adidas AG (ADS) Earnings Call Transcript & Summary

Hello, and good morning, everyone. Thanks 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 13. As always, I would also like to ask you to limit your initial questions to 2 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.

Thanks, Sebastian, and good morning, everybody. We start the presentation with a beautiful picture of our new Predator, which was 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 5, 6 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 EUR 1 billion in sales. If you then exclude YEEZY from the numbers, you will see that you are up around 2%. And then if you then take the Argentina devaluation, you will see that's another percent. So if you put those two together, that had an impact of about 3% on our top line. If you remember, our latest guidance was a 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. As you can see, we're ending 47.5% gross margin, which is then 20 basis points better than what we actually had a year ago. And I think we have been very good at actually managing our inventories. And when we publish our numbers, you will see that we're very, very happy with where our inventory actually ended in the year. On the profit side, you see that we reached EUR 268 million, which, of course, is much less than we had in '22, but we flagged that a long, long time ago. And if you look at the extraordinary impacts, we had another EUR 100 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 EUR 100 million. So as you can see, there's a positive swing from that guidance to the year-end of EUR 368 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 EUR 700 million. Then in the second guidance, we then said now we only expect a mid-single-digit decline. The underlying business still breakeven. But because of the sell-off of YEEZY, we are now looking at the possible loss of EUR 450 million if you write off the left over 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 EUR 100 million profit. And then again, because of the YEEZY development that we need -- that should then give a reported EBIT of around minus EUR 100 million. And when you then look at the actuals, the low single digit has then gone to a flattish. The operating profit, the underlying business has improved by another EUR 100 million up to EUR 200 million and we then tell you that we're not going to write off EUR 268 million on the inventory that then turns into be a EUR 268 million profit. So that has been the improvement during the quarters. If you take that into a slide to try to explain it that again, we started with a minus EUR 700 million. Then we sold off YEEZY that generated a profit of EUR 150 million. And because we sold the inventory, we didn't have to write off $100 million inventories. So we then had a guidance of EUR 450 million. The same thing happened in the next phase. But here, we also had an improvement of the underlying business of EUR 100 million. That's where we ended at the guidance of minus EUR 100 million. And now on the actual, we have a EUR 268 million decision not to write off the left of inventory plus an improvement of the business of EUR 100 million, and that gives you then the EUR 268 million. To sum that all up and you round, then you would see that that's an improvement from the beginning of the year till the end of the year of about EUR 1 billion in our bottom line. Again, not saying that this is great. The only thing I'm saying that 12 months ago, we had YEEZY problem that could have caused us to write off all the inventory. We sorted out half of that. We still have EUR 268 million left of the inventory, which we will now sell at least cost. There's an upside to that. And I think the underlying business we turned from being on a negative downfall in 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 on the last 12 months. If we then look into the sales going forward, it's a little bit complicated though as we tried to explain it. We ended the year with EUR 21.4 billion in sales. Of that EUR 750 million was YEEZY. That means that you have an underlying sales of the adidas product of about EUR 20.6 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 EUR 22 million and EUR 22.5 billion top line. If we then add the YEEZY sales at cost, that's another EUR 250 million. Then you do the math, you're at EUR 22.25 million or EUR 22.75 million as a currency-neutral sales, and that would be for the whole company, including YEEZY then the mid-single-digit growth, currency neutral. Although the adidas underlying business is high single digits. 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 that 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 TERREX. We did not have the Campus. We did not have the Predator. We did not have the Anthony Edward 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 midterm 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, 6 to 9 months behind the rest of the world. And that has to do with, of course, our performance when it gets of 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 go in all other markets. And therefore, we say and we promise 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 -- 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. 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 3 weeks, which, of course, causes some delivery issues again, especially to the European market. All other areas are actually positive, then 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 then 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, then we are currently -- then currently neutral saying that we will have a mid-single-digit increase in our total company. That includes YEEZY where you have to remember that we're currently planning with substantially less sales because we're only planning in this guidance to sell the EUR 268 million inventory at cost. There is an upside to that. If you take YEEZY out and if you look at the adidas business, we should have a 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 is around EUR 500 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 wit this is, again, to repeat it, to sell the YEEZY at cost. That's around the EUR 260 million. And currently without no operating profit contribution from that inventory. We talked about the FX headwind that has, of course, a translational effect when you convert sales in countries back again to euro. And then it has a directly 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 overinvest 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 long to be very, very good. So that was, what should I say, simplified explanation of where we are. And then with the second beautiful picture, this is the Anthony Edward 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?

