Good day. Welcome to the adidas conference call for the Q2 2017 financial results. Today's conference is being recorded. At this time, I'd like to turn the conference over to Sebastian Steffen. Please go ahead, Sebastian.
Thanks very much, Julia. Good afternoon, ladies and gentlemen, and also from my side, a warm welcome to our second quarter 2017 results conference call. Our presenters today are Kasper Rørsted, adidas CEO, and our CFO, Harm Ohlmeyer. Before I will hand over to Kasper and Harm, allow me quickly a couple of housekeeping items. Firstly, we have, once again, quite a few participants in the call today. That's why I would ask you to limit your questions to two, so that as many of you as possible can ask a question today. Thanks very much for that in advance. Secondly, as always, all figures are currency neutral and will be discussed for the group's continuing activities. With that, I would like to hand it over to Kasper.
Thank you very much, Sebastian. Again, welcome to everybody. We pre-announced our numbers last week, so I assume that you have had between last week and the details today ample time to go through them. We look forward to take you through the details, which I'm certain will give you some more color on the numbers that we released last week. We continue to execute upon our strategy, Creating the New and are making also progress against the targets we have set ourselves. TaylorMade and CCM, the hockey business, has been sold, and we expect the divestitures to close in the second half of 2017, and that would mean for everything moving forward, we will be reporting numbers only in the context of continued operation, an important step in our activity or focus around our portfolio.
We have kicked off our ONE adidas initiative that was introduced to all of you in the first quarter of 2017. As I'm certain that you will recognize, many of those initiatives are very long-term character and will take time before they will have an impact on the P&L, and some of them will have a negative impact in the short term and positive impact in the long term. Thirdly, we have now made the final two changes to the Executive Board following the appointment of Harm to become CFO and replace Robin. Karen Parkin, who's been long in the company, has now joined the Board as Head of HR. Gil Steyaert, who's also been here for a very long time, has now taken over from Glenn Bennett, who's been with the company for ages in a positive sense of the word.
Glenn is retiring today after many, many years with the company, has done a great job, but we're happy that we've been able to make three board appointments, all from internal people. I think it also speaks to the quality of the team and the talent development that's been done in the past. In the second quarter, we saw a number of strengths and weaknesses. We continue to see very strong ongoing brand momentum with double-digit growth in all key regions, China 28%, North America 26%, and Western Europe 19%. The decision to really aggressively push e-commerce have proven to be right based on the work that Harm has done in the last five to six years, and we're seeing accelerating momentum with an e-com growth of 66%. We are seeing also a healthy inventory position. Some of you initially expressed a concern.
We are by far not concerned about that because you have to see it in the greater context. It depends on what the 9% is against. We believe it is reflecting a strong sell-through, and of course, it is also in the knowledge of what we have in our inventory, we have guided for the second half. We believe that we have a very strong inventory position. We're seeing strong profitability improvements start despite the headwinds in 2016 one-offs, which Harm will take you through. However, there was also things that didn't work the way we wanted. We continue to see a sales decline in Russia in currency neutral. This you don't see in the conversion into EUR, and this will not change.
We expect the Russian market to continue to contract after four years of sanctions and very low oil price, and we're also aggressively taking actions against it with closure of stores, which we already indicated to you. We've closed more than 100 stores so far, and we'll close another 50 before the year ends. However, Russia is roughly 3% of our revenue, also stated as if you want, it's immaterial to the results of our company. We are seeing challenges in Latin America to persist, particularly in Brazil, Argentina, but also in other countries. The revenue number you're seeing is driven by a very, very strong Mexico, but the political climate is, of course, impacting the overall economic climate in Brazil, and that has an impact on our business.
We're seeing the top-line growth in apparel is lacking behind that of footwear, and of course, it's an area of focus for us. It doesn't mean that we have to be equal, but over time needs to have a stronger growth in our apparel business. We are seeing limited operating overhead leverage despite the top-line growth. However, I want to be very clear on this. We did guide with improvement in our leverage factor moving forward, not only for 2017 but also for 2020. That is continuing to be the case. We're not concerned, but we're just flagging where we are. On the major P&L developments, revenue increased 19% currency neutral and 20% in EUR terms to EUR 5 billion in our continuing business. We saw the gross margin up by 70 basis points, up to 50.1%, due to more favorable pricing, channel, and product mix.
The underlying operating margin up 140 basis points to 10.0%. This is supported by a different timing of marketing spend in 2017 across all regions. Let me just pause here because this is a repeat of what I said in the first quarter. I do want to repeat because we also, in a non-event year, we have a different marketing spend. The marketing spend will happen as we've indicated, and that is also included in the guidance moving forward. We have no desire to save marketing, which you can see in some of the investments that has also recently been announced vis-a-vis the investment in the MLS in North America. You will see aggressive marketing spend taking place in the second half. Net income from continued operations increased to 16% to EUR 347 million in basic EPS from continued operations at 14%.
On the adidas brand, we saw a growth of 21%, very strong North America 33%, and Greater China 18% and 28%, and Western Europe 18%. Our three major regions between 18% and 33% from the adidas brand. We also saw the women's business outperforming with growth of more than 30%. If you look upon the women's business, which continues to outperform the overall growth for the company, shows that we are making progress. We saw, particularly in North America, a growth of 77% and Western Europe of 27%. A very strong growth in our women's business, which is key for us as this is one of our strategic areas of focus. Our sport performance grew 7% versus 4% in the first quarter. Running revenue is up 27%, driven by the success of our Boost franchises. I want to stress the following.
We are still in a constrained operating environment for the Boost, despite the fact that we grow our UltraBOOST business with approximately 100% in the second quarter. We are in a constrained environment and will continue to be in one until 2019. Training sales grew 9%, reflecting exceptional growth initiatives in athletics. Football and basketball are still in decline, but let me just stay with football for a second because this is an important part. Our footwear business is now footwear and football is growing 13%, and our major club franchises are all growing. What is not growing is our apparel business, which is impacted by the Euro/Copa and the Chelsea termination of the contract. The basketball business is in decline, is solely driven by the end of the NBA partnership. Our footwear business in basketball is up almost 50%.
Also strong underlying performance in many of our sports areas. Originals and Neo continue to enjoy very strong brand heat. Originals up 36%, driven by strong double-digit growth in all key regions, and the modern franchises increase of more than 60%. Here I would like to pause again. Many of you had a lot of questions, not only following the first quarter, but also on road shows that Harm and I had with you, where we continue to reiterate that despite a declining growth rate in Superstar and in Stan Smith, we're able to offset those by growth in our new franchises. I hope you can see that what we said also came true. We continue to see a declining growth rate in Superstar and in Stan Smith.
