Bjorn Gulden: Well, I think on the Yeezy thing I said all the time that we started out with €500 million in inventory. And as we were selling off the bestseller, the quality of that inventory, a, from a styling, from an aging and where it’s located, would get worse and worse. So we always said that the profitability in the beginning would not be the profitability at the end. And as you can imagine, as you’re selling down on good inventory, you have broken size fronts. You sold out of the best colors, the best styles. And that’s why I think the development of that is exactly as we said all the time. And so I think we have, what should I say, executed it exactly as you promised to. Then it gets to my 10% EBIT. I think what I’ve said all the time since we started is that when we looked at the company beginning of ’23, it was actually Harm and myself, we said, do you think we can get to 10% EBIT as an operating model given where we are?
And we both agreed, yes, we can. And that’s based on the math that we show you, the 50%, 52% margin, 12%, marketing, 30% other and gives a 10% EBIT. And if it’s 9.8% or 10.2%, I don’t think that’s important. I think it’s important that — we see it and sell it with what should I say, the execution we currently are doing. If there is more room after that, maybe but I think when we’re coming from a company who lost €800 million in Q4 ’22, then to promise you 14% or 15% will be the absolute wrong thing. So we stick to the 10% as an operating margin in a business model that you all understand. And then when we get closer to it, I think we can start to discuss if there are other options getting a higher profitability. But I think it’s the wrong place to speculate on it when we are where we are.
We are very happy with the development of the last 6 months. We are very happy with the resources we have at adidas. We think the timing for us is good, although we are in a very volatile, what should I say, economy or political situation. But the brand is strong. The resources we have is strong, and we feel we have done a decent job over the last 6 months. So I think we should to that. And then as we get closer to ’26, we can discuss if there is an upside.
Operator: The next question comes from the line of Jonathan Komp with Baird.
Jonathan Komp: Yes. Bjorn, I wanted to ask a bit of historical context as you manage the current lifestyle and Terrace footwear trend. If I look back to 2013 and 2014, the adidas business produced about 250 million pairs of footwear each year. That net grew to more than in just a span of 3 or 4 years. And I’m wondering, could you give a little more context as you think about the history, the upside potential for the trend you’re driving and whether or not that’s an appropriate framework to think about how you scale this business for the next few years looking forward?
Bjorn Gulden: I think talking Terrace 10 years ago or 15 years ago, putting that into context is difficult. I’ll try to do it another way. I believe that in the last 10 years, the market has gone more casual. I think the market has become more performance-oriented. And the 2 biggest economies in the world when it gets to population, the India and China is growing the interest in our sector. If I then look at adi in that context. We have the biggest archive when it gets to things that can go faster. We have a presence in all the big sports, and we clearly have the attitude of being visible in local sports. If you put that all together, I think it’s our task to say that we can grow 10% knowing the, what should I say, a lack of performance in the last 3, 4 years.
And we feel very comfortable that we have the vehicles to grow our footwear business double digit in the midterm future. And I think we all need to leave it to that because it’s very complicated when you start to kind of break it down and you go deeper down because we don’t even think like that. If we look into certain market shares to certain categories, we have single-digit market share. And I haven’t met one retailer that couldn’t do, what should I say, double the business that we did last year. So the room to grow is great. But then we also have competition. And of course, we need to do our job. So we will not double our business. But I think when we say we think we can grow double-digit every year, I think we should. And that’s why for us at and to grow double digit every year is .
And you can translate it into pairs or pieces. And of course, we’re doing that. But — but I don’t know how, what should I say, relevant that is to be very honest with you. You also have to admit that the supply chain is going to be more local. I mean you clearly see that China is going to be China for China. You clearly see now that India is going to be more produced in India. America cannot really buy from China. So we are ending up having a supply chain that we were broken up in more local supply chains which, again, can bring more speed and agility into our pipeline. And we don’t need to push everything to one big item. So many things that we can improve, but I hope you have seen that with the change of attitude, with the change of, I would say, agility and speed, we have turned the heat of the brand and the commercial visibility of the brand around pretty quickly, and that shows again what the normal strength the 3-stripes of adidas brand has and it’s up to us then to maintain that.
