adidas AG (PNK:ADDYY) Q3 2023 Earnings Call Transcript

adidas AG (PNK:ADDYY) Q3 2023 Earnings Call Transcript November 8, 2023

Sebastian Steffen : Hello, everyone. Good evening, good afternoon, good morning, wherever you’re joining us today, and welcome to our Q3 2023 results conference call. We know it’s a pretty busy reporting today, so we definitely appreciate you joining our call today. Our presenters on the call will be our CEO, Bjorn Gulden; and our CFO, Harm Ohlmeyer. As always, I would like to ask you that during the Q&A session you limit your initial questions to two to allow as many people as possible to ask their questions. And with that and without any further ado, over to you, Bjorn.

Bjorn Gulden : Yes, thanks. And hello also to everybody from me. As always, we will take you through a lot of pictures and some numbers, both Harm and myself, to tell you what we are working on and what is going on. I’ll start with some good news. There has been a lot of critique and negativity around adidas that we are not a good company and a lot of critique on different things. Therefore, I’m actually very proud to see the Forbes research that says that we are one of the 12 best companies to work for and actually the best one in the sports industry. And I think that I’ve always said that adidas is a great company. And being on the inside of it, I can confirm it. And it’s also cool to see that external people say the same thing.

A customer in a specialty concept store wearing a full outfit of apparels and sports gear.

We have talked a lot about the soft values. And also a couple of weeks ago, we had what we call a global week of inclusion, where all minority groups and all groups in general were able to present their views, and we discussed on how we should behave with each other. And in a global company, this is extremely important and is actually very interesting to be part of it. I’m proud of the outcome. Also extremely proud to look at what our team in Ukraine is doing under very difficult circumstances. The stores are open, they run the business, and they’re also now starting again the running club. And as you know, sports is always important. And the spirit of our people in Ukraine is just a fantastic. Unfortunately, over the last month, we have another conflict in our world, which will impact us, I think, for a while.

We have about 620 people in Israel in the offices and the stores. Good is that no one of them are hurt, but many of them are now being called into the army. What we have done is, of course, to assure all the safety of all our people, and then we have started donating for our people and also in the Gaza area through SOS-Kinderdorfer. And we will continue to do that, of course, to help the civilians in the area in this terrible conflict. When you then look at the business, I think it’s fair to say that we are trending in the right direction and a little bit better than what we have told you the last 9 months. And by that, the financial performance — I think both top and bottom line is a little bit better than expected. I think the energy in the team and especially in the decision-making has improved.

So we are becoming faster, and therefore, in my opinion, better. We are getting extremely good feedback from the retailers for Fall/Winter ’24. And you have to remember that Fall/Winter ’24 is the first go-to-market process. That is the way we would like it to be. And the first time we have gotten together as a team, treating the retail partners the way we want with full set of samples, showrooms and also, I will say, with a service agreement that gets the [SBUs] and everything. And I’m pretty certain that we will have a very good order book building for the second half of ’24. The sell-through of new product is improving. I’m sure you see that also in the stores that you are. And of course, for us, it’s about getting enough of the new good inventory through the slow-moving inventory.

And as you probably have seen already, the great thing is that our inventory is heavily down 23% and we feel that our inventory at the year-end will be under control with the exception of the U.S. I also think I said in my quote that retail inventory is improving. And therefore, it should be during the first half an improvement in the total sellout, and, of course, then also building then the order book for the second half. Inventory level in the U.S. in general is still an issue. I think it lags about 6 months for the rest of the world, but very proud of what Harm and the team in finance and also what the operational team has done. And you will see the details of that later. If we then get to the top line, North America was down 9%, 15% for the year.

So you see that at least the quarter has improved. We still have issues in our American business that we have to work through. We had a management change. Rupert, who’s been the President for about 2 years and 11 years with the company, resigned and ended his great career with adi end of October. As an interim solution, our Board member, Arthur, has taken over. And then the idea is that during Q1, we will announce a new permanent President. And it should not be a surprise that they’re looking for an American citizen. The issues in the market hasn’t really changed. There are still elevated inventory, both in the trade and also in our own books. And especially, the successful outlet business is then almost only clearance business, which has a drag on both sales and on margin.