At the same time, we're seeing our newer franchises like NMD, Tubular, and EQT being more than able to offset the declining growth in those franchises. Adidas is more than a white tennis shoe. Neo business grew 45%, reflecting more than 50% improvement in footwear. Coming to Reebok. We see the growth of Reebok continuing with 5% and sales increase driven by a strong double-digit growth in Classic. We saw significant growth increase in many of our regions, but also a significant decline in North America. Let me again, here a decline, we proactively went and addressed before needed sales with low or no margin businesses in North America to ensure that we're getting to the core of our business in North America. We're doing this at this stage because we believe we can afford to do so. That is impacting our growth rates in North America.
We have closed 35 stores in North America, and we still have approximately one-third to go. We about have to go. Excuse me. We believe that we are making progress in our Reebok business. We grew 13% in the first quarter due to early announcement of products and also to sales in our Chinese business. We're saying to you, we feel comfortable with a 5% growth. We proactively drove negative growth into our business and cleaned up businesses in the second quarter because we believe doing it quicker is better than doing it slowly. Before I hand over to Harm, we're particularly, I wouldn't say proud, because that is the wrong word, but we are satisfied with the progress that we're making in our e-com business with the acceleration that we're seeing.
North America all is growing 80% in China, more than 100% in our e-com. It's clear that the consumer is moving online, and the importance of online will be immensely important moving forward. We also over-allocate resources in terms of money, bodies, but also product allocation to our online business. While it was a good number, we still believe there's tremendous opportunity ahead of us to ensure that we build the right digital franchise for our consumers to address. First six months, we've grown more than 60% on our online business from a basis of EUR 1 billion and making the first while minor steps towards our target of EUR 4 billion in 2020. Excuse me. Now I'd like to hand over to Harm Ohlmeyer, who'll give you the details of our financials. Harm, please.
Thank you, Kasper, and warm welcome from my side as well. Ladies and gentlemen, it's now a pleasure to present the more detailed and financial highlights of the second quarter. I want to start with the regional view. As you can see on the map, there's a broad-based top-line momentum. Kasper already mentioned about the momentum in our key markets, whether it's North America, Western Europe, and Greater China. Just focusing on North America. Clearly, the details, primarily driven by the adidas brand and, as Kasper already mentioned, planned decline on the Reebok side. Western Europe, we are definitely proud of that. On a double-digit growth, accelerating momentum from Q1. The only region that is declining is Russia. As you already mentioned, we are managing that with up to 160 store closures for the full year.
There's still some to come, which will result in, by the end of the year, to a number that is below 800 for the full year or at the end of 2017. We move to Western Europe. Again, currency-neutral sales increased by 19% in the second quarter. A double-digit growth in most of the countries. The adidas brand up by 18% on top of a 30% increase last year in the second quarter. The Reebok brand specifically increasing 33%, which is one of the highest growth areas that we have for the Reebok brand, and the growth is going across all the key categories there. We're also proud of the gross margin growth of 80 basis points, and this is coming on top of a FX headwind of almost 300 basis points.
That is definitely a testament of the sell-through that we are enjoying in Western Europe specifically. Due to that effect, the operating margin, despite the FX effect, is up by 280 basis points, also through the leverage of operating expenses. In North America, currency-neutral sales for the region are up 26%. There specifically, the adidas brand growth was 33%, and also that 33% comes on top of a 32% in the second quarter 2016. That, of course, is, as you all are aware, in a very challenging retail environment in the U.S. Strong double-digit growth in key categories like running, training, but clearly, as you have seen overall in adidas Originals and adidas Neo as well. Let me highlight that we want to continue to invest into that market. We announced yesterday the new partnership for MLS, which is going beyond the league.
This goes deep into the next generation and beyond the league, so out in the grassroots. We definitely go deep into that one. We continue to invest not just in our global headquarter, Herzogenaurach, when it comes to new offices, buildings, facilities, but definitely we're expanding in Portland, in our headquarter for the adidas brand and for the company overall, significantly. That's where part of the CapEx guidance is being invested into. On the Reebok side, we mentioned it. It's primarily based on store closures. We are rightsizing the retail fleet that we have for the Reebok brand. As Kasper mentioned, the focus is on more on profitability than on growth, and we want to have quality growth, and that is a planned decline in the U.S. There's no surprise on the Reebok side.
When it comes to Greater China, currency-neutral sales increased 28% in the second quarter, and it's the same number also for the adidas brand, 28% up, and it's growth in all the key categories. The Reebok brand enjoys also a growth of 20% that is primarily in the running and the training category. The gross margin had some pricing mix effects in the second quarter. It's down by 70 basis points. Due to that effect, also the operating margin declines by 140 basis points. There's no leverage in the operating expense, but we are investing significant in our brand-led retail operating model in China. We mentioned many quarters already that the profitability that we are enjoying in China with still the 35.8% is a very healthy profitability and is not necessarily sustainable profitability for the long term.
That's why we're also not surprised about a temporary decline of 140 basis points. That is something we are definitely expecting. When it comes to Latin America, we're still enjoying overall as a region a healthy growth of 14%. As Kasper mentioned also, it is primarily driven by Mexico, which is overproportional growth, and there are definitely challenges in that market when it comes to Brazil specifically, amongst others as well. One challenge, of course, is on the gross margin, where we have significant FX headwind even more than in Europe, and that's why the gross margins are slightly down by 190 basis points. Through the operating leverage, we are definitely keeping the operating margin stable. Moving to the gross margin overall, which is definitely of interest for many of you.
When we look at the Q2 development of an overall margin of 50.1%, we are clearly seeing roughly 170 basis points of FX headwind. That is a combination of previously hedged rates, but spot rates as well, as we're not going to hedge every currency. It's a mix of both effects. You see on the 240 basis points improvement, it's a minority of that is category, channel, or product mix, and the majority of that improvement is underlying pricing improvements, whether it's higher sell-through. It's definitely less clearance as well. These are elements that we are definitely seeing in Q2, and that led to an overall improvement of 70 basis points in the second quarter. Now it's a pleasure for me to explain the Q2 P&L, which is somewhat more complicated with the divestitures.
On the green box, you're seeing what we had reported in Q2 2016, including TaylorMade and CCM. A top line of EUR 4.422 billion and the net income of EUR 291 million. In the blue box, you see now the continuing operations reflecting our continuing business, excluding TaylorMade and excluding CCM. When I talk about TaylorMade, we are also talking about Ashworth and Adams Golf, and then of course, the CCM hockey company and the adidas NHL business is still being retained in our business. The underlying comparison is EUR 4.199 billion in Q2 2016, and a net income of EUR 301 million. That's where you see on the top line, the healthy 20% growth nominal with 70 basis points improvements.
On the other operating income, you see the one-time effect from the termination of the Chelsea contract in Q2 last year, and also the divesture of Mitchell & Ness. That's where you see the decline from another income of EUR 159 million to EUR 24 million in Q2 2017, which is driving the underlying operating profit being up 18% from EUR 429 to EUR 545. The operating expenses in between are growing 13%, which is a mixture of operating overhead and marketing working budget. As Kasper said, we have a different timing, we're definitely catching up in the second half when it comes to our marketing investments in that line, resulting in a net income of EUR 347 million or 16% improvement on net income in the second quarter. When it comes to the operating profit, the starting point is again on continuing operations, EUR 429 million.
