adidas AG (ADS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the adidas AG Full Year 2023 Conference Call and Live Webcast. I am Alice the Chorus Call operator. [Operator Instructions] And the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Sebastian Steffen, Head of Investor Relations. Please go ahead, sir.

Thanks very much, Alice. Good evening, good afternoon, good morning, everyone, wherever you're joining us today and welcome to our full year 2023 results conference call. Our presenters today will be our CEO, Bjorn Gulden; and our CFO, Harm Ohlmeyer. Before Bjorn and Harm will take you through the puts and takes of 2023 and explain our expectations for 2024, as always, I would like to remind you that during the Q&A session, you limit your initial questions to 2 to allow as many people as possible to ask their questions. Thanks very much in advance for sticking to that rule. I actually know that it was a long night of football for some of us yesterday. Some of you definitely seemed a bit tired when I spoke to you this morning. So we figured that before Bjorn is going to kick it off, we'll start with a video to make sure that everybody is awake and in the right mood. Here we go. [Presentation]

Hello everybody also from me. I am also tired from yesterday because I also watch soccer and since we talk about Champions League, 3 out of the 6 teams that have qualified are adidas: Arsenal, Bayern and Real. So, so far, we have half of the teams to result. That looks good. We thought we will take you through a little bit of the story from '23 before we go into the numbers. And when we met or talked a year ago, I think there was a lot of question marks, what is the future going to be and there was a lot of quotes being made on, a, from the press, and I think in the industry in general, and it basically said that there's no innovation. The pipeline is empty. There is no hot product and there's a lack of brand heat. There's little talent. Adidas is not a great place to work, and it will take you a long time to turn the business. Reality was different. I think we're very early when we spoke, I said, you know what, the pipeline of innovation is not that bad. And I'm going to show you some examples. In the running area with the Pro Evo, I think we have the most innovative shoe on the market with 138 grams. Setting world records on the women's side, setting national records and winning almost every marathon that exist. And you know this is Evo 1 and there is Evo 2 and there's an Evo 3 in the pipeline. So I think from an innovation point in running, we are actually in a very good spot. Same thing on trail running, where we through the Terrex sub-brand has invested quite some energy, both on products and also sports marketing. And sure, you see here the Agravic Speed Ultra is going to normal market April 1. But it's won almost all the competition in ultra marathons and all the events that you do on the trail. So again, a proof that a lot of innovation and investment in the product. And then my favorite, the new interpretation of the Predator. I think if you talk to the trade, the probably most successful boot launch ever both from the activations, the sell through and, of course, also the reaction from the players. And I have to mention that Jude Bellingham playing in the product the way he does and the games he is doing and also his relationship to Trent Arnold at Liverpool was a great story and it is very, very, very good for us that we have extended youth being the new Zidane for the Predator franchise. Further, maybe a little bit surprising, but even in the difficult basketball category, I feel that by signing Anthony Edwards, I think Michael Jordan calls him the new me and the new design and the calls we rolled out, we have actually been able to sell out all the launches, and that's a new experience for us in the basketball area. If I then add that the Harden 8 has been similar successful, then we have 2 franchises in basketball that is currently selling well that we didn't have 12 months ago. And when you then add that we finally have Fear of God products coming into the market at the end of the year, both on the performance side, which use and uniforms in NCAA. And of course, on the lifestyle side, I think we have 3 elements in basketball that will help us in the American business, which you know have been tough but where I can report that the order book for Q2 is already turning to be positive. In general, these are just examples. I think both on the training side, the running side, the outdoor side, we have a pipeline of what you will call innovative product. And those who you've been here and seen our Inno Lab and the investments we're doing, I do not think that performance product when against innovation will be an issue. So it's up to us to bring it to the market and get distribution and then, of course, activate it. The other line, which was maybe more important for you guys was that you don't have any hot products and the brand it is lacking and strangely enough a couple of months later, we won the Samba shoe of the year. And you can say that's only luck. But I have to say that the whole Terrex thing, I think, was successful because what adidas did back in end of '21 and '22 with all the call-outs and especially the call-out caller with Gucci, which heated up the Gazelle [indiscernible]. And then I think we did a good job actually scaling Samba, Gazelle, and Spezial during '23. So it's now probably the most successful group of franchises in the market. What came as a surprise positively during the year was in the Campus. And as you probably know, the Campus is actually outselling Samba in many retailers when we are in stock, especially in the colors of black and gray. If you then go further, we are facing an SL 72, which is [indiscernible] running bottom. It's the original shoe the Olympics in 72. So it has a great story to it being an Olympic year. And also there, we see the first successful centers. We then have told you that the big issue adidas ever had is the superstar and that's going to be an investment now to heat it up for being a commercial product in '25. So you will see a lot of activations both through collapse and honor, I would say, in a way of hitting that product up around the world. And then we have Lo Profile. Again, I write it without the V because the creative sales should be written Lo Profile. I think you know what I mean. A trend that is currently on the catalog and we start to see it also in the trade. And as you know, we have a lot history, and I will show you in a second that we will also be part of that trend. And then most importantly, midterm lifestyle running already has a history with these. I think with Ultra boots, I would also say the flux and of course, the YEEZY 350. All franchises that are slowed down. And now we are overinvesting in development on many new possible franchises, which we will show you a little bit later because the goal is to allow 1, 2 or 3 silhouettes and new technologies and look coming into market already in a seating high-end side this year and to have the possibility to scale into '25. What is very -- what I say promising is this slide. This is the social media searches of different shoes. And as you can see, the most searched shoe currently is the Campus. I think Samba and Gazelle is at 2 -- no 3 and 4. And even more important is when you look at the right side, you see that the search for our shoes has improved from December to January and the best shoes of our competitors actually has gone the other way. So this shows you that the Terrex and the Campus is really not over, it's actually still in the accelerating phase. So we see that as very positive. And if you then follow the fast media, you will see that it's full of examples of these Terrex type and Campus being shown on catwalks and being shown in social media on a lot of celebrities. If I then go into SL 72, it is the same picture. A lot of our partners are curating the shoe. We have a lot of columns out there. I think maybe my favorite is the Bob Marley one. You know he has a long history with the brand and the story of Jamaica which we will play. It's great that in general, a lot of celebrities actually using also the running silhouette on Terrex, which, of course, is what we had hoped for. If you then look at Lo Profile, the same thing there, a lot of catwalks and a lot of, I would say, fashion environments and street culture relevant people, again, finding their old deluxe Lo Profile shoes and they can come out of many areas like Track and Field or especially sports like Boxing and Taekwondo or coming out of motorsport. And in all these areas, we have a long history to actually be part of this trend. When it goes from only being, I would say, on the high end to be more commercial I don't think we can own the trend because there are other brands that'll also be part of it, but we can definitely be part of commercializing it. What we also have been very open about is that we take any trend that we have upstairs, I mean commercial assets. Here, you see the examples of the TKO campus, but also a very, what should I say, a normal shoe for us to Stan Smith, where we then take it down from the original price point down to mid price point in leather and then a synthetic price point going into the shoe trade. So any trend that we have silhouettes that are kind of setting the trend you will see takedown versus in 2 different price points, not only on the court side, but also going forward, you will see it also now in the running lifestyle. So all the shoes that we are designing now on the higher end to be winners in the running lifestyle, we will immediately also do takedowns in the mid and the lower price points. On the apparel side, we are just 2 months away from launching the new Z.N.E., which you see here. That's, I think, the best fleece program that the market has seen. Forecast from the trade has doubled in the last 6 months. So this is millions of pieces. I think you all agree that the logo and the execution, I mean you can feel the material. This is a great next step for us connecting to the big fleece market where we have been lagging behind a different brand. Three Stripes, you probably watched Super Bowl, the left girl maybe more famous, Taylor, but Blake Lively also very, very popular. And of course, her Three Stripes very visible. So what you do, you commercialize this very quickly. The adicolor range, which is our way of interpreting originals in apparel. I think it's very, very time right with Three Stripes on the logo. And of course, we have it in all kinds of courts, and you will start to see more and more of this also into the different distributions. Brand hit extremely proud of the campaign we did in September. We launched different films, videos connecting with the tariffs and also the superstar because it is the biggest we have ever had. And to give you a taste of it, here is the Samba video. [Presentation]