The good thing is that our full price concept stores are all comping like-for-like open with a higher margin. So you clearly see that the D2C business is improving, where we have the right merchandise. We do continue to see high discounts, and we will, of course, continue to be very conservative in the way we sell product in for the next 6 months. I told you about this before, but we need to be more American. That’s why the office that we opened in L.A. in Q1 is so important. It will focus on the American street culture, also connected to basketball. And all of American partnerships when it gets to collab and street culture relevant, collabs will then be managed out of L.A. And I think this is a game-changing thing for us. There is no results of this yet because this was open in Q1.

So you will not see the impact of this in product until, I would say, Q2, Q3 next year. Stores. I mean I’ve been in New York every month and very happy to see the development of all of our stores in New York. Here you see some of them. And as the good inventory has floated in, the like-for-like has continued to improve. And in the stores you see here, they’re all up double-digit like-for-like. And it clearly shows that the consumer is reacting very positively even in the U.S. to our new merchandise. Messi’s entrance to the U.S., we talked about many times. What he has done in Miami is unbelievable. They didn’t qualify for the playoffs, but they won the League Cup. And when you see his pink jersey is the most sold jersey in the U.S., I think, ever, and, of course, it has had an impact on what we call also soccer street culture in the U.S. And extremely happy that he went there instead of going somewhere else.

Also calling the U.S., we were part of the biggest women event ever, 93,000 people or 92,000 people watching our Nebraska-Lincoln women’s team in volleyball playing. And again, one of the small pieces in the focus on women’s sports that I think is going to be very important also going forward. American football, extremely important for the U.S. market. Patrick Mahomes probably being the — what should I say? — not only the best, but the coolest player in NFL. He was also in Frankfurt last week. We just launched his collection, his training shoe, and we will do more products with him, branded with him. And I’m very, very, very sure that we can market him as a superstar and also get much more commercial success of him especially in the U.S. We have also started to sign college athletes legally with the NIL agreement.

That’s now allowed. And also here in American football, we started to invest in that. And it’s clear to say that both college and high school sports for us connecting to the sports youth culture in the U.S. is going to be important. And here, you see a couple of examples of players that we have just signed. Changing into EMEA, Europe, Middle East and Africa, plus 2%, same in the quarter as for the year. So basically the same business. Also here, investing in things a little bit different. We extended the Kings League. If you follow it, a very cool league for the Gen C coming out of Spain. They will expand this concept into other markets. And it’s soccer done in a different way. And the same thing with the battle of the socials. We do try to connect with our traditional sports also into the new generation and into the social media, and are doing quite some stuff outside sponsoring the big teams and the big players, and these are 2 examples of it.

We talked about India and cricket. We signed at the beginning of the year. We have sold more than 0.5 million jerseys of the national team, very, very unique, I think, for the sport and also very cool for us. The team won the Asia Cup and is currently playing the World Cup. I think the final is on the 19th. And that will give another boost to a business that — I’ve said many times, I think India will be the fastest-growing market for us. And that’s why it’s cool to see that, that investment has worked very well. Another market that people talk a lot about, Saudi Arabia. We just opened the office. Harm stayed to open it. And it’s clearly that Saudi Arabia will play sports — or play a bigger role in sports. We know that they are trying to get events.

We know that the league is attracting players. And I’ll be very surprised if we don’t see Saudi Arabia investing even more into sports. And that is for us natural also to open our office there, which we now have. If you then move into a big, big, big important market, Greater China, we were up 6% for the quarter, 3% for the year. You remember we started the year being down double digit. Then the business has improved. All of us, all Board members have been to China not only one time, but more times. We have talked to the trade. We have talked to the political, to the government. We have talked to the different sports federations. I have been very active to understand what we can do and not do. And I’m happy to report that the local focus, the energy of the team is starting to improve the business.

You see the growth numbers are not that great. But if you take the Yeezy business out, it’s already double digit. And all the D2C business, where we really have the best of the best, are up double digit. And as I said many, many times, I’m a big believer of the market, and I’m really, really, what should I say, proud of the energy of the team and feel that we are on a very, very good way. We also took our basketball stars to China. We started our grass root program again, and we know that basketball still is the sport that has the most street relevant culture, so we will continue to do that. And we will also start to bill basketball products for a price level that will compete with the local brands. Because we clearly see that there is 2 different markets.