As you saw on the previous page, if you deduct the Chelsea one-time effect in Q2 2016 of EUR 70 million and the Mitchell & Ness proceeds that we reinvested in 2016 as well, you get to an adjusted operating margin of EUR 360 million in Q2 2016 or an 8.6% operating margin. That's where we are seeing comparing it like for like excluding Chelsea, it's actually not a 20 basis points decline in operating margin. It's actually 140 basis points improvement of an underlying margin in the second quarter. Let me explain briefly the discontinued operations. As I mentioned earlier, as we want to focus on the continuing operations, this is the divesture of TaylorMade and the respective brands and the CCM hockey brand and partly a little number on the Rockport side as well.
This is a one-time hit in the second quarter of EUR 189 million in discontinued operations. It's a non-cash item. That results on the next page to a net income of not EUR 291 million comparable, but to EUR 158 million comparable deducting the discontinued operations. Again, when you see it end to end, 20% growth, a net income of EUR 347 million, 16% up as a continuing operations. You deduct the EUR 189 million one-time non-cash effect in the second quarter. You're reporting a net income attributable to shareholders of EUR 158 million or down 46%. When it comes to inventories, we're in a very healthy situation and the 11% that you see at the end of June is a comparable number like for like. It's adjusted for TaylorMade and CCM and it's currency neutral. It's an 11% growth over Q2 2016.
Let me be very clear on that 11%, given our guidance for the second half. We are definitely very happy with the inventory position that we have. There has been a lot of effort put in over the last six months, a lot of discipline to get to the position where we are today. Please also compare that to the 24% increase that we had last year in Q2. Definitely in Q2 last year, the position was not as healthy as we have it today. You need to look at that as a mixture, but rest assured, as we got some calls from you already today, that this is a very healthy position and we'll be very confident that this is filling the demand that we have in the second half as well.
When it comes to the operating working capital, the combination of inventory payables, I want to highlight the receivables here as well. We have now an operating working capital over net sales of 20.4%. That is 100 basis points down from the previous quarter and the 22% up in receivables is pretty much in line with our net sales growth as well, but also there's a one-time effect from Chelsea in that number as we had the P&L effect last year in Q2, but now we just have the receivables effect as we are settling the contract in June 2017. Also there, an adjusted number would be more in line with your net sales number. All right, with that, I want to hand over to Kasper again to explain shortly what our outlook is for the remainder of the year.
Thank you very much, Harm. I know you've seen this slide many times. Creating the New, we'll continue to show that slide to you for the next three and a half years because that is what the company is about and that is what we're trying to do. Drive brand desire, top line and market share growth, expand the gross margin and drive operating leverage. That is the business model of our company and that is what we're pushing very hard. We see strong growth momentum to continue in the second half and we will drive a lot of investment into our brand to make certain that we sustain the brand heat, but also make certain that we have enough support to support the sell-through of our new products and product launches in the second half.
We believe we'll start being able to capitalize on the 2018 FIFA World Cup by the end of the year, thereby continue the growth that we're seeing in the first half and leverage our top-line growth to drive operating overhead efficiency. That means that we change the guidance for the year 2017, and we are now guiding of an increase between 17% and 19%, very similar to the growth rates we've seen in the first half, and a net income growth of 26%-28%. Doubling the net income growth to EUR 1,360-EUR 1,390, coming from EUR 1,200-EUR 1,225. A healthy growth on the top line, but also on the bottom line.
This gives us a different outlook for the full year, I've mentioned some of the points, you are seeing we're taking the guidance of our gross margin up, the operating profit up, as I just spoke about before. Also taking our operating margin up to a guidance up to 9.2%, starting from 7.7% last year. 7.7% of course, contained CCM and TaylorMade, but we did pay the price and the criticism for you for having a lower margin. We dealt with the portfolio, that's why we are getting to the 9.2%, and it's moving the company in the right direction towards the 11%+ that we're aiming for by 2020. We've updated the guidance for the full year based on our strong second quarter, of course, also the outlook for the remainder of the year and the backlog that we have.
The key takeaways from the second quarter are ongoing momentum in key growth areas. We are growing where we need to grow. We are seeing profitability gains despite headwinds and difficult comps. Difficult comps in the context of the one-offs, which are significant. I think that one of the key takeaways, as Harm very clearly articulated, is a 40% growth in the underlying income if you start doing the adjustment for the Chelsea one-off. The full-year outlook increased. We're seeing further progress on our portfolio initiatives. We spoke about TaylorMade and CCM, that we have divested. We are seeing signs of progress along the expectation we have to Reebok. When we come to our full-year results in March next year, we'll give you a detailed overview where we are with Reebok, but we are making the progress along the areas that we are striving to make.
However, this is a long-term project. This is not a short-term project. We are getting a very high level of focus on getting the job done on execution, and at the same time ensuring that we're making the right investments for the long term, particularly around ONE adidas, that will ensure that we will be able to also present following 2020 an attractive longer-term outlook. As I said, some of these investments will have a negative impact in the shorter term, and when we give also the guidance and the details for 2017 and beyond in March next year, we'll give you insights of what we're doing with ONE adidas. With this, I'd like to close the call from our side when it comes to presentation. We now look forward to taking your questions.
Okay, Julia, we're now happy to take the questions from the call's participants.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question today, please press star one on your telephone keypad. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Again, to ask a question today, please press star one on your telephone keypad. We'll pause for just a moment to allow everyone to signal for a question. Thank you. We will now take our first question from Erinn Murphy from Piper Jaffray. Please go ahead. Your line is open.
Great. Thanks. Good afternoon. A couple of questions. Just first on the updated guidance, Kasper. What has been the biggest driver in the last three months that has really given you the confidence to raise the fiscal 2017 guidance by almost EUR 1 billion? Then connected with that, could you just help us understand what are the key growth assumptions across North America, Europe, and Western China in that for the back half of the year?
As you're seeing, we continue to see very strong demand for our products both in Europe, the U.S., and in China. Let me start with the profitability. We saw a high level of full price sell-through, which is of course due to the brand heat that we have. We are selling the right products through the right channels, and we've taken also the appropriate pricing initiatives on our key products. These are some of the key drivers. We're getting slight operating leverage, but I'm saying slight operating leverage. That's why we said that we had it on the right-hand side. Based on the backlogs that we have and the, I would say, unchanged brand heat, we have no reason really to believe that a slowdown will occur in our key franchises across the board.
We're also getting, by the end of the year, closer to some of the key events taking place in 2018 that will start driving business in 2017. At this stage, we feel, I would say, confident with the outlook that we've given and have no reason to believe that that should not be taking place in the second part of the year. Confident with that, but also really confident because we are growing in the right categories and with the right products.