So in my opinion, one of the best videos that we ever made and the success of the Samba. What has been important is this is a campaign to relaunch the originals, the visual language, both in what you do in print, outdoor and also, of course, digital, the same everywhere from a vision point of view, but then with different content, as you can see here around the world. I'm very, very proud of how people have executed it. And I think it helped us a lot to improve our bandwidth during Q4. If you then look at the quote, you don't have enough talent. I think we need to look at it at different levels. When it gets to the athletes, I'm very, very proud of who we have. I think if you just look at this slide, I mean, Messi all know we don't need to talk a lot about it. But Patrick Mahomes, I think a fantastic athlete that we haven't activated enough in the past but we will do now. And I think on the right side, Yamal, the 16-year-old kid that is playing now at Barcelona, some people say he is the new Messi. Extremely proud that we got him and then Jude Bellingham we have extended through 2030. So he will be an adidas player for the rest of his career. On the women's side, yes, it's thinner, but I think with Trinity, Mikaela Shiffrin, and also, of course, with Tigist, world record holder in marathon, starting to build also a portfolio of partners that we can use more in global campaigns also towards the female market. When it gets to cultural partners, same thing here. I mean, Bad Bunny, the most played artist, I think, been very, very good for us to connect to the U.S. and actually also the Asian street culture, [indiscernible] delayed, but very important. And Wales Bonner I think on the design side, maybe the most, what should I say, a popular designer now in the luxury area. Everybody wants to work with her and her loyalty to us has been great. And all the product that is done for us on the result side has grown out. Edison Chen is very special because he is an American Chinese. We have worked with him for the Chinese market. Same thing, very successful, but also on global collabs, and he will, for example, be very influential in heating up the Superstars, the same thing here. And then in our own organization, with our 59,000 people, I have met a lot of talent. I think we have a great culture. So I think the quote that we don't have enough talent is something that we shouldn't believe and we should show that we have enough talent to recruit into any position. And then the same thing when it gets to adi not being a good place to work. I mean, our infrastructure is next to nothing. I think the offices and the resources we have is fantastic. It's almost like people should pay to work for us. And when you look at the workforce, I mean, almost 60,000 employees, we have 180 nationalities globally, 127 here in Herzo. And as you can see, 51% women, it's a very, very balanced what should I say, workforce. When it gets to women in leadership, we have the latest count, 39.6%. We said a couple of years ago, the target to have 40% in 2025. So that is more than achievable. And as you know, we have a target to be balanced in 2033. And I'm sure that, that's more than doable. If you then look at the image, not being a good company, I mean, Stern, which is a big magazine in Germany, rated us #1 out of the company -- big companies in Germany I think Porsche was #2. And again, this is a rating based on interviews with people who work here, and that shows you that the employees are also very happy. I think Forbes did 2 things, where they rated us #12 out of 700, far #1 in our industry, and then #10 to only out of 404 women. It is 2 examples, but again, just to avoid this what should I say rumor that we don't have a good culture. We're trying everything we can to bring celebration and on to campus. So almost every week, there are teams, athletes, celebrities, street culture, relevant person of a different campuses. And here are some examples of it. And this is one of the unique things that we can do. The German national team will stay on campus during the whole tournament, for example. And as we speak, we have 40 of the best outdoor athletes walking around here and staying all week doing both testing when it gets to products and their own fitness. And then maybe more important for you, the quarter that it will take a long time to turn the business. I feel that we can prove to you that's already happening. Yes, I know we will say your guidance was very conservative but the swing from a possible loss of EUR 700 million to a win of EUR 268 million is almost EUR 1 billion. And this is a proof that we never tell you something that we don't believe in and that we will take the necessary steps to guide you through our progress. And I think the starting point we had a year ago, we have done a decent job. And then remember, we started in '23 saying it's a breakeven company. We said in '24, we should be a better company. In '25, we should be better than better, which is then good. Then in '26, we should be a healthy company having seen double-digit growth and then getting to a 10% EBIT, which is our target. And again, this is not because of me, as I've said many, many times, the things that are successful was already here before I came. It's not only also because of the Board. Although to be honest to you, the Board showed a lot of courage last week when this should have been a video, but this is the Board on the floor [indiscernible] shown the best skateboarder and they were jumping over us to show that we are not afraid. But what I wanted to say is that the success of the turnaround is not dependent only on a few people. It is adidas family. And we have had a unique culture in this company and it's the Board's and my job to bring that back again because then I believe that we are actually unbeatable in this industry. So just a couple of highlights of the numbers. We are -- although we started the year with all the issues, we ended by staying almost flattish. We were able to increase the margin by 20 basis points. Although we started the year with a lot of bad inventory. All the levels then brought us the profit margin of 1.3%, which is the EUR 268 million, of course, not a great result. We know that but from the starting point, I think we can say we are decently happy with it. And then maybe the most important number is that we were able to reduce our inventory with EUR 1.5 billion due to a fantastic job done by the finance people and by Harm, but also operational people when it gets to logistics and sourcing, being extremely disciplined. If you then look at the topline, you see a pretty mixed picture for the full year North America being down 16% and again in a difficult environment with a lot of bad inventory. That's a ballpark where we thought we would end, maybe a little bit better. Europe, Middle East and Africa, flattish. China, first year in a long time turning to +8%. Asia Pacific, it was 7%. And LatAm at +22%. This is the full fledged currency-neutral development. If you then take YEEZY out, then you will see we grew the adidas brand at 2%. You see America improving by 2 points from 16% to minus 14%. Europe, Middle East and Africa improving 1 point and the biggest change is in Greater China, where you see that the adidas brand grew by 14%, which is a strong number. Asia Pacific and LatAm almost unchanged. If you go into the different channels, wholesale being down 4%. Now you have to remember, we started the year with the order book being down 20% to 25%. So a lot of work being done quarter-by-quarter to end at only minus 4%. You remember, our relationship to the trade was not that great, and we have spent a lot of time building relationships again. And of course, now with the success that we have on certain franchises and that improved center that is continues to increase and it should not be a surprise that you now have a positive order back everywhere. On retail was up 12%, yes, a lot of that was, of course, discount in the beginning. But at the back end of the year, we had great success with full price, and that shows again that when we have new products on the shelf, it did also extremely well. E-com down 5%. But as you know, that is only due to the missing YEEZY business. That gives you a 59-41 mix between wholesale and DTC and as you can see, brick-and-mortar on retail and e-comm being both around 20%. If you now look at the divisions, footwear growing at 4%. That's a healthy development. Apparel as we knew, in a very, very what should I say, over-inventory market being down 6%. And then accessories led by especially soccer balls up 3%, and that gives you a 57% footwear, which is a very healthy mix, 36% apparel. And to be honest with you, the accessory share is a little bit low because you know accessories have a very high margin. So I think there is some upside to that. If you then look at the different categories, performance was up slightly. And as you can see, the biggest growth in triple and what we call specialized sport running, trending flattish. And the only thing which is down is U.S. sports, but that is explained by NHL. We gave away or lost the NHL license. So if it wasn't for that, you would also see U.S. sports being up. If you look at lifestyle, slightly down in total. Originals or everything included, flattish, if you take YEEZY out, retails were up and basketball were up and the more price aggressive sportswear was still down, but that's already changed during the last couple of weeks and months. So you will in the future now see lifestyle being up. The last information on product sustainability. We achieved all the targets we had on sustainability. We now have more than or almost 80% of all our products being sustainable. You have to clear in the mind between footwear and apparel. In apparel, we are more than 90% sustainable. And in Footwear, we are only at 44%, that is because sustainable material for footwear is much more difficult. Most of the mix or outsole products are oil-based, therefore, not sustainable. But we did actually double the amount of sustainable articles in footwear also in '23, so we're making progress. Overall, the CO2 emission going in the right direction, which is also the midterm target for our remuneration. When it gets to all things that have the human rights benchmarking and tracking I think adidas is one of the best companies in the industry, not only in the sports industry, but apparel, footwear in general. And we do continue to do all the investments that we need to do. So all goals achieved. And with that, I hand over to my friend, Harm, to take you through the more financial detail.