It’s the market at the top where we compete now, but there is also a commercial market where especially the local brands have established price points that we also need to enter, for example, in basketball, but also in running. Talking to running and other sports, for the first time, I think, in a long time, we have invested then in many, many sports, from track and field to volleyball to tennis. And the team is signing more and more athletes. So that even if the market is small now, we will be a real sports brand in China because we think that’s very important for the future. And we will overinvest in this in the next couple of months and also in years to come. Quoting the breakdance thing, which is also going to be an Olympic sports. That’s where we already have a big, what should I say, impact.

And needless to say, when you see 3 stripes, when you see — here I think it’s Superstar — you clearly see that we fit into that and have already, I would say, a good connection to that generation in that market. To service the growth that we foresee in China, we just opened also the most modern and the biggest distribution center. Harm was there. And again, it’s a commitment to the market with the best technology and the most automated wares that we have. And yes, I’m sure Harm will say something about that later. Going into LatAm, 13% for the quarter, 29% for the year. So the growth was slower in this quarter. As you probably know, LatAm, many of the markets are in a political, what should I say, situation with elections. There’s a lot of inflation and uncertainty.

So maybe a little bit more careful growth. But as you can see, still double digit. And we have the feeling that the team with the investments in sport, but also the energy they have on the activations are doing a great job. Here, you see we sponsoring running events in all the markets. And we are opening new and modern stores in all the major cities. And the D2C business there has developed very, very good. And again, I’m sure that LatAm will still be a growing market for us. Very excited about Asia Pacific, up 7% for the quarter, 10% for the year. You know that both Korea and Japan are very trendsetting markets, of course, very lifestyle driven. And here, we also clearly see that the success of our lifestyle business is having a big impact.

I mean, you see the reaction to both the regional campaign that we started in September, but also to the [Terra] trend and other trends that we have generated. Our stores are doing extremely well, especially — actually in Korea and Japan. So when you look at all that, you see that the Q3 growth was then 1%, and we are flattish for the year. If we then take a quick look how it looks compared to the non-Yeezy business, you see that North America was 9% up in total. If you take Yeezy out, 9% down for the quarter. If you take Yeezy out, then with minus 10%, so a small impact. EMEA, actually no impact, plus 2%, plus 2%. Greater China, plus 6% with the Yeezy, plus 10% without. So you clearly see that the impact of Yeezy was less and the underlying business is stronger.

LatAm, almost flattish. And then Asia Pacific, a little bit the other way, where actually the business was then helped by the Yeezy business with plus 7% to plus 5%. All in all, as I said, our growth at 1%. If you exclude Yeezy, the underlying business was then up 2%. If you look at the channels, wholesale business down 2%. You have to remember that we started the quarter with an order book that was down more than 20%. I’ve always said that the second half order book was very, very weak because of all the inventory and because the way the retailer was reacting to adi a year ago. So you can see we’ve been able to chase the business and then deliver into the trade much more product that was not on order from the preorders, but actually then products that we accelerated and scaled, especially on the lifestyle area, where they may able then to sell-through and, of course, then also make money with us.

Own retail, brick-and-mortar, up 10%. Number of stores, if you take China, Russia out, flattish. That means that most of this is like-for-like growth. Very happy to see that our concept stores, meaning the full price stores, are actually up between 10% and 15% everywhere. And then the factory outlets are, of course, weaker because, as we know, they are currently selling almost only clearance. But the most important thing is that our own retail full-price concept stores are up double digit. E-com up 1%. Same thing here. We have said that it’s not to optimize or maximize top line. It is now to balance the brand side of it together with commercial success. So the share of full price here has increased substantially. We’re protecting our franchises.

