Adidas reports stable sales and optimistic 2024 outlook By biedexmarkets.com

Adidas AG (ETR:) (ADS.DE) announced its preliminary full-year 2023 results and the outlook for 2024 during a recent earnings call led by CEO Bjorn Gulden. Despite facing currency translation headwinds, the company reported stable sales and an improved profit of EUR 268 million, surpassing the expected loss of EUR 100 million. Looking ahead, Adidas (OTC:) provided a positive forecast for 2024, expecting mid-single-digit sales growth, a potential increase in gross margin, and an operating profit of approximately EUR 500 million.

Key Takeaways

• Adidas reported flat sales year-over-year, with a 5% decrease due to currency translation.
• Excluding the Yeezy brand, sales increased by 2%.
• The gross margin improved by 20 basis points from the previous year.
• The company’s profit for the year was EUR 268 million, exceeding previous expectations.
• Adidas anticipates mid-single-digit sales growth for 2024, including Yeezy sales.
• Operating profit for 2024 is projected to be around EUR 500 million.
• Marketing costs are expected to be between 11% and 12% of sales for the year.

Company Outlook

• Adidas forecasts mid-single-digit growth in sales for 2024.
• Gross margin may increase despite negative foreign exchange (FX) impacts.
• The company targets a 10% EBIT margin by 2026.
• Adidas plans to optimize its cost structure after solid growth in marketing and sales.

Bearish Highlights

• The company has not yet started any cost optimization programs.
• Concerns about FX impacts and the lack of hedging programs were mentioned.
• Challenges such as freight delays due to the Red Sea conflict have been acknowledged.

Bullish Highlights

• Adidas is overinvesting in marketing and sales to build a strong product pipeline.
• The company is confident in its ability to increase market share and deliver top-line growth.
• Plans to extend the popular tariffs shoe line, which offers higher margins and less discounting.

Misses

• No specific regional details for Q4 or exact numbers for tariff shoe sales were provided.

Q&A Highlights

• Adidas emphasized the importance of strong relationships with retailers and collaboration.
• The company has hedged around 80% of the U.S. dollar and 50% of other currencies.
• The EUR 500 million operating profit guidance for 2024 includes freight rate development assumptions.

In summary, Adidas remains optimistic about its growth and profitability in the coming year. The company’s focus on strategic marketing investments and strong retail partnerships aims to lay the groundwork for sustained success. While acknowledging current challenges, Adidas is confident in its product offerings and expects to maintain a positive trajectory in sales and margins. Further details on the company’s financials will be released on March 13th.

InvestingPro Insights

Adidas AG (ADS.DE) has demonstrated resilience in its preliminary full-year results for 2023, with an unexpected profit and a promising outlook for the upcoming year. The InvestingPro Data and Tips provide additional context to the company’s financial health and market position.

InvestingPro Data highlights a challenging period for Adidas with a negative revenue growth of -2.78% over the last twelve months as of Q3 2023 and a significant EBITDA decline of -82.28% during the same period. Furthermore, the adjusted P/E ratio as of Q3 2023 stands at a high -239.34, reflecting the market’s tempered expectations for earnings. Despite these headwinds, the company maintains a moderate level of debt and a gross profit margin of 46.39%, which underscores the strength of its core business operations.

InvestingPro Tips shed light on the broader industry context and the company’s valuation. Adidas is recognized as a prominent player in the Textiles, Apparel & Luxury Goods industry, yet it is trading at high valuation multiples, with a Price/Book ratio of 5.92 as of Q3 2023. Analysts have revised their earnings expectations downwards for the upcoming period, but there is an anticipation that Adidas will return to profitability this year.

For readers seeking a deeper dive into Adidas’s financial outlook and industry standing, InvestingPro offers additional insights and over seven InvestingPro Tips, which can be accessed through a subscription. To enhance your investment research, take advantage of the special New Year sale with discounts of up to 50%. Use coupon code SFY24 for an extra 10% off a 2-year InvestingPro+ subscription, or SFY241 for an additional 10% off a 1-year subscription.

In light of the InvestingPro Insights, Adidas’s forward-looking statements about sales growth and operating profit for 2024 can be seen within the context of its current valuation challenges and industry position. The company’s strategic focus on marketing and cost optimization will be essential as it navigates these financial metrics and strives for a profitable year ahead.

Full transcript – Adidas AG (ADDYY) Q4 2023:

Sebastian Steffen: Hello, and good evening. Thank you very much, Francie, and also from my end, welcome to the Conference Call and our Preliminary Full Year 2023 Results. We very much appreciate your flexibility in joining our call on such short notice, knowing that this means getting up very early or in some cases even in the middle of the night for you. The participants in today’s call are our CEO, Bjorn Gulden; and our CFO, Harm Ohlmeyer. The purpose of this call is twofold. First, Bjorn will provide you with a brief overview of our preliminary full year 2023 results and afterwards, Bjorn will share context around our published full year 2024 outlook and its underlying assumptions. And lastly, of course, Bjorn and Harm will be happy to take your questions. Please understand that, during today’s call, we will not be able to comment on our Q4 performance beyond what has been published yesterday. We will be more than happy to discuss these elements during our regular conference call on March 13th. As always, I would also like to ask you to limit your initial questions to two during our Q&A session in order to allow as many people as possible to ask questions. Thanks very much in advance for sticking to those rules. And now without any further ado, over to you, Bjorn.

