adidas AG (ADS) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the adidas AG Q2 2021 Conference Call. [Operator Instructions] And I would now like to turn the conference over to Sebastian Steffen, Head of Investor Relations. Please go ahead.

Good evening, good afternoon or good morning wherever you are joining us virtually today, and welcome to our Q2 2021 results conference call. Our presenters today are our CEO, Kasper Rorsted; and our CFO, Harm Ohlmeyer. As always, we will kick it off in a second with the prepared remarks from Kasper and Harm, which will then be followed by the Q&A session. [Operator Instructions] And now without any further ado, over to you, Kasper.

Thank you very much, and welcome to our call. I'll first share a high-level view on where we stand. And afterwards, I'll provide you an update on our business progress made in the second quarter. And subsequently Harm will take you through our Q2 numbers in further detail. And finally, I'll discuss the outlook. And while several challenges persist, our innovation pipeline is filled with exciting new products and will drive successful first year and will drive a successful first year of our strategic cycle. We have a very clear strategic direction until 2025, and we are already in execution mode. The strong second quarter also have positive proof of that. Own the Game is a growth investment strategy that's rooted in sport. And that's one of the reasons why it was so fantastic to see that sport is trying to take center stage again. And we really see sports back on the center stage. I think many of you and all of us have really been long for this and we can see also the enormous interest there is for sport, whether the Copa América saw, the Tennis Grand Slam Cup, or the Olympics, I personally had the opportunity to go to a number of Euro games. It was a relief and a joy to be in the stadium again and also see the excitement coming back. And no matter if football is coming home or coming to Rome, it's back for everyone who loves this game at that stage. And we can see the sheer excitement that is across the globe. And of course, we're using this stage to showcase our brand when it comes to major events, but also smaller events. While our strategy and our brand is rooted in sports to help people that bring them to life, and I'm excited that we continue to make a lot of progress in our diversity, equity and inclusion at adidas. And we are making good progress on hiring targets for Black and LatinX employees in the U.S. And most recently, we had our former Olympic champion, Jackie Joyner-Kersee, who was with us in Herzo this week joining our Supervisory Board. We celebrated prior months internally and externally with our consumers through a dedicated adidas bag collection. We're not stopping there. We continue our D&I journey. Whether it's having a D&I activation week in September or the D&I managers that we have employed in our various countries to make certain that we have the right focus. I'm very confident that with the release of our people strategy of Own the Game, which we have communicated internally today to our employees globally, we're making the right progress on our D&I journey beyond 2021. As you know, the consumer is a heart of Own the Game, and that's why I would like to start the business update with some consumer highlights. The Euro, which was a fantastic tournament and 35% of all players were wearing our equipment. We also had Player of the Tournament, like Donnarumma and the Young Player of the Tournament, Pedri from Spain. So great to see the progress that we're making in football. On the outdoor side, we saw also Timothy Olson ran the faster time on the Pacific Crest Trail, running 52 marathons in less than 52 days, huge impact on the media that we're seeing here and also really credibility proof for our outdoor business. We launched saw on training Stay in Play campaign and the TechFit Period Proof offering with strong consumer engagement with more than 40 million views increasing our credibility with women. And the [indiscernible] launch of the jersey, which was a poly jersey, drove 4x the sales on day 1 from 2019. On the experience side, on the member week, we added more than 4 million members during the week. And on sustainability, we continue to make a lot of progress in innovation, whether it's the Oberg collaboration where we created the running shoe with the lowest carbon footprint, the UltraBOOST made to be remade the Stan Smith Mylo, an industry first with a leather substitute made from mushrooms, or Run for the Ocean where we had more than 5 million people participate. But let me give you a bit more detail on some of these elements. When it comes to credibility, that means we deliver groundbreaking innovation in sports and in running, winning is the most tangible currency for innovation. We create industry-leading footwear innovations like our new cushion platform, Lightstrike Pro that empower athletes to and break records. The adizero Adios Pro enable our athletes to secure 3 world records in a few months and reclaim credibility in the running community. The second generation of the shoe was just launched at the Tokyo Olympics. And we're now bringing