Thank you, Bjorn, and welcome from my side as well. I'm not as tight as the other 2, despite the fact that I watched Arsenal as well, was pretty happy about it. But I also want to give you some updates on the financials. And I know that all of you understand them very well. So I really would like to guide you through the progress that we have made rather than talking about the numbers because you probably know all the numbers already. Go to this one. Of course, you know the top line, it was somewhat flattish overall currency-neutral but we also had a minus 5% reported. So I want to remind everyone that the currency impact that we have on the top line was more than EUR 1 billion here if you do your math, right? And I think everything has been said about excluding and including YEEZY, but also Argentina had an impact of 1 percentage point for the overall year. I go deeper into the gross margin later on. And also on the operating profit, we should not forget, and we mentioned that Argentina alone in the fourth quarter had EUR 100 million operating profit impact given the devaluation of the of the Argentinian peso. So I want to go a little detail, but I want to go back to the different guidance that we have. I know you have seen that, but as we gave a somewhat complicated guidance at the beginning of last year, I want to reiterate that again. So again, the starting point on February 9 was potentially high-single-digit decline being a breakeven company and potentially losing EUR 700 million because there was a risk of writing off EUR 500 million inventory on YEEZY and having a onetime cost of EUR 200 million. That was the original guidance. Then, of course, we had the first drop of the YEEZY. So we improved to mid-single-digit decline as a guidance. We remain a breakeven company underlying. But as we had less risk of writing off the inventory, we improved the operating profit to minus EUR 450 million. Then October 17, after the second drop, we then said it could be a low-single-digit decline. We actually improved our underlying business by EUR 100 million in our guidance and because we sold another EUR 100 million of inventory, made some profit with it. Now we said the worst case guidance would be minus EUR 100 million. And then Bjorn talked about how we imported, we are flattish. The underlying business actually improved even further, so to EUR 200 million. And because we decided that we will continue to sell most of the YEEZY inventory in '24 and it's worth something in the future, we didn't write off any inventory other than a low double-digit amount on YEEZY, we reported the EUR 268 million. So no major news, but just wanted to be clear on our development and the progress that we made during the year. When we talk about progress you also look at the fourth quarter. Of course, it's a disappointing quarter. But again, on the progress, it's impacted by YEEZY compared to last year. But also here, I want to show you again it's the 6 percentage points difference of currency-neutral vessels reported. Again, it shows and we talked about it towards our guidance of '24. There is still a headwind on translation on the top line. The gross margin improved because also here, I come to that later on, less discount is definitely helping to the comparison of last year. And yes, I don't want to talk too much about the Q4 profit. I'm not even sure, yes, of course, it's an improvement, but losing EUR 377 million is nothing we are proud of, including or excluding the Argentina devaluation, but that's why we are looking forward. When we talk about gross profit, I want to go in a little bit more detail. First, starting with the full year. As you see here, of course, we had positive impact from the business mix overall, whether it's channels or originals. Freight, finally, after a difficult '22 was positive for the full year, but as I said, on the top line, we also -- based on the hedging that we have across different currencies, we had a headwind on the margin through currencies, headwinds through product cost that became somewhat more expensive given the raw material prices. And of course, given the inventory situation, we had a lot of discounting, even so it improved during the year. And yes, we reported 47.5%. If you take the YEEZY effect out of it, it actually would have been 46.7%. But also there, when I look at the fourth quarter, also improvement there. And what happened in the fourth quarter compared to the full year, discounting became a positive one because there's less discounting because all the markets are in North America. We are very happy where we are with our inventory on our side, but also in the market that allowed us to be less promotional and also reverse some of the inventory allowances of aged products that we started to sell through our factory outlets as well. But the FX has been continued, product cost as well. And in Q4 '23, we didn't sell any YEEZY, so there was also a negative impact this time by not selling any YEEZY in Q4 as we still sold roughly EUR 100 million of YEEZY in Q4 '22. So then looking at the overall P&L, going to the marketing expenses, declined by 8%. This should not be seen as not investing into marketing, but '23 was not a big event year and when you look at our guidance in more detail, we will invest more in '24 again because we have 3 major events with the Olympics, with the European Championship played in our home country, and the Copa being played in North America, that is just event based. When you look at the operating overhead, it's flattish, the same amount even so we deleveraged, but the reason for that is in the box on the right-hand side. On the one hand, it's fully included with the EUR 200 million strategic review that we have conducted and of course, the donations linked to the YEEZY sales of EUR 140 million. If you take out the EUR 340 million, whether you call them one-offs or not, but the EUR 200 million was based on strategic review and one-offs to the nations, we might continue that depending on the YEEZY sales in '24 but if you deduct these, we're definitely making progress also on the cost line. Now going further down as this is some news relative to the talk that we gave, so we expect I want to explain a little bit how we are moving from operating profit, EUR 268 million to the IBP and to the actually net income. So as you see, there's financial income, it actually has improved compared to prior year as interest rates are going up, we have cash on the balance sheet. So we start gaining some interest here and there. That is the simple answer to it. And even the financial expenses improved a bit, it's still a big number, EUR 282 million, what's in there, of course, as you all are familiar, roughly 1/3 of that is IFRS 16. Of course, we need to pay interest for the bonds that we placed in '22, but also in the years before with some interest. And once in a while, we're in the money market as well, if you have some liquidity based on the phasing of the buying of our products and other things are linked to reversal of hyperinflation in Turkey and Argentina that has the financial results impact that is negative but overall, also moving in the right direction. But that only leaves an income before tax of EUR 65 million. And then you might ask yourself, how can you have 189% tax rate. This is, of course, the EUR 65 million is a consolidated number. So we pay taxes in many markets where we are profitable. And we have some market or legal entities where we are not profitable. And that's where we have some nondeductible expenses that are significant. And we have some withholding taxes also that we normally deduct from the income. But if you don't have income, you can't deduct withholding taxes. So it's really a unique thing in '23. But rest assured, going forward, the tax rate will normalize as we become a more profitable company again. So all of this looks strange on the spreadsheet and resulted to a negative net income of EUR 58 million. So more importantly, how we moved in inventory is definitely a story of progress as well and as you see on the next chart, we peaked with EUR 6 billion by the end of '22, including EUR 400 million of YEEZY inventory, every quarter we said we want to improve. And the biggest one was in the third quarter actually '23 because on the one hand, it took some time because we bought less, but also we cleared a lot of product. And of course, we got some momentum as a brand in the second half. That's why we made a step change in the third quarter. And we actually finished with EUR 4.5 billion, including EUR 250 million of YEEZY inventory at year-end, and we would call that a very healthy level of inventory. And as Bjorn said, it's still in North America, there's some work that we do, it's probably 6 to 9 months behind to be at a really healthy level. But again, it shows you when we know how to take the problems, it takes some time, but we did clearly understand what to be done to move that inventory down. Also on the accounts receivable or accounts payable, you see wholesale wasn't a decline. We had a negative order book for the second half. That's why the receivables are also lower than last year. And on accounts payable, it's an indication that we bought less products because that is what we have to pay to our factories. So all normal course of business. And of course, based on the inventory reduction, our operating working capital improved to some degree. And that's where you see the development by quarter on the operating working capital also there, improving compared to the first quarter in '23, then it was 25.7%, not where we want to be. But if you have read our guidance in '24, we believe it will be somewhere between 23% to 24%. And if you really want to be a healthy company in the future, we believe you're targeting 20% or even go below 20% over time again. But also here, it's about the progress, not where we are right now. The last number is cash and cash equivalents. So we added another EUR 600 million to the balance sheet. Also there, I said sometimes having EUR 1.5 billion in cash on the balance sheet is very healthy. We will use some of that to take some risk on building up the inventory for the growth that we are planning, not just in '24, but also in the future. But again, the balance sheet very, very healthy from inventory, receivables, payables, overall working capital and cash that allows us to be more proactive on taking some risk also going forward based on the acceleration that we are seeing. Talking about investments, a lot of investment goes into controlled space initiatives. This is either new retail stores, refurbishing retail stores, but also expanding our shop-in-shop in our retail presence with our retail partners. And as Bjorn said, it's part of showing more love to our partners and representing our brand in the right way. That's where we're investing as well. Almost half of the CapEx goes into something that the consumer sees. Of course, we are modernizing our ERP infrastructure as well. That's why we spend a lot in IT as well. And as we said, all the logistics and DCs and the central offices that we have around the world are up to date. We don't need a lot of investments. We have invested into an infrastructure around digital DCs and offices that caters for the future. Don't expect a lot of investment into these areas. We are focusing on what the consumer sees. Also when it comes to the leverage ratio, not a good starting point with EUR 6 billion adjusted net borrowings in '22, but also here, improving EUR 1.5 billion. Of course, that is linked to paying back the bonds and having more cash on the balance sheet through the working capital improvements. And also here, when you see the adjusted net borrowings over EBITDA and not where we want to be. And over time, making good progress on '24 and definitely getting to what we believe is a healthy ratio around 2. That's also something that we discussed with our rating agencies to get to that level. Also here, tremendous progress. Clearly, on the net borrowings, still progress to be done, net borrowings over EBITDA in '24. With that, I also want to talk quickly about the dividend. As you've seen, we had a negative net income but we believe and that's a sign of confidence as well, having a strong balance sheet. We want to be a dividend payer with EUR 0.70 or EUR 125 million at the same level as we did in '23 for '22. And of course, as we're improving our profit profile and the overall liquidity of the company, we want to be a trusted dividend payer again around 30% to 50% of our net income from continued operations. That's also on the dividend. Also, a reminder, when we look at the market setup in '23, these were the 5 markets that we reported on in '23. North America, Latin America, EMEA and Greater China and APAC. And as we indicated going forward in '24 we have a different structure. North America and Latin America, Greater China remains the same. Europe will be stand-alone outside of emerging markets. So it's core Europe. And then we have emerging markets. And in the emerging markets, also Southeast Asia. And then we have left South Korea and Japan. And we will bundle that together going forward, but this is how we look at the markets going forward in '24. And of course, you will see all the comparisons in '23 as well to make sense out of these numbers. And with that, as an incentive going forward, we also talk a little bit the outlook in '24 and over to Bjorn again.