Bjorn Gulden: Thanks, Sebastian, and good morning, everybody. We start the presentation with a beautiful picture of our new Predator, which is launched in the last couple of weeks, doing extremely well on the pitch and also in sell through. So one of the future successes for us. The purpose of this call is to take you through the announcement and we have five, six slides to explain the different components and we start with the top-line and you basically see that, we have a flat sales, currency neutral and reported a minus about 5%. If you then do the math, you see that only on currency translation, we lost almost EUR1 billion in sales. If you then exclude Yeezy from the numbers, you will see that we were up around 2%. And then you shouldn’t take the Argentina devaluation. You will see that’s another percent. If you put those two together, that had an impact of about 3% on our top-line. If you remember, our latest guidance was low-single-digit decline currency neutral and when we then ended flat, we all understand that Q4 was stronger than what we had expected. If you then look at the gross margin, I do actually believe, given the inventory we started with during the year, that we have done a very, very good job actually getting through that. And as you can see, we are ending with a 47.5% gross margin, which is then 20 basis points better than what we actually had a year ago. I think we have been very good at actually managing our inventories. And when we publish our numbers, you will see that we are very, very happy with our inventory, actually ended in the year. On the profit side, you see that we reached EUR268 million which, of course, is much less than we had in 2022, but we flagged that a long, long time ago. And at least, you should I look at the extraordinary impact, we had another EUR100 million negative in Q4 because of the devaluation of the Argentina peso. And if you remember, our latest guidance, we said that, we will lose EUR100 million so as you can see, there is a positive swing from that guidance to the year end of EUR368 million. We will try to explain that as we go through the slides. If you then look at the different guidance that we had during the year, this is my first year with the company and I would like to take that through because that explains how we are guiding and why we did what we did. We started out in the beginning of the year saying that we expected a high-single-digit decline, that our underlying business, taking Yeezy out, should be breakeven. And again, we were coming from a Q4 the year before with a loss making. And then we said, we will have a reported loss because of the Yeezy inventory of a possible EUR700 million. Then in the second guidance, we then said now we only expect a mid-single-digit decline. The underlying business is still breakeven. But because of the sell-off of Yeezy, we are now looking at a possible loss of EUR450 million, if you write-off the leftover on the inventory. And then the latest guidance were then from mid now to low-single-digit decline. We had an improvement in our underlying business to EUR100 million profit. And then, again, because of the Yeezy development, that would then give a reported EBITDA around minus EUR100 million. And when you then look at the actuals, the low-single-digit has then gone to a flattish. With the operating profit, the underlying business has improved by another EUR100 million up to EUR200 million and when we then tell you that we’re not going to write-off EUR268 million on inventory. That then turns into be a EUR268 million profit. So that has been the improvement during the quarters. If you take that into a slide to try to explain it, then again, we started with a minus EUR700 million then we sold off Yeezy. That generated a profit of EUR150 million, and because we sold inventory, we didn’t have to write-off EUR100 million inventory. So we then had a guidance of EUR450 million. The same thing happened in the next phase, but here we also had an improvement of the underlying business of EUR100 million. That’s where we ended at the guidance of minus EUR100 million. And now on the actual, we have a EUR268 million decision not to write-off the left of inventory plus an improvement of the business of EUR100 million and that gives you then the EUR268 million. To sum that all up any around, then you would see that that’s an improvement from the beginning of the year till the end of the year of about EUR1 billion in our bottom-line. Again, not saying that this is great. The only thing I’m saying that 12-months ago, we had a Yeezy problem that could have caused us to write-off all inventory. We sorted out half of that. We still have EUR268 million left of inventory, which we will now sell at least at cost. There’s an upside to that. And I think the underlying business returned from being on a negative down four on the top-line to actually now having a positive momentum towards the consumer and the retailer. So I think a lot of positive things have happened over the last 12-months. If we then look into the sales going forward, it’s a little bit complicated. We tried to explain it. We ended the year with EUR21.4 billion in sales. All that EUR750 million was Yeezy. That means that you have an underlying sales of adidas product of about EUR20.6 billion. If you then say that, that business should grow high-single-digit, remember we said that it will start flattish and be double-digit at the end. Then you will end, but if you say the sales line is between 7% and 9%, you will end between EUR22 billion and EUR22.5 billion top-line. If we then add the Yeezy at cost, that’s another EUR250 million, then you do the math, you’re at EUR22.25 billion or EUR22.75 billion as a currency neutral sales, and that would be for the whole company, including Yeezy land, the mid-single-digit growth, currency neutral. Although the leader’s underlying business is high-single-digit, just so you understand the math. And then unfortunately, we have very, very negative FX impacts around the world currently. Of course, I can’t name them because even I don’t know them. But that’s, of course, what is then going to give the pressure on the top-line during the year. And we will get back to that and explain it more in detail. And then I’m sure also Harm can explain it even more to you. But that is the picture we’re looking at now. And now you have to remember that our goal in the last 12-months was to get rid of bad inventory both in the trade and in our own books. It was to solve the Yeezy problem. It was to build the relationship with our retail partners and to get momentum towards the consumer. And 12-months ago, we did not have the tariffs. We did not have at Campus. We did not have the Predator. We did not have to Anthony Edwards shoe. So I’m actually very happy with what we now see in the market. And that’s why I think we’re on the good way of actually reaching the things that we have promised you mid-term meaning 2026. When you then look at the quarters, and of course, this is just a visual indication, we say that Q1 will be flattish. There might be some upside to that. And then we should have continuous improvement quarter-by-quarter. Why is it like this? Well, it’s especially because the American market is lagging, I would say, six to nine months behind the rest of the world. And that has to do with, of course, our performance when it gets to our inventories that are in the trade and also, of course, deliver the fresh product into the trade and get the buy in of that at the same speed as we’ve gotten in all other markets. And therefore, we say and we promised you that we will start flattish, improve every quarter and then when we get to the end of the year, we should have a double-digit growth. And of course, as always, it could happen also quicker, but this is where we are currently. If you then look at the gross margin, then FX, I think, and again Harm will talk more about this, that just in the gross margin, there is about 200 basis point pressure on the gross margin because of currencies. If you look at freight, that looked very positive, I would say, until the red ocean — the red what is it, Red Sea problem came up, and currently, there is a negative effect of that. But that negative effect will be smaller than the positive effect, but you should be aware of it that currently the spot rates are actually exploding again. So, if you don’t have a long-term contract or you ship more than your contract. There is an increased cost because of that. And there is a delay currently of about three weeks, which of course causes some delivery issues again, especially to the European market. All other areas are actually positive than it gets to the gross margin. And I think it’s fair to say that we are planning and pretty certain about that we will have a very positive development in our gross margin despite the 200 basis point negativity that we’re getting because of the FX. When you take the second half and the picture is ballpark the same, and remember, now we are comparing to H2 2023, but the picture is ballpark the same. If you then look at our guidance, and then we are currently then, currency neutral, saying that we will have a mid-single-digit increase in our total company. That includes Yeezy. But you have to remember that we’re currently planning with substantially less sales because we only planning in this guidance to sell the EUR268 million inventory at cost. There is an upside to that. If you take Yeezy and you look at adidas business, we should have high-single-digit increase for the full year and we should have double-digit increase at the back end of the year. The operating profit that this gives you it’s around EUR500 million, of course, with an upside. But as you know, it is our clear goal to always start with what we can promise you and then build from that. The assumption that we have in this is, again, to repeat it, to sell the Yeezy at cost, that’s around the EUR250 million and currently without no operating profit contribution from that inventory. We talked about FX headwind that has, of course, a transactional effect when you convert sales in countries back again to euro, and then it has a direct impact on the gross margin, which we already talked about around 200 basis points. And then important, we have not started any programs to optimize our cost structure. We have said that, the most important thing for us is to be positive towards the consumer and positive towards the retailer. That means that, we continue to over invest in both marketing and sales. And as soon as we have a solid growth in that area, which we think we will have in the second half, we will, of course, then also start to optimize and leverage on our cost base. But I hope you understand that, we first focus on the front side to turn what you said was negative 12-months ago into positive, and then we optimize the back end of it. I think if you do it the other way around, you could be in danger of actually killing something that is going to be very, very good. So that was, what should I say, simplified explanation of where we are. And then the second beautiful picture, this is the Anthony Edwards shoe, which is selling very well. I think it’s the best-selling basketball shoe that we had for 10 years. Then I think we are ready Harm, me, and Sebastian to take any questions that you have. Seb?