And the new management of digital clearly has the view of being more branded and value creation than maximizing top line. That’s why we’re actually very happy with that number under the current circumstances. That gives to the current split, 63% wholesale, 37% D2C. And as you can see, brick-and-mortar and e-com is basically 50/50. Talking about digital, we had a change in the management. So Scott left us as the Chief Digital Officer, and we welcome Tobias again. He has a big history with us, but also with other digital companies and was the natural replacement when Scott decided to go. I think Tobias has been here for a month and has already had a big impact on looking at the strategy, making sure that we build plans based on the new adi and the new environment in digital.

And then, of course, make sure that we really are pushing the brand side and not only the commercial side. If you look at divisions, very important for us that footwear is still growing here at 6%. Apparel we said we’re going to be down with all the inventory in the market, down 6%. And then accessories for the quarter a little bit worse than flattening. Remember, last quarter, it was up because of all the football accessories. So I would say in line with our expectations. Footwear being almost 60% of the business, apparel 36% and accessories only 6%. I think a very healthy split. You could argue that accessories, which should be high margin, could be bigger. But as long as footwear is above 50%, I’m very happy. Performance, basically a flattish business.

Football being up slightly; running, flat; training, down very, very slightly; outdoor, strongly up. Golf actually down now. We clearly see a stagnating side on the golf side after a series of quarters with the positive number. Specialist sports down, but that has more to do with deliveries into the market. And then U.S. sports, up. Especially, a very healthy business in American football, which is kind of cool for us that in America 3 stripes can actually have high market share in America, triple. That tells us that if we build the right product for America, we can actually also be good in the U.S. sports. On the performance side, I don’t need to talk a lot about it, but very proud of Women’s World Cup. Not only winning with Spain the whole tournament, but also taking 3 of the 4 individual prizes with our players.

And again, a clear commitment from us to women’s football. And I think the tournament was a great, great win for women’s football in general and look forward to that investment to continue. Some cool takes we’re doing on women football, not only building now shoes for her with specific models, but also starting to use collab partners. Here you see that one of the jerseys that Arsenal is playing is actually a collab with Stella McCartney. And you will continue to see us actually doing different branding on certain teams to make it more street relevant and build brand heat also through the combination of, I would say, partners, originals and performance. Cool collab on the soccer/football side. Here an example of what we just did with Bugatti.

And again, same thing here on footwear. We will do more collab product to create heat with the more limited edition and create excitement in football. And we have all the vehicles to do that. Welcome home to Newcastle. After a while, they are coming back to 3 stripes. When new ownership and very, very high ambition, this is a great fit. So look forward to that. Ballon d’Or, almost as usual, Messi won his 8th. And then I think the future Jude won the Kopa Trophy, which is the young player’s award. And again, needless to say he’s probably the Superstar of the future and, of course, playing in our product. A lot of critique on us that we are not having enough innovation. I think that is not true. And I think the Pro Evo you hear from Adizero is a good example, the lightest shoe in the market, the best performing shoe in the market, setting also the world record with Tigist here in Berlin, almost 2 minutes better than the previous one.

But also in other, what should I say, records, if it’s records on track or it’s records in markets, this shoe has been unbelievable, and it shows that we can bring innovation very, very quickly to the market if necessary. I’m very proud of that. Then in general, in running, we are investing a lot of money into events and to athletes to build credibility. We know we still have a long way to go to actually be back again by adidas belong, but we have the credibility now by winning races, arranging races and having the best performances. So now the job is, of course, to build credibility also into the commercial area, and that’s what we’re going to do in the future. Same thing on track and field, very important for us to be in the most, what should I say, credible sport.

In Budapest, a lot of our athletes did a great job, and we’re very visible with the footwear. Going forward, you will see a shine again more federation to also be visible on the apparel side. And again, as I said many times, we will invest more and more money also into the smaller sports. Same thing on outdoor. I think with the Agravic Speed Ultra, we have the most innovative train running shoe. And here the same thing, winning a lot of events, taking part in many events and showing innovation as a big part of investment of what we’re doing in TERREX. Very proud also what happened in the Rugby World Cup. Siya Kolisi, the captain of the South African team 9 months after he pulled his ACL. He kept them to the championship, a great ambassador for our brand, fantastic guy.