Yes. Thanks very much, Bjorn. And Francie, we're happy to take the questions now.

Thank you very much. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] And our first question today is from Piral Dadhania from RBC.

So I have two. The first is on the midterm EBIT margin target of 10%, which I think you stated in your prepared remarks, we 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 2 years. Could you just help us understand what the -- 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 2 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.

I mean, first of all, I think we are fully 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 to 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 at the 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 face 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 and our investment 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 -- you should not expect us to come with those kind of numbers for restructuring.

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

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?

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

Yes, David, very quick. Just on the margin, I know I indicated and 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 you guidance in detail yet, but it's still a good indicator. When it comes to the -- and I only want to add, when it comes to the first half and the second half, as Bjorn indicated on this 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 also 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, there 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 taken from the 5% in '23 to 3% to 4% in '24.

Next question is from Warwick Okines from BNP.

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 $200 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?

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 in 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 in the second half, but there are some smaller currencies as well that impact the second half. But again, you should first and foremost, assume that in vast majority of that FX impact is in the first half and is to a minor degree in the second half. It also depends, of course, we're hedging only roughly 80% depending on 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 we keep accelerating in the second half, then of course, the FX impact, depending on where we are in 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 forecast. They haven't been perfect in the last 6 months. So we believe what we are having in there is the worst-case scenario. So that's really where we are.

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

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 over investment 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 side, 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, specialist 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 not -- as I think I've said many times trying to optimize things for short-term profit, but laying the base so that we can reach the 10% EBIT midterm 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 to be more local relevant in local sports. It is to have brand heat in our classic original line and then capitalize on that in the 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. And we have done that without putting in any optimizing or saving programs because those two things worked against each other. So right now, we've been talking to the consumer and the retailer, not so much to you as investors. 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 get there, I understand that. But I also hope you understand that for us to try to maximize our profitability, what should I say, quarter-by-quarter or being very optimistic in our outlook to impress you would be the wrong strategy. So I hear you that you are maybe negative with the outlook, but don't forget, we started last year with EUR 750 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 objective to be nice in the quarter because I really don't think that, that's what we need. So Amen.

The next question comes from Aneesha Sherman from Bernstein.

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?

I would say that the supply and the order book for H1 even looks a little bit better than what I've 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. The issue is -- Harm and the people has almost been too good when it gets to taking the inventory down. So with the delays we're having -- we're 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 2 weeks ago. That we need another 6 to 9 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 channel 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 2 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 have to solve all the bad inventory and replace a 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.

Next question is from Adam Cochrane from Deutsche Bank.

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 EUR 268 million. How -- if you're selling 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 sort of clarification 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 at how you're thinking about average selling prices for 2024?

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, 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 YEEZY's 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 is 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 we're selling it. And we have written off, I think it was EUR 12 million already where we had damaged goods and broken sizes. So 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 EUR 268 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 products 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 sales to now, for example, on the Predator or the Anthony Edward 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 is very different from product to product and market to market. And I think it's fair to say there is still in 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 inventory, which is very, very positive.

Next question is from Geoff Lowery from Redburn.

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 or 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 product and better relationships.

Well, the second is clearly that when it gets to the, what should I say, basic terms that we have in our relations, we don't do anything, there's no necessity 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 max 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 products 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're 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're now trying to do the opposite that say, okay, let's use the retailers to gain more competence locally in the different markets and the different categories, make sure that we look very good compared to our competitors in that environment and then let's utilize then D2C to maximize the things that we can do in D2C and it's a bit from a brand side of view. We should 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 an [indiscernible] that should represent 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're 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 3 week 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 of a margin, but 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 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 should I say, 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.

Yes, Geoff. Probably one more argument what's going better and if you -- of course, you follow us in detail, the last couple of years, we will not be able to grow the lifestyle business, and that has change fundamentally in '23 that we now start growing the lifestyle business, and you know very well that the lifestyle business carries a higher margin, and that is definitely an opportunity that we capture 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 the lifestyle business. And then you look at the market mix, where we always talk about the challenges in North America. That is probably 6 months behind, but also making good progress in China and making tremendous progress in our home market in Europe. So these are things that are definitely going better than we originally expected.

Next question is from Edouard Aubin from Morgan Stanley.

Just two questions for me. The first one is the shortfall in terms of your guidance versus market expectation and the analysis you've run. If I listen to you this morning, essentially, it's essentially because of FX and kind of YEEZY being sold at cost. So it's not really a function of higher potential supply chain cost or even market dynamics given that a number of your peers or retailers have 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're 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'm sure it's difficult to you to break it down, but just your -- some color would be help.