Sebastian Steffen: Yes, thanks very much, Bjorn and Francie, we’re happy to take the questions now.

Operator: [Operator Instructions] Our first question today is from Piral Dadhania from RBC.

Piral Dadhania: So I have two. The first is on the mid-term EBIT margin target of 10%, which I think you stated in your prepared remarks still expect to deliver by 2026. Just based on what this year’s 2024 guidance implies, that leaves a lot to do in the next two years. Could you just help us to understand what your expectations are in terms of the shape of or the acceleration in the margin progression in ’25 and ’26 and how confident you are that you can get there? And the second question, I guess related to that is, just on cost optimization. One of your — I appreciate the comments you just made around investing for growth in the near-term and then perhaps optimizing in the future. Could you just clarify whether that means that, you would in the next two years or so undergo a program of cost optimization like your nearest competitor has done? Do you view the overhead cost base as being too large in absolute terms and you would look to reduce that to deliver that 10% margin?

Bjorn Gulden: I mean, first of all, I think we are full in line with our midterm target of getting to 10% EBIT. You have to remember that to get there, the most important thing is actually to connect with the consumer and the retailer. And to be very honest with you, I think we are after 12-months actually ahead of what I expected on that. Part of that, I think, is luck. Part of that is that we worked very, very hard. And on the lifestyle side, on the soccer side, I would say on the running side, partly beginning of the basketball side, I feel very comfortable that we have the right tools to actually achieve that. I think also marketing with our originals campaign that we started last year and on the performance side, where you see the weekend of Super Bowl and afterwards with our so-called backyard campaign, you will see the new phase of adidas as a total, both in lifestyle originals and then also in performance. So, I think on that side, we are even ahead of schedule. When it gets to optimizing the cost side, this is a difficult one, because we think in total that we have the structure to leverage on. But then you know that when you start changing from a negative to a positive, we need to be careful that we don’t start restructuring in the middle of that and then causing a negativity again. So, we have chosen an overinvestment in the front end in sales and marketing and then working with existing infrastructure currently. We know that’s too big for the current sale. But as we then are getting the double-digit growth, which I’m 100% sure we will get, we will then start to optimize. I do not expect anywhere near the restructuring that you are mentioning from our competitor, but of course, we will optimize and improve things. So, that’s obvious. But you can or you should not expect us to come with those kind of numbers for restructuring.

