a second, please allow me just one housekeeping item up front. We have quite a few participants in the call today. So that's why I would ask you to limit your questions to 2 in order to give as many people as possible the chance to ask questions.
Thanks very much in advance for that. And without any further ado, now over to you, Kasper.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [3]
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Thank you very much, and also welcome from me. adidas recorded a strong starting to the year. We grew our top line in revenue neutral terms by 16%, the net income grew by 30%, and our e-commerce business grew by 53% as some of the highlights you'll hear through today's presentation.
But let me take you through the strength and weaknesses of the first quarter. We continue to see an accelerating momentum in the 2 regions that for us are the most important regions globally, China and North America, where we saw a growth of, respectively, 30% and 31%. In North America, if you exclude the Reebok and just look upon the pure adidas growth, we recorded growth of 36%. So we are continuing the very strong momentum that we have seen in North America in the last 2 years. We saw excellent top line growth in Running and Originals by, respectively, 27% and 28%, so also very strong growth [metrics] in those areas.
E-com continued, and I'll get back to it in a second, but of course, it is vital that we maintain a very high growth rate to get to the EUR 4 billion by 2020. And we did see improvements in our profitability despite severe FX headwinds.
On the challenges, our performance in Russia was not satisfactory with a growth of minus 10% against a target of plus 10%. And what we're seeing in Russia is a severe impact of the sanctions, but we're also seeing that, particularly in apparel, lower price points are being shopped. We did go in and close 80 shops in the first quarter in Russia, but I do want to just remind everybody on the call that Russia today, for adidas, is a very different market than Russia 5 years ago. Russia today is 3% of our total business. And despite the challenges we have in Russia, it will have no impact on the overall outlook for us as a company. But we did want to highlight it, but it is only 3% of the business, and of course we are taking it serious. That will also mean that we will not reach the 10% that we initially had planned for, for the year. As I said, it will have no impact for the company's results for the year.
We did see slower comp sales growth in Western Europe and Russia, which I just spoke about. We saw a decline in Football and Basketball, which is particularly relating to the license business. In Basketball, it's related to the exit of the NBA contract, which will be finalized by the second quarter. And in Football, it's partially, but only partially, due to the exit of the Chelsea contract. But overall apparel business in the license side has been negative. We did see also limited operating overhead leverage, which I'll get to in a second.
So if you look on the major developments, our revenue increased, currency neutral, 16%, nominal 19%, which got us to a EUR 5.7 billion top line. Our gross margin went down 20 basis points to 49.2%, very much in line with the expectations that we have which are related to currency impacts. It will have no impact on our annual guidance, and Robin will take you through the details of this.
Our operating margin improved by 90 basis points to 11.1%. And what I do want to highlight here is there is a positive influence of the same 90 basis points because of pure sequencing of marketing spend. So I want to stress that this is not a saving, it is simply a sequencing of marketing spend that you will see in the quarters to come. And so the improvement of the 90 in this [coincidently] is the same as the sequencing of the marketing spend. So there is no intention of having a lower marketing spend than we've had previously. It would be in the same ballpark. So I repeat, purely sequencing.
This gets us to a net income growth of 30% and to a total number of EUR 455 million, and EPS growth of 29% to EUR 2.26.
When we go through and look upon the top line momentum across the regions, I did speak to Russia and our position in Russia. We continue to see a solid market in Western Europe growing at double digit, and North America with an extremely strong 31% growth, despite a slightly negative Reebok, which brings the adidas growth to 36%. In Latin America, a 9% growth, despite flat to slightly negative growth in 2 of our countries in Latin America, Brazil and Argentina, which are impacted by the overall political and economic situation in those regions. So despite that, we still are growing at 9% in the region. Japan at 21%, which is again is a change in the business model. The guidance of 10% for the year still stands. So this is simply we have changed the business model, which we have mentioned on a number of calls lately. And then we see a growth in the Greater China of 30%. So you can see, overall, very strong growth and particularly in the 2 largest markets in the world, North America and China, which we're very happy about. North America is coming back to the point that we have a target of a EUR 5 billion business for the adidas brand by 2020. So it's important that we maintain the growth rate that we have. The [symptom] still stands. We are very happy with the progress, and we are very unhappy with the state where we are, but we are making progress in trying to change the latter.
When you look upon the overall adidas brand, growing 18%. And so we continue the double-digit improvements we saw. As I said, very strong growth in North America and China, and we did also see very strong growth in the women's business. The women's grew by 28% and now account for 1/4 of our overall business versus 24% last year, so 1 percentage points improvement versus to the first quarter of 2016.
Breaking it down to sports performance, we saw a growth in sports performance of 4%. And this is divided into 2. We saw strong growth in Running and Training, and we saw negative growth in Football and Basketball. So we continue to accelerate our growth in our Running. And in footwear, we also accelerate our growth in Training. In Basketball, as I said at the very beginning, we're exiting the NBA contract, which is you're seeing the impact of here. And in Football, we have 2 phenomenons. You have a non-event year, which means that the license business as it relates to the country teams, are in decline. And we have seen a negative development in the license business for football clubs, particularly driven by the exit of Chelsea, which we'll be exiting by the end of the English season, which is in the second quarter. Overall, our Football -- footwear business is going up.
If you go to the Originals business, we see a growth of 30%, which is very strong growth compared to where we're coming from. And I think that the most important message here is that we are seeing a 50% growth in our modern footwear franchises, the NMD, the Tubular, and the Shadow, and the EQT, which means that we are doing exactly as we communicated, building a broader franchising landscape to ensure that when different franchises are in different status of their life cycle, we are certain that over time we'll decline, we are certain that over time we'll pick up. And that means also the split between the "old" and the "new" franchises are now close to 50-50.
We saw double-digit growth in all markets except Russia and China. So overall, a strong growth in our Originals business, but mostly important is the balance of the growth is now getting more towards the newer franchises, which does give us a higher level of stability within our Originals business.
Moving on to Reebok. We saw a 13% growth in Reebok, which was the strongest growth we have seen for a long time, driven by Classics and Training. And it was driven by a couple of different events. One was the expansion of retail business in China because we are bringing -- we're putting a -- what you call it, accelerated effort in our Reebok business in China. And we are seeing a different launch schedule than we saw in the past year.