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 -- which was a 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 than us so if you put the two competencies 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 retailer partners in-house working with our products 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 increase terms. We haven't increased any terms. What we have done is that we have short-term solve problems. So if a retailer has taken programs for us that hasn't sold, we have given them help either in mark down money or taking it back and credit 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 by 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 wiser 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 were sitting in my chair. And thirdly, I think it is very, very import 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 than rather, what should I say, surprise you positively than negative. The consumer sentiment around the world is, of course, not great. It's not like people are lining up everywhere to buy 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 the opportunities that 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 2 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 serve 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 the sell-through is higher? And that's the indication that we're building the base for growing, not necessarily if we probably see EUR 100 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 hot issues 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 say, 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.

Thank you. Thanks, Ed. Francie, we have time for two more questions, please.

Okay. Then the next one is from Jurgen Kolb.

Actually, just one question. All the others have already been answered. 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?

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 the dollar was still very attractive. So we had a good hedge rate in spring/summer '23. That's why we have a significant impact in spring/summer '24 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. So what 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 repeat again, despite all the elements that we have on freight and where we had a discount 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 13 but that's pretty where we are.

Very good. Understood. And maybe one -- sorry, a quick follow-up. Though I understand the conflict in the Red Sea is not a major impact. But the EUR 500 million you're 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. You again, understood it's -- you're saying it's rather a smaller issue, but it's already baked into that EUR 500 million thing.

Yes, definitely baked into that EUR 500 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 the deploy your vessels to the deploy all the containers. We believe they are able to do that, then it will be solved in a couple of months. I mean if it gets worst from here and stays for 2 years, and it's a different picture, right? But right now, we believe we can handle it. And what we have been -- there is, from what we know today, rather the worst-case scenario and it's baked into the EUR 500 million. So there would not be a reason this year that we come out and said, oh, we can't do the $500 million because of the Red Sea. That's not an option.

The only thing, if I may add is that a 3-week delay wasn't planned. So when we certainly have product lines that is high in demand and higher than the supply and you get a 3-week 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 3 weeks delayed, that has an impact. The good thing, though, and don't tell anybody, we all have delays. So it's like it's not that we're 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 it. And of course, that is the biggest impact currently on the Red Sea. And surprise, surprise, if you don't want to air, air rates are currently I think, 700%. So it's like you being hit on all those kind of, what should I say, extra things. And I think that has more impact right now than what should I say, the freight rate. So, but I'm sure all the people will tell you the same.

And our last question for today is from Monique Pollard from Citi.

Just a couple for me. I just wondered if you were able to provide any regional color on Q4, maybe particularly China now. And obviously, you mentioned Europe doing very well? And then secondly, Bjorn, obviously, you talked about doing double-digit million sales of the TERREX shoes in 2024. Just wondered if you could give us a sense of what the number was of the TERREX shoe sold in '23 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 carries a higher margin and the TERREX is selling very much at full price. So any indications there would be useful?

Monique, this is Sebastian. 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 on 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 13. Thanks for your understanding there.

I was supposed to answer you and he saw that, he stopped me. I'm not legally always compliant. The only thing I can tell you is that currently on the TERREX thing, which is mainly Samba's [indiscernible] and Gazelle, it is still in a higher demand and supply. So that's still building. What is new is that Campus in certain retailers and certain markets are actually out selling Samba. And as you know, Campus is a wider, more scape looking shoes with also then [ reaps ] more also to the main consumer, which is good for us. And then we have extended the TERREX thing with the SL 72, which is running TERREX. So it's a running upper T-Toe construction from 1972 that we are now playing as a fashion thing. And that is now in limited distribution doing very well. So that will be extended. There is no signs currently that the T-Toe is slowing down. But the good thing is that it's extending into the more scape 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 SL 72 TERREX running look, the classic look then to a more progressive, what should I say, running lifestyle thing where you will start to see feedings 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 then 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 we're using them and also own channels 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.

Yes. I just want to add on the TERREX margin. I don't give you the details, of course, on 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 to better grow in margin to begin with. And then secondly, is the sell-through is great. What it is right now. You have less discounting in your own channels. And then that's where you get an even better margins. So that's why I indicated the growth in lifestyle, especially on the TERREX products, it's a positive mix in the overall gross margin picture.

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 Philip 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 13, which we are 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.