Operator: The next question is from David Roux from Bank of America.

David Roux: On the just, I’ve got one question on the margin and one on FX, with the puts and takes of the gross margin for the forthcoming year that you highlighted. Do you still expect to achieve the 48.5%, which I think was flagged last year has been a good indication for this year. And then my second question is just on FX, I understand it’s volatile, but as it stands today, do you expect a similar translational impact as we saw in 2023?

Bjorn Gulden: I’ll leave the FX thing to Harm. On the margins, yes, I’m convinced that you will see a 48% plus margin and then I think, I hand over to you Harm.

Harm Ohlmeyer: Yes, Dave, real quick. Just on the margin, I know I indicated I got quoted many, many times on the 48.5% as an early indication last year, but I can confirm today that this is not a wrong number. So, it’s a good starting point, put it that way, without giving a guidance in detail, yes, but it’s still a good indicator. When it comes to the — and I probably want to add, when it comes to the first half and the second half, as Bjorn indicated on the slide, there’s definitely when we talk about 200 basis points FX in the margin. That is not all in the first half. It’s a combination of first half, second half, but it always depends on how you utilize the Fall-Winter ’24 products and some of that you sell already in June. So, from a season point of view, it’s different, but from a reporting point of view, it could be the 200 basis points, could be 70%, 80% of that is probably in the first half a little bit in the second half, but as the chart indicated, it will be much more positive on the gross margin second half than the first half. When it comes to the FX overall, you asked whether it’s the same significance as in ’23. It’s probably less than that, but still significant. So, you saw on the chart, it was roughly 5 percentage points in ’23, and we believe but we go on the forward rates for the end of June that we’re using right now. It could be 3 to 4 percentage points in ’24. That’s what we’re assuming. And of course, it could be better, it could be worse, but we are using the forward rate that we’re looking at right now. And of course, it could be in some markets where we have inflation measures that we work with slight price increases to mitigate some of this, and of course, that’s what we are watching. We are not forecasting ourselves, but it’s take it from the 5% in ’23 to 3% to 4% in ’24.

Operator: Next question is from Warwick Okines from BNP.

Warwick Okines: Actually could I just start with a follow-up on to clarify and make sure I understood your comments on the currency on gross margin, Harm? You said that some of the negative EUR200 million could actually fall in the second half. So are you saying that the year-on-year movement in currency through the gross margin could be negative in both halves?

Harm Ohlmeyer: Well, it depends on when you send the product really, right? And we should understand it’s not just the U.S. dollar. I mean, it’s an RMB, it’s a yen. If you look at all these currencies, we always follow the U.S. dollar. That is predominantly in the first half. It will turn positive into second half, but there are some smaller currencies as well that impacts the second half. But again, you should first and foremost assume that the vast majority of that FX impact is in the first half and it’s to a minor degree in the second half. And also depends of course, we’re hedging only roughly 80% depending on the currency. Some currencies, we only hedge around 50% when it’s outside of the U.S. dollar. And we believe the second half is accelerating. And if you keep accelerating in the second half, then of course the FX impact, depending on where we are on spot rates, could be also positive, right? So, everything that we are saying right now is conservative. And also what I said on the FX on the translational impact, when I say 3% to 4%, we watch all the banks and all the forecasts. They haven’t been perfect, in the last six months. So, we believe what we are having in there is a worst case scenario, so that’s really where we are.

Warwick Okines: And then second question is just on operating costs, and you talked about sort of overinvesting at the start of the turnaround. Could you just give us an indication of what you think the marketing cost as a percent of sales it will be in the year ahead, please?

Bjorn Gulden: Yes. I think in this business, I think between 11% and 12% marketing cost is what you’re looking at. And then there might be overinvestment when there are events or big things that are happening. I mean, for us, I mean, we can live with the 12% marketing. I don’t think we need to increase that. I think what’s important is also the sales line because we need to make sure that the good product pipeline we have on performance. For example, in running also have specialty distribution, and we took a clear decision that we need again to be in front of the retailers and the consumer and not believing that they will all buy digital. So, there is quite some investment in the markets when it gets to actually doing that, tech reps, especially in sales force and a little bit I call it the old fashioned way of again connecting with the consumer. So, we are overinvesting in that front-end compared to the growth currently. And are not, as I think I have said many times, trying to optimize things for a short-term profit, but laying the base so that we can reach the 10% EBIT mid-term that we have promised you. And I think this is important that everybody understands that in 12-months, you cannot turn the company around when it gets to getting heat with the consumer, getting, what should I say, credibility with the retailers, then optimizing margin and cost, that’s an impossible task. So the priority again is to put adidas where it deserves to be, that is being a good performance brand in the categories we choose, also be more local relevant in local sports. It is to have brand heat in our classic original line and then capitalize on that into commercial line. And all those things, I think, we have improved on. At the same time, we have reduced the inventory substantially. We now have gone from a very negative order book to a positive order book. And I also think that the atmosphere in the company and the agility and the speed in our organization have improved. We have done that without putting in any optimizing or saving programs, because those two things works against each other. So right now, we have been talking to the consumer and the retailer, not so much to you as investor. That comes later, when we have the base that we can optimize to be more profitable. But again, we promised you a 10% EBIT margin in ’26 and that’s like running a marathon. Now we have run 10k and I think we’re actually a little bit ahead of, what should I say, our form. But of course, in the numbers, you then need to trust and believe us that these components then gets there. I understand that. But I also hope you understand that, for us to try to maximize our profitability, which I would say quarter-by-quarter or being very domestic in our outlook to impress you would be the wrong strategy. So I hear you that, your maybe negative with the outlook. But don’t forget, we started last year with EUR750 million showing you the worst case. And I think you just have to accept that, that’s the way we are and then we want to deliver what we promised you and not put us under pressure to start to use adverbs and adjectives to be nice in a quarter, because I really don’t think that that’s what we need so.

