Q3 2017 Adidas AG Earnings Call
Nov 09, 2017 AM CET
ADS.DE - adidas AG
Q3 2017 Adidas AG Earnings Call
Nov 09, 2017 / 02:00PM GMT
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Corporate Participants
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* Harm Ohlmeyer
Adidas AG - CFO and Member of Executive Board
* Kasper Bo Rorsted
Adidas AG - CEO and Member of Management Board
* Sebastian Steffen
Adidas AG - VP of IR
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Conference Call Participants
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* Andreas Inderst
Macquarie Research - Senior Equity Analyst
* Anna A. Andreeva
Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst
* Antoine Belge
HSBC, Research Division - Global of Consumer and Retail Research
* Chiara Battistini
JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail
* Erinn Elisabeth Murphy
Piper Jaffray Companies, Research Division - MD and Senior Research Analyst
* Geoff Lowery
Redburn (Europe) Limited, Research Division - Partner of Non-Food Retail, Luxury & Sporting Goods Research
* John David Kernan
Cowen and Company, LLC, Research Division - MD and Senior Research Analyst
* John Frederick Speirs
UBS Investment Bank, Research Division - Director & Research Analyst
* John William George Guy
MainFirst Bank AG, Research Division - MD
* Julian Easthope
Barclays PLC, Research Division - MD
* Jurgen Kolb
Kepler Cheuvreux, Research Division - Analyst
* Omar Regis Saad
Evercore ISI, Research Division - Senior MD, Head of Softlines, Luxury and Dept Stores Team, and Fundamental Research Analyst
* 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 Q3 2017 Financial Results. Today's conference is being recorded.
At this time, I'd 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, Levi, and good afternoon, ladies and gentlemen. Also a warm welcome from my side to our Q3 2017 results conference call. Our presenters today are our CEO, Kasper Rorsted; and our CFO, Harm Ohlmeyer.
Before I will hand over to Kasper and Harm, I will as always, quickly run through a couple of housekeeping items. Firstly, we have once again a record crowd joining our call today. So I would ask you to really limit your questions to 2, and also to those of you who are very innovative in asking questions, please stick to that. Thanks very much for that in advance. And secondly, as always, all figures that we will be talking about are currency-neutral and will be discussed for our continued activities, unless otherwise stated.
And with that, I would say we kick it off, and 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, Sebastian. And you know the drill, I will start and then Harm will take us through the financial details. We are in execution mode, as you know, executing our strategy and we made a number of (inaudible) progress. TaylorMade and CCM has been sold and the divestitures are now complete and that means, from a portfolio standpoint, the only one we've spoken about besides this is our Reebok business that we're in the process of turning around. Our (inaudible) leadership groups in our company has been established and are being activated, that is the top 20 and the top 120 leaders. And within this community, they are now fully aligned to execute on the strategy and we have also, as indicated or told on previous calls, put a LTI program in place, which is aligned with the targets, as you know, aligned to the target 1 KPI versus EPS. So the organization is in full execution mode to ensure that we hit our short- and our long-term targets, both of those have been communicate it to you. The quarter was, like any quarter, described by a number of strengths and weaknesses, we continue to see instant growth in North America and Greater China.
The eCom continues to outperform any channel in all the regions. Globally, we saw very robust gross margin improvements reflecting the continued strong brand desire, and we also saw strong profitability improvement in the third quarter. There were also areas that we are not as happy with. We saw slower growth in Western Europe due to market and retail slowdown, down to 7%. I would rather say that it's still substantially above the overall GDP development, and also reflecting a good and growth development. Most of you've seen the U.S. basketball allegations and I would just spend one second on this. So while we had another strong quarter in U.S. with excellent growth, we also are dealing with the basketball allegations. As soon as we learned about allocation, we immediately, within 24 hours, put the relevant individuals on leave and engaged outside counsel to conduct a thorough investigation of our grassroots and college basketball. The investigation is still underway and will take some time. We are fully cooperating with authorities.
Based on the results, we will take whatever action might be necessary to strengthen our process. We do not expect the situation to having a short or long-term impact on our business. Basketball makes up a very small percentage of our revenue. Globally, it's 1.7% of our revenue, in the U.S. it's less than 1% of our revenue. So while the allegations are serious, and we are take them serious, we do not expect them to have any business impact. We continue to see a decline of basketball and our football business, driven by the license decline due to terminations of sponsorship contracts, predominantly the NBA and the Chelsea contract. Our footwear business is growing and we are still not seeing the limits of upgrading the operating leverage that we're aiming for, we are making the right decisions to allow this to take place, but it is still too early to see substantial impact on operating leverage.
On the P&L developments, our revenue increased 12% on a currency-neutral bases and 9% on a euro basis, to EUR 5.7 billion. It's the first time we've had an adidas quarter above EUR 5 billion, so I think it also speaks to the strength of the quarter. The gross margin went up 240 basis points to 50.4% due to more favorable pricing and product mix, and Harm will take you through that in more detail. Operating margin up 270 basis points to 14% margin, supported by an increase in gross margin and operating leverage. The net income from continued operations increased 35%. So while we grew the top line 9%, normally we grew the bottom line 34%. So [a factor of 4] and the bottom line compared to the top line, and the basic EPS to increase up to 33%.
Key growth areas are North America, Greater China and eCom, which have grown 31%, 28% and 39% respectively. This is extremely important for us because we have been very consistent in communicating to you that the 3 most important markets for us, globally, are North America, which represent 37% of the total sporting goods market; Greater China, which currently represents around 20% of the sporting goods market, but it has a huge long-term opportunity; and the eCom channel, which is in our first 9-month growing more than 50% and is of strategic importance to us, in order to create a one-to-one relationships, but of course, also has fundamental impact on driving our margins up. So all 3 having a profound impact on our third quarter. The adidas brand grew 13% double-digit growth on top of 20% increase in the prior year. We saw a strong double-digit eCom growth in every single market and our woman's business continued to outperform with a strong double-digit sales growth. So overall, a strong performance on the adidas brand. Sport Performance increased 3% with a mixed picture. Running revenue up 16%, driven by a 20% growth in footwear, which we're very satisfied with.
Training sales grew 6%, reflecting double-digit growth in athletics apparel. The underperformance of the Sport Performance is predominantly coming from the apparel business and is going back to the NBA, the Chelsea, the euro and the copper, which has had a negative impact on us throughout this year. However, let me be very clear on this. Despite what I mentioned here, we are still not happy with the underlying performance in apparel and it will be an area and is an area of focus for us to ensure that we'll get a more satisfactory performance in the apparel area. So we are not looking for any excuses in this area.
The Originals business and the neo business continued to enjoy strong brand heat with the growth of 25%. Originals up 22%, driven by a strong double-digit growth in all key regions. The modern franchises, and again, this is a continuation of what we also said (inaudible) in the second quarter, grow more than 40% and now represent more than half of the Originals footwear business overall. So I believe we are getting the balance right between "the older" franchises and the more modern franchises.