And even if he beat the All Blacks, which is our team, he’s a great, great part of the family. And the same thing with the All Blacks, probably the team with the best spirit in the world in any sport, doing their training camp here in our campus very proud to work with them. And I’m very, very happy that they extended that contract, and we will extend that cooperation into also other product categories also into the lifestyle area. If we then look at the lifestyle side, the business is up for the first time in a long time, good growth in the higher area with originals. Basketball also growing double digits. So we clearly see that the higher end of the market is accepting our new product. Sportswear, the more commercial side is still down a little bit.

But again, with the pipeline of more commercial products for ’24, we will also turn that in to be a positive number. And needless to say, the left side is more important in the beginning to create brand heat again, and that’s what we have actually been able to do. Couple of things that we have done in the basketball area. We have signed a new multiyear contract with Overtime Elite, which is a professional league, both in American football and in basketball, linking the college athletes into the professional leagues, the MBA and NFL. We will do a lot of collabs and partnerships with them to be more connected to that youth culture in American sports. Then Anthony Edwards, the new superstar in NBA launched his first signature shoe, as you see here.

We launched it on the field of play in September and is now being rolled out in the different markets. And needless to say, he captain also the American national team, and we expect actually a lot of good stuff coming out of that cooperation. Mostly proud of probably is the original campaign that we launched in September, the first campaign, I think adidas has done for original since 2015 or ’16, very well received campaign between €50 million and €100 million in media money, very well executed all over the world, both with global stars, but also connected into local celebrities. And it’s a message that we will continue to use also going in to ’24. The collab with Moncler launched in their fashion show a couple of months ago now in the stores.

And the same thing here, Moncler for me, the only luxury brand that has connected into the winter culture for us being together with them with fantastic product, very, very thankful for their CEO that they did that and the product also selling very, very well. A couple of other things. We did the call up with Korn, sold out very quickly, collab that is also connecting to the young consumer. Then we did in China with Edison Chen a collab both on the global, as you see here, but also local. And here, you see people lining up in front of the stores. So, one of the very, very high impact collabs that we’ve done shortly. And this is the replacement that we have to do to replace the Yeezy business. We need many smaller collabs that can create the heat and that we then can commercialize.

Not surprising probably Samba has being named the Shoe of the Year in the U.S., so we will receive that award I think end of the month. And then I’ve said many, many times, what has turned the brand lately is, of course, the Terrace trend with the Samba, Gazelle and Spezial. We have then lately seen Campus outselling Samba in certain markets already, especially, I would say, in the men’s area in the kids area. So then we have something outside Terrace that is working well. And then those who follow fashion has seen that Superstar, especially in Black White and Triple Black is picking up, and that’s a shoe that we will heat up for the future. Extending the Terrace trend into running, we are into the 70s running here with SL72, which is then a natural evolution for us, again, getting into running lifestyle, and you will see these products starting to seed in in Q1 and then be scaled into the second half of next year.

We are also working on 4, 5 very interesting silhouettes on the running lifestyle side of new silhouettes to replace the successful shoes that we had, for example, the [NMG]. Needless to say, next year will be full of 3 stripes and color. This is in line with what you see on the footwear side. And we have, I think, 16 color combinations coming in different silhouettes and you will see a lot of this in the market, and this is being very well received currently of the retailers. Couple of words about Yeezy. You know we have had 2 very successful launches, 1 in Q2 and 1 in Q3 we are still sitting on about €300 million of the inventory, and we have decided not to have any more launches during Q4 and will then spend the rest of the year then to evaluate what we should do next year.

And I think with that bla-bla, I’m ready to hand over to Harm, who will take you through the real reason why you’re listening, the numbers.

Harm Ohlmeyer : Thank you, Bjorn, and he gets a deserved a break for a couple of minutes now as I guide you through the financial update. Well, unfortunately, there will be not a lot of news, which is probably fortunate as well because we did the press release already a couple of weeks ago. So what you see in the P&L should not be a lot of news for you. Again, €6 billion on the top line in Q3, leading to a 49.3% gross profit and then to an operating profit of €409 million. Of course, all of you are interested, what is the relevance of Yeezy in these numbers and then the €6 billion net sales, which is roughly 1 percentage point currency will increase €350 million Yeezy in there, as Bjorn alluded earlier, if you would do a like-for-like without Yeezy actually 2% up currency neutral.