Operator: The next question comes from Aneesha Sherman from Bernstein.

Aneesha Sherman: So Bjorn, a couple of quarters ago, you talked about retailer order books being soft for H1, in some cases, potentially creating stock outs. Can you give us an update on, where you feel the demand supply balance is for the first half? And then in the second half, are the order books at the level that you want them to be and are you expecting to hit your target ratio of about 65%, 35% wholesale to DTC this year?

Bjorn Gulden: I would say that, the supply and the order book for H1 even looks a little bit better than what I said a couple of months ago. I was afraid going into the beginning of the year that, it might be negative, but it’s actually already positive. Harm, and the people has almost been too good when it gets to taking the inventory down with the delays. We are having some delivery issues because of the Red Sea, which again, it’s not a huge problem, but it is a problem because as you will see that the inventory is very healthy. The order book are increasing everywhere with the exception in the U.S., where we know and you’ve probably seen also that we changed management there two weeks ago that we need another six to nine months to clean up stuff. In all of the markets, I would say that we are a little bit ahead of the curve. And when it gets to the second half, of course, the order book is only full for Q1, Q2 and the order book for Q3 is filling, that’s the time line. So there is no order book currently for Q4. But the indication and the reaction of the retailers. And of course, the current sell-through indicates that we should be in good shape also for the second half. When it gets to the split between, what should I say, wholesale and retail, I mean, the 65%, 35% is not the target by itself. That’s the result of what’s happening. And if it’s 37% or 38% or 39%. To be honest with you, I don’t really care. What is important is that what we try to use the channels for e-com for us is, A, to build the brand; and B, I would say optimize the margin, not necessarily maximizing sales because that causes a lot of discount and a lot of performance marketing. In the concept stores, it’s brand first and then commercial. And in the factory outlet, it should be to clear product and then do as much profit as we can. And that’s what we’re working on the retail side. On wholesale, it’s, of course, to look good next to our competitors, make sure that our packages, both from a financial point of view and from a product point of view, makes all retailers make good money with us, because if they make money with us, they will grow with us. So that’s what we’re working towards. And of course, many of the retailers did not have that feeling a year or two years ago, but we feel that that’s changing. And I do think if you hear with the retailers, you will hear that our sales and product organizations are very eager to build relationships and solve problems. And if you look at all the programs we had to solve all the bad inventory and replace with better inventory and how we chase the business where possible. I’m very, very proud of the way our sales and marketing and product team have done that. But again, of course, things take time. And we started this process 12-months ago. We should not forget that. But everything we said, I think, a quarter ago, I feel very confident about.

Operator: Next question is from Adam Cochrane from Deutsche Bank.

Adam Cochrane: A couple of questions on pricing, if I can. Firstly, on Yeezy, just to clarify, you’re talking about selling it at cost, which is the EUR268 million. How if you’re selling it at cost, is there any implied costs associated with selling it to get to the flat EBIT impact? I would have thought that if you’re selling it at cost, that just covers the cost of goods sold and there might be some selling costs associated with it. So just a source of verification on how the math works on that Yeezy part. And then secondly, in terms of pricing discussions with your own brands or retail partners, how is the price environment looking? How are you thinking about average selling prices for 2024?

Bjorn Gulden: Well, on the Yeezy, what we have told you is that we had two successful drops. We then stopped at third drop last year because of the situation in Middle East and a lot of uncertainty. We now have done a review of the inventory, very, very thorough. And we have also checked with wholesalers and traders. If we could sell it that wholesale way, and the answer was yes, so we could get rid of the inventory in a big bulk, we have felt that the best thing would be to try one more drop, which we are now currently working on, and then we will see how that works and then we will make the easiest decisions as we go. There is always cost in selling. That is correct. And also, forget that when we talk about the profitability of Yeezy that we report, that’s the margin on it. There’s a lot of costs hidden in our business, in IT, in digital, in sales, in logistics by doing it. But we don’t report on that because the cost is hidden in the business. I wouldn’t add any, what should I say, additional sales cost of this because it is in our, what should I say, cost line anyway. Again, there’s clearly an upside on the Yeezy thing, but I think also that you have to appreciate that we’ve gone from writing it off to now accepting that deselling it. And we have written-off, I think it was EUR12 million already, where we had damaged goods and broken sizes. We are conservative on the way we look at it. And again, we will report on this. Every time we do something with Yeezy, we will tell you so you can see that the upside. But the most conservative view now is just to cover the cost, which is then the EUR268 million. When it gets to pricing, I think right now, our line is priced correctly when it gets to the retail price. You have to remember that the market has been very, very discounted. We see currently that many of our product is selling at full price. I mean, every success we have on the lifestyle side is taken out of discount, so that’s very positive. We also have very good sell-through now, for example, on the Predator or the Anthony Edwards shoe in basketball. So we have performance leading products that are actually being sold without discount, which is great in this environment. And then, I think the feeling is in the market that our pricing is actually priced now locally okay. And there’s not a lot of discussion on pricing. Again, I think we all know at the end right now, the most decisive factor on price is the discount. And that as very different from product-to-product and market-to-market. And I think it’s fair to say there is still the total trade, not necessarily our product, but there’s still a lot of inventory out there. And I would still say more in the U.S. than what you have in Europe, where at least our customers seems to be very clean on our inventories, which is very, very positive.