So I would caution you, and that's why I'm really saying at this stage that 13% is going to be the growth rate. We said at our last meeting that we are quite happy with a 6% to 8% growth rate. The 13% is coming on the picture of a slightly negative growth in the U.S. So we have, as we've indicated or communicated, put a turnaround plan in place. It is far too early to say that this is the early indications of this. This was more due to retail opening and different launch schedules than anything else. What we need to do is we need to make certain that the quality of the top line is found on the bottom line, rather than having a larger top line.
So overall, not a bad situation, but this is far too early to do any celebration when it comes to Reebok. We still have a long way ahead of us. When we look upon the areas that we're driving -- or we're focused on to drive profitability, it's in the area of our business model where we looked upon the U.S. and global integration, which we've done and defined or executed. We have defined a clear governance model. We have implemented a new design structure with design-to-value that should improve our overall cost of goods. We have defined new consumer touch points in the creation process and are in the process of executing on a number of initiatives. We have mentioned the initiatives here.
But as long as initiative is not fully executed upon, of course, we do not take it off. It does not mean that we're are not fully engaged in joint account planning where the wholesale does not engage, or we are not well underway with closing the 50 doors in the U.S., where we've closed 30, but we're not finalized it. An in order to have a consistent reporting towards this part of our stakeholder community, we have chosen to operate in a binary modus (inaudible). Of course, we execute upon it. That's why it's transparent. But we will report upon it when it is done, but we are doing what we said we're going to do. But some of these items will take time. Some of them will have a time lag, particularly as it comes to product design and bringing new products to market. That's where you're going to see a 12- to 18-month design -- time lag as in any other creation process.
We saw exceptional growth in our e-com, driven again by our 3 most important markets in the world, the U.S., China and Europe, by 53%. So the momentum we've had from last year, we'll be capable of continuing and carrying into this year.
And as you remember when we guided our CapEx, our CapEx was coming up to EUR 1.1 billion. A big part of that CapEx is going to be directed towards building the appropriate and necessary infrastructure for our e-commerce business to get to the target we set ourselves for 2020. But overall, a very strong growth for our e-commerce business, which not only helps the top line, but is also -- will be accretive to the bottom line of our business.
We are making the appropriate progress on the strategic initiatives. When it comes to portfolio, we are, as you know, in the market with our TaylorMade business. We have not been happy with the progress that we have made, but we will report and report when an agreement has been made. In our CCM business that we announced we'd be taking to market, we're making good progress on it and are engaged in relation -- in discussions with interested parties. And we are going through a list of what we call loss-making legal entities to ensure that we reflect our infrastructure to the local market conditions. As an example of that, you did see the severe change in Russia. And of course you also saw a corresponding reaction from our side of closing 80 stores in Russia in the first quarter.
We have established our top leadership team, which is our top 20. We have subsequently established the next level, which is our top 110. So we now have the top 130 defined. We have a long-term incentive scheme defined, which is being measured upon one single transparent KPI, which is EPS, which is also our core KPI for our target for 2020. So the key KPI for 2020 is and will remain the EPS growth.
So overall, we had a strong start to the year with a lot of focus in many areas, but also a number of areas where there's room for improvement. I'll now ask Robin to take us through the greater level of details through the first quarter.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [4]
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Thank you very much, Kasper, and good afternoon, ladies and gentlemen. Yes, my job is to go into a little bit more detail. I'll start with the regional analysis and then talk a little bit more about the P&L and balance sheet.
Let's jump straight into Western Europe, where we had very strong performance continue with revenues increasing 10%. And that, ladies and gentlemen, don't forget is on top of a 25% increase last year in this region.
If we look at it from a market perspective. The main contributors to the increase were the U.K., Spain, Italy and Poland, where revenues grew at double-digit rates each. But in addition, high single-digit sales growth in Germany obviously also contributed to the region's development.
Brand adidas sales were up 8%, and that's despite difficult prior comparisons, resulting particularly from the sell-in of the UEFA EURO 2016-related product, which was also in Q1 2016. And growth was driven by double-digit sales increases at adidas Originals and adidas neo as well as top line improvements in the Outdoor, Training and the Running categories.
Reebok had an excellent start into the year in Western Europe. Their revenues increased here 25%, mainly due to double-digit sales growth in the Training category, but as well as in Classics, following the successful launch of a new CrossFit Nano 7 product and the ongoing demand around athleisure-inspired Products.
Now as far as the gross margin is concerned, we're still burdened in this region by the severe currency headwinds. And so the gross margin declined in Western Europe by 1.6 percentage points to 44.5%. However, due to lower operating expenses as a percentage of sales as a consequence of lower marketing investments following last year's annual -- last year's event here, we limited the operating margin decline to 60 basis points, ending the first quarter of 2017 at 21.6%.
North America, Mark discussed, has already set another quarter of exceptional performance, with revenues up 31% due to strong double-digit growth, particularly at brand adidas where the momentum accelerated further, with revenues up 36% on top of a 31% increase in the prior year period. Double-digit growth in both the wholesale business, up 40%, and retail, up 28%, shows the heat of the brand with U.S. wholesalers and, of course, consumers alike. The fact that this development is driven by our Performance, which is up 9%, and Lifestyle, up 73%, business makes us feel very positive that we are leaving a lasting impression with U.S. consumers.
From a category perspective, growth was driven by double-digit sales increases in our Training and Running categories as well as at adidas Originals. Revenues at the Reebok brand declined 2%, mainly reflecting the planned closure of Reebok factory outlets in the U.S., as Kasper has already mentioned. This resulted in sales declines in the Training and Running categories, more than offsetting double-digit growth in Classics.
The exceptional top line development in Q1 is also reflected in the region's profitability development. And while the gross margin increased 40 basis points to 38.1%, strong leverage from both our marketing investments and operating overhead pushed operating margin up 7.2 percentage points to 9.8%.
