Good day. Welcome to the adidas Group conference call for 2012 full year financial results.
Good afternoon, ladies and gentlemen, and welcome to our 2012 full year financial results presentation. I'm John-Paul O'Meara, and I head up the investor relations activities here at the adidas Group. During today's presentations, Herbert Hainer, adidas Group CEO, and Robin Stalker, Group CFO, will reflect on the achievements of 2012, clarify the impacts from one-off items, and discuss the group's strategic and financial outlook for 2013. To allow for ease of comparison, there are a few things today to bear in mind during our discussion on the figures. Firstly, all sales and revenues-related growth rates will be discussed on a currency-neutral basis unless otherwise specified. In addition, all comparisons will be based on the restated 2011 financial results and excluding impairment for 2012. Robin, in his remarks, will deal specifically with these issues. With that in mind, let's begin.
As always, let's start with a refresher of the widespread presence and success of our brands and athletes over the past 12 months.
Yeah, you can be the greatest. You can be the best. You can be the King Kong banging on your chest. You can beat the world. You can beat the war. You can talk to God, go banging on his door. You can throw the hammer down. You can beat the clock. You can move a mountain. You can break rocks. You can be a master. Don't wait for luck. Dedicate yourself and you go down in history. Standing in the hall of fame. We are amazing. The world's gonna know your name. Yeah. Because you burn with the brightest flame. Yeah. The world's gonna know your name. Yeah. You'll be on the walls of the hall of fame. You can go the distance. You can run the mile. You can walk straight through hell with a smile. You can be the hero. You can get the gold. Breaking all the records they thought never could be broke. Do it for your people. Do it for your pride. How you ever gonna know unless you ever even try?
Do it for your country. Do it for your name. 'Cause there's gonna be a day when you're Standing in the hall of fame. Yeah. The world's gonna know your name. Yeah. Because you burn with the brightest flame. Yeah. The world's gonna know your name. Yeah. You'll be on the walls of the hall of fame. Be students. Be teachers. Be politicians. Be preachers. Be believers. Be leaders. Be astronauts. Be champions. Standing in the hall of fame. Yeah. The world's gonna know your name. Yeah. Because you burn with the brightest flame. Yeah. The world's gonna know your name. Yeah. You'll be on the walls of the hall of fame. You can be the greatest. You can be the best. You can be the King Kong banging on your chest. You can beat the world. You can beat the war. You can talk to God, go banging on his door. You can be a master. Don't wait for luck. Dedicate yourself and you go down in history.
Good afternoon, ladies and gentlemen, here in Herzog, and good morning to the people who are following us out of the U.S. and the rest of the world. I'm very proud to report that 2012 has been another successful year for our group. Our dedication to create the unexpected in our product and brands once again sparked consumer excitement all around the world. This resulted in significant market share wins in many of our key categories and markets. I look forward to sharing some of these great achievements with you this afternoon. However, 2012 was also not without its challenges. As you would expect, we have moved swiftly and aggressively to deal with them, meaning we have delivered on our target for the year and are ready to drive for another year of new records again in 2013. Let me go into more details.
In 2012, group sales increased by 6% or 12% in EUR to EUR 14.9 billion. This means we added EUR 1.6 billion in revenues during the year. Our focus on quality growth, which is a key component of our Route 2015 strategy, also ensured our bottom line again grew significantly faster than the top line. The group's operating margin improved 80 basis points to 8%, and earnings per share grew by 29% to EUR 3.78, also our highest result ever. Due to the strong operational performance, we finished 2012 with a net cash position of EUR 448 million, a five-fold increase compared to a year ago. This significant cash flow generation once again underpins the trajectory and the value we are unlocking with our Route 2015 strategic business plans.
In terms of growth, despite macroeconomic headwinds, sales increased in each and every region in 2012. In terms of highlights, without any doubt, the standout performer was Greater China. Sales for the year increased 15% to a new record level of over EUR 1.5 billion with double-digit growth in every quarter. For many players in our industry, China was indeed a challenge in 2012. However, this was mainly due to the specific competitor issues and not because of any lack of interest in sporting goods on the part of the consumer. You might ask yourself, what is our recipe for success? As part of a rising middle class, our consumer target group in China is maturing at a rapid pace, becoming increasingly discerning and sophisticated.