Operator: Next question is from Geoff Lowery from Redburn.

Geoff Lowery: Two questions, please. Firstly, given things like FX and presumably freight are shaping up to be worse, at least near-term than you’d originally envisaged. What’s going better that still allows you to think the 10% margin is the right one? In other words, what’s filling that gap in your medium-term plan? And then the second question is, in terms of the relationship with wholesalers, are you having to give them any sort of improved terms some more marketing support or similar to help, sort of lubricate that improved relationship? Or are you managing to do it on broadly existing terms, but with better products and better relationships?

Bjorn Gulden: Well, the second is clearly that when it gets to the, what should I say, basic terms that we have in our relationship, we don’t do anything. There’s no necessity. What we have done over the last 12-months is, of course, to help where we have inventory. So when it gets to support for take backs or support for discount. We have been more flexible than before. And we have tried to act as a very good partner. And of course, that’s been helpful. I think going forward, we will not have to give more terms or be more service minded. I think we always maxed that. I think where the improvement is and will be is, how do we work with the big retailers when it gets to go to market, both product and chase business and activations. And that is, again, accepting that the retailers around the world are sitting on a lot of competence that we can utilize and together we are stronger than if we act individually. So I think it’s more of an attitude. The danger of saying D2C is, of course, you get very introvert because you are saying that, we go direct to the consumers, therefore, we know everything better and then you don’t listen to the retailer. And I think we are now trying to do the opposite, that say, okay, let’s use the retailers to gain more competence locally in the different markets under different categories, make sure that we look very good, compared to our competitors in that environment and let’s utilize then D2C to maximize the things that we can do in D2C. And it’s all bits from a brand side of view. We should in e-com look fantastic. We should show up as a sports and lifestyle brand at the best, but we should not try to optimize sales because optimizing sales in e-com has two drugs, as I said, that’s the discount and performance marketing, and that’s what we need to avoid. And then on concept stores, if we have a Fifth Avenue store or we have [indiscernible] that should represents the brand the best possible way and it’s more of a marketing tool than it is a commercial tool. And then as soon as we say a store is commercial, being a factory outlet or a normal store, we need to make sure that, we do that like a real retailer, maximizing the contribution of that store. And that’s a culture that maybe has been lagging a little bit that we are now trying to wake up again. When it gets to the FX and the freighting, I just want to clarify that, I just indicated to you that, there is a shorter pickup on the freight, and that is because of the Red Sea. This is not something that we think will belong for a long time. You should just be aware of it that there are currently three weeks delays on shipments because of that, because the ships cannot go through the shortest route. And of course, as always, the transportation companies are utilizing things to take up the rights. We have contracts that go through the summer. But if we need to ship more than the contract says, or we need to accelerate something, that has now a pretty high premium. This is not something that will have a huge impact on our margin. We just flagged it that you should be aware of it. And all other things, in my opinion, are currently positive. And you know what the currency will also meet turn one day. So negative thing will turn positive again, and we are 100% sure that with all the tools that we have, with the current setup we have, we can get to the 10% EBIT. You have to remember that, we have an organization that has had a negative, what shows a development on the top-line and we have not leveraged that organization. And we have had a lot of discount and clearance in the last couple of years. So we see as an ongoing normal business, we see the 10% clearly there as our target, if we deliver on what we already have. And I don’t know if you want to add Harm, but I think that you can also add some pace to that.

Harm Ohlmeyer: Yes, Geoff, probably one more argument, what’s going better and of course, your follow-up in detail, the last couple of years, we have not been able to grow the lifestyle business and that has changed fundamentally in 2023 that we now started growing the lifestyle business and very well that the lifestyle business carries a higher margin and that is definitely an opportunity, that we captured already, but we’ll continue to capture. So, what you should follow is the growth of the lifestyle business. And as the brand is picking up, we can easily say all boats are rising, but apparel business is something that is coming it’s the next step as well. So, lifestyle business growing again, growing significantly with a better margin and then the apparel business should come as well. These are things that are definitely going positive, but definitely more positive than originally expected as a lifestyle business. And then you look at the market mix where we always talk about the challenges in North America that is probably six months behind, but also making good progress in China in making tremendous progress in our home market in Europe. So, these are things that are definitely going better than we originally expected.

Operator: Next question is from Edouard Aubin from Morgan Stanley.