And also on the gross profit, if we exclude the Yeezy part, the underlying business at 48% gross profit, and I’ll come back to that in a second. What’s also important, looking at our infrastructure, because we always said we need to have healthy top line, and we need to continue to grow the top line, to grow into our infrastructure, while we also rightsized the infrastructure through the onetime costs. So we have €1.9 billion operating overheads, which is around 32.1%. But in there was €110 million extraordinary costs. So €80 million one-offs, which is a combination of severance, DC closures or retail closures and impairment and €30 million linked to the Yeezy business. So if I would deduct that one, we are getting closer to the 30% line, which again would contribute also to the bottom line in a healthier way.

And on the bottom line, it’s €150 million Yeezy is included there. So as gross margin is a very important KPI for us. I want to decompose that a little bit when it comes to Q3 compared to prior year. As you would expect, freight is a significant benefit in that gross margin bridge, but also the underlying business mix is positive compared to prior year. What is the business mix? Of course, it’s a combination of category mix, market mix, channel mix, but also what kind of products we are selling when it comes to footwear versus apparel. So all of that is in, and that’s what I want to say, I call it business mix or underlying business, which is healthier compared to last year. Inventory allowance, given the progress that we made on the inventory also contributed positively.

And then we have a significant negative impact on the currencies on the FX because, as you know, we’re hedging early on going into that season, and that has significant negative impact on our gross margin. And compared to prior year as we continue to clear some products, especially on the wholesale side and in our factory outlets and primarily in North America, it had also a negative impact compared to prior year. If I compare that quarter-to-quarter, you see the similar impact on the freight. It’s very positive and will continue to be positive for the next couple of quarters. Discounts here is already positive because we made so much progress on the inventory. So that is also something you should expect going forward. And the business mix is slightly negative.

That is the reason as we’re expanding our wholesale business as a higher share of business, and that has an impact there. And of course, when you come to the market mix, it’s a similar impact there. FX, it’s also negative because we are going into a season of negative impact, and therefore it continue to go into early next year as well. And here, like-for-like from Q2 to Q3 Yeezy also had a negative impact because we had, on the one hand, a smaller business in Q3 versus the second quarter. And of course, it was a mix of our own D2C business and a combination of our hotel partners as well. So that hopefully share some light into our gross margin bridge. What probably was new today is our balance sheet information in more detail. The highlight is probably the first number.

The inventories of €4.8 billion, again, 23% down reported or 90% currency neutral. And I give you one more detail on that on the next page, but that is definitely a significant progress that we have achieved over the last couple of quarters. Accounts receivables are somewhat down given our declines all on the wholesale side and the accounts payable are significantly down as we bought less given our trajectory of the business overall. So don’t be surprised that was required to bring the inventory down as well linked to a conservative sell-in and making sure that their sell-through in the market. One more number on this page you see cash on the balance sheet. It’s roughly €1 billion on the balance sheet. Also that is a healthy level compared to 12 months ago.

I am as a CFO, very happy to see that development on the overall balance sheet, very healthy situation on the balance sheet. When it comes to the inventories, we all remember Q3 was the peak on inventory last year with €6.3 billion. If you compare it to today, it’s €1.5 billion down. That is significant progress and also look at year-end, €6 billion, made significant progress. We always said it will improve quarter-by-quarter. But now being at €4.8 billion, €300 million of that Yeezy and still having higher product costs in 12 months. To go over from an inventory point of view, we’re now at a point where we’re happy with that inventory. We’re happy with what we have on our side. And of course, by the year-end, we are also happy with what we have around the world, but North America when it comes to our retail partner, still North America, slightly too high, especially with our retail partners facility to work a couple of months to get to a deepen level of inventory.

But tremendous progress and happy where we are and do expect this coming further down going forward. Now of course, we gave a complicated guidance at the beginning of the year, and we changed it a couple of times. So I want to explain that a little bit in more detail. Going from net sales through operating profit underlying and operating profit reported. We started the year with a high single-digit decline on the net sales as a guidance. We changed that to mid-single-digit decline on July ’24. And when it comes to the guidance a couple of weeks ago and today, it’s now only low single-digit decline. So significant improvement on the top line over the course of the last couple of quarters. We have not changed in the last update on the underlying business, which was reported as a breakeven.