these innovations and performance benefits to more runners globally by broadening the franchise with Prime X, Boston 10, Adios 6 and Ambition. And even beyond the adizero franchise, we continue to make running accessible by diversifying our offer for every runner more to come when I discuss our product pipeline later. When it comes to experience, our members week in May, provided a number of experience in the delivery exceptional result. The week offer different experiences and reward, including opportunity to win match ball used in the Euro or 1 of only 100 pairs of the adidas Allbirds sneaker. Not only did we acquire 4 million new members during the week alone, we also generate revenue of more than 100 million during the period. In total, we have significantly more than 200 million members today. Compared to the prior year, the number of buying members access our digital ecosystem grew by 80%. And if this wasn't enough, just last week, our Creators Club program have been recognized by U.S. consumers as the best loyalty program in the industry according to the 2021 loyalty program -- loyalty report. And when it comes to stores, we just opened our first Hello store -- Halo store in Joburg with 58 digital touch points and the largest retail area globally dedicated to sustainability. And talking about sustainability. As you know, we gave a strong commitment that 9 out of 10 articles offered will be sustainable by 2025 and we'll be achieving this target by scaling our 3-loop offering while also working with strategic partners. And we have now invested in 2 of them. Together with Finnish and Spinnova, we will push boundaries in the use of renewable raw materials such as wood fiber. And in partnering with Infinite Fiber, we are driving the mainstream of circular process to convert worn apparel into new fabrics that looks and feel like cotton. And we'll continue to raise the bar when it comes to sustainability because it's the right thing to do, and it's in mind of our consumers. 70% of our consumers claim it as being important as a purchase driver. Moving on to the store opening trend. And let me briefly provide you with an update on our current retail economics. As a reminder, 89% of our global store fleet were opened at the end of March, 44% in Europe. The opening rate increased above 90% during the month of May as COVID-related lockdowns in Europe got lifted. When lockdown materialized in APAC, the positive opening trend was somewhat halted at a high level. At the end of June, 97% of our global store fleet was open. However, to revitalize, retail has led to a continuous improvement of traffic in the stores that we opened. However, traffic across our retail fleet continues to be significant below pre-pandemic levels due to the reduced opening hours, social distancing guidelines and changed shopping behavior. On the other hand, we continue to experience strong increases in conversion rate in reopened stores as consumers that visit stores turn to have a clearer buying intent. And this has helped us largely to compensate for the lower footfall. On the strength and weaknesses side, let me start with the weaknesses side. The external factors like the geopolitical situation, industry-wide supply chain issues and the APAC lockdown remains a significant drag on our supply and development. Lower growth in footwear also due to major footwear that's driving revenues in apparel and hardware. On the positive side is that we experienced a better-than-expected top line recovery with sales well above the 2019 level, driven by stronger-than-expected demand for our products. Our momentum is strong across all markets that are operating without disruption. Revenues in strategic markets, EMEA are 99% up; and America, 87% up. So almost doubled driven by exceptional growth in our own retail stores in wholesale. And our business in Latin America was up triple digits. So very strong growth in a number of regions where we have a somewhat normalized economic environment. On a P&L at a glance, the revenue we recorded was exceptionally strong and so was the profitability improvements. The revenue increased 55% in the second quarter achieved against the background of the geopolitical situation and extended lockdown in the Asia Pacific region. Excluding these external factors, our growth would have been in the mid-60s. Both gross and operating margin almost fully recovered to pre-pandemic levels. Harm will comment more in detail on our major P&L development side. We're also seeing the top line acceleration. The brand strengthened better-than-expected product demand drove the top line acceleration in the second quarter. Let me remind you that the revenue increase of 27% in Q1 was achieved despite a high single-digit -- high single-digit drag from external factors, the prolonged EU lockdowns industry-wide supply chain challenges. In Q2, the revenue increased 55% despite a low double-digit drag from external factors, geopolitical extensions, lockdowns in the Asia Pacific region. And as a result, revenue were above pre-pandemic levels in both quarters and accelerated from 1% versus 2019 in Q1 to 5% in 2019 versus Q2. In fact, our Q2 was the highest in June, and we had double digit