Yes. Thanks, Harm. Remember, when we started a year ago, we told you that was the wrong way. We told you that '23 would be a breakeven year and kind of build the base. We said that in '24, we will start to improve and be a better company. In '25, we should put some of that down to the bottom line and be what we call a good company. And then in 2026, adidas should be -- what it always should be a double-digit growing company with a double-digit EBIT. That's kind of the plan we have. To get there, nothing has changed. The focus is on people, product, consumer retailers and athletes. That's the core of our business, and that's what we focus all of our time on. Going into '24, the creative direction we had from our designs was Power of 3, pretty logic. We have 3 ways of signing off product. We have the Three Stripes. And I think when you see this visual it shows you the new, what do I say, visual of our brand. We simplified the logos. So the 2 logos we use on the left side, the so-called performance logo and on the right side, the original logo, we will use the left logo in sports marketing and everything where we showcase our brand in competition without dealers underneath. And then the 3 foil, the dry blood to the original logo from the brand, you will also see in this version that without adidas underneath. At the same time, we have gone away from our tagline impossible is nothing. And the new one is you got this. There's many reasons for this. We felt in our marketing and creative felt we needed something new. We felt that the taglines about impossible is nothing was a lot about pressure and a lot about having to win and we feel that sports today, we should have less pressure. We should be more free and you got this is a more confident and I would say, more free tagline, we will get back to that in a second. You remember back in September, we launched a new vision language in the original campaign. These are the way we looked and I think the reaction to it was great. And then a couple of weeks ago, we did the same on the performance side when we launched the first initial you got this campaign. And you see the visual language is similar. It is very, very the new adidas and the reaction to it has also been very, very good. To show you a little bit of the taste, here is a video of the initial part of the campaign. [Presentation]