Now we said even that one is improving, not just on the top line trajectory, but also on operating profit point of view. Now we believe €100 million is now the guidance for the underlying business, excluding any one-offs for Yeezy business. And of course, what we’re going to report is yet another number. We started with €700 million decline or loss as a starting point, moving to €450 million. And now we believe, as we had a second drop in Yeezy, we can report a loss of €100 million. How does that relate to probably simpler bridge? How do we get from the €700 million to the €450 million that was linked to the first drop of Yeezy, where we generated a net €150 million in profit and €100 million less potential write-off of the Yeezy inventory.

A similar thing happened now in the third quarter, another €150 million net profit from the Yeezy drop from the second drop. Of course, with that, less risk of writing off the Yeezy inventory because we sold it. And then what’s new now is also that the underlying business has improved by €100 million to now lead to a guidance of €100 million negative. I know this is not where we want to be, but we show significant progress. But now I want to hand over to Bjorn again, where we head from here.

Bjorn Gulden : As Harm said, we are not where we would like to be, but we have asked you for some patients. We feel that we are making progress and actually a little bit faster than we thought. There was a lot of critique from you that we’re not creating brand heat. We are not having what should I say, innovation. I do actually believe that that’s not true at all. The pipeline is full of innovative products. I think also on the lifestyle side, we’ve been able now to activate 4, 5 of the franchises. That will also move into a high-low effect on the apparel side. In the next couple of weeks, we will finally have the Fear of God product that we talked about for a couple of years in the market. They are now in the markets and will soon be in the stores.

We will in the next week — actually, next week, launch the ball for the European Championship here in Germany that will be done in Berlin. And for the Indian market, we will probably win the World Cup final with India. And again, it’s been a huge investment for us that has paid off. And we actually do believe that if you give us the time, we will show you that we can again be the best sports brand. I ask you, when you say your long term to think long term. Q4, when you do the math, you will say you’re too conservative. It’s obvious that we will not do something to look good in Q4. We will build the base for a better ’24 and a successful ’25 and ’26. That is important. And then you will ask about the Yeezy inventory. You know in that outlook it’s currently that we write off old inventory.

If we will do that or not depends on many factors. And if we don’t do it, of course, you can add that back again to your P&L. And I think with that, I’ve already answered some of the questions you will have, but I hand back again to Head of IR.

Sebastian Steffen : Thanks very much, Bjorn. And I’m sure there’s going to be more questions. So Andrea, we’re happy to take the questions now.

See also 30 Best Whiskeys Under $30 and 15 Best Gins Under $50.

Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Aneesha Sherman with Bernstein.

Aneesha Sherman : I have two questions for you, please. The first one is, your Q4 guide implies a pretty big deceleration in revenue trajectory, double-digit revenue declines at the midpoint. Can you talk about what’s driving the deceleration in your performance? And does your current performance align with that Q4 guidance so far in the quarter? And then my second question is, Bjorn, you talked about your ability to sell-in product this quarter and the past that wasn’t part of the preorders originally. Given that response, are you seeing retailers change and have more appetite for higher preorders in H1 or H2 2024?

Bjorn Gulden : Well, your second question definitely is yes. As I tried to say is that 9 months ago, we started to look up on how we would like to treat the trade in the future. And that has to do with what we offer them, how we offer it, how we treat them, blah, blah, blah and that actually our retail partner is more important for us than D2C. And of course, to set that up, take some time. And the first, what should I say, go-to-market process that is in line with that it’s fall into ’24, which is happening right now. So we clearly see a big increase in the interest of the retail partners and therefore, expect a much higher order book for the second half of ’24. You have to remember that we’ve been working on a negative order book as long as I’ve been here in the sense that the sell-through of the product, the inventory has not been good, therefore, the preorders for all the quarters in ’23 was negative and that will improve all the quarters in ’24.