in the quarter versus 2019, excluding the headwinds we've been facing. This clearly shows the strong underlying demand for our product. The strong momentum is particularly visible in North America and EMEA, where revenue almost doubled in the second quarter and were up 15% compared to the second quarter of '19. In North America, we saw exceptionally strong growth in D2C with 35% year-over-year and 27% versus '19. We more than doubled the sale with our key partners. And let me quickly also update you on a very recent leadership change. Our current MD of adidas, America, Zion Armstrong has decided to leave the company at the end of this year to return to his home country, New Zealand, where his young children live since the start of the coronavirus pandemic. We have activated our internal succession plans, have appointed Rupert Campbell as successor effectively January 1, 2022. Rupert, a British National has a long and successful track record within adidas. He's currently our MD in Russia. And under his leadership, adidas increased its market leadership in the region and recorded double-digit sales growth. Rupert will be on the ground in Portland in Q4, and Zion and he will work closely on a smooth transition. Zion and the team have built a strong foundation for us in North America by making adidas a strong #2 in the market. We are sure that the Rupert and the team will further expand this position. In Europe or EMEA, we are seeing a similar position in the U.S. We're seeing exceptionally strong growth in D2C. And overall, an increase by triple-digit growth in football and in running. And as I said, we are seeing triple-digit growth in Latin America. China was down 16%. And before I speak about the situation more in detail, please allow me to remind you everyone that this development also reflects a strong recovery in last Q2 when sales in Greater China have grown a strong double-digit rates in May and June. Overall, we recorded a slow but steady business recovery during the quarter with sequential improvement in sell-out trends, as you can see from the development of our e-commerce revenue. E-commerce sales growth versus '19 was still positive in before hitting a low point in April. The trend improved sequentially as we successfully started to launch products and campaigns in the second half of April. As a result, e-com revenue already returned back to growth in June. Overall, sales were also improving throughout the quarter, resulting in a flattish exit rate versus 2019. At the same time, we remain very disciplined when it comes to sales in as this is not about short-term optimization. Greater China is one of our strategic markets and we remain confident about the long-term opportunity, especially after the State Council announced yesterday, that will further promote sport and exercise among its people. Our priority is to show consumers our appreciation and respect and to earn their loyalty. Key to this will be complementing our global brand strength with a strong local angle and understanding our local creation center in Shanghai plays a key role here. So the trend in China is clearly positive. We remain excited about the long-term growth also in China as outlined in our strategy. And while it's too early to tell how the business in China will look in detail in 2021, we continue to expect strong growth in China this year as well. From a channel perspective, top line development was characterized by the strong recovery from the material declines in physical distribution last year, as you remember, more than 70% of our stores were closed. We saw our wholesale business and sales in our own store grew at high double-digit rate. At the same time, e-com was up 14%, reflecting exceptionally high growth last year when digital revenues had almost doubled during the store closure. Over a 2-year period, e-com sales, excluding China, increased 86% versus the 2019 level. Looking behind the headline figures, our digital business is developing extremely well with our mobile and members approach paying off. We've been able to add more than 15 million new members to our program during Q2. Mobile and apps already reflect more than 2/3 of our business. The full price share is up strong double digits, and the month of June was the biggest month this year so far. We continue to significantly invest in digital check and data analytics capabilities and will create almost 2,000 new positions in '21 and '22. And this year alone, we have hired close to 1,000 digital experts already. From a category perspective, growth was led by our key performance categories running outdoor and football. We achieved over proportional growth in running as we diversified our franchise and technology portfolio with DTC exclusive launches of new products such as the UltraBOOST made to be remade or the adizero Adios Pro. Outdoor sales more than doubled as we are leveraging the trend towards more outdoor activities through a strong product offering and successful activations. And football grew more than 150% as excitement returns to the pitch on both professional and amateur levels. I will talk about our product pipeline in detail and also other categories a bit later. But now over to Harm.