This is going to help us. Also, when I was in the U.S. a couple of weeks ago to see it go live both in the All Star weekend for basketball and the Super Bowl, I felt that our American marketing team showed up very confident stealing a lot of, I would say, visibility and it fits very, very well in the market where we all know it's most difficult for European brand. But even here, I think it fits extremely well and being at Super Bowl in Las Vegas with both quarterbacks playing in our products and seeing the [indiscernible] campaign was very, very strong and it gives us a lot of confidence for the future. What is also good is that this campaign being in original performance allows us to be very local. You see examples from around the world, how we show up and the local teams are very excited to use this frame and also to fill them with the local hero, their local visuals, the time where we only have global assets or partners in the campaign is over. It is about the combination of using both global and local. And when you get to local, I think that is so important that we both on the product side, on the street relevant partner side and then also on the content side that we really are conscious about that we need to be more local. And I think it is also very, very motivating for our teams around the world to be part of this. So when I look at the rest of the year, I feel very, very comfortable on the product. We have innovative product, we have commercial product and we have a clear pipeline. You know the lifestyle side that is currently working well. You know that SL 72 has started well. You know that you're going to hit up the Superstar with many, many activations to be commercial in '25. You have heard about the low profile area, which we will be part of. And you have demanded from us that we do something in lifestyle running and we will. We didn't put many teams in action on the running lifestyle side. Usually some of the products that will go to market, SL, you heard about, Aruku which means walking in Japanese is a new I would say, very aggressive shoe that you only see part of. Sponge is a new technology. [indiscernible] is a new Terrex shoe on a very modern midsole and reboost is a new interpretation of boost. These are examples of product that will be seeded and commercialized during '24 to go in to '25. Not all of them will work. These are also not all of them. There are more but it shows you that we have a lot of things in the pipeline that are different and innovative to be part of the lifestyle running market. When it gets to a new product that we have launched, you have seen some of it, the Clot Superstar is the first activation of a collab with Edison Chen in the direction of Superstar, sold out. I think we sold 10,000 pairs. We had a request for 200,000 pairs within a couple of hours. The Anthony Edwards is working in all courts. And Supernova, which is our everyday running answer in the comfort running area, has also done very well in the initial phases. We know it's a sporting year. We talked about it many times. We will start with the Olympics, which is a great, great, great event for us. I wish we had more teams and more federations but of course, we couldn't sign a lot given we only had 12 months, but we have been able to add both sports and Federation. I think the visibility of our brand will be good. And then the Euro will be a fantastic party here in Germany. I really look forward to it. We have tons of activations and are very optimistic about what they will do with the fans. It will also be a commercial event. And then the COPA is kind of the test for World Cup that comes in 2026. And I also think that that's going to be a fantastic buildup for us and '26 will be, in my opinion, a fantastic year for adi in the U.S. market. What is also good, if you see here, the Pope and the German Chancellor is already having the Foosball and [indiscernible] ball and also the German parliament that you see there are starting to heat up the excitement for the tournament by having the balls in their hands. And as you can see, we're building a soccer stadium outside the German parliament that will fit 2,000 people, and we will have activations there almost every day during the tournament. COPA other small things, we think that the sales line will grow from quarter-to-quarter. I think we will even grow in Q1, to be honest with you. And then the second half, we think we should have a double-digit growth because that's when we will see the result of the center and a good building of the order book already. If you look at gross margin, I think Harm has talked about it many times. We have on the FX, a lot of headwind. If we sum it up, it's around 200 basis points. We have a little bit of headwind in the freight in the first half because of the Red Sea what so I say situation. And as you know, if the freight companies have a chance to do something, they increase prices, that should normalize. And then the rest of everything that has to do with margin is going in the right direction. So we feel that we are on a good way of improving our gross margin for next year. Just so you have that in your mind. The strategy has been to invest in the top line, making sure we have programs and activations through for the end consumer at the same time, build relationships with the retailers. That means that we are overinvesting in both product development and marketing. And at the same time, we have not started working on streamlining our processes. But we think as the momentum is coming through, we can then use the top line to leverage our cost base and then, of course, also to be more efficient in the way we work. That means that the guidance looks like this. We will have a mid-single-digit growth. If you take YEEZY out, it should be a high single-digit growth for the adidas business. And again, the assumptions are we will sell the YEEZY inventory at 0 profit. That is EUR 268 million. I think we say around EUR 250 million. There will be, as we said, significant headwind both on the top line and on the margin, and we will continue to overinvest in marketing and sales. And that means that we currently are promising you a profit -- an operating profit of EUR 500 million. And that is then what we call a better company. Of course, there is an upside to this. But as you know, we tell you when we are sure and this is how we start the year and how we continue the travel to what we have promised you during '24, '25 and '26. So I think with that, we have told you basically the story, and I'll hand it back to Mr. Steffen.

Correct. I'm glad we got that right. And I'm actually going to hand over immediately to Alice to guide us through the Q&A session.

[Operator Instructions] Our first question comes from the line of Aurélie Husson-Dumoutier, HSBC.

This is actually Erwan Rambourg for Aurélie. Three quick questions, if I can. I think you're indicating 2024 to be down mid-single digit for the U.S. I'm just wondering how you think about that sequentially quarter-by-quarter and by declining mid-single digit, do you think you'll be gaining share actually in that market? Secondly, on YEEZY, I think you're indicating that you're selling YEEZY at cost, but at the same time, my understanding is you've been selling YEEZY on your own digital platform. So can you reconcile what the difference might be? And does that actually constitute a bit of upside relative to your current guidance? And then lastly, maybe on China. Obviously, a lot of pain following the BCI event. I'm wondering if you can comment on how you perceive the market, is there a possibility in the short term that Western brands actually take back some share from local Chinese brands? And how you see the psychology of the end consumer right now in that market?

Well, I'll start with China. As you saw, we had 8% growth in China. If you look at the deals brand, it was 14%. So it's the first year where we grow again in China, and that is an indication of 2 things. First of all, that we have been allowed to do marketing again in an almost normal way. And of course, that the Chinese consumer is reacting positively to it. We currently have the feeling that there is no what should I say, restriction on what we can do. So the team is doing more and more. We have also given the team a lot more, I would say, local authority, both on the product creation side and of course, also on local sourcing. So you're turning more and more into be a local, what should I say, set up? And I have the feeling that the psychology in the team is starting to get more and more confident. What we, of course, don't know is what is going to happen with the American election and is that going to bring any new tension. But right now, I think it's the easiest, what should I say, situation that I felt for the last 4 years. And the energy in the Chinese team is very, very high. When I guess a YEEZY question, you are correct. The assumption that we did in our EUR 500 million EBIT is no profit contribution of the inventory. That's based on the following. Yes, we are currently selling the so-called drop one at full price that creates the margin. But you have to remember that the quality of the inventory will be worse and worse. At the same time, the risk of the relationship with him. So it might be worst case that you will lose money on the last part of the what should I say inventory, and therefore, the profit will be washed by loss. This is, of course, a worst case. But I think with everything we've been through on the YEEZY thing, that's the way we decided to guide and then of course, it has an upside. When it gets to the American market, I think we need to be careful with how we kind of interpret what can happen. We are currently in a situation where the business was down double digit last year and where the trade has a lot of inventory. We have, again, the same thing as we've done in China spend a lot of time developing product and programs for the American market. I think you see it in basketball, you will see it in Classics and we opened our design center in L.A. So there's a lot of positivity in the American team when what we can do and what we are doing. I think the uncertainty is in the general market, at what point in time is this over-inventory situation at the level where people will start to buy more of our products to put it into the trade. The order book that we're looking at is starting to go from negative to positive. So we see that the trade is really again to buy our product. The sell-through of the new product is also good, but then there is more bad inventory in the U.S. than it is in other markets. So there is a time lag of 6 to 9 months, and that's why it's very difficult to be specific with you I am 100% sure that when the situation normalizes, we will take market share in the U.S. But at what month that will happen compared to all these variables, I don't know. But the investment that we will put into the U.S. Board from a resources, meaning creative talent and specifically developed product for American market and American retailers will be substantially higher. And as you know, we have a new American President, which I will call is a sales machine. I mean, it's connected to all the retailers and is hired for the reason. And that is, of course, to build back the relationship that adi used to have. So midterm, I think we're all optimistic about the U.S. market, and I think we bought ourselves some time to actually get it back on track again.