The neo business grew 30%, reflecting exceptional improvement in our footwear business. So overall, a continued strong growth of 25% followed a 42% growth in the same quarter last year, so on very strong comparables. The Reebok business grew 1%, and let me just pause here for a second. When we entered the year, and when we reported the first quarter, we were very clear that we would have a unbalanced growth profile of Reebok throughout the entire year.
We had a strong growth in the first half, and we are clear in saying we expected a much more modest growth in the second half. We are dealing with 2 different strategic challenges. One is a growth challenge in the U.S. and an overall profitability challenge for Reebok business. And we have been addressing those very consistently throughout the year, throughout most of our programs.
In the U.S, we are making progress on the store closures, which is driving the negative revenue growth number in the U.S. 52 stores will be closed in total, close to 50% of the U.S. [stores]. So far, we have closed 36 stores and we have another approximately 15 stores to go. 6 will come in the fourth quarter and 10 in 2017 (sic) [2018]. We expect -- '18 excuse me, we expect Reebok North America to return to growth in next year. We are satisfied with the progress we are making according to the Muscle Up plan. What we also did was, in order to drive our business in the future, we signed up with Victoria Beckham, to unite and drive our women's business, which is a very important path of where Reebok come from and the business in itself. So the overall contribution for Reebok, we are satisfied with the progress we're making, and we are not surprised about the growth profile. It is purely down to the store closures we had in the U.S.
With this, I'd like to hand over to Harm, who will give you the financials in greater detail. So Harm, please.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [4]
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Thanks, Kasper, and good afternoon, ladies and gentlemen. When it comes to the financial highlights, I want to start with the ongoing momentum in the key regions, as Kasper indicated already, we are very satisfied with the momentum as it continues in Greater China and North America and I'm going to more details there in a minute, but I want to talk a little bit about Russia, the decline of 17%. So as we indicated in the beginning of the year, we have a store rationalization happening in Russia, given the distinction of the overall environment in Russia, originally we planned 150 doors to be closed.
And so far we've actually closed 140 doors, and we are now estimating for the remainder of the year, we will add some another 60 stores to it. So roughly 200 stores, which is a little bit more than we originally had planned. And the reason for that is, we are managing that market based on cash flow relevance and we want to make sure that we have remaining significant cash flow positive, that is the #1 priority for us. If at any stage, the oil prices would move again or the sanctions are less than they are today, we will be well positioned in Russia to go back to different levels that we are seeing today. When it comes to Western Europe, currency-neutral growth's up 7%, this indicates growth and most of the key countries especially, when it comes to adidas brand, double-digit growth in the Originals and neo.
And of course, what Kasper mentioned earlier, football and also the euro and Chelsea is mainly impacting the European region, that's why we see some of the slower growth in that region. The Reebok brand growing this 21% currency-neutral, driven by Running in Classics. And also the gross margin, I'm [specifically] happy about, given the FX headwind of 120 basis points is being more than offset by pricing improvements. And here I want to be clear again, it's not that we are significantly increasing the prices, it's just that we are establishing different price points. So especially when it comes to Originals or football and running, we are getting to difference price points. So as an UltraBOOST or in UltraBOOST ATR, the [alternate] of NMD or EQT. We are just getting to different price points. That is the main driver of the gross margin improvements. And hence, although the bottom line, the operating margin 180 basis points up, is definitely a testament of quality growth, also in Western Europe.
When it comes to North America, there is exceptional momentum, especially with the adidas brand. Overall currency neutral growth of 23% in Q3 and this comes on top of the 24% growth last year in the same quarter. And that is despite the loss of the NBA, despite what we're all aware of a very tough retail environment in the U.S. market. All categories, especially the key categories, running, training, Originals and neo are growing more than 20% in Q3. When it comes to the Reebok brand, we are down 22%, as Kasper mentioned already earlier, we have closed already 40 stores or in the process of closing 40 stores until the end of the year and there are 10 more to come in 2018. But I want to reiterate again that we're going into a growth (inaudible) on in 2018 again for Reebok in the North American market. When it comes to the margin improvement of 240 basis points, it's probably equally impacted as a percentage from both brands. And when it comes to the operating margin being up 350 basis points. This is the over-proportional, impacted by the Reebok brand as a percentage, as we're making, as Kasper said, despite the net sales challenges in the U.S. market, we are making good progress on the profitability of the Reebok brand without going into further details.
When it comes to Greater China, we are continuing the excellent growth with the currency-neutral increase of 28%, led by a 29% currently-neutral increase of the adidas brand. This, again, driven by training, running, Originals and neo, and also on the Reebok brand, we are up by 9% driven by training and running. The gross margin, just slightly down in Q3 by 90 basis points. This is again FX headwinds impacting that, but given the significant growth that we have in Greater China, as the team has been able, again, to improve the operating margin by 120 basis points, now up to 35.8%.
As always, and as usual, I have to state that in the midterm, we are still expecting not to keep a level of 35%. I know even my predecessor said that many times, but I just want to reiterate that again that we don't get used to 35% for the foreseeable future, but we are very, very pleased with our development in China in Q3. When it comes to Latin America, we definitely, and this is the one market where we continue to see challenges, currency-neutral sales grew 8% in Q3. Adidas, slightly ahead of that 8%, is 9% with growth in running, Originals and neo. Reebok up 2% and also their growth in training and Classics. The fundamental challenges that we have from the overall economic climate, that's also from a currency point of view, having significant headwind of 260 basis points in Latin America and has been partly compensated, but also led to a decline in the operating margin by 100 basis points.
We have done significant one-time effects, also in some of these markets, to get prepared for the future, but we are definitely not happy with operating margin of 13.6% in the quarter. That is definitely something that we are taking very seriously, not just in the first 9 months but ongoing in the fourth quarter, to get into a better space in 2018 and the years to come.
The highlight of the quarter is definitely the gross margin increase to 50.4% and I want to go into a little bit more details there. Still in FX headwinds of 20 basis points, they are still a headwind from the input cost as well. I have to say, the channel mix is pretty much a neutral one as we are growing significantly, especially in China with franchise doors and in U.S. with wholesale. And eCommerce just isn't significant or big enough to have a significant channel impact yet. So it's more a neutral element. And as I indicated early on Europe as well as the pricing on establishing new price points, that gives us the opportunity to show the 50.4% margin. And given the strengths of the brand, we are definitely, without going into the details, improving our full price sell-through at all channels as well, and that is definitely contributing to the better margin. There is a slight element of healthier inventory in that margin as well, as we are strictly managing our inventories based on our sell-through. This is all contributing to an overall uptick of 260 basis points and net of 240 basis points in this third quarter.