Thank you, Kasper. And as always, we start with the revenue growth by market segment. So our top line expansion in Q2 was driven by increases in all markets, except Greater China where, as you heard from Kasper already, revenues declined despite a steady business recovery and sequential sellout improvements throughout the quarter. Sales in both EMEA and North America, almost doubled versus the prior year's period and revenues in Latin America grew by more than 200%. This reflects strong double-digit growth versus 2019 level and shows that our momentum is strong across all markets that are operating without disruption. Sales in Asia Pacific increased 66%, but remained below the 2019 level due to the negative impact from extended lockdowns and lower tourism in the region. Let me call out that top line increases across all markets, except Greater China, were also complemented by exceptional profitability and margin improvements, especially when I call out 19.3% in North America after a very profitable quarters already in 2020. And always said that North America over time will get close to a mature market like Europe, you're seeing development and similar developments also in Latin America with 18% profitability. Turning over to the P&L. Our strong product momentum drove an impressive top line recovery with sales well above the 2019 level. Currency-neutral revenues increased 55% despite the geopolitical situation and APAC lockdowns reducing top line growth at a low double-digit rate. Our gross margin improved 50 basis points year-over-year. Given there's a lot of puts and takes in this development, I will provide more details on a separate slide in a minute. Operating expenses were up 5% compared to the second quarter 2020. The increase reflects higher marketing and point-of-sale expenses which increased 17% or almost EUR 100 million compared to the prior year. Kasper mentioned it, the return of sport marked an important moment for people around the world. We are making sure that we are leveraging these moments and have been connecting with our consumers in a meaningful and emotional way through our digital channels, but also physical platforms and events. Operating overheads were flat at a level of around EUR 1.5 billion, excluding the temporary stranded costs in the amount of around EUR 60 million related to the Reebok divestiture, overhead costs would have been down at a mid-single-digit rate year-over-year. This also reflects the efficiency improvements that we gained last year and that we will continue to benefit from going forward. Our operating profit was up to EUR 543 million, while the operating margin almost fully reached the pre-pandemic level and recovered to 10.7%. Let's now take a closer look at the gross margin development in the second quarter 2021. I'm also providing Q2 2020 impacts to put things into perspective. In terms of pricing impact, the drag from higher discounting in the prior year almost fully recovered this year as we were able to increase our share of full price sales significantly year-over-year and quarter-over-quarter. The positive mix impact in Q2 2020 related to the exceptional growth in e-com and last year's recovery in China was fully offset in Q2 '21 amid a normalization of our channel mix as well as an unfavorable regional mix. Sourcing costs, on the other hand, increased in the second quarter '21, a direct result of the supply chain challenges we are currently faced with and which have led to higher freight and logistics cost. Kasper will talk about these challenges in more detail in the outlook section. The nonrecurrence of last year's inventory allowance balance out the negative effect experienced in the second quarter 2020. Looking at FX, which was slightly positive in the second quarter '21, as we slowly start to see our hedges improving. Nevertheless, we still experienced a very significant negative currency effect of more than 200 basis points versus the 2019 level. So excluding this unfavorable FX impact, our gross margin is already back at the 2019 level, which just like the top line development clearly speaks to the speed and quality of our recovery. During the second half, we expect currencies to remain a drag on our gross margin versus both the 2019 and the 2020 level. This is mainly due to unhedged currencies and will only turn into a tailwind in 2022. While lower discounting and a better channel mix will support our gross margin development in the second half, higher freight and logistics costs will act as additional headwinds, especially as we will work on mitigating the supply chain challenges in order to ensure we can meet as much of the strong demand for our products as possible. Kasper will speak about this in more detail. Let's also look at our net borrowing on our equity position. Let's have a more detailed look at the balance sheet. Adjusted net borrowings amounted to EUR 3.1 billion at quarter end. This represents an improvement of EUR 1.8 billion compared to the position 1 year ago and underlines the increased financial strength we have gained over the past 12 months. And our equity ratio remains very solid at 32.5%. If you look at the operating working capital. First, both inventories and operating working capital decreased year-on-year. Inventories were down 22% currency-neutral and this development was, of course, supported by the exclusion of Reebok inventories as the prior year restatement of the balance sheet is not committed under IFRS. Let me emphasize that on a like-for-like basis, including Reebok, our inventories were also down at a double-digit rate year-over-year with 14%. We are happy with the progress made over the last 12 months, reducing our inventory to this healthy level. If anything, we wish we had more stock given the strong demand for our products on the one hand and industry-wide supply chain challenges on the other hand. Again, Kasper will give you some more details how we are dealing with the situation in a few minutes. But I'm definitely happy for every T-shirt and payoff shoes that we have on stock right now. Demand is definitely not our issue at the moment. It's a supply side of things, but we have been making great progress over the past few weeks in mitigating these impacts. Just finishing up on the balance sheet. Receivables were up 26% currency-neutral year-over-year, reflecting the broad-based top line increases, especially on the wholesale side. Payables were down 16% currency-neutral year-on-year as our payment terms with vendors continue to normalize compared to prior year. Let's look at our cash returns to shareholders. You have heard Kasper and myself talk about increasing our investment into our brand, our direct-to-consumer channel as well as the digital transformation of the company. We talked about the EUR 100 million increase in marketing spend in Q2 alone and the hiring of almost 1,000 digital experts in 2021 so far. Own the Game is not only a growth, but clearly also investment strategy. At the same time, we are becoming a more free cash flow generator for business than ever before. As a result, we plan to return between EUR 8 billion and EUR 9 billion to shareholders through either dividends or buybacks during the 5-year strategic cycle of Own the Game. And we hit the road running in 2021. Given our strong financial profile, our positive outlook for the year and successful start of our new strategy, we have made the decision to resume our share buyback activities. As a result, the dividend payout of EUR 585 million in May is complemented by a share buyback program with a volume of up to EUR 550 million until the end of the year. Since the beginning of July, we have already bought back shares worth more than EUR 130 million as of today. This means that in total, we will return around EUR 1.1 billion through a combination of dividends and share buybacks to our shareholders in 2021 and rest assured, this is just the beginning. Just a couple of words on Reebok. Currency-neutral sales grew strong double digits compared to both the 2020 and 2019 level. So 94% over 2020 and 13% over 2019. And the profitability improved significantly. The divestiture process is well on track, and we expect a signing until the end of the summer, as I mentioned also on previous calls. We will, of course, make an official announcement once we have come to a final decision. And with that, over to you again, Kasper.