Given the breadth and the depth of our product offering in performance and lifestyle, adidas fits perfectly to this consumer. On top of our global appeal, we also infuse our brand messages and products with local flair and understanding. Additionally, we have deepened our already very close relationship with our retail partners, who now operate more than 7,500 point of sales across Greater China. By ensuring that our business remains constantly in tune with theirs, we are able to keep our product offering fresh at the point of sale. This is a clear edge we are enjoying and will continue to enjoy. Looking forward, from our market research, we can see that the adidas brand appeal has the most momentum in the Chinese market right now.
As a result, I'm very confident we will continue to take more market share and grow faster than any of our major competitors also in 2013. Turning to another one of our strategic markets, sales in North America grew 2% in 2012, with brand adidas increasing 9% and TaylorMade-adidas Golf are up 25%. Excluding the impact from the NFL and the NHL license, Reebok revenues declined 11% in North America, while total group sales, excluding the NFL, increased by 6%. Since we began Route 2015, adidas brand sales are up more than one-third, which is well ahead of market growth. In fact, when we look deeper into the adidas numbers, our business with our key high school kid-relevant retail partners was up over 20% in 2012.
Through Originals and basketball, we have created a great base to build on. Quite frankly, when I look at our plans for running, we are only just at the beginning of exploiting the tremendous opportunities this market has to offer for our group. Speaking of markets with opportunities, in Russia, CIS, revenues were up 17% in 2012, driven by outstanding comparable store sales growth of 8%. Both adidas and Reebok sales grew at double-digit rates, with adidas up 16% and Reebok increasing 20%. Equally as encouraging was our group's resilient performances in Western Europe and other Asian markets. Revenues in our home territory were up 3%, driven by double-digit growth in the U.K. and Poland, as well as increases in Germany and in France. In other Asian markets, despite our issues in India, sales in the region increased 7%.
This was driven by double-digit growth in South Korea and a strong rebound in Japan, where revenues increased 11% as we extended our considerable lead over competitors in that market. Finally, in Latin America, sales increased 8% for the full year, driven by a strong adidas brand performance, where sales were up 13%. Double-digit increases in football and running, as well as over 20% growth in own retail, were key to this development. Turning to our brands, two of our group's most important values are passion and performance, both of which were at the forefront of many of our 2012 brand and category achievements. The obvious highlight from 2012 has to be the role adidas played at the year's major sporting events, which spurred adidas brand sales up 10% or 15% in EUR to over EUR 11.3 billion.
In particular, the London 2012 Olympic and Paralympic Games will surely count amongst the most memorable and inspiring sporting events of our time. The adidas brand, as the official sportswear partner of the event and of Team GB, played its role to perfection. It delivered its most comprehensive offering of high-performance products ever and contributed significantly to the emotion of the event with the highly acclaimed Take the Stage campaign. Similarly, in Poland and Ukraine, standout performances from our teams and players at the UEFA Euro 2012 was another catalyst which truly inspired consumers and fans around the world. They once again reconfirmed adidas as the number one football brand, highlighting that our passion for innovation continues to set us apart from the competition.
Be it our iconic Predator, the official match ball and federation jerseys, as well as our presence in the UEFA Champions League, we once again dominated the world's favorite sport, achieving a new record level of sales of well above EUR 1.7 billion. Eclipsing even our own very high expectations. However, our success was not just limited to the event-related categories. In fact, all other key adidas categories, be it running, basketball, or outdoor, grew at double-digit rates in 2012. In running, sales grew by 13% as the Adizero and Climawarm product franchises continued to drive sales globally. Adizero footwear sales increased more than 40%, driven by another year of high visibility on the world's major marathon podiums. On the court, our basketball business also gathered pace with our sales growth rate doubling to 22% compared to 11% a year ago.
In particular, our D Rose Crazy Light and NBA licensed products drove growth of almost 50% for the category in the strategically important mall-based channel in the U.S. Finally, in outdoor, sales increased 14% as we continue to make strides towards our Route 2015 goal of EUR 500 million revenues. This was driven again by the highly innovative range of Terrex footwear and apparel. This passion for innovation leads me to another major highlight of our year, TaylorMade-adidas Golf. With sales up 48% to over EUR 1.3 billion in just two years, our golf business has already rocketed past its initial Route 2015 targets and is now more than double the size of its neighbors down the road in Carlsbad. Considering that the golf industry is still relatively stagnant, this is a remarkable testament to TaylorMade-adidas Golf's relentless focus on helping golfers to perform better.