This leads to the overall financial results. Again, a 9% increase nominal and 12% currency neutral and comes on top of 17% increase in Q3, and I'll talk about Q4 later on. But it's a significant growth over last year. When it comes to the margin, I just mentioned that, let's focus a little bit more on operating expenses. Marketing investments grew year-over-year by 8% in actual terms and as a percentage, it's slightly down by 10 basis points. We will continue to invest into the brand, as we always said, not just in '17 but also towards our 2010 -- 2020 guidance, and that is definitely something you will see in Q4 to pick up to a different level of percentage over net sales.
When it comes to the operating overheads, we are only down by 10 basis points. As I reiterate in every call, we are not happy with the leverage that we are seeing so far, but we are still in an investment mode, as you mentioned, with One adidas to drive more standardization and digitization of this company. And to make this one company out of, slightly 20 companies in the past. There are still some investment needed, and especially in my area of responsibility, when it comes to one ERP suite into the market, when it comes to standardizing processes, global business service and nontrade procurement. These are the things that I am personally overseeing and driving, not just in '17, but continue to drive in '18 to get then more benefits in the second half of '18 and towards '19 and '20, all of these initiatives.
But overall, despite the operating overheads, we are not happy about, we have been able to grow our operating profit by 35% and our net income by 35%, which is clearly the high quality quarter for us. And as Kasper indicated, if we grow the bottom line 4x faster than the top line, that is definitely something that we give credit to our employees. When it comes to inventories, there are a lot of numbers that we are reporting on the continued operation, discontinued operations and nominal, currency-neutral. I will leave the most relevant numbers, for all of you and for us, to see currency-neutral numbers of the continued operations. And that's why I want to mention the 16% inventory growth that is indicative of what we plan ahead in the fourth quarter, given our order backlog and the growth in eCommerce and retail. And we had a similar number in end of Q3 with 11% and delivering in the third quarter on that, and that's reflecting the receivable to 17% of currency-neutral and also payables, but overall, most importantly, reflecting the operating working capital average of 20.3%, another 100 basis points improvement compared to the same quarter a year ago. And that is definitely something we continue to drive, quarter by quarter based on the seasonality.
All right, with that, I would like to hand over to Kasper to explain a little the outlook before we go into the questions.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [5]
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Thank you very much, Harm. So in wrapping up this quarter, and also speaking about the outlook. Let me just remind everybody where we are. We are in the process of fundamentally changing our company through creating the new strategy, and building a stronger adidas for the future. Driven by a higher level of brand desire and with the following up of getting the right balance between top line and market share growth, gross margin expansion and operating leverage. That means we are trying to get that balance right, to ensure that we're not looking for growth for the sake of growth, and we're not looking just for profit for the sake of profit. But getting the balance right to ensure that we get to the 2020 guidance, but, of course, firstly, deliver upon our annual guidance and that is what we are in the process of doing, well knowing that '17 is an important year, and '18 will be equally important. Well we need to build the right progress throughout the years to come to ensure that we hit our targets for 2020.
We expect the sales growth to accelerate in the fourth quarter, and we'll substantially invest in margin, working margin activities to drive a number of areas, new launches, ensure that we have the appropriate sales out. But also support the World Cup that will take place in Russia next summer. We expect -- so that means that we expect a tick-up in growth for the fourth quarter as compared to the third quarter. Our outlook for the full year, we're confirming, and that means a sales increase between 17% and 19%. We expecting the sales increase to probably come in at the low end of the range of the net income within the range. That's why I mentioned, what I mentioned, we want to make sure that we get the right balance.
The challenges we've had in the past was not so much getting the top line, but it was getting right balance, so I'm guiding here is we'll probably come in at the low end of the sales range, but we have seen no issue or challenges in the income range. The take aways from the third quarter was second was that the ongoing momentum in our key quarter will continue. North America, China and online, we're seeing strong possibility gains reflecting quality of our growth, before the outlook we are confirming. We are progressing against the 2017 targets that we have communicated and also the 2020 target that we communicated to all of you earlier this year and we are having a relentless focus on executing on creating the new plan.
On the upcoming events, on March 7, we'll have the full year 2017 results and we'll also have the full year 2018 outlook. And just to reiterate what I said, exactly a year ago, the guidance will be given in the year that we will be in, that means that '18 guidance will be given in '18 and '19 guidance in '19. So we were -- stated that in last year and that is the way we are progress, so don't expect any guidance for us today on 2018. You will see receive guidance upon our full year results on March 7.
With this I'd like to thank you for listening so far, and then we look forward to the question-and-answer session.
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Questions and Answers
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Operator [1]
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(Operator Instructions) And we'll take our first question from Fred Speirs with UBS.
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John Frederick Speirs, UBS Investment Bank, Research Division - Director & Research Analyst [2]
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So first question was around the full year sales guidance, which you've maintained, but guide us towards the low end. I'm interested, how does Q3 compare to initial expectations when you raise that guidance range? What were the main headwinds and disappointments that you hadn't expected? And then looking forward to Q4, what are the main factors you would highlight to drive the acceleration in Q4? And then secondly around Europe, it feels like there's been a bit of a slowdown in the market and you said it, also, retail feels like maybe it's becoming a bit more promotional, just interested in some more detail around that. Which countries are driving that, in particular? What's causing that? And are you seeing traffic shifting faster online?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [3]
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So let me start on the third quarter. We came in at the lower part of the -- our own expectation, and there is really 2 different reasons for us. One was that in Europe, we came in at the low end, predominantly driven by a lower number from France. So we saw a slower demand in France than originally anticipated. And in the U.S, we experienced execution challenges in our distribution structure, simply because we have outgrown pretty much all our offices, systems and structures. And we are addressing this urgently, but we probably could have shipped more in the U.S. But as you can see, our growth was, on the adidas side, 30%. So we are not speaking about low growth. But these were probably the 2 most important parts that impacted the growth in the third quarter that drove it to the lower end of our expectation, which of course, also is impacting our fourth quarter. But at the same time, as I said, we believe we'll be within the range for the lower part. In the fourth quarter, we believe we'll have a very strong quarter. You can see, indicative of it will be, if you do, what I call, rule of mathematics is 20% plus growth we expect in the fourth quarter. And it's really down to a couple of things, which I mentioned, it's new product launches; it's our continued overall strong business; and it's also in the sell-in for the World Cup that where we launched the jerseys this week for a number of countries. And we'll start seeing the impact in the fourth quarter of this year. Of course, we didn't have that impact last year. So that is the way we are looking upon it. So France, a bit lower. U.S., warehouse issue, simply, we are struggling with the success, fourth quarter new launches and World Cup.