Thank you very much, Harm, and I'm going straight into the outlook. Our #1 priority remains driving brand heat with exciting new products and global campaigns and celebrating major sport events. And we'll also continue to invest in digital capabilities to engage and win members, our most loyal and profitable consumers, as you know. And the next member week will take place later this month. A dedicated action plan will drive the mitigation of industry-wide supply chain challenges as our products remain high in demand. And we're executing Own the Game as 1 team and continue to accelerate top line momentum fueled by our innovative product pipeline. Our broad portfolio of product innovations continue to drive brand heat. We fuel brand credibility by executing overarching brand campaigns and showcasing our brand on both major and smaller stages through our athletes and teams. Major sporting events, including the Olympics and the Paralympics in Japan, the start of the club football season in Europe and the NFL kickoff in the U.S. as well as [ Lacrosse ] activities around the world provide ideal platform to bring our brand and product stores to life. And against this backdrop of significant brand awareness, we're having an array of innovative product releases to cut through and continues to drive growth momentum. I'll now take you through some of our brand initiatives and product launches in more detail. There is probably no other sport events that will affect our brand attitude in better than the Olympics. Everyone would feel over the last weeks, how important it was for the athletes to be able to compete. And so far, more than 20 areas of athletes have already taken home gold medals and there are 4 more days to go. Our top 2 Olympic teams, Great Britain and Germany are performing very well, showcasing adidas latest performance products to a worldwide audience and so are all the 650 participating athletes as we equip. But the Olympics are not just a great platform to showcase our brand, they are also the perfect stage to introduce our latest innovation to the global stage. British triathlete Jonathan Brownlee not only wore the adidas Adios Pro during the triathlon race, but also together with his teammates also accepted their medals wearing our brand new 4DFWD. And as you can see, the Olympics provide the ideal platform to start scaling our 4DFWD franchise. After 2 very successful limited quantity drops, which sold out quickly, we actually launched -- we're actually launching the 4DFWD today with 7 days early access for D2C. Next week, we'll expand the launch to our sport wholesale partners in all our locations around the world. 4DFWD, we'll continue to retail at EUR 200 with a strong increase in volume. At the same time, we'll be making running accessible by diversifying and commercializing our offer for every runner. As part of this, we'll introduce the 4DFWD Pulse at a price point EUR 160 and open this up to a wider selection of retail partners, including [indiscernible] distribution. And as you can see, we're driving impact in the biggest sporting category running through strong franchises and innovative technology platforms that address different consumer needs. In football or soccer, if you will, both professional and amateur teams are excited to return to the pictures around the world and we're fueling this excitement with the launch of Madrid jerseys. And today, we're launching the Real Madrid Away jersey. And I can't wait to see the stadiums across Europe being filled with spectators again, cheering for the team and being united in the passion for the game. And the passion for the game is uniting fans across continents, and this will be evident during the MLS All-Star Game in Los Angeles at the end of this month in anticipation we created a jersey that sparked exceptional consumer attention in the U.S. While football apparel increases triple digit during Q2, we remain equally excited about the opportunity in footwear and key franchises ex Copa and Predator. The latest majority pack is made up of these franchises with a jewel in the crown being the new X Speedflow endorsed by Lionel Messi will bring a new proposition to the important Speed segment of the football footwear market. Speed is also relevant in other key categories, and let's take a closer look. With the graphic roadshow, we are taking performance and speed to the outdoors, so created -- co-created by the best trail runners and it will debut on the upcoming Ultra Trail Mont-Blanc race. For us, performance does not mean cutting down on sustainability. The shoe is made in part with recycled material and no virgin polyester used. One of the most exciting new launches comes from the lifestyle category. We will be introducing the NMD one of Adidas most successful and iconic franchises in recent history with a completely new look and feel. The new NMD S1 has a broad appeal with [indiscernible] for sneakerheads and the broader lifestyle community. And we have seen exceptional engagement on social media. We're seeing the product a few weeks ago and look forward to the member-exclusive drop on our CONFIRMED app next week. On top of that, ZX franchise will be further diversified through the addition of new stars led by the ZX 5k boost. The ZX 5K will provide this franchise a new premium identity that elevates the ZX to a new audience and higher price points. This is part of the premiumization strategy originals, which we have told you about before. Our Forum has developed into a summer favorite for many consumers. After the successful incubation throughout the first 2 quarters, we'll now the quadruple the franchise in size during the second half of the year, driven by several operations dedicated marketing and exciting partnerships. And as always, we'll offer members early access to campaigns, product drops and personalized D2C experience. Our innovation in lifestyle does not start with footwear. We explained our successful apparel portfolio combined the D&I of adidas Originals with the luxury fashion lens. Blue version represents a collection of our most iconic apparel pieces recorded for today. And we are expanding our successful collaboration with Beyoncé and released our latest Ivy Park drop Flex Park. Flex Park, the swimwear capsule includes beach-ready styles like swimsuit for both men and women as well as athletic tops and shorts, many of which sold out quickly. We are also doing collaborations with Prada to the next level and launched the Luna Rossa 21 in 2 colorways. The great colorway is last aversion of the sneaker 1 by legendary Luna Rossa Prada Pirelli team as they want the product type releases like that continues to drive brand heating offers, in many cases, member-exclusive via our CONFIRMED app adidas.com. We continue to