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

I've got 2 questions, please. The first is on the performance of the concept stores in the fourth quarter, up double digits. What's been selling well. I mean, obviously, terrace, but what's been selling well, perhaps it supports to you? And what does that say about the brand heat. And then secondly, how long do you think it will take to get your online full price mix to where you're happy with it?

Well, the performance stores or the concept stores have been growing double digits for a while. So when we fill them up with the new merchandise, they do well. That's been also the biggest argument towards our retail partners. And the same thing happens with them. If you look at the sellout share improvement with our suite stores, our partners, the Foot Lockers, the JDs, the SNIPES you will be amazed to see how improvement that is. So if we have enough of the good product the sales goes up dramatically, and that's, of course, what makes us so positive and the number for our concept stores, I think, was up 13% in Q4. And we've seen the same and even better numbers during Q1. When it gets to -- what was the second question again? Okay. The full price share on our e-com, for example, in Europe is already there. the discount rates, I think, in the first 2 months of this year was in single digit, maybe too low, to be honest. So it's again, we are taking the franchises out of discount and to keep the brand heat and they're selling well, of course, right now because we have a very hot product. And then I do think that this development will then go around the world because that's what we're trying, even in the U.S., but of course, it will take the longest time in the U.S. And I would say again that we should be, in my opinion, a situation that the mix, what we have in the market, the sell-through and also how we are discounted, I think you will be into the beginning of '25 before you start to see that we feel good in the U.S. So it is the 6 to 9 months lagging behind Europe.

The next question comes from the line of Edouard Aubin, Morgan Stanley.

So just 2 questions for me. Bjorn, sorry just to come back on the start of the year, I mean, you said that you could be potentially slightly up. If I look at consensus about 4%. I know you don't want to be tied down to a number. So it looks like it's more or less in the right place based on what you said, but which regions are kind of outperforming and underperforming? I think it's quite clear that you're still underperforming in the U.S. based on what you just said, but if you could be a bit more specific on regional performance. And then just a second question, which is kind of a follow-up, worried questions on the top line. If you look at the growth in terms of channel, how balanced do you expect your growth to be this year and kind of how -- what type of confidence investors can have that the growth will be balanced in terms of the growth, i.e., not detrimental to the brand equity. So I guess my question is, are you -- do you expect towards the remainder of the year to gain shelf space at the leading generalist. And I think you mentioned Foot Locker with the big, the JDs and so on and/or the performance sporting good retailers, the leading ones, for example, in running. Is that what you're expecting or not?

I can promise you that our distribution regardless what happened only strengthen the brand. The places where we will grow share and what should I say the development of discount will definitely in '24 strengthen the brand equity. You don't need to be worried about for a second. There is no plans or any activities to take the brand downstream in what should I say, everything we're doing is the opposite. It is to have less discounts to get more share in good distribution both on the lifestyle side where we have the heat. And then, of course, on the performance side to build the businesses. Soccer doing very well built on the success and this year in running but extended into every day running now with the Supernova to continue in the basketball area to have innovative products on the high end and then, of course, try on the Footwear side of the outdoor business to build a business which is actually working very well and then commercializes the takedowns in the right channel. So I think we have a very good and robust plan when it gets to go-to-market with the right product. And I can swear to you that you shouldn't be worried about that we will do anything to get growth that will take brand equity away. That is 100% Sure. The first question was?

Yes, the regional performance and kind of so far in Q1, which you're seeing.

I think you need -- in our sales right now, 60% is wholesale, 40% is retail when you look at it just now and what we see everywhere is that the sell-out of the product, meaning the consumer is buying more at full price. So that's a positive side. When it gets to the reported sales, you have to remember that on the wholesale side, delivering into the wholesale has 2 factors. One is the order book and second is how we feel it and it is true that in Q1, we have certain delays, especially because of the Red Sea. So there is a delay of some of the orders that we could have booked that will now go into Q2 but again, we are not losing the orders because we will get them in Q2 instead of Q1. That's why when you say we will have growth and is it 3%, 4%, whatever it is, it depends a little bit on that. But when it gets to the reaction with the consumer I would say it's positive everywhere. So that's why we speak with a bigger confidence than we have done before.

The next question comes from the line of John Kernan, TD Cowen.

Bjorn, when do you think about the long-term profitability of the business, how do you think about gross margin and the opportunity to leverage operating expenses long term as you build back towards the low double-digit EBIT margin.

Yes, before I took the job, I sat down with Harm with a good glass of red wine and we said, so what can we promise and we both came to a 52% margin is doable with the mix that you see. 12% marketing is ballpark where you should be because it's difficult to see how you will get leverage on it. That gives you a 30% overhead and that gives you the 10% EBIT. And that's kind of what should I say, the map we are working towards. If I'm really honest with you, I think there's upside on the margin. So there is some room maybe there depending on what distribution we go and how can we optimize our product. And again, we all know that the original product has a higher margin. So there might an upside to it. And then, of course, the challenge is to get to 30% overhead. That's kind of where we need them to take the top line and get leverage on the existing organization and also where we might have to streamline a little bit. But the 10% EBIT for us at the scale we are is something that we all clearly see and have to deliver. So I think that's the -- what should I say, the near-term, midterm goal. What is beyond that? I think it's a separate discussion, and I don't think we should have it right now because I think we first should show you that we're going towards that direction and then we can start to discuss what upside is there eventually on that? You have to remember that in the last 4 years, you've lost the YEEZY business you have gone from being very fast growing in China with the highest margin and you lost the Russian business. So there has been a lot of catastrophes when it gets to having a high profitability. Now we are seeing that we can get to the 10% with what we already know. And I think that should build you some confidence that we are optimistic about this brand and this organization can do.

That's really helpful. And then if I could just ask a follow-up. Paris this summer is coming. How should we expect to see adidas at the Olympics? Are you planning any large-scale activations, it feels like a lot of your peers and competitors are going to be there. Is there anything that we should be watching? And how do you expect to show up at the Olympics this year?