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John Frederick Speirs, UBS Investment Bank, Research Division - Director & Research Analyst [4]
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And just on top of France, any other sort of changes to call out in the European environment?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [5]
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We have Nike that continues to be exceptionally promotionally driven. And I think you can see that in some of their numbers. But I think that has been an ongoing development throughout the year. But I think what we stated here was really the relevant ones.
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Operator [6]
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And we'll take our next question from Geoff Lowery with Redburn.
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Geoff Lowery, Redburn (Europe) Limited, Research Division - Partner of Non-Food Retail, Luxury & Sporting Goods Research [7]
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Two questions, please. Can you help us understand the phasing of impacts from Chelsea and the NBA from here? Is this the peak quarter in terms of the sales impact of not continuing those relationships? How does it shape from here? And secondly, just picking up on the e-commerce point, clearly, you're still growing very strongly but it has slowed. Was that impacted by the warehousing issues in the U.S? Or is the slower rate of growth logical from here?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [8]
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So let me start with the last question, and Harm will take the first. The first question -- the first answer to your question on our growth rate, yes, of course, the U.S. slowdown, not slowdown but execution capability in the warehouse impacted it. But I just want to be very consistent, what we are saying here is, if you look upon the guidance that we made, back in March, it does indicate that over the coming years, we will not be able to maintain the same growth rate as we had in the past. And just -- to put in some perspective, you do a forecast, we will come out depending on currencies around EUR 22 billion, without TaylorMade and without CCM. Two years ago, we had EUR 16 billion so we added EUR 6 billion to the top line. So if we continue to grow with the same relative amount is not going to be a realistic. But that was completely, I would say, incorporated in our guidance when we guided back in March. But still -- we still feel very comfortable with where we are coming out and growing a EUR 20 billion company with approximately 17 plus/minus percent is still a, I would say, formidable challenge.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [9]
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All right, Geoff. When it comes to the Chelsea and then the euro impact, I don't want to go into the details by quarter, what the absolute impact is. Because then we get into the game of every quarter explaining that, again, and also doing it next year, again, compared to what we missed this year. So -- in general, it is definitely the second and the third quarter when it comes to Europe, and when it comes to Chelsea and the euro. But overall, we take responsibility of what decisions we make and what is the impact on the top line. Again, we care for quality growth. And we are not going to talk about it next year again.
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Operator [10]
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And we'll take our next question from Erinn Murphy with Piper Jaffray.
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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [11]
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I guess I had a couple of question maybe focusing on the North American landscape. Clearly, a lot of moving parts here with the competitive landscape. It's been a lot more promotional for some of your peers. I think you, Kasper, already addressed that a little bit. But I guess, how concerned are you that this competitive landscape, kind of excess inventory, moving away from that pricing could start to encroach on your success in the upcoming quarters?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [12]
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So of course, competitive behavior impacts overall in the market. I think that, that is one. Secondly is, we will always be in a competitive market. There is no doubt that it has been more driven by promotional activity than we've seen in the past. But despite that fact, we have now grown in the U.S., in fact, with adidas approximately 30% every year. So it does have an impact on the market place. There is no doubt that we have significantly gained market share, if you look upon our growth rates and those of our competitors. But if you look upon trying to get the balance right, we grow 30% and we took our margins up in the U.S. by 3.5 percentage point or 350 basis point. So it's getting the right balance of not giving our products away, because we are not in the business of giving products away, so still finding that balance. But we still feel confident that the U.S. will be accretive to growth for the quarters to come. We still think that we have a long way to go in the U.S. So despite the fact that we've had 3 or 3.5 good years in the U.S, we need to recognize that we are in catch-up mode, and we are not at a market share position that we are aiming at. I believe, in previous calls, we have set a minimum market share. In a large country, it should be around 15%. And we're not there yet at that stage. So I'm actually less concerned about this stage. I think that we'll continue to have quite a lot of opportunity in the U.S. and penetrate the U.S. market further into the future and also gain market share.
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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [13]
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That's helpful. And just 2 follow ups to that. Could you just walk-through where you guys are at right now, with the percent of the product that you sell on full price, particularly in North America, and maybe where you were last year to help contextualize that?
And then on Reebok, when you're done with the reset here in North America, what's the steady run rate of the business from a revenue perspective that we should be looking at for which you can kind of then reaccelerate?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [14]
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So on the full price success, well, we don't disclose that number. But it did improve compared to last year. On the question of Reebok, right now, Reebok -- we've been growing Reebok mid-single digits as a brand. And I would assume that in a steady state that's at least what we should expect. I think that, from a Reebok standpoint, in the past, we said we have 16 quarters of consistent growth but we are not making any money. And so we need to get Reebok to contribute to the value of creation of our company. And clearly, that means having a meaningful bottom line contribution but also have a top line contribution. But we are not going to chase revenue in the U.S. for the sake of chasing revenue. We are virtually, as we indicated, both Harm and I, we will return to revenue growth is our expectation next year, but you should think about it more on the single digit.
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Operator [15]
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We'll take our next question from Jurgen Kolb with Kepler Cheuvreux.
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Jurgen Kolb, Kepler Cheuvreux, Research Division - Analyst [16]
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Just a quick one on the OpEx line, as you indicated that the leverage has not yet kicked in as you may have expected that. But when would you expect the OpEx leverage to be a little bit more pronounced, as you've discussed? And then, also on the gross margin development, obviously, a very impressive development here. Maybe some expectations as to what you think could be or is doable, if we take that a little bit forward. What are the levers that you think you can still work on in order to have the gross margin at this high level?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [17]
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The first question is on the OpEx line. And yes, even so we don't see the leverage yet that we all wish to see in the future. There's probably 2 reasons for it. As I indicated earlier, we are significantly investing and still rolling out our ERP systems into the remaining markets. And we are investing into setting up a more professional and nontrade procurement team. We're also setting up just to build global business services outside of our main locations. That's something we are still investing. And by doing that, we are also shifting workforces and that has some onetime cost. We also had to rationalize the business in Russia and in some of the Latin America markets. And whenever you rationalize or rightsize the business, you have some onetime effects and these are some onetime effects that we had both in Q2 and Q3, that's why we don't see the full leverage. But again, these are onetime effects that we have this year and investments into the future of the leveraged. But there is one single goal that we have. And this is what I take personally on my responsibility, also leading the IT team. We want and will build a more scalable business model in the future. And that's where the investments are going into, that we can drive more to the bottom line through the growth that we are experiencing on the top line. Secondly on the gross margin, yes, we are very happy where we are. But I want to remind everyone, again, as successful as we are in Q3 and with our guidance for the full year 2017, our hedging policies is also 20 -- 18 months old. And still 9 months ago, we were talking about the risk of going to parity with the U.S. dollar and that's why we continue to hedge and not take any bets. That's why there will not be a lot of tailwind in 2018, it will normalize. But not a lot of tailwind in 2018. 2019 will be a different story. But I don't want to talk about it yet. But I think we are optimizing the product portfolio. We are getting to the right price points. That's what we're seeing already today. What we have not seen yet is significant impact of the channel shift because e-commerce is just not, from a size point of view, at the level where we want it to be. And so the channel impact is more coming towards '19 and '20. And that's where we should see more benefits. But we are very happy with the price points that we are achieving, based on the sell-through of these price points as well. And it's a discipline that we have from a margin point of view.