diversify our collaboration and bring newness to well established franchises such as UltraBOOST to stay highly relevant for the consumer. The latest version of our legal collaboration uses UltraBOOST DNA platform with a brick inspired texture and is available in several new colorways. And while it's still early days, we have been experiencing very strong sell-through, particularly in North America. As you know, we are looking into having an innovation day. And I just covered our Q3 product releases in stores, but there is much more to come, of course, and we remain very confident about the brand and product momentum. We will host a dedicated day in mid-December to do our high-quality innovation pipeline justice. This will be a purely physical event to provide you an exclusive and comprehensive preview of unreleased future platforms and products. We're going to share more details with you soon. Our unique world of sport experience awaits you, and we can't have to wait to have you here on December 13 and 14. Now let me speak about some of the global supply chain challenges that the world is experiencing. While our product pipeline provides us some strong tailwinds going into the second half, we also faced with some industry-wide headwinds. There are 4 aspects of supply chain challenges due to the long-lasting pandemic that the global economy is currently confronted with. The drop in demand in the first half of 2020 has led to significant capacity reduction in both vessels and containers and led to a hike in freight rates. In addition, a significant production reduction at the port due to the health and safety measures has led to congestion in key markets such as U.S. West Coast and U.K. -- U.K. and Europe causing additional delays. These challenges have been leading significant delays and additional logistics costs, particularly as we've been having been making more use of airfreight. Since July, we're now experiencing an additional challenge within our sourcing network due to a surge in COVID-19 infections in Southeast Asia. Most impacted country is Vietnam where the government mandate large-scale factory lockdowns. And as a result, the vast majority of supplier factory capacity in the country has been unavailable since the middle of July with current restrictions lasting until August 15. While other countries have been impacted as well, we're currently seeing -- not seeing any major interruption outside Vietnam. While we, of course, supporting all measures taken by the authorities as health and safety remain a top priority, we have identified 5 key actions to mitigate the impact from the shutdowns in Vietnam. Number one, we're making use of the proven sourcing flexibility and are reallocating production to other regions. Number two, we are making use of our excellent relationship with our suppliers and are securing additional production capacity. So far, we've already been able to secure additional capacity for 30 million pieces, particularly for high-priced products, we will use airfreight. Number four (sic) [Number three], we are prioritizing key campaigns and product launches as they are essential to continue driving top line and brand momentum. And number five, and not least, we are redeploying existing marketing inventory, creating new sales packages, utilizing existing stock, which will allow us to reduce cancellation rates and discounting. We remain optimistic that the disruption will only be temporary and our mitigation efforts will help us to reduce the overall impact. We expect the current situation to start improving later this month, leading to a largely operational sourcing network at the end of the third quarter. And while the current interruptions will have a negative impact on our business in the second half as we'll not be able to fully cater to the strong demand for our product, the expected impact is already built into our full year guidance. In total, external factors did weigh on our top line in the magnitude of more than EUR 500 million in the first half of the year, and our current guidance already fully accounts for a similar negative impact on our top line in the second half due to the supply chain challenges, the lockdowns in certain countries as well as the impact from the geopolitical situation. Despite these challenges, we are confident that the strength of our brand, the strong momentum we are experiencing across all markets that are operating without disruption, and our innovative product pipeline will drive sales acceleration in the second half of the year. As a result, we now expect currency-neutral sales growth of up to 20% year-over-year for the full year 2021. This increased outlook implies a 7% growth year-over-year during the second half. Compared to 2019, this translated into a growth of up to 6% in the second half, which reflected an acceleration compared to the 3% increase we recorded in the first half. Given the acceleration of the top line momentum, we are also increasing our bottom line outlook for this year. While the gross margin guidance remains unchanged given the unexpected increase in sourcing costs, we now expect an operating margin increase to 9.5% to 10%. Consequently, we are expecting net income to increase to between EUR 1.4 billion and EUR 1.5 billion. This outlook is based on a number of assumptions. A last year operational store fleet reflected in our store opening rate at least 95% throughout the second half of the year. And let me remind you, we are running at 97% in the second quarter. Improving factory capacity starting in the second half of August, leading to a largely operational sourcing network at the end of the third quarter and a continuation of the steady recovery in China. Being able to increase our outlook despite various sources of uncertainty and another potential EUR 500 million drag on sales clearly underlines the momentum we are currently enjoying. We delivered a successful Q2 despite being restrained by external factors. Driven by the strength of our brand and better-than-expected demand for our products with our top line acceleration and will continue to do so in the second half. Sales in our strategic growth areas, EMEA and North America, almost doubled. Revenue in our key franchise categories Football and Outdoor even grew at triple-digit rates. The share of full-price sales increased strongly, fueling exceptional profitability improvement. And this momentum gives us the confidence to increase our full-year outlook despite the external challenges that our industry continues to face. Own the Game is in full execution mode across the entire company, and I'm absolutely convinced that 2021 will be a successful start of our new strategy cycle. And with this, Harm and I now look forward to take any questions you may have.