Edouard Aubin: So, just two questions for me. The first one is the shortfall in terms of your guidance versus market expectation and the analysis is different. If I listen to you this morning, essentially because of FX and kind of Yeezy being sold at cost. So, it’s not really a function of higher potential supply chain costs or even market dynamics given that a number of your peers or retailers you talked about a more difficult start to the year in terms of discounting. So, that’s question number one. And then beyond question number two. So, you talked about kind of top-line first, kind of profits maybe later in terms of the focus. On your progress with wholesale, when we do channel checks, we know the feedback from retailers is that they are obviously more happy to work with you because you are giving them better terms. Is that one of the reasons why the cost might be a bit under slightly more elevated than anticipated? And again to break it down in terms of your progress with wholesale, to what extent is it a function of just a better relationship you have with these guys or the product pipeline. I know, I am sure it’s difficult to break it down, but just your some color would be helpful.

Bjorn Gulden: Well, just to clarify, a relationship itself doesn’t bring any business. The relationship opens the door to get better product on the shelf. And of course, a better relationship is also, what should I say, positive for us in the sense that we’re building products and activations that actually works. And I’m actually convinced that the retailers around the world has competence that sometimes are better enough. So if you put the two competences together, we build better packages. But this is not having dinner with people and being friends, and that’s why we do more business. The business is far too, what should I say, serious for that. So, I think the attitude of having retail partners in-house working with our product and marketing people before we actually make decisions, have them have full overview of our innovation pipeline. And being a very, very good and consumer oriented organization is the goal. And we do that both direct, but also working through the retailers. That is what relations is about. It’s not about increasing terms. When you say they are happy because we increased terms, we haven’t increased any terms. What we have done is that we have short-term solved problems. So if a retailer has taken programs for us that hasn’t solved, we have given them help either in markdown money or taking it back and getting it to our own, what should I say, network. So it’s more of an attitude and helping each other, but that goes both ways. So I really feel that the relationship thing is a little bit more common sense accepting the role of retail around the world and then finding ways on how we can build better programs together and also give them full visibility of what we have. You’ll be amazed how many retailers have been surprised when we actually show them the whole range and show them the pipeline instead of just showing them a little bit. So, again, this is a wider thing than just being nice to each other. When it gets to the guidance being lower than your expectation, I think that has to do with many things. The FX, I’m not sure if you have that really in your models. Secondly, I mean, guiding on a profit of Yeezy under these days, I don’t know if you would have done that if you’re sitting in my chair. And thirdly, I think it is very, very important that when we guide something, we can also deliver it with a good, what should I say, feeling. And that’s why I’m saying that we’re trying to be humble and down to earth and then rather, what should I say, surprise you, positive than negative. The consumer sentiment around the world is, of course, not great. It’s not like people are lining up everywhere to buy a product. But for us, it’s almost like that doesn’t matter because we feel that the share we have with the retailers and the way we have exploited opportunities that, Ed, hasn’t been good. That’s why we think we need to grow also when the sentiment is not positive. And then, yes, there has been terrible weather in the U.S. the last two weeks. And of course, if there’s snowstorm, we can’t sell product. But these are all short-term things. I’m convinced that the potential of adidas as an organization, as a brand, as a history and everything we have will deserve a higher market share with the retailers and also in the different categories in the different markets, and that’s our goal to then bring. If that goes from month to month to month and it’s measured in quarterly profits, I’m not sure if that’s the right priority. I think I said 12-months ago, you should check, are we actually delivering top-line growth with our retail partners? Do you see activations that is actually, what should I say, confirming what we say? Do the retail partners agree that sell-through is higher, and that’s the indication that we’re building the base for growing, not necessarily if we probably see EUR100 million more profit or not. We could easily have done a quick restructuring and put costs below and we could look good very short, but I’m not sure that would have built the right attitude that we need for the next 24-months. So it’s a more step-by-step approach. But again, I think all of us, if we were sitting 12-months ago knowing that now, we have some of the hottest shoes in the market, we have the best soccer shoe that has ever been launched, we even have a basketball shoe that is doing well, I think we will all be saying, wow, we will take that. So, we don’t have the attitude that we are negative even if our EBIT guidance is below what you have as your model. We think that with the consumer and retail, we’re actually a little bit ahead of what we thought 12-months ago.

Operator: The next one is from Jurgen Kolb.

Jurgen Kolb: Actually just one question all the others have already been asked. It’s a little bit of nitty-gritty, but probably, Harm, could you share with us the hedge rate where you hedged throughout 2023 and then also in 2024 and how much of that exposure is already hedged?

Harm Ohlmeyer: Yes. As you would expect, I don’t give you the details on how we are being hedged, but I can give you some hint. We hedged very early in ’22 for ’23 when dollar was still very attractive, so we had a good hedge rate in spring summer ’23. That’s why we have a significant impact spring summer 2024, but that’s the one thing. But the second thing is, we normally hedge around 80% of the U.S. dollar for every season. And for other currencies, it’s rather around 50% depending on the market. But you should and that’s probably the opportunity in the P&L as well as we accelerate our growth, the 80% could become 75% or 70% and then we are more to the spot rates how we buy products, right? But that’s why it’s not easy to predict the gross margin, and that’s why I will repeat again, despite all the elements that we have on freight and what we hadn’t discounted in the FX, we are very optimistic to grow the gross margin in the first half and even more so in the second half. That’s why I repeat my indication of 48.5% is not completely wrong, and you will hear more details then on March 13th. But that’s pretty much where we are.