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Operator [18]
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And we'll go to our next question from Antoine Belge with HSBC.
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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [19]
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It's Antoine at HSBC. Three questions, if I may. First of all, a bit similar to the question that was asked about the top line but this time on margin. Where is the margin, actually, above your expectation in Q3? Because that's why I think the margin guidance. And I know that Q4 is a small quarter, but you only need, I think, around EUR 50 million of EBIT, together, in particular, in the gross margin you already reached 50.1% over the first 9 months. And I think selling Chelsea has always been a quite positive for the gross margin. So in other words, are you actually sort of reinvesting part of that extra margin into OpEx to, first of all, not a little bit more room for the [ultra] years? Second question is, I've noticed an increase in FOB, which is a bit -- it is something a bit new, and what is closing exactly that? And here I'm leaving aside any effects consideration. And finally, you've -- I think you had an interest comment about Reebok margin, actually increasing even more than the adidas brand margin. And then also to quote you, I think you said, "Several quarters of not earning anything." So could you confirm that progress in 2016, the EBIT margin of Reebok was between 0% and 2%? Or actually it's very, very, very minimal so that we can or maybe better assess what's the potential going forward from a brand's perspective?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [20]
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So let me start with the last question. Reebok was and is loss making. So that's -- and we believe that, that is not what we can be happy with. And we are confident that we can turn that around. On question number one, I don't think it's appropriate if we change our guidance every quarter upwards or downwards. I think it's important that we hit on annual guidance, and we hit the long-term guidance. And there are certain upsides in the fourth quarter, but there are also, as Harm relatively alluded to, that there is a number of investments that we need to make. And we want to make particularly in the brand but also in other areas of the company to ensure that we build a scale of this model. So that is the way we look upon, we're trying to look upon the long-term. And we would like to become so predictable that we don't change guidance throughout the year. I don't think it's good that we have to do that and that is also what we would try to strive towards. So the annual guidance is the annual guidance. Of course, if there's upside, we'll reflect that but only with one change. So you shouldn't expect a changed guidance for the fourth quarter on the FOB side.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [21]
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On the FOB, there is no surprise yet. So it's impacting us through input cost but primarily labor cost. And that's where our sourcing and global operations colleagues are doing the utmost to find the right sourcing base and moving it in -- from China also to Vietnam to Cambodia to other places. But there is a message there that we are seeing. I mean, it's manageable given the price points that we are achieving right now, as you saw on the overall gross margin guidance. But we should expect a continuation of FOB pressure for the years to come and that needs to be managed. And so far, it's being well-managed.
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Antoine Belge, HSBC, Research Division - Global of Consumer and Retail Research [22]
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Maybe just a follow up on Reebok margins. So I understand that it was loss making and still when you look at your 2020 margin target of around 11% for the group, what type of margin does it imply for Reebok at that horizon?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [23]
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Positive.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [24]
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That's what you get, Antoine, if you ask more than 2 questions, right?
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Operator [25]
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And we'll take our next question from Andreas Inderst with Macquarie.
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Andreas Inderst, Macquarie Research - Senior Equity Analyst [26]
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Okay. I try to be disciplined to get an answer out of you. Two questions. The first one, maybe you can give us a sneak preview for 2018, not necessarily when it comes to top line and bottom line, that's not what I'm expecting, but maybe in terms of product launches besides World Cup? That's my first question. And the second question, you mentioned some bottlenecks for the U.S. market when it comes to distribution. How quickly can you actually sort these luxury issues out?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [27]
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No. Thank you for describing that as a way because we think it's a positive problem that we have in the U.S, and Harm will speak about that. I think it will be more appropriate if we discuss launches in '18 for '18. But we believe we have a solid set of new products coming in, both new products but also products within our existing franchises. So we feel comfortable that '18 should be another year that contributes to the long-term strategy. But beside that, we don't really want to give details of product launches. Too early because, of course, that is -- will then become public knowledge also to our competitors. But as you can see, we are confirming our 2020 guidance and '18 is an important step for 2020 so that will be a step in the right direction. On what you described as a luxury problem, Harm?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [28]
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Yes, just on the bottlenecks, as you described it, Andreas. First and foremost, Kasper and I've been in Portland just some months back and all the employees are complaining about not having any parking spots. And we said, it's also a luxury problem because we're hiring a lot of people to drive the growth in the U.S. So it's indeed a luxury problem. But on a more serious note, it is a challenge for us as a second year in a row with significant growth in U.S. And we are seeing the warehouse capacity, right now, significantly impacting our e-commerce deliveries in the U.S. So it's not as fast as you wish it to be. And of course, it has a sentiment on the consumer and also the on time and full time [key] accounts is not to the level that we used to have in the previous years. That's something we are diligently working on. We are adding another capacity still this year in the U.S. that will ease that problem to some degree. But that's a bigger infrastructure plan starting to come into fruition in 2018 and then 2019, which is ensuring a faster delivery to our digital consumers and definitely a more professional delivery to our key accounts and all the partners. So short-term, there's some easing coming in November, December. But definitely more significantly it will be in '18 and '19, to have a '19 then a full infrastructure in place again for our targets towards 2020.
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Andreas Inderst, Macquarie Research - Senior Equity Analyst [29]
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Okay, very good. And maybe one more question. Harm, you mentioned some one-offs in Russia and Latin America in the second and the third quarter this year. Could you quantify that, please?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [30]
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But I'm not going to quantify that, but the one-offs are in the retail closures, of course. And especially when it comes in Russia, when you close 200 stores, you will have an impact on the central administration in Russia as well and that was pretty significant. And we are talking about the significant workforce that we reduced in Russia. You saw overall headcounts being below prior year and a similar thing after the World Cup 2014 in Brazil, and then the Olympics. It didn't get to the expectations that we had from a top line and that we had to rightsize the Brazilian organization as well. But it's about rightsizing retail stores and rightsizing the organization that is supporting not as ambitious growth that we originally expected.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [31]
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But maybe to add and I think Harm said it very correctly. We'll have "one-offs" every quarter. And because we have them every quarter, so they are part of the business. And understand you're looking from the underlying. I'm just saying that there will never be a quarter -- or there itself will be a quarter where we don't have a either a special income or special expense. But I think that's just the nature of the business and that's why we start specifying it, we start pulling it in and out of the business, which is actually an ongoing element. Because, of course, we've always addressed structures to the market capabilities upwards or downwards, because that's the appropriate way of dealing with it.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [32]
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And I'll probably add to that, I mean, despite the effect of the Chelsea and the Mitchell & Ness diversion that we had in the second quarter. Just assume, these are pretty normal quarters that we have in Q2 and Q3 other than Chelsea and Mitchell & Ness. And this is what it is. But there will be always some one-offs up and down in there. But they're not significant in the overall scheme.