Turning now to Reebok. Sales declined 18% in 2012, excluding the impact from the discontinuation of the NFL business and the transfer of the NHL-related sales to Reebok-CCM Hockey, sales declined by 8%. The brand's gross margin was essentially flat at 35.9%, which is not a bad performance, given we had quite some promotional activity to move all toning products during the year. While we are obviously disappointed with the Reebok result, we have seen the underlying business further stabilize as we accelerate our measures to position Reebok as the fitness brand. In fact, in the first quarter, Reebok sales, excluding license revenues, were up 3%, driven by 13% growth in classics and almost 40% growth in apparel.
As we announced last April, we discovered commercial irregularities at our Reebok business in India, which brought to light a high level of criminal energy and collusion between former employees and external business partners. As promised, we have followed up vigorously and swiftly on the matter through a thorough internal and external investigation, also with police involvement. In addition, we have also taken the opportunity to comprehensively review our internal control processes and procedures of governance and compliance with the necessary external expertise at all of our locations around the world. Robin will take you through more specific details on the matter in his presentation in a few minutes. Let me reiterate quite clearly, non-compliance with our policies has never been and will never be tolerated within our organization.
As unpleasant as the identified irregularities at Reebok India Company are, I am satisfied we have diligently completed our efforts to uncover all the wrongdoings while simultaneously laying the foundation for a healthy and profitable business for Reebok in India in the future. Here, let me reiterate once again our full commitment to the Reebok brand in India. That, ladies and gentlemen, wraps up my review of the group's operational performance in 2012. Despite the cosmetic of the accounting restatements and impairments in our reported figures today, I believe it is important to recognize just how successful our underlying growth and operational performance have been over the past 12 months. In addition, we have also again demonstrated our ability and long-standing credentials at tackling external and internal challenges with speed and with determination.
Be it the full mitigation of the considerable sourcing cost pressures, the countless hours of vigorous effort to solve the commercial irregularities at Reebok India Company, or the discipline and restraint in managing our business in a persistently uncertain global economy. I am very proud of the passion and the dedication of our employees around the world to tackle these challenges. More importantly, all of this was achieved while continuing to stay diligent and focused on ensuring we remain fully on course to deliver our ambitious Route 2015 strategic goals. I will be back in a few minutes to tell you about what's to come in 2013, but first, Robin will take you through all the financials.
Thank you very much, Herbert, and a very good afternoon, ladies and gentlemen. As you've just heard, 2012 was another successful year for our group. From an operational perspective, we again delivered a robust performance, and I will highlight how this has played out throughout the financials of our group. However, before I come to that, let me provide you with some more clarity on the one-off items contained in our financial results this morning. Now, as we announced in April 2012, we discovered commercial irregularities at our Reebok business in India, which resulted in the termination of the services of the then managing director and chief operating officer. As Herbert said, we have followed up vigorously and swiftly on this matter.
Key findings from our internal investigations include inappropriate recognition of sales, a failure to book sales returns, and a failure to correctly post credit notes to accounts receivable. This resulted in a significant overstatement of net sales and accounts receivable, as well as materially incorrect accounting for inventories and provisions. During the investigation process, the new management also discovered four secret warehouses not disclosed in the official accounting record. The findings of the investigation suggest that the practice of inflating sales and profits had been going on for several years. As a result of these findings, we have restated our accounts in accordance with the IAS 8, which has led to a reduction in net income attributed to shareholders of EUR 58 million for 2011 compared to what we had previously reported.
In addition, shareholders' equity in the opening balance sheet for 2011 was negatively impacted by EUR 153 million to account for the prior year periods. For further information, we have outlined the changes in detail in note three of our 2012 annual report. The second one-off topic is goodwill impairment. As you know, impairment losses are non-cash in nature and do not affect the adidas Group's financial situation. However, let me spend a few minutes explaining to you why we have done so. Following our review of the medium-term growth prospects for specific markets and segments as part of our annual impairment test and taking into account our updated targets for Route 2015 outlined at our investor field trip in September, we came to the conclusion that a few of our cash-generating units need to be impaired.
The resulting impairment of EUR 265 million means we have reduced goodwill on our balance sheet by 17%. In the overall scheme of things, the negative impact on total assets is minor, at only 2%. Looking at the specifics, within wholesale cash-generating units, goodwill impairment losses amounted to EUR 106 million in North America, EUR 41 million in Latin America, EUR 15 million in Brazil, and EUR 11 million in Iberia. The impairment losses were mainly caused by adjusted growth assumptions for the Reebok brand, especially in North America, Latin America, and Brazil, and an increase in the country-specific discount rates as a result of the euro crisis. In addition, goodwill of EUR 68 million allocated to Reebok-CCM Hockey and EUR 24 million allocated to Rockport was impaired.