Well, you know the Olympics is not a commercial event. It's very seldom that you know you have commercial product connected to the Olympics. The first reason is that the Olympic rings are very, what should I say, protected? Secondly, people don't buy replicas of Olympics sports. So what you normally do is that you use it as a platform to launch technologies. You use it as a way of showcasing your brands also in smaller sports. And we will look good. I wish maybe that we had started a year earlier to develop product into smaller sports again and have more federations. We worked very hard the last, I would say, 10 months to get more federation or we will be visible. But you shouldn't expect any short-term impact of the business. We will have a huge delegation there. We will have guests there. We will have all our shoe experts to help the athletes, and we will be visible but it doesn't have any one-to-one impact on the business. And to be honest, I don't think it ever had. There will be Olympic stories being told. I mean it's obvious that an SL72, which comes out of the Munich Olympics has a good connection to Paris, and there will be other programs like that. I think on the commercial side, I think both the COPA and the European Championship here in Germany will have a bigger impact because then you're selling, I would say, replicas and merchandise that is connected to the tournament. And given that this is the first tournament in a long time with spectators again in France, I really believe that, that will have a bigger impact than some people think because I think people are really eager to have big sports fests again. And remember, the Euro is now 32 teams and in 2006, when Germany had the World Cup, it was the biggest party that I've ever seen, and I think you will see the same thing again. So I'm counting on making this a big thing to get people in a good mood. And I think it will have a positive impact on the sports soccer, but also on fan gear and I would say the industry in general.

The next question comes from the line of Piral Dadhania, RBC.

Could I maybe just start with Greater China. It's a clarification question. For Q4 '23, you did very strong growth. I think it was like 35%, 37% organic, but there was no profit to show for it. Could you just help us explain what went through the P&L in Q4 for China that there was no profit? And how we should think about profitability for China going into 2024. And then my second question just relates to the brand equity point that you just made, Bjorn. And in relation to the U.S. inventory situation. It does feel like despite your best efforts, a lot of -- well, the endpoint to get to a cleaner position in the U.S. is taking longer and longer than expected. Is there a scenario in which you take back more product from some of your partners to accelerate the cleanup process just because you have strong brand momentum for some key franchises and having products sitting next to it, which is being discounted perhaps takes away from the brand equity and the cleanliness of the marketplace as it relates to your brand and presentation.

I don't think it takes longer than we have said. I think we said all the time that U.S. will take longer. And the turn when it gets to the consumer in other markets have happened over the last, I would say, 4, 5 months, right? So I don't necessarily agree that it's taking longer than we've said, but it's taking longer in the U.S. than it is in other regions because of the situation. Your tool to take back product or bad product to make the good product visible is a good one. And believe me, we are doing that. But it's not always that retailers are part of it. That depends sometimes a, on how agile the retailers are, some of them have been more agile than others. And then, of course, also, it's the conditions for that. And then secondly, you then need to have enough of the good product, right? So this is kind of a process that is going on all the time, but definitely in the U.S. one of the tools that will be used more as soon as we have availability of an off good product and that the retail partners in the U.S. sees that, that's the best vehicle. If you have products sitting in the retail with your partners that is not working, you have 3 different ways of dealing with it. One is your way where you say I take it back and then you flush it through your outlets. Second is to give the markdown money so that they can have full margin on a discounted product or you just leave it and close your eyes and leave it to the retailer, which is always the worst solution and we are using the 2 others. And again, a very service-minded in the attitude and especially now with John Miller, the new President of adidas America, he's very, very agile on that. And since he's new, he can take a new initiative. So we will do what you're saying. And again, it's one of the tools that will bring us more sales pace of the good product. But you have to remember, you then have to have enough of the good products so that you can fill the shelf. And that is, of course, also a topic that we're working on. I think on the China thing, I'll look at Harm and have him answer you.

Yes. Just really quickly on China. Indeed, there was no profit in Q4, but first of all, the growth of 37%, you got to put in comparison to a lot of returns that we did in Q4 '22. So it's an artificially high growth versus 37%. If you look at the absolute number, actually EUR 670 million, which from a quarterly net sales, it's probably the lowest quarter that we had in '23, that had one impact. And of course, we did some measures in Q4 as well to get cleaner going into '24. So without going into the details, but we definitely looked at some inventory, we looked at some stores. Some of that is part of the onetime costs that you have seen in '23 as well. That's really utilize Q4 to have a better start into '24. When we talk about '24 profitability. We don't give a guidance level in detail, but you can rest assured that we will improve our profitability in China in '24. And we still believe given the business model that we have, not knowing what the size of the business will be, but we are very, very confident that in '25, '26. We will not go back to the mid-30% operating profit that we had, but we are very confident we are getting 25%, 26%, 28% profitability over time. Not sure what the size of the business is but we know the path to a higher profitability and it starts in '24.

Just one quick follow-up, if I may, Bjorn. When will you have enough of the good products for the U.S.? Like how should we think about the product flows for the best-selling lines?

Yes. Again, you asked questions that if I knew all the answers, I would be very rich, right? I think that the retailers in the U.S. has been very conservative ordering the right stuff because of all the inventory they had. So this is kind of the difference between the U.S. and other areas where the sales group was so strong that they didn't have any choice than to order. So what we have been doing is that we've been ordering in our own risk and making it available for the U.S. trade and that's starting to happen right now. We have gotten a lot of orders from the U.S. retailers in the last 3, 4 weeks because they start to see it and that inventory is flowing in during Q2, right? So enough, I don't know what the enough is, but you should start to see on the shelfs, the success stories more during Q2 than you see now. So it will improve but enough is -- I don't know what enough will be, right? But the pipeline of product that is needed in the American market will improve from month-to-month that I'm 100% sure about. Did we lose you?

The next question comes from the line of Aneesha Sherman with Bernstein.

I have 2 questions, please. The first one is on running. So Bjorn, you mentioned running with flat growth for 2023. Obviously, the category was growing. Would you say it's fair that adidas continues to lose share in running? And can you give us an update on how your plans to get back into distribution, especially in running specialty and whether you expect to see that drive some share gains this year? Or will it be more 2025. And then a follow-up on your commentary on medium-term targets. You talked about gross margin being in the low 50s. If you look back, gross margin hasn't been in the low 50s until you had the growth of YEEZY in the last few years before COVID. What gives you confidence of reaching those gross margin levels? Is it about underlying margin mix and introducing higher-margin products? Or is it about running the business more efficiently or a different driver.

Well, I think on the gross margin, it's my experience and what the mix of product can be and what it should cost and what the price points are, why worked in this industry for a long time, and I clearly see that, that's possible. The biggest mistake in gross margin is not the ingoing margin but the inventory you have to discount. And I don't know what the leaders has done before, but I have a very, very clear feeling that with the tools we have and the people we have that 50-50 too is possible. And I think Harm and everybody working in the company now agrees. And I think we will start to see improvements in a very difficult circumstance is very, very soon. When it gets to running, I think we need to look upon that. I think the running team has done a fantastic job in the higher end. So if you look at the adi zero range, there was a growth of almost 50% already in '23. And that is shoes is with carbon plates that people buy to run fast. We all know that's the most difficult segment to actually make products in, but we also know it's a segment that is not the biggest. I think a mistake, if I may say so that adi did is that we stopped delivering specialty and thought that we can sell it D2C and through digital. And I think that is a mistake. So what we're doing currently and have done over the last month is to invest in sales forces again so that we could people on the road to service the running communities in America, but also in Europe to be connected not only to the runners but also the stores because we all know that the store manager and the store staff has an enormous potential to sell your product if they have the right incentives. So this is investing in heads and legs and people. And then the Supernova, which is, I would call, the collection for everyday runner and more from a comfort area and not necessarily to run the fastest is just being launched as we speak. So it's another leg. And if you put all these pieces together, we should start to take share again at the back end of this year. And again, from a product point of view, I don't think we have anything to hide. But of course, if you don't have a sales force to sell it, it's difficult then to increase the share. So the business unit people have in my opinion, had a very difficult situation, and I almost feel sorry for them. And then you know that the people that have taken share, the haka and [indiscernible] are coming at it from a comfort level. So they have been selling shoes to people like me, and I'm looking around here, they all look like runners. I'm probably the only one, a little bit overweight older per person that runs to stay fit or lose weight and you want to feel comfortable, and that's an area that we haven't invested in neither in marketing nor in distribution, the way we should, and that's changing as we speak, and I think that we have all the answers in the collections. The reaction from the trade, what the business unit and the go-to-market people are presented has been good. So I think in the second half, we should start to take share in running and that should then continue again also in 2025. I'm very, very certain that we, in running are on a very good avenue with the offer that we have.