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Operator [33]
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And we'll take our next question from Chiara Battistini with JPMorgan.
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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [34]
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The first one is on -- just a follow up on Europe. As we go into next year and forward, should we assume that high single-digit growth is actually more similar to what we've seen in Q3 is more sustainable going forward rather than our return to the double-digit that we've seen, so far, in Europe? And the second question is on your CapEx guidance, which is up to EUR 1 billion, but you've done 50% of that in the 9 months. So I was wondering what projects you have in Q4 to make up for the other 50%, please?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [35]
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Chiara, thank you for the question. Just to reiterate, we'll give '18 guidance in '18. I think that's the right way of doing it. But what we did said is, also, 3 quarters ago is that we will not be running at the 20% growth rates in the long-term, because that would then articulate a very different number in 2020. But the actual guidance, including growth assumptions for '18, we will give in March in '18. And Harm on the CapEx?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [36]
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Yes, you definitely called it right, Chiara. I mean, when it comes to the CapEx, similar to the nonexistence of the operating overhead leverage. I mean, I'm also not happy with the discipline that we have on CapEx spending and similar to the infrastructure opportunities that we have in the U.S. that I just talked about. Sometimes you wish it's -- we are speeding up with some more investments to make decisions faster that is still something we want to accelerate. So with that being said, I also personally doubt that we spend another EUR 500 million in the fourth quarter. So we definitely will be significantly below the EUR 1 billion number as CapEx spend for the full year.
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Chiara Battistini, JP Morgan Chase & Co, Research Division - Co-Lead, European General Retail [37]
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Perfect. And maybe if I can just follow up on that, when should we expect extra CapEx sort of in 2001 -- I know that you're not going to answer, I'm going to dig in '18, but is it just a shift of spending for investments that were supposed to happen in 2017, in 2018?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [38]
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No. As we said, you can expect roughly another EUR 1 billion in 2018, that's what I've already said, '17 and '18 are the investment years. Then it's easing to the normalized levels of 3.5% to 4% in '19 and '20. So do not expect it's significantly shifting in 2018. I would play around the EUR 1 billion number then.
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Operator [39]
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And we'll take our next question from Omar Saad with Evercore.
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Omar Regis Saad, Evercore ISI, Research Division - Senior MD, Head of Softlines, Luxury and Dept Stores Team, and Fundamental Research Analyst [40]
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I was looking -- wanted to ask about the DTC comp, which I think decelerated a little bit from a plus 6% trend last quarter to a plus 3%. Can you give any color around that? Regionally, the outperformers and nonperformers are by category? Or 3 strive versus Originals? Maybe what it would look like ex Russia, too. Because I think Russia is a pretty big DTC market, details there would be great.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [41]
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Well, Omar, let me take the comps. I mean, as reported, we are definitely not happy with the comps that we are seeing. But there are 2 effects to it. One is if I exclude CIS, where we're significantly rightsizing and again the structural challenge that we have, we are getting more in the mid-single-digit when it comes to the comp numbers. And secondly, as we indicated in the last call, we are doing a lot of renovation of our stores and the comp basis is now roughly only 50% of the stores. And the stores that we have renovated are actually comping better. So internally, we also look at the like-for-like number, that is slightly more positive and it's more indicative of what we do in retail. But again, we don't want to create a new KPIs, everybody externally want to stick to what we have on comp, otherwise, we go back next year again. But that's really the direction that we see there.
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Omar Regis Saad, Evercore ISI, Research Division - Senior MD, Head of Softlines, Luxury and Dept Stores Team, and Fundamental Research Analyst [42]
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Got it. And then a follow up in Europe. I'm wondering, adidas Originals was such a strong trend in Europe earlier than the rest of the world. I'm wondering if you're seeing any sort of shift in the product or style or fashion trends and from the demand side in Europe? And if that's a leading indicator for other markets? Or is it really just kind of regional macro level issues in Europe?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [43]
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No. On front of it, we're not seeing any change. It's simply just a sequential or regional -- I would say regional development so on the macro side. So there is no, overall, I would say, trend change. So trend is still very much in favor of what we are doing and with the increased number of franchises we'll bring into the Originals part of the business. We believe we can also, I would argue, satisfy that demand in the future. But you have a different overall macro picture in Europe and we have in certain other countries -- certain other regions.
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Operator [44]
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And we'll take our next question from John Kernan with Cowen.
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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [45]
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Can you hear me now, guys?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [46]
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Yes, now we hear you.
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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [47]
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Just back to North America, the operating margin performance has been fantastic all year. You'll probably be at a double-digit segment operating margin this year. I'm just wondering, you haven't even seen the transactional benefits from FX yet that you may see next year? I was wondering how we should think about the North American profitability as we head into the fourth quarter of this year, given the competitive environment?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [48]
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So I can't really guide you on the fourth quarter operating margin. But of course, what we are doing is and we've been clear on this, we expect a substantial improvement in North America towards 2020. But we've also said that we believe that North America will be slightly dilutive to the overall margin by 2020. And we are doing this, I would say, very diligently and carefully and not trying to jack up the margin too quickly because we've been there and done that with a very bad results some years ago. So it's more building sustainable, I would say, improvement over time. But we expect an improvement of growth, a substantial improvement in 2017 compared to 2016, so somewhat in line with what you've seen. But that's the only guidance you can get -- I can get. But we want to make sure that we continue sequentially to improve the profitability of the U.S. That's where a big part of the profit that we need to deliver by 2020 is going to come from.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [49]
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Similar to what...
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [50]
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That we would have invested a little faster in some of the distribution network and that have less leverage on the operating margin. But it is what it is. But capturing market share is more important than expanding the operating margin at this stage.
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John David Kernan, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [51]
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Okay, very helpful. And then just one follow-up question on North America. Incredible 30% plus top line growth for the adidas brand. How are you segmenting the adidas brand now on the digital space versus the brick-and-mortar wholesale channel, which is obviously seeing quite a bit of disruption? And then, obviously, the adidas app is a big boost to the digital platform. Can you just talk about how you're going to segment the market between digital and then the brick-and-mortar wholesale channel in North America?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [52]
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Well, first and foremost, I mean, we're definitely prioritizing our online channel over other channels. And there will be some limited early launches on dotcom as well when it comes to the key franchises that we are launching that is in a limited way. But that's how we want to create exclusivity on dotcom, and prioritizing it and getting consumers back to dotcom to drive the growth. And then secondly, when it comes to the family footwear business that we are segmenting, clearly between Originals and then core and neo. Then it comes to family footwear that Originals is more for the foot lockers of this world, and the premium fashion accounts and then for the family footwear, it's more the co-offering. And that's how we're segmenting it in the physical retail.