These impairment losses are the result of the reevaluation of future growth prospects and, with regard to Rockport, also due to an increase in the discount rate. Again, here, we have provided full transparency and clarity on this topic in note two of our 2012 annual report. Now with that, ladies and gentlemen, let me get into the financials. Without deflecting from our great top-line achievements, I believe our margin development is again one of the major financial highlights. The severe pricing pressure we faced in procuring our products from record-high raw material costs and wage inflation in 2011 was a significant headwind in each quarter in 2012. In fact, the headwind after supply chain mitigation amounted to 3.1 percentage points for the fourth quarter and 3.8 percentage points for the full year.
The 20-basis point improvement in gross margin to 47.7% highlights not only our best-in-class supply chain activities, but more importantly, the strength of our brands and product innovations to take price increases. In terms of magnitude, the key offsetting factors were, firstly, price increases, product engineering efficiencies, and a more favorable product mix. Secondly, the overproportionate sales growth in our retail segment and emerging markets, which carry higher margins. And thirdly, our hedging strategy yielded us a slight positive tailwind in 2012. Let me point out now that this will reverse in 2013. In terms of operating leverage. Here we also delivered against one of our key Route 2015 objectives, achieving a reduction in our other operating expenses as a percentage of sales of 50 basis points to 41.3%.
Although marketing investments grew 6% to EUR 1.8 billion, marketing spend as a percentage of sales declined 60 basis points to 12.1%, given the strong top-line development. By brand, adidas marketing investments grew 10% to EUR 1.4 billion, while spending at Reebok decreased 17% to EUR 238 million. As a result, 2012 operating profit was up 24% to almost EUR 1.2 billion. This translates into an operating margin of 8%, exactly in line with our guidance. For the fourth quarter, operating profit increased 49% to EUR 26 million. Turning now to the non-operating items of the P&L, net financial expenses decreased 17% for the full year. A decrease in interest expenses of 9%, as well as an increase in interest income of 16%, were the main contributors to the decline. Negative exchange rate effects were similar compared to the prior year, at around EUR 7 million.
For the fourth quarter, net financial expenses were up 40%, as exchange rate variances had a significant influence during the quarter. Excluding these effects, which amounted to a swing of EUR 9 million, net interest expenses declined 27% in the quarter. The effective tax rate for the full year was 29.3%. As a result of all that, net income attributed to shareholders increased 29% to EUR 791 million. For the full year, this translates into record earnings per share of EUR 3.78, slightly better than the range we guided to in November of EUR 3.68-EUR 3.75. For the fourth quarter, we reported a net loss attributed to shareholders of EUR 7 million compared to a net income of EUR 3 million last year, and this was due to higher income taxes in the quarter as a result of adjustments related to Reebok India.
Let me spend a few minutes on our segmental performance, starting with wholesale. Wholesale revenues grew 2% for the full year, with sales increases in all regions except North America. In the fourth quarter, wholesale revenues decreased 4%, as growth in Greater China, Latin America, and other Asian markets was more than offset by declines in other regions. This decline was mainly due to the issues we already highlighted in November, such as the non-recurrence of the NFL license sales and the prior year major sporting event-related product selling. For the full year, the wholesale gross margin increased 0.4 percentage points to 40.3% as a result of a more favorable brand sales mix. To the retail segment. Currency-neutral sales grew 14% to EUR 3.4 billion, representing 23% of total group sales for the year.
This was driven by robust comparable store sales growth of 7%, which is impressive considering the already strong 14% comp store growth in the prior year. Both adidas and Reebok comp store sales increased 7% each. In the fourth quarter, comparable store sales increased 1%. In particular, Russia, CIS positively contributed to this development, with comp store sales advancing 4%. From a store format perspective, concept stores, factory outlets, and concession corners all delivered comp store sales increases in the mid-single digits. In addition, our sales per square meter continued to improve, with store sales per square meter increasing 7% in 2012. Equally pleasing is the continuous improvement of our retail profitability as segmental operating margin improved 20 basis points to 21.5%.