Jurgen Kolb: And maybe one quick follow-up. I understand the conflict in the Red Sea is not a major impact, but the EUR500 million you are guiding for the full year, that obviously includes some assumption on this development of these freight rates, I assume. So you probably also have here a rather conservative and cautious view. Again understood it’s you’re saying it’s rather a smaller issue, but it’s already baked into that EUR500 million thing?

Harm Ohlmeyer: Yes. It’s definitely baked into that EUR500 million thing. Of course, we don’t know if this is now continuing for a year and it depends on what the logistics companies are doing. Do they deploy their vessels? Do they deploy all their containers? We believe they are able to do that, then it will be solved in a couple of months. I mean, if it gets worse from here and stays for two years, then it’s a different picture, right? But right now, we believe you can handle it and what we have been there is from what we know today rather worst case scenario and it’s baked into the EUR500 million. So there would not be reason this year that we come out and say, ”We can’t do the EUR500 million because of the Red Sea”. That’s not an option.

Bjorn Gulden: The only thing, if I may add, is that a three weeks delay wasn’t planned. When we certainly have product lines that is high in demand and higher than the supply and you get a three weeks delay that is a hiccup. And of course, that is, in my opinion, actually worse than the higher rate right now, because there are shortage in certain of our lines. And of course, when you then get them three weeks delayed, that has an impact. The good thing though, I don’t tell anybody, we all have delays. It’s not that we are worse than anybody else, but the irony is that we actually have products right now that the sell-through is so good with certain retailers that we can’t deliver and of course, that is the biggest impact currently on the Red Sea. And surprise, if you don’t want to air. Air rates are currently up by, I think, 700%. It’s like you’re being hit on all those kind of, what should I say, extra things and I think that has a more impact right now than what you said the freight rate. But I’m sure all the people will tell you the same.

Operator: Our last question for today is from Monique Pollard from Citi.

Monique Pollard: Just a couple for me. I just wondered if you were able to provide any regional color on Q4, maybe particularly China, NAM and obviously you mentioned Europe doing very well. And then secondly, obviously you talked about doing double-digit million sales of the tariff shoes in 2024, just wondered if you could give us a sense of what the number was of the tariffs you sold in 2023 and whether you can give any more indication beyond the double-digit millions of where that could get to in 2024 and any indications on margin of that product? Obviously, Harm, you mentioned that lifestyle obviously carries a higher margin and that the tariffs is selling very much at full price. Or any indications there would be useful?

Sebastian Steffen: Maybe quickly on your first question, I want to refer to what I said at the beginning that unfortunately, we’re not able to comment anything beyond what has been published yesterday. So, all the details around our inventory and particularly the segmental development in the region will be something that we will be able to discuss in our call on March 13th.

Bjorn Gulden: I was supposed to answer you and he saw that, so he stopped me. I’m not legally always compliant. The only thing I can tell you is that currently on the tariffing, which is mainly Samba, Spezial and Gazelle, it is still in a higher demand and supply. So, that’s still building. What is new is that Compass in certain retailers and certain markets are actually outselling Samba. And as you know, Compass is a wider, more skate looking shoes, so it also then dries more also to the male consumer, which is good for us. And then we have extended the tariffs thing with the SL72, which is running tariffs, so it’s a running upper key toe construction from 1972 that we are now playing as the fashion thing, and that is now in limited distribution doing very well. So, that will be extended. There is no signs currently that the [indiscernible] thing is slowing down. But the good thing is that it’s extending into the more skate look, which is again the territory for us. The test for us is going to be can we then extend this hype into the running lifestyle where we used to be very strong with the NMDs and also the Yeezy product. And there we’re using the SL72, Terra’s running look, the classic look tend to in to a more progressive, what should I say, running lifestyle thing, where you will start to see seedings and limited lines during ’24 with the idea of scaling in ’25. And so, there is a plan A, B and C when it gets to the lifestyle side. In my opinion, a very, very strong what should I say development and with many avenues that we can go and that’s where again back to the issue how do we work with the trade, where we have given full what should I say transparency and be using them and also our own chance to test. So, I think on the lifestyle side, I think we feel very comfortable on the footwear side that we have the right, what should I say, product for the next 18 to 24-months.

Harm Ohlmeyer: Yes, I just want to add on the tariffs margin. I don’t give you the details of course of the margin, but as a starting point, if you compare it to other categories, it’s a much more simpler product to begin with, because these are products that existed for 30, 40 years. So, we know how to build them, we know how we optimize it to build them, so to better go in margin to begin with. And then secondly, it’s a sales growth grade, what it is right now, you have less discounting in your own channels and that’s where you get an even better margin. So, that’s why I indicated the growth in lifestyle, especially in the tariff products, there’s a positive mix in the overall gross margin picture.

Sebastian Steffen: Thanks very much, Monique. Thanks very much, Bjorn and Harm. And thanks very much, Francie and of course, thanks very much to all of you. Ladies and gentlemen, this concludes our conference call today. If you have any open questions, as always, please feel free to reach out to Philippe or myself. We’re happy to answer any questions that have been discussed today. As I mentioned before, also in these discussions, we will not be able to comment on any other details around our 2023 numbers or the current trading before we’re going to do the full release on March 13th, which we’re looking forward to connecting with you again. And with that, I want to wish you a good remainder of the day or in some cases, good night. All the best. Bye, bye. Take care.

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