Just to that end, just on the three key regions, should we continue to expect a very similar growth rate that we saw in the first half and the second half of both North America, Europe, and Western China? Or excuse me, China. Western Europe and China.
We really don't want to go to that detail. We expected to see double-digit growth across all the regions at this stage. As you can see, we are guiding at 17% to 19%, double digit is not at the low end of it, because if not, then we wouldn't get to that. We expect high growth rates out of China and the U.S. particularly, and also moving forward.
Okay. Just my second question is on the women's business, clearly an area of outperformance. Could you just help us understand that outperformance by product category splitting between footwear and apparel? Could you just talk more about your marketing approach in this category that gives you confidence to continue to drive outsized growth? Thank you.
We don't split our women's business in footwear, apparel, so apologies for that. I think that the most important part is that we are now starting to get a more competitive product set and also better display in our stores of our products for our female consumers. The way we communicate to the female consumers are becoming better. We're very clearly realizing not now but a while ago, that the most effective way to females are not through the major sports franchises. It's probably through very different channels and different individuals, and that we've changed in our marketing approach to ensure that we get the right interaction with our female consumer, through bloggers, through fashion, and through other influencers, and less through sports idols like you would do to the typical male consumer.
Got it and wish you continued success.
Thank you.
Thank you. We'll now take our next question from Omar Saad for Evercore. Please go ahead. Your line is open.
Thank you for taking my question. Fantastic quarter. I wanted to ask you about the DTC acceleration. I think it was up 66% in the quarter. That's a really big number. I think it was more in the mid-20s in the first quarter. What's driving that? Is there an inflection in certain product categories? Is the DTC overall growth acceleration more on the digital side, or the stores, or evenly balanced between the two? Thanks. That's my first question.
Yeah, Omar, this is Harm speaking. First and foremost, when we talk about DTC, it's actually our physical stores and e-commerce, the 66% growth in the second quarter was just the digital piece, so it's just e-commerce. On the overall combined, we are talking about a 21% increase in the second quarter. 66% is just the e-commerce piece. Talking about the e-commerce piece, it's an acceleration over Q1, it's also a reflection or consequence of all of the clear prioritizations that we set out in 2016, that we want to allocate more products to that channel. We want to focus it from a content point of view. We want to focus it from a launch point of view.
What you see from a category point of view is pretty similar to what you have across the other markets as well when it comes to Originals, when it comes to running, and to key franchises overall. There's no difference to what you see across the markets.
Thank you. If I could just ask a question on social media. It seems like you guys are doing a really good job effectively using some of these new marketing strategies, brand-building techniques, social media, partnering with some of the digital app platforms. Maybe you could dive in a little bit deeper, why that's working so well for the adidas brand globally, I'd say. Thank you.
Yeah, definitely. You can't grow the e-commerce business if you don't have a better understanding where the consumer is living nowadays, and that is in social media. It's still important to have the major partners that is reflecting our brand on field. As we also mentioned with the digital initiative, we are investing over-proportion in the digital side of the brands, everything across social media. There's nothing specific that I want to highlight, but having an understanding how the consumer is consuming brands today is fundamental to the growth, not just in digital, but for the brand overall. I have to refer to my colleagues on the brand side. I can only echo what you said. They're doing a fantastic job.
We don't want to go through the details of what we're really doing there other than connecting with the influencers and the bloggers in these new, not really new media, but for some people, new media. This is where the generation is already on for many, many years.
Thank you.
Thank you. We'll now take our next question from Geoff Lowery from Redburn. Please go ahead. Your line is open.
Yeah. Hi, team. Could you talk about your attitude towards e-commerce platforms, and in particular, what your approach is to Amazon, both in North America and the rest of the world?
Clearly, we need to be where the consumer is, and that is a starting point for our entire thinking. We got to be consumer obsessed when it comes to products and engagement with the consumer. That is point 1. Point 2 is we also believe that it's essential that we have a direct relationship with many of our consumers, thus the push to engage directly through our dot-com platform. We'll continue to push that. Thirdly, we don't believe it's a one or the other. We believe that you have to be, as I said, where the consumer is, and that is in physical stores. It's in partnerships with companies like Zalando. In the U.S., we have a partnership with Amazon. We continue to evaluate partnership opportunities with different partners across the globe, in China, in the U.S., and in Europe.
Many of those partnerships, of course, will be online partnerships, whereas in the past, they were brick-and-mortar partnerships, and that's a natural evolution of the market. We're very happy with the relationship we have with Amazon. We've had a two-year relationship in the U.S. and U.S. only. Right now, we're not contemplating changing the setup of that relationship to expand to other parts of the world.
As I said, we stress very clearly, we want to make certain that the consumer can buy the products where he or she wants to buy our products. We believe that we need to have a personal and direct relationship with our consumers in order to service them the best.
Great, thank you. Can I ask a second one? What do you expect your U.S. dollar-euro hedge rate to be for this year and for next year? As we stand today, what would you expect the FX impact on the gross margin to be in the second half of this year?
Geoff, I'm not going to give you the details of what our hedge position is, you can assume, as we always said, that the second half in 2017 is slightly better than the first half. We are clearly saying that's how we get to the up to 50% gross margin for the full year, so it's slightly better, it's not a revolution. Also for 2018, based on our hedging or treasury policy, we are hedging out up to 18 months, we are pretty significantly hedged into 2018 already. What we are seeing right now, we might get some of the benefits but not the full benefits of it in 2018. Again, 2019 is a different story, where we haven't even started looking into this one. We're just starting to look into that, which might be an opportunity then.
For 2018 and the second half in 2017, definitely no further headwinds, some easing, it's not significant.
That's great. Thank you.
Thank you. We'll now take our next question from Jürgen Kolb from Kepler Cheuvreux. Please go ahead. Your line is open.
Thanks very much. One question. Coming back on the whole topic on e-commerce. Kasper, in one recent interview, you mentioned that you're not just looking to hire the best designers, but also the best IT people. I was wondering if that also leads to kind of IT labs, the same setup that you have with some of the design teams in different places, so that you can maybe get even more attractive as an employer in destinations that right now might be a little bit more of the hotspots, being it Berlin, being it some of the other markets. Or is that all concentrated in the headquarter in Herzogenaurach? Thank you.
Of course, in our business model moving forward, digital plays a very very key role, and that's why we need to make sure that we attract the right people. Maybe just as an example, in the U.S. in the first six months, we had 330,000 applications alone in the U.S. Last year, we had more than 1 million for the company. Clearly, the brand is helping us to do so. We need to continue to attract and build more know-how in our organization when it comes to digital, not only e-commerce, it's big data, it's analytics, et cetera. Location does not have to be Herzog. Today, we have a very large setup in the Netherlands. We also have a setup in Spain. Clearly, we're not seeing that the people for the digital space, the hubs or the centers of expertise needs to be in Herzog.