And then, of course, also manage the life cycle of these franchises in a way that we can sustain it because that is going to be the test that we can.
Jonathan Komp: That’s very helpful context. Bjorn, one follow-up, if I can, on gross margin. Clearly, you’re signaling maybe upside to the prior guidance of 48.5% for the year. Are there scenarios where you could be already at 50% or above for the year? And are there quarters going forward that we should think more closely about the factors you mentioned that would make you be above or below that level?
Bjorn Gulden: I think on the underlying business, I think we will try to keep our inventories clean. So whatever we have at end of quarters or end of season or end of life cycle, we will take the markdowns as we need them. So we might be more aggressive on markdowns than we have done before on a lower inventory, that’s one thing. I also think that the Yeezy inventory, to be honest with you, of course, that’s going towards 0 when it gets to the value of the inventory at the end. And that’s why we will also there being, what should I say, a situation that we might have to write off part of the inventory. And that’s an uncertainty. So there are still, of course, an upside on the 48.5%. That’s obvious. But again, there is not a goal for us to optimize our gross margin in 2024.
You see it’s like we need to create the momentum, make the underlying business be more stable and improve the way we go to market also for ’25 and ’26. So I don’t think any of us is trying to impress you with a substantially higher margin that we promise you. But it might be a result of the sell-through and everything is going as it today. That is correct.
Operator: The next question coming from the line of Jurgen Kolb, Kepler Cheuvreux.
Jurgen Kolb: Two questions from my side. First of all, I noticed that you terminated or not renewed the contract with Parley. Maybe some comments on why you decided to not continue that franchise, which I think at least I thought was quite successful at least at a certain stage. And at the end, what sales contribution was coming through from that cooperation? And secondly, maybe for Harm, or Bjorn, you also mentioned it, we’ve seen a little bit of leverage in the operating overhead in Q1. I think in one of the previous calls, you said that right now, Bjorn, you don’t want to think about efficiency improvements, that’s rather something for the second half or 2025 or so. Just maybe some comments as to where you think you are currently from that perspective. Is OpEx seeing or going to see a significant ramp-up of this leverage in this year in the coming quarters? Or is that something we should rather be looking at in 2025?
Bjorn Gulden: Well, the Parley decision was made in ’22. So it was my decision. But I think the decision is made on the following is that ocean plastic, the way that was set up is not scalable to, what should I say, take care of all the plastic that you need to produce, what should I say, all the polyester product. So we have gone for, I would call, the recycled polyester in general and not only go for one niche. So that’s the reason for the decision that was taken back in ’22. So I can’t give you the number that Parley was, but you know we are basically going towards 100% recycled polyester. So that comes from many, many, many different resources. I think that’s the reason for it. On the gross margin, I can only say that we said we would like to have momentum on the top line with the retail and the consumer before we start to kind of really look for leverage, but I’m looking at Harm, and he seems ready to answer.
Harm Ohlmeyer: Yes. No, very clear. It’s similar to what the question was earlier on the gross margin. I mean, we clearly — and you have seen that start of the year with confidence and Q1 allows us now to do the right things for the future. And we are laser-sharp on what we want to deliver and what we shared some more details on in 2016 from a top line acceleration from a gross margin that we need and also leverage on the operating overheads. But again, Q1 gave us the confidence both on the gross margin and also what we need to invest into the brand. And yes, I could now target a leverage every quarter, what will be the size of that, but we also might decide that we need to focus on the line and get more leverage than in next year.
So rest assured, we are laser-sharp on what we want to deliver in ’26. If you are not here to optimize every quarter. That’s why it’s not a target in itself, but the target overall is that what you’ve seen in the formula, we got to get leverage over the next couple of years. And of course, we got to start somewhere. But again, it’s not quarter-by-quarter.