This will be Greater China, where continuing -- where it's definitely continuing its winning streak with sales growth of 30%, also comping against tough previous year baseline when our growth last year was also 30%. So an excellent momentum at both the adidas and Reebok brands continued, with sales up 31% in adidas and 19% in Reebok, driven by double-digit growth in key Performance and obviously also Lifestyle categories. This underpins the favorable trends we have been talking about for many quarters since the disposable increase -- sorry, disposable income increases, the interest in sport and the growth in sports participation. And of course, it reflects the high brand aspiration our brands enjoy within this growing market.
Gross margin continued to grow in Q1, ending the quarter up 1.7 percentage points at 58.9%, reflecting an improved pricing, product and channel mix as well as lower input costs.
Operating margin actually increased again, up 90 basis points now to 39.9%, driven obviously by the increase in the gross margin. And while we remain very optimistic about China and the underlying dynamics, we must not regard these exceptional growth rates and profitability levels as sustainable for the long run, as we have been commenting on for the last several quarters.
Finally in terms of the regions, Latin America, Kasper has already mentioned that our business in Latin America has to cope with a challenging macroeconomic environment. This is particularly true for Argentina and Brazil, where we experienced a slight sales decline in the quarter. Nevertheless, driven by double-digit growth in Mexico, Peru and Chile, sales in Latin America as a whole grew 9%, reflecting strong top line improvements at both the adidas and Reebok brands, adidas up 7%, Reebok brand actually up 25%.
Despite difficult prior comparisons resulting from the sell-in of the Copa America and 2016-related product, adidas brand revenues increased 7%, driven by double-digit sales growth at adidas Originals and adidas neo. Now the Reebok brand revenues, as I said, up 25%, was as a result of double-digit growth in the Running and Training categories as well as in the Classics category.
The segment's gross margin declined, however, 5.3 percentage points to 39.9% as the positive effects from an improved pricing and channel mix were more than offset by the severe negative currency effects.
Operating margin therefore decreased 3.3 percentage points to 10.9%, reflecting this gross margin decrease, which more than offset the positive effect of lower operating expenses as a percentage of sales.
The other part of our business, we classify as other business, and this actually grew 4% in Q1. Here, the largest driver here is obviously the TaylorMade adidas golf business where revenues were also up 4%, largely the result of the TaylorMade brand, which was partly offset by declines at Ashworth, Adams Golf and adidas Golf due to the timing of product launches. CCM hockey also had declining revenues [mainly] of 11% and mainly reflecting declines in the licensed apparel business in light of the upcoming transition of the existing NHL partnership from CCM Hockey to the adidas brand, and there were a few revenue decreases because of the brand's equipment business. Other centrally managed businesses increased 8%, mainly result -- as a result of double-digit sales growth at Y-3.
Gross margin grew 3.8 percentage points to 40.8%, mainly due to higher product margins at TMaG. Operating margin also increased 8.1% and now turning a profit at 7.9%, supported by strong improvements at TaylorMade adidas Golf.
One of the key areas I'd like to make sure you understand properly, ladies and gentlemen, is obviously the development of our gross margin. And yes in this quarter, the gross margin did decline, but it is right in line with our full year guidance for 2017. So while we were down 20 basis points to 49.2%, this decline is solely related to the anticipated negative currency effects experienced during the quarter as our hedge rates during Q1 '17 were less favorable compared to last year's hedging rates. I mean, we we're at around about $1.12 for '17, whereas we were at about $1.17 for 2016. But once again, we were able to mitigate almost all of these negative effects through better pricing and through mix, largely product mix.
Now as negative FX effects will slow down during the second half of the year -- in fact, they even reverse because we've got a hedge rate for the second part of the year for '17 of about $1.14 -- I'm obviously talking about dollar-euro -- to what we had at $1.12 in 2016. And given our strong momentum in the marketplace, we expect gross margin improvements during the second half of the year. And so as a result, we continue to forecast a gross margin increase for the full year of up to 50 basis points.
Let's look at the P&L below the gross margin now. Other operating expenses, as a percentage of sales, decreased 1.3 percentage points to 39.1%. Now that's mainly driven by the significant leverage in the point of sale and marketing investments, down 90 basis points, but largely, as Kasper said, reflecting a different phasing of our marketing spend in 2017 because of the events in 2016. In addition, we were also able to generate leverage around our operating overhead expenses of about 40 basis points as a percentage of sales.
For the full year, we're expecting this picture to change as our marketing investments will increase as the year progresses. We expect only slight leverage from the marketing in 2017. At the same time, however, leverage from operating overhead expenditure will accelerate in the coming quarters. And so the Q1 operating margin increased 90 basis points to 11.1%, translating into a strong improvement of 29% in the operating profit to a figure of EUR 632 million.
Carrying on further down in the P&L, the strong increase in both the financial income and financial expenses as a result of, on the one hand, positive exchange rates and an increase in interest expenses, netted out at about a net financial income slightly increased at about EUR 8 million compared to a net of EUR 6 million that we had in the prior year. We were able to apply an income tax rate of 28.9% this quarter, which meant we were able to end the quarter with a net income from continuing operations of EUR 455 million, which is up 30% on the prior year. This translates into diluted EPS from continuing operations of EUR 2.23, up 31%.
A quick mention about our status with the retail business. And here our own retail, as you can see from the chart, with the number of shops we've had. And we had a strong improvement of revenues in 2001 (sic) [2017] first quarter of 18%, supported by strong double-digit growth also in e-commerce, as Kasper's already indicated, and improvement in the comp store sales, which you can read here, were up 5%.
Two opposite effects weighed in on our retail performance, however, during the quarter: an overall weakness in the Russia CIS market, which negatively impacted the comp store sales; as well as a total of 125 net store closures, as Kasper said, the majority of that in Russia. The comp store sales increased 5% driven by brand adidas. Excluding Russia CIS, where comp store sales declined 7%, the total comp store sales would have been up 7%. Additionally, the shift of the Easter business from Q1 last year to Q2 this year also negatively impacted comp store sales, especially in the Western Europe market.