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Operator [53]
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We'll go to our next question from Anna Andreeva with Oppenheimer.
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Anna A. Andreeva, Oppenheimer & Co. Inc., Research Division - Executive Director and Senior Analyst [54]
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A couple of questions from us. Following up on North America, did you by any change quantify the missed sales opportunity as a result of the bottleneck? And also, what was the North America comp during the quarter? And how did growth in wholesale parse out between new versus existing distribution? And then secondly, on supply chain, can you maybe remind us where you are currently in terms of speed-enabled production? And what are some of the initiative to get to 50% target by 2020?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [55]
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Well, let me start with the quantification. Similar to Chelsea or the euro, we don't really want to quantify what we have missed in sales. But rest assured, I mean, given the change that we have in infrastructure, we could have shipped more if we had had another warehouse. But it is what it is. And then, we're going to catch up, if not the next quarter than in 2018. But it is what it is, and got to deal with it.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [56]
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So maybe just to go through the speed initiatives. We can say, right now, we're approximately 20% and our aim is to take that to 50% and adding different product lines from footwear into apparel. I really don't want to break down, in essence, but we believe we are well underway to ensure that we hit the targets we've set ourselves, which -- we will also deliver the margin that we need to get to. I do just want to go back on the North America point and just really stress where we are. We've had 3 exceptional years in the U.S. We have it positive right now on delivery. The reason why we have the delivery problem is, one, of exceptionally -- continued exceptionally high demand, coupled with a very, very strong growth on e-com. And the e-com, pushes a bigger stress on distribution than normal wholesale will do. With the change in strategy that we went through last year, with increased focused on e-com, this is the consequence of it. We believe it's the right business decision. So I do want to stress, this is a problem or challenge that we are very happy to have instead of having the reverse challenge. And I believe that we've acted in the right way, because moving towards a more one-to-one relationship through this, even though it does put more stress into our distribution channel, is long-term the right solution? And with the growth rate of a 30% or 31% in the third quarter, I still believe that we can be quite satisfied with the results that we have in the U.S. and also we believe that we can continue to share with the consumer in the appropriate way. That's why Harm said that we've outlined very quickly some short-term solutions which we're in the process of implementing and some medium- and long-term solution. So we'll continue to be able to share the market. Well, and I wouldn't over emphasize, what could have been done. I think that we are, right now, quite satisfied with the 31% and that meant we -- that 1 or 2 points on the table or in the field. So it might be, but it's still a very strong growth that we have. And the -- had we built reversely a very large infrastructure, then we would have had the marginal profits. Simply we would have carried different margins. Right now, we need to get this balance right. And overall, the market in the U.S. is a very low growth, if at all, and growing 31% of the adidas brand we are very satisfied with it. And we will take them the profits that will come along.
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Operator [57]
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And we'll take our next question from John Guy with MainFirst.
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John William George Guy, MainFirst Bank AG, Research Division - MD [58]
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Two questions. Maybe just sticking with channel and potential channel volatility going into some markets, namely the North American market next year, especially with what Nike is doing in terms of trying to redefine the retail model and cutting out, as they call it, undifferentiated third parties. How do you see the North American market dealing with potentially a more promotional environment, even more so than what we already see on any incremental markdown not just for maybe Nike brand but also any of the other competitive brands? And what sort of levers do you think that you can pull over the course of the next 6 to 12 months to mitigate that? And I appreciate that you're really going for quality and not obviously quantity, which is what we've seen with their margin. And that's my first question.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [59]
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Let me start with and Harm could help me instead. I think the best way of mitigating promotional activity is to bring cool products into the marketplace and investments in the brand. And I think it sounds very simple but that is really the core of what we're trying to do and full price sell-through. And while there is great scarcity in the market around certain franchises to ensure that it's going to happen instead of driving promotional activity. I believe that, that is instrumental to a brand, if you over a longer period of time continue to drive sales through promotional activities. So you will see us being careful. It doesn't mean that it will never happen. But I do believe that the quality of the top line, this in the long-term more important than driving top line growth through promotional activities. So new launches, cool products, brand investments and also in certain areas scarcity of bringing products into the market. And reversely, I would say, deliberately or undeliberately I think that the scarcity on our BOOST products, potentially has been good for us, if you look upon it strategically. Because it has maintained the BOOST and the Ultra Boost products that should be very hot and desired product. When it comes to channel segmentation, Harm, you've been around longer than I have?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [60]
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Yes. I really want to comment too much about what our competition is doing. But all the comments that I've heard about, the partnership with Amazon or redefining the third-party market place is definitely not something that is new. And I fundamentally believe it will not happen overnight. So it is definitely a strategic direction. But especially, when it comes to Amazon, I think it's still more on a pilot or at a limited level. And also, given where we are in the U.S. market with some of the competition. I don't think it's a short-term next quarter or next half significant change. It's more strategic intent than anything else. And as Kasper said, most importantly, we got to watch our sell-through, we come up with good products and good marketing campaigns and continue the growth trajectory that we had in the last 3 years and that's what we are focusing on.
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John William George Guy, MainFirst Bank AG, Research Division - MD [61]
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That's great. My second question is just around hedging. Harm, could you just remind us please, in terms of where we are on hedging rates for this year? And if there is any move going into next year as well? But more importantly, this year just sort of got the hedging down. Bit of a housekeeper, I'm afraid.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [62]
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Yes. Just -- as I mentioned earlier, our hedging policies up to 18 months forward, and we are not going to take any bets. What we've seen quarter-by-quarter are some unhedged positions in some markets where we get benefits or we do get downsides. So -- and the third quarter was more no benefits in the unhedged positions. But for 2018 clearly, there's -- don't expect any headwind, but also don't expect any tailwind, given the position that we have. And again, 2019s will then be a different story as we are entertaining 116, or where ever we are today. That might be some tailwinds in 2019. But 2018, expect that we are remaining where we are today.
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John William George Guy, MainFirst Bank AG, Research Division - MD [63]
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And so you shouldn't see any benefit at all in the second half of '18? I thought there'd be some.
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [64]
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While our hedging policy is, we are not -- never hedged 100%, right? You don't know where you're heading. So depending on our growth rates, we are normally going towards an 80% hedged and there's a 20% variability or some market where we're not going to hedge. So let's see, I mean, it's still far out, but the most relevant currency is whether the pound or the U.S. dollar then towards the pound versus euro. I mean, that's we are pretty much hedged and there's not a lot of volatility to be expected even in the second half.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [65]
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Levi, we have time for 2 more questions.