Operator: The next question comes from the line of Monique Pollard with Citi.
Monique Pollard: A couple of questions from me on China, please. The first one is, obviously, you constant currency sales growth in China at plus 8% in the quarter, and you’ve mentioned e-commerce and wholesale, both up double digit. So just wondered if you could give some sense of the growth rate in stores in China and what you’ve got planned there in terms of improving that performance. The second question is just on the China EBIT margin, which was up really strongly in the first quarter, up 10 percentage points year-on-year driven by the 6 percentage points of gross margin expansion and some cost control. So we’re now at a 30% China EBIT margin. Just trying to understand whether that’s a reasonable level to expect for the rest of the year as well.
Bjorn Gulden: What I can tell you from the China retail is that our own and operating stores were doing better than our franchise stores, which is again, a little bit the same with that we have talked about in other markets is that owner and operator did extremely well because there were forward-fresh new merchandise. And I think also in China, our franchise partners. Remember, that’s mono-branded stores, but they’re driven by external partners didn’t have the same presence in our inventory. So we feel again that the proven our own and operated stores doing so well shows that the brand is on the very right track. And if we fill the stores with the right merchandise, you will also get the same performance, but our wholesale partner or retail partners is then getting, what should I say, the success delayed because of limited and depth in their supply.
So it’s the same in China as we see it everywhere else. Having said that, for us to plan a bit more than 8% growth is kind of risky. So when we say 10%, it is 8%. I think that’s in the ballpark where we’re actually happy with the performance, but it gets to the EBIT margin of 29%, that’s on the high end, if you look at the full year. We had a very, what should I say, clean inventory again in China. We had high sell-throughs and there’s many moving parts to give you that number, but I would be careful thinking that we will deliver up to 30% EBIT for the full year. I think we have said that China will be probably our most profitable market that we’re looking midterm, more at mid-20s the high 20s.
Operator: The next question comes from the line of Geoff Lowery, Redburn .
Geoff Lowery: Just one question. Marketing, do you think, given the need to localize more and given some of — in China and given more globally, some of your competitors prepare to be more locally willing to bid up for marketing assets that you will actually be able to hold the marketing budget at 12% or so of revenues over time? Or do you think there’s upside risk to that?
Bjorn Gulden: No, I don’t think so. I think that 12% is where you should model it, and I think that’s where we are modeling it. You know if some of the competitors are bidding up the prices on certain, what should I say, partners, that doesn’t necessarily say that the whole market is following. So I think we have done the math and you clearly see that we did not bid as high on certain assets because we don’t believe that’s the right thing to do, and I doubt other people will do it. So I think 12% is still a solid number on our side and plan to be at that and don’t necessarily or I don’t see a risk of us going higher than that. And should we, I would tell you because that would be a change in strategy.
Operator: Our next question comes from the line of Warwick Okines, BNP Paribas Exane.
Warwick Okines: Two quick ones, please. Could you talk a bit more about the process of taking down high-end running into more commercial lines, where are you with that? I know you mentioned some upcoming launches. You’ve also talked a while back about investing in sales reps, but just wondering if you’ve got — are getting any traction in that respect. And then the second question is on LatAm, up 18% in the first quarter. You referenced inflation there. Could you just give us an indication of what sort of volume growth you saw in the quarter there?
Bjorn Gulden: Yes. I think that when it gets to the sales reps, we did over the last 3 years, reduce our sales force in many areas by moving to the digital strategy. So there was a belief that you, for example, in running specialty but also in other specialty didn’t need a sales force because those consumers and also retailers could buy the product digital. And of course, the proof that, that didn’t work, we have. And that’s why we’re back again in many sectors to hire specialists, the trainers, experts, sales reps, for example, in running, but also in America, also in sports like skateboard, where we hire people from the community to be part of the community. I do think that we clearly see that physical communities around different sports, especially running is so important that you cannot replace that with digital.