We will make use of our global presence and create the hubs where it's most appropriate to get hold of the right talent. Clearly, we need to have hubs. We have no intention to have 25 different hubs. As I said today, we have a very large setup in the Netherlands, in Amsterdam. We have a strong setup in Zaragoza, in Spain, and we'll continue to ensure that we have hubs where the right level of talent is to ensure that we actually hire that talent into our company. We're a global company. We don't believe that global means that everything has to come out of the headquarter.
Okay, understood. Thank you very much.
Thank you. Our next question comes from Antoine Belge from HSBC. Please go ahead. Your line is open.
Yes. Hi, it's Antoine Belge at HSBC. Two question. First of all, I know that the debate going into the results was about the U.S., but actually it's more Western Europe that I think explained most of the big surprises consensus. You had a basis of comparison last year with the euro and still some Chelsea sales, et cetera. Can you maybe elaborate a little bit about what's driving that extraordinary high performance in Western Europe and if you expect that to continue? My second question, I think you were quoted on, I think on Reuters mentioning extra marketing of EUR 700 million-EUR 800 million, with no sort of particular timeframe. Maybe a bit of an explanation there on how that fits into everything that you shared with us at the Investor Day and the sort of leverage that you expect on marketing spending. Thank you.
Yeah, the latter is very easy. We do EUR 18 billion roughly based on guerrilla mathematics when you take TaylorMade and CCM out, we guide it for around EUR 25 billion to EUR 27 billion. That's EUR 8 billion. 12% on EUR 8 billion is EUR 800 million, and 12% is our spending. That's how the EUR 800 million came out. Simply you're saying we expect, as we said, approximately 12% marketing working budget by 2020. We guide it between EUR 25 billion and EUR 27 billion. That's how we get to the EUR 800 million. There is no change in that. You see, we have significant opportunity to invest moving forward, and you can do the same if you take our guidance this year. That also indicates that we'll be spending up to EUR 300 million more this year compared to last year, which for some of our competitors is about 75% of the total marketing spend.
We will use the size that we have as a competitive advantage. For the European growth, I'll hand over to Harm.
Yeah, in the European growth, given that size of the growth, 19%, it's of course widespread across many categories. It is across Originals, Neo running, but also training is in the double-digit area, so apparel is a significant part of that as well. It's definitely market share gains in some of the larger accounts. Without going into the specifics of that, Antoine, it's definitely broad-based, as I mentioned earlier. It's across most of the countries in the double-digit area with some only few exceptions, and it's across many categories and across most of the accounts.
Thank you. Maybe since you mentioned running, which was, I think, very strong. I think you also mentioned this morning some kind of issues of capacities on Boost. Maybe a word on that.
The Boost capacity constraint is not new, we just continue to mention to be consistent. We are in a very strong position. We grew our UltraBOOST business more than 100% in the second quarter. What we continue to see, demand is outstripping supply. We have a great relationship with BASF that continues to put more supply online. It takes 18 months to build a line. On previous calls, both Harm and I have said that we expect to be in a down situation between supply and demand by 2019. The good part is that we've really been able to establish the Boost franchise as a very viable franchise in our sports business, our performance business. It was not a surprise for us, but of course it does limit some of the growth that we're getting.
I just want to say from a constraint standpoint, we grew our UltraBOOST business by 100% compared to the same quarter last year. Great growth, but there is more to come, and it'll probably continue to make the brand hot and the sports franchise with Boost also a very desirable one.
Thank you very much.
Thank you. We'll now take our next question from Andreas Inderst from Macquarie. Please go ahead.
Yeah. Hello, everyone. I have 2 questions. The first one on the gross margin. Your full price sales improved significantly according to your opening comment. Where are we in terms of full price sales right now? Maybe you can quantify that, and then give us an update on the medium-term target. The second question I have is on the apparel category. Clearly, it is a footwear-led outperformance right now. Still apparel was robust despite the high comps and the tough clothing market. What is your take on the overall opportunity in apparel for the medium term? What are the key product launches in the next 6-12 months? Key initiatives, maybe beyond the FIFA World Cup. Thank you.
We stated apparel to be subcritical because apparel grew less than footwear, and clearly a big part of our focus since 2013 has been really driving differentiation and consumer obsession through innovation on footwear. What has worked very well in our footwear business, and I think you can see that, has been active management of the different franchises. We believe the franchise opportunity also exists within the apparel business, and that gives us the opportunity to drive that further ahead, the higher growth that we're doing today. Clearly, some of the events that are coming up now will help us, but these are quote unquote, of course, one-time events because they only appear every four years. Innovation does also has its place in the apparel business. I think the hoodie has been a great example of that.
We have not been able to do that consistently and good enough and building a really strong pipeline to drive consistent high growth to the same extent as we've done in footwear. I would say fairly, just to try to put it in the right context so it doesn't seem overcritical. We've had and still have a greater focus on footwear because we believe that you drive higher level of differentiation through the footwear part of the business. That's where we see if we can apply some of the same mechanism to the apparels, we can probably get more out of apparel. That's where we see an opportunity.
It's not going to happen next quarter, but it's an opportunity for us because in order to get a balanced or more balanced growth portfolio like we're right now seeing from a regional standpoint, it would be good for the company in the medium term to maybe have a, I'm not saying 50/50, but maybe one third, two third growth balance between apparel and footwear. This is something we're just highlighting because it's apparent when you see the numbers. On the gross margin, I'll hand over to Harm.
Andreas, thanks for the question. On the full price sell-through %, we always said it was below 50% in the past. It's definitely getting above the 50% threshold right now. There's a data challenge on this one. As we are talking to our key accounts and some other wholesale accounts, we don't have a good database. These are estimates. Given where we are from a sell-through point of view and where our inventories are right now, it's a combination of better pricing, less clearance, definitely working through the trade terms as well amongst other things. It's a combination of many things, but definitely the underlying result is we're going into above 50% territory right now, and we are working hard on that one in the future. The data quality will remain a challenge for all of us.
Good. Thank you.
Thank you. We'll now take our next question from Louise Singlehurst from Morgan Stanley. Please go ahead.
It seems we lost Louise or she's muted.
Hi there. Can you hear me?
Yes. Now we hear you.
Great. Thank you. Good afternoon. Thank you for my questions. I'll just ask one if that's okay. Around the U.S. margin progression and thoughts around the speed of the expansion, I guess balancing the investment with the high growth of the business where you're clearly taking big share. I think Kasper, you mentioned earlier this year, more scale, better return. I guess what we're all trying to figure out is the pace of the margin expansion and the thoughts around sponsorship deals, where I guess the U.S. will take a bigger proportion of the overall marketing pot. Thank you.
In the years 2015, 2016, and 2017, we clearly articulated that we would spend an additional EUR 100 million every year in the U.S. You are seeing us doing that not only in terms of sponsorship deals like the MLS or athletes or authenticators of our brand in the U.S., we're also doing it when it comes to infrastructure, physical and non-physical infrastructure. The margin in the U.S. was, I don't have it here, 13.4% I believe, and it was about 35% in China. That shows the delta. I don't think we'll ever get to the 35%. Clearly, we have no indication of a quick fix in the U.S., and I think that is the most important part. We have a long-term view in the U.S. This time, we have to get it right, and as you can see right now, we are getting the momentum.