I think I said to you that the order book we were working against for Q3 this year was over 20% minus. We ended at minus 2%. So the difference is what we then have chased. And I think I also said you on the lifestyle side, when we began the year, the whole Terrace thing was not on the calendar to be scaled this year, but next year. And of course, you have seen that the visibility of that has turned around, I think, the image of the brand very quickly, and that is based on actually chasing the business and then put good product on the shelf and therefore, increasing the sell-through. But what you also have to understand that we cannot do that with everything. So hopefully, when we get to Q1, Q2 next year, we can actually fulfill preorders, which are then increased in these areas, and we can have a more planable business.

The reason why Q4 looks the way it is, is, of course, we are not going to chase any business in the sense that we will pull anything forward to look good in Q4 because it makes no sense because then we will actually put even more pressure on the pipeline. So Q4 for us will be to lay the foundation for a better first half next year and a very good second half next year. And that’s why the guidance is the way it is. I’m sure when you do your math, you think it is conservative and maybe it is. But you also have to understand that for us, the performance in those 3 months is not relevant for the long-term story of adidas. So that’s the way we deal with it. Same with Yeezy. We could easily have sold Yeezy in Q4 to look good, but it doesn’t make any sense where we’re sitting.

And I hope you agree with us that what we’re trying to do is to build a business now with brand heat, the performance and lifestyle products that we can extend for a longer period of time. We have gotten the inventories down. Of course, we need them to improve the quality of the inventory, both in our own inventory, but also in the trade and all those things are not done in 12 months. So you need to be a little bit patient and believe in us and then we will actually convince you that the strategy is correct. But your math is, of course, correct. And then we will see if it’s a little bit better or if we will end exactly on the guidance.

Operator: The next question comes from the line of Graham Renwick with Berenberg.

Graham Renwick : Just firstly on full price sales. You made quite a few comments there of making good progress on full price sales mix. Just to put a bit more context to that. Are you able to tell us where full price sales were as a percentage of that brand sales ex Yeezy pre-pandemic, where that mix is today and what your ambition is the full price sales mix in the midterm? And on running, it was flat overall in Q3. We’ve seen the headlines of athletes breaking records in Adizero shoes. You mentioned the Adizero family is up strong double digit. I presume that’s from a low base. I just wondered how long it takes to build that credibility and better distribution in the commercial segment. So when will we see Adizero success.

As the athlete level starts to cascade down to stronger growth across the broader running business, should we be expecting a big impact as soon as next year? Are you already seeing that stronger demand in order books? Or is this something that needs to be developed over a longer timeframe?

Bjorn Gulden : Well, I take your first question. I mean, what we clearly see is that the new product that we have been chasing where demand is selling at full price everywhere in actually all markets and all channels. And then, of course, not all the products we’re selling is that new product, and this is what should I say, difficult that we are in is that there isn’t enough good product to kind of replace the bad product, and that’s why the numbers are now better than they are. If we only have the right product now, we would already promise you probably 10% EBIT next year. So it takes some time to get through all the issues that we have had because you have to remember that we had an order book being down 20% because the retailers are full of product that didn’t sell.

And we have been able to take the inventory down partly in our own, as you saw, down 23%, but also with many retailers, we’ve been able to clear a lot of products. So we are cleaner than we’ve been before. That’s why the full price sales of new product is much, much higher. On our e-com, we have protected our franchises. So we are not allowed to discount them ourselves, which should also help our retail partners. And the full price share is then going up and margin is going up. But of course, when you look globally and especially in the U.S., all our outlets are selling at a high discount because it’s only clearance. So we are not there yet. And a lot of the retailers still have too much of the inventory that was not selling is now being sold at a discount.

So the picture is, of course, not as clean as we would like it to be, but the trend is right. And I think with the fact that we now have in the way we work with the retailers and especially the reaction for the preorders for fall ’24 is, of course, that now they can buy a brand that is selling well with new products, there’s the trust on how we go to market. And of course, we’re then starting to build our business on facts and not only believe. So it’s a better situation to be in. In the running area, we have chosen or what should I say, the business unit have chosen to build credibility at the top. So there, the sell range is probably, I think, even competitors will say the best technical product in the market, and it’s selling and performing very well.