[Operator Instructions] The first question is from the line of Graham Renwick of Berenberg.

Just first on the exit momentum from the quarter, just a clarification from the presentation really. Is it correct that you said the sales for the whole China business in June were flat versus 2019? And are you also able to provide the same June growth or exit rate for total group sales versus 2019? And how has that developed into July, if possible, at least directionally? And then secondly, on wholesale, a key part of your strategy was streamlining the wholesale distributed -- distribution and exiting undifferentiated wholesale doors, particularly in U.S. and Europe. Something I assume, has accelerated faster through the pandemic. So when we think about the sales growth in '21 versus the 2019 base, had exiting wholesale doors being a headwind toward your revenue growth, at least a temporary one before you recapture those sales through DTC or better quality wholesale partners?

So I will try to answer the second question, and Harm will do the first one. We did see exceptionally strong growth in wholesale in the second quarter, but you have to take it on the back of what we're comparing to because, of course, wholesale shutdown overnight and we stop shipping to them. So you have an abnormal comparison. As you know, for 2025, we expect the vast majority of our growth, approximately 80%, if I remember correctly, to come from our D2C channel over that period. So you are going to see a normalization of the growth rate as we move forward. We're also seeing a continued consolidation within our wholesale partners. So the likes of DICK'S, JD's, et cetera, and course we'll get an increasingly larger importance within our portfolio, also due to the digital capability. And there is no doubt that there has been an acceleration of the, I would say, slow -- going away from smaller wholesale partners that have either no wholesale capability -- no digital capability or have a very generic character. So we're seeing acceleration of that, but we're also seeing a consolidation around the big ones. And as I said, you should assume that we -- the growth rate we saw in wholesale in the second quarter is not the real run rate. It is simply a comparison to what we saw due to the lockdown in the second quarter last year.

Yes. On the first question, Graham, you're absolutely rightly stating your assumption on China. So revenues, as you saw in the presentation, in e-commerce, we're already returning back to growth and we also had a kind of flattish exit rate versus 2019 overall in China in June. And when it comes to the total company, as you've seen in the presentation, the first quarter was 1% over 2019. The second quarter was 5% over 2019 and growth in the second quarter was the highest in June and actually would have been double digit in the quarter versus 2019, excluding the headwinds we are facing. So also there, a good strong exit in June for the quarter.

The next question is from the line of Zuzanna Pusz of UBS.

I have two. So the first question would be on your retail channel. Could you please comment on the performance in the retail channel on a 2-year stack in Q2 versus Q1? Just to share if I'm right the estimate that there was -- to estimate that there was some acceleration sequentially? And the second question is on the footwear category. So looked a little bit weaker relative to the rest of the business at plus 38% FX neutral. So would you be able to discuss maybe specifically reasons for that? I guess there's been strength in football, I presume maybe jerseys or some shipments around that, but any color on that would be very helpful.

Can you repeat the second part of the question? I simply do not understand it.

The second question is on footwear. So footwear was plus 38% versus obviously higher growth at the group level. So is there any specific reasons for the weakness in footwear?

No, there's no specific reason for it. Of course, what we have mentioned in the presentation, given the events apparel growth was faster overall, given the events and the returning football on the pitch. And that's what we saw in apparel. And that's a consequence of course, then the footwear is below the average growth of the company. That's the main reason for it. It's the mathematical calculation.

And also, Zuzanna, keep in mind that a lot of the franchises that Kasper has talked about that we've started to introduce in the first half of the year will be scaled in the second half of the year. So we talked about the Adios adizero Pro, which we've only had in very low quantities in the first half of the year, and we're adding not only quantities to that product family, but also adding additional franchises to our running category. The same applies to the 4D, which we've only launched in very low quantities. And as we've said, we're actually launching in higher quantities today. So that's definitely also something that is adding to the growth rate that you've seen.

Yes. And on your first question on retail, of course, it's difficult. We definitely don't talk about comps, given so many closures and not easily comparing quarter versus quarter or even versus prior year. But rest assured, in the second quarter, we had strong double-digit growth in the key markets like EMEA, also North America and that gives us confidence going into the second half as well that consumers are returning. Of course, not with the same traffic that we had in the past, but with a higher conversion. But again, comparison quarter-by-quarter is really difficult. It's not something we are focusing on. We want to make sure that the product is there, and we are there when the consumers are returning that -- who we are seeing.

The next question is from the line of Piral Dadhania of RBC Capital Markets.

Two as well. Firstly, on OpEx. You touched on cost savings you found through COVID and operating efficiencies. But when I try and look at your OpEx split between your segmental costs and then your central costs, your central cost to down like 17% versus 2019. I just wanted to understand how sustainable that cost structure is going forward? Is that the type of cost base that you can operate with -- on a kind of run rate basis into 2022 and beyond or should we expect some rebuild of cost at the center going forward? And then secondly, on CapEx actually, your run rate CapEx for the first half of the year is well below historical trend. There's obviously good reasons for that cushion given COVID, et cetera. And looking backwards, I appreciate you had some big projects in terms of expanding your H2 and your logistics footprint. But going forward, could you just help us understand what a sensible CapEx number would be? I think in the past you used to guide to CapEx, but we don't seem to see that guidance anymore.