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Operator [66]
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We'll take our next question from Julian Easthope with Barclays.
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Julian Easthope, Barclays PLC, Research Division - MD [67]
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Just one question from me. You predominantly still at wholesale businesses some thrive to 80% wholesale. And I just wondered going into Q4, what percentage of the Q4 revenue within wholesale do you actually fully know? And also, within that, what flexibility do the retailers have in terms of returns, or you helping them out should they get into difficulty in the Q4? Just, like, sort of have an understanding as to how confident you are about doing the 20% plus growth into the Q4?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [68]
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First and foremost, the split is roughly on the yearly basis 75% wholesale, including franchise in China that's considered that being wholesale. Otherwise, you need to be more specific on wholesale and franchise, but including franchise in China it's roughly 75%, than at 25% DTC. That's a split that we have. It's not fundamentally changed in the fourth quarter. Even though the fourth quarter is more retail quarter for us and to sell-in for our partners happening more in Q3 for their Q4. So maybe it's slightly up but not significantly up in the fourth quarter. When it comes to returns, as we did in the past, I mean, you're working with all partners but we don't have any specific returns policies or whatsoever. We are managing our working capital very tightly. We're managing based on the sell-through and the marketplace. And this is how we sell-in based on the sell-through. And that's how we manage. There is nothing specific to it, and there's definitely no returns policies in the marketplace.
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Julian Easthope, Barclays PLC, Research Division - MD [69]
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I guess, so if the 75% is wholesale then, and you -- is that basically booked now totally in terms of purposes at this later stage of the year? Or does the orders pattern still come through later on?
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Harm Ohlmeyer, Adidas AG - CFO and Member of Executive Board [70]
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But for 2017, we definitely have all the orders in the books. So there might be some replenishment still, but it's not significant. So the end of the quarter is being determined by our direct-to-consumer business but not by our wholesale business yet. That is pretty much based on deliveries. So we have the orders. It's just a question, how we are converting the orders that we are seeing some, like, bottlenecks in the U.S. warehouse come into the game. Even if you have the order, you can't ship it, we still have the order in your books and you're going to ship it. But that's where we are.
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Operator [71]
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And we'll take our final question from Piral Dadhania with RBC Capital Markets.
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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [72]
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On a more high-level basis, Kasper, I think, you mentioned basketball is only less than 2% of your global revenues now, appreciate the NBA contracts rolled off. But when we look to North American and levers of future growth outside of like-for-like, do you consider basketball to be an area which you would plan to rebuild on a medium-term view? And I guess, separately to that, how will apparel feature in your plans for 2018, given the 2 years stack run rates for footwear becoming increasingly more difficult?
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [73]
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So thank you for your questions. Let me start with the apparel. And as I said, I'm not going to give you any guidance for '18, but I do want to say the following, which I did say during my part of the presentation. That despite the "excuses" we have we are not happy with the performance. And there is no doubt that we have to up the game and get a better balance of revenue growth coming from both footwear and apparel than we've done in the past. When we got into trouble in 2013, part of it was driven by less attractive footwear franchise. And that's why we are spending an enormous amount of energy and resources of building a very competitive footwear platform which, I think, you're also (inaudible), we put in place now. Now we need to do the same of apparel and get them a better platform that we have today. And I think that, that would be the appropriate way of answering without giving you '18 guidance. But right now, it's an uneven growth contributor we're getting from footwear and apparel despite the one-offs or all the impacts that we have this year. When it comes to the U.S., let me just say, before I go to the basketball category say that pretty much every country around the world where we're present and our big competitor is also present. We are more or less in the same position. We are #1 or they are #1, it's a 1 or 2 positions. In the U.S., it's a dramatically different position. There's approximately EUR 9 billion of difference between us and our competitor [or neighbor] in the U.S. So what I'm saying by that is, there is still plenty of growth opportunities in the U.S. irrespective of market segment, that's number one. Within the market segments that we currently occupy where we are strong in, like running or football or soccer. We also see opportunities for growth because we are coming from a growth profile in the U.S. that in the last couple of years have been more dominated coming from the Originals side. Going into the traditional American sports. We need to come into those and be more successful than we've been in the past and basketball, definitely belongs to one of those areas of sports that we need to address in a more successful way. That's why it's good to see the growth we are having in our footwear business. The apparel business is declining, which is NBA-related. But it's still a very minor part of our business, it's 1% in the U.S. So a blip in that quarter you wouldn't even see. So we need to have a broader base than we have today. But I think it's important that we do it step-by-step and build meaningful and relevant positions in each of the area of sport where we're active in instead of trying to boil the ocean. I hope that was a meaningful answer to your question.
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Piral Dadhania, RBC Capital Markets, LLC, Research Division - Analyst [74]
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Yes. Great. I was just in the context of strong momentum in North America for the adidas brand so why not leverage that momentum in categories where you're underpenetrated like basketball, but very clear.
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Kasper Bo Rorsted, Adidas AG - CEO and Member of Management Board [75]
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Yes. I completely agree. We're just saying that we think if that is one of the options we have and we need to do that. And of course, with James Harden signing, I think, 18 months ago, that was a step in that direction because clearly, we've not achieved what we would like to achieve in North America in basketball. Maybe before I hand over to Sebastian, let me just close with the following. We will exit 2017 with a very strong year. We upped the guidance in 2000 -- no, in August. It's a very important step in the right direction. And despite the fact that we might come into the low end of the '17s or '19 I will not get overly excited about it. I think that we are making substantial progress against what we're trying to do in the long term, both from a growth standpoint and from a margin expansion standpoint. And in order to do that, we have to build a scalable business model. We have to build a business where we continue to expand our market share position and continue to expand our margin and get into a landscape where we have a competitive margin. That is what we are doing -- trying to do every quarter to ensure that we take one step at a time and eventually get away from what you have rightfully criticized for us was a lower margin business. But we at the same time also have to grow our market share in a meaningful way. And that is, I hope you can see that what we are striving to do this year. And that's why we'll continue to do what we are doing to deliver on the short-term but also make sure that we can make the appropriate investments so '18 and '19 also become good years. Sebastian?
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Sebastian Steffen, Adidas AG - VP of IR [76]
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Okay. Thanks very much, Kasper. Thank you very much as well to Harm.
Ladies and gentlemen, this completes our conference call for today. As Kasper mentioned before, our next reporting day will be March 7, 2018 for our 2017 full year results. And that's actually also the point when we will provide you with our detailed 2018 guidance. We all look forward to speaking to and seeing many of you over the next couple of weeks and months. If in the meantime, you have any questions, as always, please don't hesitate to reach out to Christian, any other member of the team or myself, we will always be happy to assist you.
And with that, I will also like to thank you for participating in our call today. Have a great day and bye-bye.
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Operator [77]
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This concludes today's conference. We appreciate your participation. You may now disconnect.
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