We closed in Q1 2017 in total 185 stores. A majority of these closures, about 84, happened in Russia CIS, reflecting the weak consumer sentiment. And therefore also, it was necessary for us to streamline our portfolio there. Closures of Reebok factory outlets in the U.S., in line with the Muscle Up program that we've spoken about in the past, as well as some closures in Latin America and Middle East and West Asia also contributed to this development. At the same time, we opened 60 stores in the quarter and mainly in the emerging markets, around about 30 in those markets. This leaves us with 125 net store closures in Q1 and a total number of stores of 2,686 at the end of March 2017.
A quick look, ladies and gentlemen, at the balance sheet. The biggest development here, I believe, is being able to keep the operating working capital at a very low level. But obviously the moving parts here were inventories are up 18% on currency-neutral basis, reflecting higher stock levels to support the company's top line momentum. However, not all of the inventory growth is driven by an increased purchasing volume. About 1/3 of the inventory growth is non-volume related, which you can see from the development of currencies.
Reflecting the higher inventories compared to the prior year's, accounts payable were also up, and they were up 21%. Accounts receivables were up 11%, and that's below the company's top line development during the first quarter, reflecting our strict discipline, again, on freight terms management and concerted collection efforts. So this translates into what I said was a very good operating working capital, which [overall] increased 17% to EUR 4.5 billion. The average working capital as a percentage of sales remained at a very stable 20.1%.
Finally, looking at our net debt position. This increased EUR 51 million compared to the prior year and totaled EUR 859 million at the end of March. But this development is mainly as a result of the utilization of cash for the purchase of fixed assets as well as the continued repurchase of shares within the framework of our share buyback program. So we remain below our midterm target ratio of net debt to EBITDA of below 2x, ending the quarter at 0.4x. And you should see the equity ratio remaining very solid at 42.8%.
And with that, ladies and gentlemen, I'll hand back to Kasper for the outlook.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [5]
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Thank you very much. Looking up on the momentum, we expect it to continue in 2017. We currently have a very high level of brand heat, and we believe that we have a number of activities that will continue the brand heat.
We have new launches of our successful franchises like X, Ultra Boost, PureBOOST, alphaBOUNCE, NMD, et cetera. But we are also very happy that we're reintroducing some of our iconic footwear brands like Predator that was announced yesterday. And those of you who still remember David Beckham as probably one of the greatest sport athletes in the football history, was the original, I would say, user of this technology.
On the Training side, we are further rolling out our (inaudible) franchise. In Running, we will be introducing a number of new Ultra Boost and -- Ultra Boost models. But of course, also what we're very excited about are our new Parley Run for the Oceans collection. We have a set of marketing campaigns planned around the summer for Climacool and Originals. And of course, we have activations planned for the major sporting events coming up like the Champions League, the Country Cup, et cetera.
And it's important that we also will start seeing a leverage of the top line in our operating overheads. It's also clear that a number of the initiatives that we've defined and communicated to you in the One adidas framework takes time to execute upon because we're changing some of the infrastructure we are having. But at the same time, we do expect leverage on our operating overheads through our strong top line growth. And then it will continue to drive our portfolio initiatives, and it really comes in a number of different areas.
On the brands, which we have spoken about, when it comes to Reebok, TaylorMade and CCM, the general stuff you just heard about and how we ensure that we have the right amount of retail channels available for us with the right quality and the right contribution. And as you could see, we had a reduction in that in the first quarter to ensure that we actually have appropriate contributions. So this is not about quantity, it's about quality and the markets, that we get the appropriate contribution from each of the markets that we are presently in. So we are managing the business in the context of portfolio to ensure that we're driving not only top line but also getting the appropriate contribution on the bottom line.
Which brings me to the outlook. And we are reconfirming the guidance that we gave you less than 2 months ago. And that means we expect sales to increase between 11% and 13%; the gross margin, as alluded to from Robin, to increase by 50 basis points; the operating margins to grow between 60 and 80 basis points; and the net income to grow at a rate of between 18% to 20%.
What I do want to just remind everybody about is that since we are in the second quarter, we will be comparing ourselves to a second quarter of 2016 where we had a number of onetime items. Chelsea (inaudible) contributed with more than EUR 100 million to the profit of the second quarter last year. That means in order for us to get to a 0% growth, we need to cover for the 100% -- EUR 100 million of non-operational items that came in, in the second quarter of last year, which is also part of the reason why we believe that the current guidance is appropriate and also realistic.
We've had a strong start to the year. The ongoing momentum that we've carried, we had last year, we continue to see this year. We expect also profitability to continue to improve, despite the FX impact that we have in our gross margin. We are seeing the portfolio initiatives gaining traction. We'll continue to have that focus on our portfolio in the short, but also medium and long term. We have established, as I said, the appropriate leadership teams and also building the incentive model that is aligned with shareholders and investment vehicles to ensure that we are defining success in the same way and report transparently about it. And we are having a relentless execution on creating the new. It is not about new strategy, it's about executing diligently about -- on the strategy that we have.
With this, I'd like to close for the formal presentation from Robin and I. And we'd be happy to take any questions you might have. So back to (inaudible)
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Sebastian Steffen, Adidas AG - VP of IR [6]
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Thanks very much, Kasper. And [Sergey], if you could now open the lines for questions, please?
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Questions and Answers
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Operator [1]
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(Operator Instructions) And our first question comes from Fred Speirs of UBS.
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John Frederick Speirs, UBS Investment Bank, Research Division - Director and Research Analyst [2]
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Two questions for me please. First was on your North American wholesale partners. We're seeing very strong sell-in at the moment. But we've seen from past cycles that these can be the moments where, I guess, you have to be most diligent -- vigilant, if you like, about the stocks you're holding in the channel. Can you talk about your visibility on inventories and sell-out at your key partners, and also how timely that data is? Second one was on China. If the proposed Belle privatization deal goes through, do you think there's much of a risk they'll look to change business terms with you?
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [3]
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Thanks, Fred. Just on the visibility that we have with the retail partners in America, you will appreciate we've had very good momentum in our business there. And the business that we have is also quite good because they keep ringing us and asking us for more. So I don't think you should anticipate any issues with inventory overhang in these partners in the U.S. We're in a very strong position with the brand and also for the retail levels -- sorry, inventory levels.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [4]
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And as it relates to China and [Bai Li]. I was there 2 weeks ago and met up with the management, which also (inaudible) to be some of the co-owners of the company. At this stage, we have no reason to believe that it will change our business relationship with Bai Li . The rest would be pure speculation. We have a very strong and very good relationship with them, which has grown significantly over the last set of years. So at this stage as I said, there is no indication that, that relationship will change irrespectively of a change in the ownership structure. I think the rest would be speculation from this side.