Yes. Thanks, Piral. First, on the OpEx, well analyzed. And I've been on record for many years as we built a more professionalized nontrade procurement function as we're rolling out our global business services. And as we are looking to maintain the cost base as we are driving the top line and rather be opportunistic on the brand investment, you're absolutely right that we have reduced in the central function. And we believe that is largely sustainable. Of course, we are a little bit behind on hiring, given COVID situation as well. We would have loved to hire even more people even so we hired more than 1,000 people on the digital side. But also that will make us a more efficient company. So yes, largely, you should keep that in mind that we retain that level going forward, and it just shows also in the second quarter, the discipline that we put into the company to keep growing while we maintain the cost at that level. On the CapEx, it's indeed -- we wish we would spend more, but we have been more cautious, especially in APAC, also in some other markets given COVID. And of course, also in today's environment is not as easy to accelerate some of the retail openings that we had planned. And of course, given historical rates, we are not investing into significant corporate buildings anymore. We have been done with that one. And going forward, it's still true to think about 3% to 4% over net sales as CapEx. So we had a guidance of around EUR 700 million this year. I doubt we're going to spend it all this year, but also going forward, there's nothing we constrain. We want to keep investing into this company. And as we said, Own the Game is not just the growth, but it's also an investment strategy. So 3% to 4% is still the right guidance for the future over.

The next question is from the line of James Grzinic of Jefferies International.

I just had a quick one actually. Perhaps if you can nuance your guidance for an acceleration into your stack sales in the second half. When we look at where you're coming from in the first half in the Q2 specifically, do you think there's perhaps some macro context and needs to be taken into account when we look into the second half, I'm particularly thinking the U.S. stimulus.

If you look on, we believe that the current guidance for the second half is appropriate because even if there U.S. stimulus, I think it's the uncertainty that we are seeing and that you should be seeing is that COVID is by no means over, supply chain constraints are by no means over. You still have a -- this week, there was 11 million people being tested in Wuhan. So I think that you're operating in an environment that, of course, you might have an upside in one region, but I think there is so much volatility and also see a lot of companies that don't be giving guidance. We operate in a super, I would say, volatile environment. So we think that the current guidance is appropriate under these circumstances, simply because of the lack of transparency we have into what's going to happen in the future. So even if you're a stimulus in the U.S., you might have an upside there, but we have seen pretty much almost every month in the last 6 months or 12 months, there's been a downside somewhere else, and that is, of course, what's reflected also in the guidance that we have -- that we're running in a very volatile environment.

And Kasper, can I perhaps ask a follow-up? Just my second one, I guess. That physical back-to-school in the U.S. actually happening this year, is that more of a help in Q2 or Q3? How does that fall within the business in terms of selling, I'm wondering?

In both second quarter and third quarter.

The next question is from the line of Warwick Okines of Exane BNP Paribas.

I've got 2 on the supply chain, please. The first is thanks for giving us the sort of roughly EUR 500 million top line impact in the second half of the year from all the external factors. Could you just give us a rough sense of how much of that comes from the manufacturing lockdowns? Is it a quarter? Is it 3 quarters? Just some sort of sense on that, please? And then the second question is what sort of products are the most disrupted by the supply chain, particularly the lockdowns in Vietnam? And sort of how confident are you about introducing newness in that environment?

So if you look upon it from the lockdowns, we're probably 50-50. So you're getting 50% from the current lockdowns that you predominantly would be an impact in the fourth quarter more than anything else. And what you're seeing is it's predominantly footwear. It will have very little impact in us introducing new products, it will have impact or can have impact on the volume. But the introduction of new products, those that are coming up at this stage will not be impacted on that. So it's more volume than introduction of new. And of course, this is one where we are looking into "[indiscernible]" we assume that there's going to be opening in August 15 because that's the government is what they're telling us. So we're giving you the best estimate that we have. But as I said, 50-50 and predominantly footwear related. And of course, what we are doing is due to our large network, we are, of course, taking fairly precautious measures and saying, if they should continue, what are some appropriate measures that we should be taking now, so it doesn't have a big impact on next year. But of course, it depends upon how long COVID will exist in one country. Because if we move things from country A to country B and you are covering country B, then you're not really help with us. We are trying to spread as much as we can.

The next question is from the line of Erinn Murphy of Piper Sandler.

Great. Two questions for me as well. First, on the -- on women's category. It was very important to call out at your Capital Markets Day. Could you just talk about how the women's business fared during the second quarter? Any proof points that you're getting excited about there? And then secondly, on China, could you talk a little bit more about the current consumer demand environment between global brands versus local or national brands?