The momentum has been there now for, I think, three years. Three years is by far not where it needs to be. You're not going to see us push aggressively on the margin side to make short-term gains on the margin. The assumptions that we've not disclosed is a long-term view on getting to the 2020 position, but we'll continue to over-invest also with the diluted margin impact from the U.S. Overall, we believe we can increase the margin vis-à-vis our guidance, but don't expect us to drive it aggressively forward. That is not the case. Of course, it will be much better margin in 2020, but it will most likely continue to be diluted to the group. Maybe one point for just for clarification to my previous answer so it doesn't go into the books as an answer.
When I said one-third apparel and two-thirds footwear, it was an illustration of what it could be. It was not a guidance. When we have a guidance on the growth contribution from apparel, we will come with a guidance. It was not a guidance. It was an illustration.
Thank you. In terms of the MLS deal that I think was announced yesterday, I didn't see any financials around it. Can you talk about the underlying inflation that you're seeing in terms of some of the big sponsorship deals?
Clearly, I will neither confirm or un-confirm the number. I think that's the first point. The second point is that the deal we have signed is a much more attractive deal, I think, both for the MLS and for adidas, because we can get much more out of it. We can get access to youth teams. The league is getting bigger. It's getting better. We are very happy with the construct of the deal. The bigger franchises will continue to increase in price, we're also seeing the bigger franchises being more financially attractive for both sides. While there is an inflation, we probably will continue to see an inflation on that, and the losers are going to be the smaller franchises because there's going to be less money. Clearly, the bigger franchises, whether it's individuals, leagues, or clubs, we'll probably continue to increase in price.
Maybe not at the rate that we've seen in the past, but we are also getting much more out of the deal, particularly the MLS deal. I want to reiterate, we have been very happy with the deal we have signed. It's an important step for us and shows our commitment and our willingness to invest long-term in the U.S. in a major way.
Great. Thank you. We look forward to following the U.S. market share story. Thanks.
I think your next question comes from Chiara Battistini from JPMorgan. Please go ahead.
Hello. Thank you for taking my questions. A couple, please. The first one on the North America opportunity. Could you please give us more color on how to think about increasing the penetration of shelf space, adding more shelf space, actually versus the growth of the like for like in the existing space you have? How much of that is driving the growth now, and how do you see that evolving going forward? Then on the growth margin for the second half, I think your updated guidance implies around 100 basis points improvement in the second half versus the 240 basis points ex-FX for the H1. Besides the ex-FX impact in the second half, should we think about other headwinds for the second half, please? Thank you.
I'll do the first one, Harm will do the second one. In the U.S., as you know, we have a plan to do EUR 5 billion with the adidas brand by 2020. We've been clear about that. We'll continue seeing expansion online and offline. We have seen 400 new doors with DICK'S and Foot Locker so far this year. You're going to see a greater expansion of our products, a wider distribution, which is also needed. We're coming from a position where in certain areas have been under-distributed. This has, in certain areas, been to our advantage because we have not been impacted by the mall closure that some of our competitors have been impacted by. We believe that in some areas, particularly in Foot Locker and DICK'S, we have not had the appropriate distribution.
At the same time, as you heard from some of the previous questions, you should also expect an expanded distribution, particularly in our own store, and see above-market growth in our own store. With some of our online relationships, online with our brick and mortar, but also online with Amazon, whom we have a relationship with in the U.S. On the second part of your question, I'll hand over to Harm.
Yeah, first and foremost, we don't see more headwind in the second half than the first half. We're seeing, to accelerate some of the right sizing for the Reebok brand, as you mentioned earlier, it comes to further closures in the U.S. It definitely comes to further closures in the CIS, and it comes to right sizing in Latin America as well. That's one piece on the market level or brand level. Secondly, we will accelerate the investment as a brand as well. We will over proportional invest in the second half compared to the first half, lacking the events that we had last year and that we will have in 2018 as well. It's a non-event year, there's more into Sport 17 and reason to believe for the brand in the second half that will be significantly more than in the first half.
That's the direction that we're going to go. There will be continuation of investment into our DC infrastructure to fuel our digital growth, our e-commerce growth. These are the investments that we are planning for the second half, that we've already planned in 2016. Sometimes these are dropping in the second half if you can't go fast enough in the first half, definitely no operational headwinds.
On the gross margin, instead, besides FX, we shouldn't expect anything different from what we've seen in H1 on an underlying basis? Excluding FX.
Yeah, pretty much. I mean, the prices that we have in the market are pretty much unchanged in the second half compared to the first half. As you saw, the first half was 49.9%, and we're getting to approaching 50%. It's on a similar level to the first half of what you're seeing in the second half. As I mentioned earlier, the hedging benefits in the second half are easing, but they are not significantly different to the first half.
Understood. Perfect. Thank you.
Thank you. We'll now take our next question from Anna Andreeva from Oppenheimer. Please go ahead. Your line is open.
Good afternoon. Congratulations to the team for really stellar performance. Two questions from us. You mentioned the less favorable pricing in North America on the grosses. Was that largely a result of the Reebok activity on the gross margin line, and what are you seeing in terms of pricing in the marketplace? You mentioned the competitive backdrop, of course, in the region. The adidas brand is certainly still executing extremely well. Secondly, with Kasper on board for the past year now, maybe talk about the opportunity to lower expenses across the organization. Any specific buckets we should be thinking of?
Anna, let me take the opportunity to talk about the expenses first. As we mentioned at the beginning of the call, we are not happy with where we are with the growth of our operating expenses, that's why it's on the right-hand side of our chart, that we always will have the good and the bad things. That's why we do a deep dive into the ONE adidas initiative, whether it's non-trade procurement, whether it's leveraging our infrastructure. We are overall investing and continue to invest, not just in the first but on the second half, into an infrastructure that is more scalable for the future. Very clearly, let me state again, it's one of my key priorities, besides generating cash in the future, being disciplined on working capital, cost discipline.
I'm not saying cost cutting, I'm clearly saying cost discipline to invest where the future growth is fundamental for us going forward. We had made some strategic decisions already. They will get operational in the second half and in 2018, we should see further leverage then as of 2018 in the operating expense line.
On the pricing pressure in the U.S., we're not seeing any change in that. The pricing pressure in the market is quite high, we don't believe that will change. We believe at the same time that we're capable of holding our pricing to a high extent, which will help over time also drive our margin up. We see a very competitive environment in the U.S., we have no reason to believe that competitive environment will be less in the second half of the year or next year.
Thanks, Anna. We can take the next question, please.
We'll now take our next question from Piral Dadhania from RBC Capital Markets. Please go ahead. Your line is open.