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Operator [5]
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The next question comes from Cedric Lecasble of Raymond James.
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Cedric Lecasble, Raymond James Euro Equities - Financial Analyst [6]
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I have 2 questions, the first one focused on China, a follow-up. But on the commercial side, on the dynamics, which are very strong for the adidas and the Reebok brand, could you go take us among the initiatives and explain why, in your opinion, the adidas brand is so hot today in China, and especially versus your main competitor? And on Reebok, what was the most recent initiatives? You said you had some retail expansion in China. Could you elaborate a little bit? And the second one is a very short one. It's about your adidas comps, the 7% ex Russia CIS. Could you maybe provide us with the numbers in North America and in Western Europe?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [7]
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I will do the first one, and Robin will do the second one. In China, it's a set of initiatives. One is we continue to have new store openings in China and also franchise openings with our key partners. Secondly, we are seeing a very strong growth in our online initiatives in our business in China. And thirdly is that with some of the products that have a both global but also local design, particularly comes across very well with our Chinese consumers. So it's more stores, it's more franchised stores, it's e-commerce. And I think at this stage, we have the right product for the right the Chinese consumer. So we're not seeing any slowdown in that context. With Reebok, as I said, we are reengaged with Reebok in China. We were with Reebok in China [7] years ago. And right now we have an agreement with one of our partners to open a set of Reebok stores, which we are seeing the early signs of. This has no significant impact on our overall Chinese growth in the first quarter. But I do think we should say it's a continuation of the growth rate that we've experienced over a longer period in China. And we continue to, we believe, outgrow the market and also gain market share. If you go to China and you see the quality of the stores in the larger cities, you will see that they are on level or above level of what you see from a quality standpoint in the Western world. So very high-quality product position in the market.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [8]
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And (inaudible) point about the comp store sales in the 2 markets, Western Europe and the U.S. Western Europe, flat, don't forget that's largely impacted by the [victim] last year. And the U.S., a very good solid, double-digit growth of 14 -- plus 14%.
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Operator [9]
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Our next question comes from John Guy of MainFirst.
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John Guy, MainFirst Bank AG, Research Division - Senior Analyst [10]
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The first is with regards to gross margin. I'm looking at the estimated impact of FX and wage inflation. As (inaudible) that's around 180 basis points. And is it also fair to say that when you're looking at the product margin mix comparison year-on-year in the 2 tournament-affected regions, Western Europe and Latin America, you clearly sold more high-margin jerseys in the first quarter of 2016. So stripping that product margin mix impact out, your gross margin could have been slightly positive on a group basis, potentially around 10 to 20 basis points positive. Just wondering if you could comment on that? And I guess by that rationale, by Q4, you'll be selling in ahead of the World Cup, so we should see further acceleration given the margin accretion that the apparel business brings. A second question around marketing spend and timing. You mentioned that it was a phasing impact around marketing. Should we expect to see marketing increase into the second half of '17? And I guess, as we move into a tournament year in 2018, what are your expectations around marketing spend?
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [11]
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Okay, John. Thanks very much. I'll take both of them. Firstly, on the gross margin, yes, that's absolutely true, there were obviously, in the first quarter of last year, because of the event, some influence from the higher profit margin product sales. And I'd be cautious, however, about reading too much into what that might mean for the fourth quarter of this year. Because I think if you go back and look at the fourth quarter of '16, we also had a very strong development in the margin in 2016. And I guess you're, fundamentally, you're correct. Second point about -- I've just forgotten. what was it, (inaudible)?
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Sebastian Steffen, Adidas AG - VP of IR [12]
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Marketing phasing.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [13]
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Marketing phasing. As Kasper said, this is clearly because of the events. We are definitely not reducing our investment in marketing. But this will be -- will maintain the percentage. The absolute is obviously going up. We're not giving any guidance specifically for '18 at the moment, but you should not expect that our marketing spend as a percentage of sales will go up. In fact, we've even said, through to the plan to execute to 2020, there will be some slight leverage on this, so no increase in the percentage. We continue obviously to strongly invest in marketing.
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Operator [14]
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Our next question comes from Jurgen Kolb of Kepler Cheuvreux
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Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [15]
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Two questions, first of all on the license business. You mentioned that you're seeing some weakness in the license business. I was just wondering if you could just give us an indication how big that is as a percent of your total apparel business and how you see that development going forward, and if that might even influence your decision to -- with respect to new endorsement partners that you might want to sign or existing ones that are running out. And secondly on the key KPI that you just mentioned as being the EPS number, maybe some thoughts as why you focus so exclusively on the EPS number. I assume in the KPIs is also still the NPS as a core indicator, but maybe some thoughts as to why EPS is so crucial for you.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [16]
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So I will take both. We will not disclose the license part of the overall apparel business, but, as I said, you have to take a couple of things into account. One was we were in an non-event year. So that has an impact, of course, on the jerseys that are related to the national teams. The second one, as we said, was the Chelsea. I think it's far too early to make any conclusion whether is this a sustainable development or is this the short-term development. And at the same time, I also think it's far too early to make any correlation between this and the pricing of the major assets. Because one thing that we're seeing very clearly is that the major sporting assets, [you stay in] Football, are migrating from local to regional to global. And that is a -- the vast majority of the growth that the major sporting assets are seeing is seen outside the region of their origin. And that is a completely different setup than we saw 5 or 6 years ago. So the major assets, the MANU, the Bayern Munich, the Real, the Juventus, seeing huge -- you're seeing the growth [protocol] being expanded to a global position. So I think it would be far too early to say that. And I don't think that any of those assets have exploited their global position at this stage. I think that's where the particular relationship with an adidas, where we have global footprint, does come into account. So that is on this. The reason why I was so specific on EPS, of course, NPS plays a key role, but I was distinguishing between what we call the short-term development and the long-term development. In our short term, all of us, including us in the management team, are measured upon margin, revenue growth, NPS, because that is what we look upon every single day because that's the [state]. Unless we get the short term right, we can't get the long term right. So these are the components of the short term. On the long term, it is only EPS. But the point is also you can't long-term drive EPS growth if you have a strongly deteriorating NPS because that is the indication to buy. So we are separating the 2. And EPS, we've chosen for the long term because it is a transparent KPI that the investors can get aligned to, so when we deliver guidance around long term, it's EPS. And that is actually also what it is -- what triggers or doesn't trigger a payout on the LTI scheme. So it's very deliberate, we're taking a transparent what you call KPI for LTI, but it does not discount any focus we have on the NPS, which is our short term.