The next question comes from the line of Jon Komp, Baird.

I want to ask a follow-up question on product. Could you maybe give a bit of an update when you look at the global product mix today roughly how much is lifestyle? How much of the business mix is spread across the key performance categories in roughly kind of rough numbers, how do you expect changes going forward over the next few years to that mix?

You know this is a question that I will never answer because the consumer decides if he uses the product for performance or for fashion. And I make always the assumption that 80% of running shoes are never running and some people don't like that. And I would say that 80% of all the basketball shoes, if you take Superstar and Air Force 1 I also not play basketball and so it's a very difficult question. What I can tell you that the original line, which is clearly lifestyle is about 1/3 of our business and the other 2/3 are then either performance or sportswear. So I don't think I should answer you different than that because I really don't think anybody who's doing research can show you different. What we do see is that the performance categories are having a growth, so people are doing more activities again, especially outdoor and that's good for us. But I think I'll leave it by that because everything else would just be number that I threw out, and it would be right. I can give you the soccer number because no one is using cleated soccer shoes to walk in the street, but that's also the only category that is clearly defined as only being for soccer. So the rest goes both ways.

Okay. Understood. One other question for Harm, as you think about gross margin in 2024. Are you willing to put any further guardrails around the level that you're expecting for the year as we think about after 2024, could you share some insights around the recapture that you still see, whether it's the North America business improving and driving better margin performance? Or fully recapturing some of the full price selling globally. Just any more color on the gross margin drivers this year and going forward.

Yes. I think everything has been said on the gross margin. I mean I went out very early last year. I think after Q3, that 48.5% is probably a good directional guidance. Nothing has really fundamentally changed because I knew how we are have been hedged in the different currencies. And as Bjorn indicated earlier, there's a 200 basis point FX headwind. We all know that we are improving in North America, but slowly but steadily. And then, of course, if we sell some more YEEZY at a profitable level and don't need to sell the losses at the end of the year. Maybe there's some upside to the margin as I've indicated in '23 as well, there was benefit from selling some YEEZYs. So again, take a 48.5% as a good guidance. And if we give a guidance, I want to make sure that this is the bottom of it. So that's how we would look at the gross margin. But again, take into account that this is already 200 basis points improvement covering the FX plus improving over 23%. So we're definitely going in the right direction and reiterating what Bjorn said, 50% is inside in the midterm and we definitely want to go above 50% as quickly as possible and then targeting the 52% in the midterm, and we are on a good pace to that.

Alice, we have time for 2 more questions, please.

The next question comes from the line of Cedric Lecasble, Stifel.

I have 2 follow-ups. The first one on the lifestyle and the heat in Footwear. A question on the timing for the success to this halo to spill over apparel? And how long can it take according to the regions to benefit from more shelf space also on the apparel side benefiting on the successes and the trendy shoes you are setting, that's the first question. And the second one is a follow-up on China and on the strategy, a few quarters ago, you said Bjorn that you needed to fight against locals on their ground and to go where the core volume is that you were good at the upper end, but needed to make some progress in the core market. Can you maybe update us on what you have done and where you stand?

I think your question on apparel is a good one. It's obvious that apparel 3-stripes should have a revival now when 3-stripes, especially on the female side, it's going so up but there is a delay between the footwear and apparel demand that we clearly see. And that is twofold. One is that the success in the sellout of footwear has happened over the last I would say, 4, 5 months and have been accelerated. So it's taken a while for the retailer to kind of transfer that picture into apparel. And the second thing is they've all been very over-inventoried in apparel, right? So apparel in general, has been more difficult. But you are absolutely correct that the halo effect over into apparel should be there. And I think it's partly that we have not been confident enough in the market to push it ourselves. And secondly, it's been that the trade because they've had so much apparel and apparel in discount, and they've been hesitating. But it's changing as we speak. When it gets to China, I think you're referring to that I said that adi has gone from, I don't know, 12,500 points of sales to 8,500 points of sales and consolidated into stores that are doing well and bigger spaces in the bigger cities and that we were looking for alternatives to reach the consumer also in the smaller stores that we used to in the past to have the so-called neo stores and what we have done there is that we find a new partner that is opening stores next to the [indiscernible] and the 361 and are competing at them with the lower end of the range. And I think we opened about 30 of them so far and that seems to be a good answer. So we will continue to roll that out and can report more of that in the coming quarters. But it's obvious that, that's the way of attacking it because the local competitors have, of course, had almost a monopoly when it gets to these kind of cities. And we feel that we have both the offers and the resources to do it. So I think that's the answer to your question.

The last question for today comes from the line of Geoff Lowery, Redburn.

Just one, could you talk a little bit more about Europe we see some pretty mixed signs about health of consumer health of inventories coming off a difficult autumn period. What would be your best judgment on market health in Europe?

Well, on the lifestyle side, it's clearly that the retailers are sterling had too little adidas. That's very clear. I think that they're coming from a very low brand share of the past and that they -- because they have lost business with some of the other brands in sell through, they needed something that we're selling well, and that was our product. I know that seems arrogant, but it's the truth. So we've had a fantastic increase on the lifestyle side when it gets to sell-through and share of their business. But I think in certain instances, that wasn't enough for them to go then into like-for-like positive numbers. We are not over-inventoried in the European market at all. And there has not been any bad news towards us in the last, I would say, 4 or 5 months. So I think we all feel very strong because we said we need to win in the home market. And I think we start to see that very clearly on the lifestyle side. If I then add that, I think the Predator launch in football was the best launch ever in the market and that we start to see some positive uptick on the running side, then of course, there is a very good mood in the European organization, to be honest, which should be for a European company.

Thank you very much, Geoff. Thank you very much, Alice, and thanks very much to Bjorn and Harm, and of course, also thanks very much to all of you. Ladies and gentlemen, this concludes our full year 2023 results conference call. If you have any open question, as always, be today or over the next couple of weeks, please feel free to reach out to Philip, myself or any other member of the IR team. We're actually going to be traveling quite a bit and look forward to visiting you. But if you want to visit us, I want to repeat our invitation to do so. We've talked a lot about the product over the last 90 minutes, and there's a lot of product here that we're currently showing as part of our pre-lines to our retail partners. And if you wish to see that here, our doors are wide open, let us know, and we're happy to guide you around. And with that, I want to thank you again for your participation. Have a good remainder of the day. All the best. Bye-bye. Take care.

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