Yeah, thanks. two questions, please. Kasper, I think you mentioned that the EBIT margin, the profitability that you've been seeing in China for the last few years is unsustainable on a medium-term view. It's not the first time this has come up. I'm just curious as to why you're quite so conservative on that. At the moment, it looks like the operating expenses as a percentage of sales are well below some of your other markets. I appreciate this is a wholesale sell-in type market, but what makes you so bearish on the long-term profitability in that market? Could you just help us understand that a bit better? Towards what type of EBIT margin should we expect that to go on a segmental basis? That's my first question. The second one is just around, again, the U.S. sell-in versus sell-out environment.
Obviously, your competitors are not doing quite so well as you in North America. You're posting very stellar growth rates. Could you just help us understand how clean the inventory is in that market and how the sell-out is tracking versus the sell-in? What gives you confidence that actually all the product that's being pushed into that market will be sold at full price? Thank you.
On full price guidance, we can't give you guidance on that, but I can tell you the inventory in the U.S. is as clean as the rest of the company. We do not have an inventory issue. That is as short, as clean as that answer. In the U.S., no, in China, we have a margin of approximately 35%. Cost of doing business over time will increase due to inflation overall, salary inflation. I do not believe it is sustainable that, and this goes for any industry, if you have a market where there's a substantial margin difference between a major market in one area and a major market in another area, that will, over time, force a certain equilibrium to take place. I'm not by any means suggesting that China can be the margin leader in our organization.
We're not suggesting it's happening Next quarter, and I know you heard this before, but we as a company believe it's unrealistic in the long term to have a margin gap between the company and its largest market between 10% and 15%. It is not sustainable. In that context, there'll be pricing pressure coming in with a higher competitive market environment. The market is currently dominated by us and somebody else from close to our address in North America, but we're also seeing stronger local competitors coming up. This is included in the guidance also, so we're not coming out and saying, "Now the margin is going down, we're not going to hit our 2020 guidance." That is part of the assumption. Actually, we don't believe it's being bearish.
We believe it's being realistic that you can only, over a given period of time, sustain such a large difference between the margin of the company and the margin of one single very large market. It will simply drive different business practices. It's not being negative. We still see a huge business opportunity in China with very strong growth, but maybe not at a margin of the level that we have right now, but still very attractive for us as a company.
Thank you. That was very clear. Cheers.
Thank you. Our next question comes from John Guy from MainFirst. Please go ahead. Your line is open.
Yes, thank you. Good afternoon, Kasper, Harm, and Sebastian. A couple of questions, please. Maybe just a quick housekeeping one. I think, Harm, you mentioned on the gross margin that I think we had roughly a third in terms of channel and product mix and two-thirds coming from full price sell through and increased prices. Just wondering if that was the right kind of split in terms of how you saw the 240 basis points increase on an underlying basis pre-FX. Then Kasper, you've gone into the industry pricing a little bit and how you feel that you're pretty comfortable sustaining momentum. If we think about certain competitors, you mentioned that that's still quite competitive, and we've seen some pricing, I think some prices lowered across some key categories in footwear, including some more competitive pricing from your largest competitor.
How do you see footwear pricing moving into 2018 on that basis? That's my first question. Thanks.
Clearly, nobody has a interest in reducing prices. You've seen that across different industries, and I also believe that our biggest competitor, which is a very well-run company, also understands that you don't differentiate yourself by promotion. That is not what anybody wants to be known for. That's called commodity. In that context, we believe by driving innovation into the marketplace, which we have done so far with Boost and other franchises, whether it's in our performance or in Originals category, we can maintain, I would say, stable pricing also in 2018. Our assumption is that is also how other competitors will drive profit expansion. If you continue to drive price down, you need to have a very high volume in order to offset that pricing. That is based on a market logic, and that's what we're seeing at this stage.
In the key franchises, we take our Boost franchise, or people are buying it because it's a cool product. They're not buying it because it's EUR 10 off. I think that's the most important part. If that would be the case, we'll need to have a different business model.
Okay, great. Thanks. Maybe just. Yeah, sorry. Go ahead.
Yeah, just quickly on the gross margin, John. I didn't specifically say it's two-third and one-third, but it's definitely in the ballpark. The majority is pricing base and the minority, and again, it's in the ballpark, that's for your model quality, one-third, two-third is definitely in the ballpark, plus, minus.
Great. That's super helpful. Maybe just one very brief one on free cash flow. You've done a great job in terms of managing your inventory, and also trade working capital as a whole. We think about free cash flow, and we think about the returns going forward, given the growth rates that you expect and some of the margin leverage that you're going to get, certainly managing the OpEx going forward, are there any plans to look at buybacks, acquisitions or special dividends? Given the amount of free cash flow, was it very much focused on just continuing a relentless focus on driving share, and growing the top line and the leverage that comes with that?
John, we have always said that we are pretty happy that we went through the divestitures that we did, whether it was Rockport, TaylorMade, or now CCM, in a timely manner. There's definitely no plan right now to go into major acquisitions, neither in 2017 nor 2018. As we always said, let's generate the cash problem first, what we tried in the past as well, and then deal with the problem of cash in the future. We are relentlessly focusing on our operational business to make it better, being disciplined, whether that's on working capital or on cost, and then hopefully generating for ourselves that cash problem in the future. Then we will probably think about it strategically. Of course, we are starting to think about that, then we will update in 2018 what our plans are.
Thanks very much. That's very clear.
Thank you.
Thank you. We'll now take our next question from Jonathan Komp from Robert W. Baird & Co. Please go ahead. Your line is open.
Yeah. Hi, thank you. My first question, just on the topic of the Originals business. If I look back now for a number of quarters, the growth rate in Originals pretty vastly exceeds the growth rate on the sports performance categories. Just kind of bigger picture, I'm wondering how long you think that trend might continue, and if you had any more color, in the shorter term, the next few quarters, what might drive the Originals business? That certainly would be helpful, too.
First of all, we don't believe that, quote unquote, "It's the right way of looking upon it" because the Originals business today contains many products that are used for sporting. This is a category, a way we've categorized the business that was created in the mid-'90s. If you look into it, actually, a lot of people go into the fitness room, or if you go to a fitness room, you will see they're wearing, quote unquote, "Original products," which is actually used for sport. I think it's up to us at a given stage to really get the right categorization around it. There's no doubt that the athleisure trend is one that's here to stay, and we're very happy about that trend.
That is by far not the only reason why we're seeing a high growth rate in our, quote unquote, "Originals category." You're also seeing the presence of Boost in many of our footwear franchises in the Originals category. These products are used for sport. I think that we will get to a point where we will recategorize, because frankly, it's a misleading indicator with Originals. Being a, I would say, leisure only, we see part of it is, of course, athleisure, but a big part of it is also sports.