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Operator [17]
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The next question comes from Louise Singlehurst of Morgan Stanley.
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Louise Singlehurst, Morgan Stanley, Research Division - MD [18]
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Robin, I think this is probably an opportunity to say thank you actually for putting up with all of our questions over the years. A few more to go for you today, no doubt. Two questions, just for me. North America, can you help us understand the margin progression? I understand presumably this year or near term, we've got some marketing shifts in the second half. But as we look to more annualized medium term, I'm not after numbers, but in terms of the thought process, presumably there's a fairly fixed cost structure with a potential for that business to see quite a good acceleration on the margin, [should hold]. And then secondly, just on really the pricing environment, as we look between Sports Performance and Sports Lifestyle, I'd just be interested to think -- or to ask the question if you think that there's any difference in price sensitivity between those 2 categories?
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [19]
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Okay, Louise. Yes, (inaudible). I'm very happy I got another question from you which I think I can answer. And that is in terms of the U.S., yes, I can confirm your assumption here that -- and we've always said this, that there's significant opportunity in America, but it's also why it's so significantly important in our strategy to grow our business, particularly our profitability in the States because there is a good upside here. So yes, the margin development should reflect the top line growth here. And I'll leave the second question to Kasper.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [20]
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So please restate the second question again because I want to be sure I can answer it appropriately.
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Louise Singlehurst, Morgan Stanley, Research Division - MD [21]
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Sure. It was just comments regarding the pricing environment, if you see any difference between consumer and price sensitivity between Performance and Lifestyle.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [22]
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Yes. Thank you very much. I think you have to break it down to apparel and footwear. And I do think if you get to the Lifestyle, you will have a more price-sensitive apparel, what do you call, environment in Lifestyle, particularly because of the H&Ms and the [Serras] of this world. So I think in that area you do see a high level of price sensitivity. When it comes to footwear, of course, in the technical footwear you can price significantly higher when it comes to a performance part, but the mid-tier segment, I would say, is fairly similar. So overall on footwear in the mid-tier, I would say it's similar. You have a higher price point when it comes to Performance. On apparel you will see a high level of what you call price sensitivity, but also lower price points than we see on the Performance side.
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Operator [23]
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Our next question comes from Adrian Rott of Deutsche Bank
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Adrian Rott, Deutsche Bank AG, Research Division - Research Analyst [24]
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My first one is a follow-up on North America. So as you explained, operating margin was up a couple of points, but gross margin only up a few bps. And I would just like to confirm that this is the sort of leverage that you can get, despite being in investment mode, or have investments in North America temporarily been muted, for example, also a marketing shift or marketing being skewed towards upcoming quarters. Because the EUR 100 million segmental operating profit this quarter is smaller than you've earned in North America in all of 2015. So just trying to get orders of magnitude right here. And secondly on retail doors, it sounds like there has been some 70 closures that aren't related to Russia or Reebok. Is that just you being opportunistic as in not extending a bunch of leases that have been up for renewal or more of a proactive move that can be seen in context of more transactions happening online and your upgrade of the e-com plan? It would be great to have an idea of what the fleet is going to look like by end of the year.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [25]
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So let me just -- following upon the American part, which Robin answered before. It's clear that North America, with the size of the U.S. market, represents long term a huge opportunity for us. And it's also clear that we need to look for long-term sustainable development and not go for short-term profit optimization in the U.S. So you are seeing a jump in profitability in the first quarter. I would caution you when I say this, because right now, we are not optimizing the short-term profitability. We'll continue to see leverage in our infrastructure, which Robin was correctly saying, but we are looking upon it and saying we need to get the size and the market share correct in the U.S. because that is what long-term drives the highest value for our company. So if you were to look upon the 2 right now, it is of course we're trying to improve the margin. But we've got to continue to have a high growth rate to generate market share and customer loyalty that will allow for the long term to take place. So, yes, we are seeing it. But we're in for the long term. And we said we wanted a EUR 5 billion adidas business by 2020, and that's what we're looking for. And of course, you will see a different contribution by then. But if we believe it's appropriate to invest more, we will invest more to make certain that we don't optimize in the short term.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [26]
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Okay, Adrian, the question about the closures. Yes, you're right. We have closed, outside Russia, around that 60 to -- well, about 50 to 60. That's coming from several factory outlets for Reebok, in line with the Muscle Up program in the States. It's also coming from closures in some of those markets in Latin America, certain ones in the emerging markets and even a couple in Greater China. But don't forget that the closure or retail shops is a normal part of the retail business. So do not interpret that we're just suddenly seeing a shift to e-commerce and therefore are doing more closures. That's not the case. There is those structural changes, such as I mentioned in Muscle Up, and as Kasper mentioned earlier for Russia, and that will probably have a little bit of an impact also in some of Latin American countries. But we continue to open shops, also. And I think I've said in the past with Greater China, particularly, as we started off, there was a lot of very small shops. As that market has matured, or developed and matured, and people have moved into bigger malls and what have you, then we have shut the smaller old shop and opened a new shop in the mall. So it's a normal process. And I think you have to look at the net development, and we still have 2,600-something shops at the end of the March. It's still very much an important part of our business.
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Operator [27]
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Your next question comes from Antoine Belge of HSBC.