Okay. Very helpful. Thank you. My second question just relates to the North America margin overall, the operating margin. Kasper, I think back in March, you said North America might be dilutive from a company basis, the operating margin level for the next two or three years. If I look at the first half performance so far, I think the North America operating margin's already back to the low double digits. I'm just wondering if there's some incremental investments upcoming that we may not see, or are you just kind of over-delivering on the plan relative to what you thought you might a few months ago?
I think that the key point here is that North America is 37% of the global sporting goods market. If you look upon our position, North America is about 20% of our business. You can see, in order to get our fair share of that cake, we still have a way to go. We believe the best way of creating shareholder value is building a sustainable, very competitive position in the U.S. If we try to squeeze the pie too early, we're afraid not getting there where we need to be in the long term. We have no strategic intent of trying to do so. When we look upon our business, and when we met also, said the same, it's our intent to grow margin and grow market share.
We get, on a company level, the same goes for the U.S., but we have absolutely no intent to try to drive the margin up too quickly. We tried that a couple of years ago with very bad results, and we learned from that and are very conscious of it. If we can find the right way of continuing to invest in America, build brand heat and market share, and we believe we can, we will continue to do so. That's why it will be diluted for a while moving forward. If you look upon the expansion of the top line and also the margin expansion, you do see in real money, you're getting a big portion coming out of the U.S. despite a diluted margin.
Understood. Thank you.
Thank you. We'll now move on.
Julia, we have time for two more questions now, please.
Of course. Our next question comes from Cédric Lecasble from Raymond James. Please go ahead. Your line is open.
Yes. Good afternoon, gentlemen. Thank you for taking these questions. I have two. First one is a follow-up on China, and China's profitability. Don't you think that it's a market where the potential for e-com is probably even stronger than in some other markets? I'd be very interested in your comments on where the consumer's going, through your e-com platforms or through the big leading platforms existing in China? That would be question one. Question two on working capital, can we expect that improving time to market initiatives, and you might update us on your most recent initiatives, probably on franchise products. Can we expect this trend to continue, or do you think there's a physical limit to any more progress on working capital in particular, which has been improving?
You said there was to some extent, some exceptional in the Q2 performance, where do you see working capital down to about maybe in two, three years in percentage of sales? Thanks a lot.
I'll ask Harm to help answer the Chinese question. Before we go there, I think the important part to understand is also the consumer goes in different countries to different places. There is not one answer to the digital question. It really depends on what are the dominant partners or platforms per country. They are, in many countries or regions, different, and they're definitely different than China. Harm, over to you.
Very pleased to answer your question. I mean, the majority still will be planned towards 2020. It's probably not on our own platform, but it's going through Tmall. That's what the platform is that is dominating China. This is where the consumers are. This is where we can clearly present the brand in a very dynamic and a qualitative way. We're pretty happy with the relationship that we have with that platform and how we are driving it. The majority will come there, and you're absolutely right. I mean, as you saw on the second quarter results, it's a significant growth driver for our business in China, but still, it's relatively small compared to the overall franchise business that we're enjoying there. That's why it's not a major driver to keep our profitability where it is today.
Of course, it will accelerate from where it is today, right? It will be a significant part towards 2020.
Okay. On the operating capital. Right now, we've not given any specific guidance on that. We believe right now we are at the appropriate level. Of course, we are looking upon all elements of our company to understand how we can become a better company. We will, of course, also over time, get more and more focused on the cash. I think it's important that we take it step by step.
What we have done in the start of July 1st, we changed the organizational structure for the finance organization. That means that in the past, the head of the finance groups in the regions report into the local head of the region. They're now reporting into Harm, which of course enable us to get much more consistency in process, in philosophy, and actually how we treat our accounts receivables and accounts payables. That is one. Secondly, in the ONE adidas initiatives, we're also looking upon the expansion and a much better acceleration and use of global procurement. There are options and opportunities, and when we get closer to a point, and probably around next year, we can get a better guidance around that. Rest assured that we are looking upon all elements.
We need, particularly when it comes to the free cash flow and cash generation, to ensure that we get the right level of leverage, both from a cash standpoint, but also ensure that we can actually get the right top-line growth in the market and not limit ourselves on this at this stage. Because assuming that we execute our plan correctly, we will have a positive problem on the cash side, but we need to get top line, bottom line and cash right, and all three elements are important, and we haven't guided on the cash yet.
Thank you.
Thank you.
Thank you. We'll now take our final question from Fred Speirs from UBS. Please go ahead. Your line is open.
Hi. Good afternoon, gentlemen. I've got a longer-term question on the .com opportunity. The channel's already nicely margin accretive, but when we think through to the 2020 target for EUR 4 billion sales, how much expansion opportunity do you see for the e-commerce margin relative to where you are today? Also, how much upside could there be to that? Thank you.
Matthias.
Yeah, first and foremost, we set ourselves a pretty aggressive target. I mean, doubling down from the EUR 2 billion to the EUR 4 billion, that's first and foremost something we got to achieve. Secondly, the nature of the e-commerce business is a very variable business when it comes to credit card fees, shipping costs. You're probably moving more and more what the consumer is expecting, what Amazon is driving to free shipping, to more personalized experiences. All of these are more in the variable nature of the cost. That's why we believe having a healthy margin today, I don't think it's much of an expansion to be expected over the next several years as we're growing the business. Of course, from a channel mix point of view, it will be attractive for us and that's why we are prioritizing it.
Within that channel, we have limited leverage given the nature of the variable cost that is driving most of the expenses now.
Maybe just a follow-up. You're targeting EUR 4 billion from your own .com business by 2020. What's your expectation for the size of revenues that will be coming from wholesale e-commerce at the same point? Thanks.
Well, we don't have a scientific number for this one. We're very clear what we are driving through our own platform. When we talk about the own platform, the only exception is Tmall in China would be part of that platform because we're controlling what we're doing there as a brand on full control. Generally speaking, the EUR 4 billion, if achieved, as part of our EUR 25 billion-EUR 27 billion plan by 2020, it's roughly 15% based on the mathematical calculation. Fundamentally, I believe that sporting goods will transact probably 30%-35% of the overall business in the online side, whether it's the footlocker.com or it's the Zalando or the Amazon. I believe the consumer is going more and more online from what we estimate probably today, 20%-25% towards the 30%-35% by 2020. Again, does it stop there? Does it accelerate?
Is it less? I don't have a scientific answer for that. I still believe even by 2020, the majority of the products even for our brands will be sold outside of our platform when it comes to the online business.
Very clear. Thank you.
Thank you very much, Fred, and thanks very much to Kasper and Harm. Ladies and gentlemen, this completes our conference call for today. As you know, our next reporting day will be November the 9th for our Q3 results then. I'm sure we're going to speak to and see many of you over the next couple of weeks and months around the world. If you have any questions, as always, please don't hesitate to reach out to Christian, myself, or any other member of the IR team. With that, I would like to thank all of you for your participation today. Wish you a very good day, and for those of you who still have their summer vacation in front of them, have a happy summer vacation and talk to you soon. Bye-bye.
Thank you, sir. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.