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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [28]
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It's Antoine at HSBC. Two questions, so first of all regarding the U.S. markets, obviously you have an excellent performance. It seems to be a bit contrasting with some kind of a slowdown that you're seeing maybe also in some sporting goods chain maybe struggling a little bit. So what's your comment about the market overall and then your own performance? And secondly regarding China, can you maybe refresh our memory about the initiatives that you're undertaking with especially schools and I think you've been trying to participate in the trend towards healthy life in China. So maybe an update on how many schools, et cetera, you are present. And what's your plan there?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [29]
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I'll take the first one and Robin will take the second one. Regarding the U.S., clearly we are, at this stage, satisfied with our current performance in the U.S. which we have had for a while now, where we are growing ahead of the market, that I think there's no doubt about it. We're also coming from a position which I think is important to understand where we have -- we are not distributed in the area that we really needed to. The evolution of the omnichannel and digital is helping our growth rate, and particularly e-commerce has been a growth driver for us in the U.S. And with the distribution structure, we have not experienced maybe the same level of closure of stores that maybe some of our competitors have done. How the competitors operate, I can't really comment on. But we are seeing continued growth opportunities in the U.S. with our key partners in the U.S. and also through our own stores and our e-commerce. So we expect to continue to outgrow the market also for 2017, which is also reflected in our current guidance. That other competitors have different challenges, I think that they are better at articulating that than we are, but we don't really -- we believe that we'll have, for 2017, again, a successful year in the U.S.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [30]
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And as far as China goes, Antoine, yes, we're very excited by the continuing opportunities here in particular, because now the authorities or the central and local governments are encouraging investment in sport facilities, encouraging the kids to play sport and be more active in schools. And as you know, we have this arrangement with the Ministry of Education where we're supporting these activities in schools. I think at the moment, we're in about 8,000 schools in China and that number presumably grows over the next quarters as we roll this program out.
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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [31]
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Maybe just a follow-up, actually, on what you said about the FX impact on gross margin in the first quarter. If you had to quantify it in terms of a minus number in basis points, I don't know, would that be 200 basis points or more?
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [32]
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We showed you the net FX figure, which is exactly 180 basis points. There's 2 portions of it. There's 230 to 240 basis points of actual hedge effect, and there's another 30 to 40 basis points positive on unhedged currency effects. So net, it's about 180. And as I said, don't forget that, that was all planned. There's no surprises in that. And the hedge rate actually turns slightly positive in the second half of the year. Therefore, we reconfirm the development of gross margin for the year being a positive versus 2016, up to 50 basis points improvement.
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Operator [33]
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Our next question comes from Erinn Murphy of Piper Jaffray.
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Eric Thomas Johnson, Piper Jaffray Companies, Research Division - Research Analyst [34]
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Hi, it's Eric Johnson on for Erinn today. My first one is on -- I was wondering if you could touch on the Boost supply shortfall, if there's any updates over the last couple of months in terms of that. And then what your contingency plan is if that becomes a barrier to your long-term targets, what you guys are working on behind the scenes to offset that? And then secondly, I was curious on your women's business, if you would help us better understand how that business looks without Lifestyle being stripped out, to better understand how the Performance side of that business is doing -- is performing and, as well as, what you guys are currently working on to drive that?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [35]
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On -- yes, I'll take the first one on Boost. There is -- with the current supply profile, that is included in our 2020 guidance. So we will continue to have Boost constraints until approximately 2019, which despite the fact that we have an excellent relationship with BASF, and despite the fact that they continue to put more capacity online, we continue to up the forecast based on the consumer demand. So we believe that we're in a strong position. Of course, we would like to have had more supply, there is no doubt about that. But the current supply profile that we have is completely calculated into our 2020 targets. And that assumes, at this stage, a supply unconstrained market condition in 2019, which we, at this stage, still believe to be the case. I will, however, say that we continue to grow our Boost business quite significantly. And we are in the fortunate situation that we have a franchise that is very highly sought after not only in the Performance, but particularly in the Performance side, but also some of our Originals. But of course, this is a performance technology that we're using to differentiate ourselves in the marketplace. And it is -- which we can see from a market share standpoint, and you can also see from overall results in our Running business, which were very positive in this quarter.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [36]
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And the second of your questions, Eric, relating to the development of the business for the women customer or consumer excluding leisure/lifestyle, although we don't break it down quite that way, I can say that this is a very positive development. We have very good development with the partnerships that we are enjoying, not just Stella partnership, but also recently Wanderlust and exciting product launches specifically for women and Running, such as Ultra Boost X and PureBOOST X. And in addition to that, a significant dedicated product in Training, which is also driving good underlying growth in the women's business in the Performance category.
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Operator [37]
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Our next question comes from Piral Dadhania of Royal Bank of Canada.
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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [38]
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Firstly, just on e-commerce, obviously the growth there is very impressive. Could you firstly break out the U.S. e-commerce growth in the period? I think Kasper mentioned that this channel has been a key driver for you in that market. And then just thinking about the profitability dynamics for that channel. How quickly do you think additional operating leverage can be achieved, assuming that the growth rates you saw in the first quarter can be continued and as you work toward that EUR 4 billion target? That's the first one. And then secondly just on China, I think you said that Originals growth was only single digit in that market. But given the actual overall market grew 30%, are we right in assuming it's Running and potentially neo that were the main contributors? Any help just understanding where that growth came from would be very helpful.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [39]
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So first, let me correct the China. No, it was, what do you call it, I gave a wrong number. It was 27% growth for our Originals business in China, which is still below the 30% that we recorded, so apologies for this. On the e-commerce business, let me just give you a couple of points here, is we mentioned the 3 large markets, Europe, U.S. and China, which are growing very fast. We do not break it down by market for competitive reasons, which I'm certain that you can understand. But it is part of our growth driver in those -- a key part of our growth drivers in those markets. When it comes to the overall profit contribution, it does drive a different profile, because we will have a higher level of operating overhead for the e-com, but we'll have also a higher overall profitability. So you will see us investing more because we need to build infrastructure to do that, but it will generate of course a higher profitability. We have not broken down and said when this is occurring, but you should assume that it's accretive to earnings, as we speak. So the quicker we can grow this, the better it is. But of course, what we are doing is we are pushing this quite hard because we see it as a competitive weapon and it also drives the top line. So we will invest as much as we can to ensure that we drive the top line. Currently, it's accretive to earnings, and you should assume also moving forward.
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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [40]
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Yes, brilliant. Can I just assume that -- sorry, did you say 27% growth in Originals for China?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [41]
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Yes, I did, apologies. 27%, and overall growth in China is 30%. So I can see where the growth is coming from.
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Operator [42]
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The next question comes from --
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Sebastian Steffen, Adidas AG - VP of IR [43]
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We have time for 2 more questions, please.
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Operator [44]
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Thank you. Our next question comes from John Kernan of Cowen and Company.
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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [45]
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Yes, I wanted to go back to North America, and particularly the wholesale environment in North America. Your growth is exponentially higher than any other brand in North America right now. And I'm just wondering what you're seeing as we go into the back half of the year for fall and holiday, order book trends within North America. There's obviously a lot of door closures going on. There's been quite a few sporting goods bankruptcies, but it doesn't seem to be affecting you at all. You're growing, like I said, at an exponentially higher rate than really any of your competitors. So can you just talk about what you're seeing in North America wholesale right now? And what's enabling you, category-wise, to really outperform the market by such a ridiculous amount?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [46]
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So thank you for using the word ridiculous. Right now, you have to look upon also where we're coming from. I think that's important. We are coming from a lower base. We're quite confident that we'll continue to have an above-market growth also in the second half. And we don't comment on order book, but our guidance was that we would grow double digits in the U.S. And of course, we've been growing quite strong in the U.S. in the past. And our assumption is that could continue in the future. So we're not seeing any adverse trends in the performance of our wholesalers in the U.S. that should lead us to believe something different than what we are seeing today. So we have not seen that, but I do want to also stress that we're coming from a position -- a low position and we're also coming from, which you need to take into account, a supply-constrained Boost delivery. So there is a pent-up demand for Boost which we haven't been able to supply upon, and of course, that helps us also in the growth profile.
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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [47]
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That's helpful. If I could just sneak in one quick follow-up question. Growth overall of the apparel category versus footwear, there was a big disconnect between growth of footwear and apparel last year. I'm just wondering what you're seeing in apparel, which has obviously been a more difficult category for everyone globally.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [48]
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So we are still seeing footwear by far outgrowing the apparel side of the business. So that is still the trend that we are seeing.
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Operator [49]
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And our last question comes from the line of Jonathan Komp of Robert W. Baird.
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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [50]
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My first question really just trying to frame up the first quarter results in relation to the full year guidance. And it was helpful to see the strength and the weaknesses listed. So maybe I'm asking about the magnitude of the strengths relative to the weaknesses, and whether it's sitting today, if you're more or less confident in the full year outlook based on what you've seen so far.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [51]
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So I am completely unchanged in the portfolio outlook because we're 2 months into it. And I've been around too long to get excited about something when you have 4 years ahead of us. So -- and I think that doing the extrapolations can be very difficult based on a quarter when we have 16 quarters -- or 14 quarters ahead of us. So for the full year, we're confirming our guidance for the full year. And then we'll of course in March next year, we'll do our guidance for 2018. But right now, our long-term outlook remains unchanged. And we know we have a lot of work ahead of us, but there's also going to be a lot of challenges and only looking upon, I would say, the assets instead of liabilities can be a very dangerous situation. So '17 confirmed. We are also confirming the long-term outlook, but there is no change in any of the guidance that we gave 2 months ago.
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Jonathan Robert Komp, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [52]
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Okay, that's helpful perspective. And my second question, I just wanted to follow up on the adidas brand in North America. I think you mentioned Lifestyle was up 73% in the quarter, so obviously a very dramatic merchandising shift that continues to go on. And I'm wondering, when you look at the distribution, how much of the growth do you think should be, or is being driven by your core current partners? How much of the growth is being driven by expanding some of the distribution to maybe nontraditional partners for your brand? And if you could just comment on the strategy for the distributing, given the merchandising shift.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [53]
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So if you look upon the first quarter, there's been very little change in the distribution structure, which doesn't mean -- it doesn't mean that we don't believe that we have more opportunities of getting a broader distribution in the U.S., but it would be premature to have any -- there is no correlation to the distribution structure in the first and the fourth quarter. They are very, very similar. So long term or medium term, we will of course look for a more balanced distribution structure than we have today in the U.S. But right now, there is no change in the distribution structure that leads to any change in the numbers that you've seen.
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Sebastian Steffen, Adidas AG - VP of IR [54]
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Thanks very much, Jon. Thanks very much, Kasper, and thanks very much, Robin. This actually does complete our Q&A session, but it does not complete our call yet. So please don't hang up.
As all of you know, this is indeed a very special call today as, after 17 years, it is Robin's last call as our CFO. And since all of you, of course, know that we have our AGM next week, that our next reporting date this the 3rd of August, and that you can always track Christian and myself down if you have further questions, I'm going to skip that part of my speech and instead, going to hand over to Robin for some closing remarks.
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Robin John Stalker, Adidas AG - Former CFO and Member of Executive Board [55]
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Thank you very much, Sebastian and ladies and gentlemen. I just wanted to take the opportunity to thank you all for the interest that you've shown in the adidas company over the years, and in particular, the respect that you've shown me and my team in all of the very professional dealings we've had through the times that have, more often than not, been very, very good, although have also included some challenging times. I'm, in one way, sad obviously to be leaving this tremendous position. But I'm also very happy to be leaving it in such a solid state and with a very good outlook for the future and in very good hands to manage it through the future. So thank you very much for your interest in the company, and thank you for all the support for me personally. I wish you all the best and stay true to this wonderful company. Thank you.
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Sebastian Steffen, Adidas AG - VP of IR [56]
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Okay. So thanks very much, Robin. This now does conclude our call today. We're all looking forward to seeing you around the world over the next couple of weeks, be it in London, Paris or somewhere in the U.S., where we're going to be over the next couple of weeks. As I said, if you -- or if you have additional questions, please don't hesitate to reach out to Christian, Jenny, myself or anyone else from the IR team. Thanks very much for dialing in. We're looking forward to staying in touch and have a good day. Bye-bye.
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Operator [57]
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Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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