Gross margin in the segment declined 1.7 percentage points during the year, with 70 basis points of the decline related to the Russian ruble devaluation versus the US dollar, and the rest due to higher promotional activity given weak retail conditions in many markets, particularly in Europe. However, this was completely offset by 1.9 percentage points of operating leverage, which drove retail profits for the period up 20%. That, ladies and gentlemen, underpins the great progress we are making on improving our retail operations. At the end of the year, the retail segment operated 2,446 stores, representing a net increase of 62 stores compared to December 2011. Our total selling space also grew versus the prior year and is now over 700,000 square meters. Moving on.
Revenues in other businesses grew 17% in 2012, with particular strength at TaylorMade-adidas Golf, up 20%, as Herbert has already mentioned. Sales at Reebok-CCM Hockey and Rockport also grew, increasing 9% and 2% respectively. For the fourth quarter, other businesses grew 7%, mainly a result of the continued momentum at TaylorMade-adidas Golf, where revenues grew 15%. This was driven by almost 60% growth in the irons category as a result of the RocketBladez launch. Full-year gross margin in other businesses decreased 80 basis points to 42.8%, driven by lower product margins at Reebok-CCM Hockey, where increased sourcing costs as well as the NHL lockout negatively impacted gross margin development. However, due to scale effects, segmental operating margin for other businesses increased 40 basis points to 27.4%. Moving over to the balance sheet, where, ladies and gentlemen, I can again report on some impressive achievements.
Despite the growth of our business in 2012, our ratio of operating working capital as a percentage of sales has reached a new record low year-end level of 20.0%, an improvement of 40 basis points compared to the prior year. This very strong performance is better than our original expectation of even a slight increase of this ratio. At year-end, inventories were up only 1% on a currency-neutral basis, reflecting the group's strong focus on inventory management throughout 2012. Keeping our markets and channels clean and fresh has been a priority all year. This ensures our brands are well-positioned for growth in the upcoming quarters. In 2012, net cash flow generated from operating activities increased 17% to EUR 942 million. After cash outflows for financing and investing activities, this allowed us to improve our net cash position by EUR 358 million to EUR 448 million.
This once again demonstrates the strength of our business model and puts us in a superb position to support and invest in the opportunities and growth initiatives of our Route 2015 strategic business plan. In terms of priorities for the use of cash, our capital deployment policies remain unchanged. We will continue to pay down gross borrowings as they mature, of which EUR 280 million will be repaid in 2013. To further support group-wide initiatives in areas such as own retail, infrastructure, and IT, in 2013, we will increase our capital expenditure to between EUR 500 million and EUR 550 million. However, at the same time, we reaffirm our commitment to advance direct shareholder returns, and the annual dividend is currently our preferred tool for this. Therefore, for 2012, we intend to pay a dividend per share of EUR 1.35, which is 35% more than in 2011.
This represents a payout ratio of 35.7%. In conclusion, ladies and gentlemen, in 2012, we have continued to execute in the right way, balancing our desire to grow with a high focus on the quality of that growth. We have again leveraged our scale and tackled our challenges with speed and with diligence. With that, let me now hand you back to Herbert to give you a glimpse into the strategic priorities to continue to drive success in 2013.
Thanks very much, Robin. In the two years since we began our Route 2015, we have achieved quite a lot. As we reported in September, in most cases, we have even exceeded our expectations to date. We have delivered robust underlying growth in all of our key attack markets. We have driven double-digit growth in all of our key adidas categories. We have already achieved our targets for TaylorMade after just two years. We have accelerated swiftly with our controlled space initiatives and already achieved our goal of 45% in 2012. We have held our gross margins essentially flat and increased operating margins while most of our competitors have not. We have grown earnings per share at a compound annual rate of 18% compared to our goal of an average of 15% per annum. Finally, we have generated EUR 1.75 billion in cash flow from operations.
This, ladies and gentlemen, is a telltale sign of a group that knows where it is going. Believe me, despite the macroeconomic pressures, we will continue our upward trajectory in 2013 and for the remainder of our Route 2015 plan. Our focus, as Robin has outlined, remains on driving quality and long-term sustainable growth for our brands. This you will see again in 2013 through a product pipeline packed with game-changing innovations, be it in running, be it in basketball, be it in football, in lifestyle or in fitness or golf. I say game-changing because when you look at some of the examples I am going to share with you now, these are not just updates or tweaks, they are really revolutionary. Take running, where all great footwear innovation starts.
In 2013, we are introducing two breakthrough innovations, one of which launched at retail last week, the Energy Boost. In only a few days, Boost is already the talk of the trade, seeing higher levels of engagement and enthusiasm than any running product we have ever brought to market before. The sell-throughs are already outstanding with many of our own shops already sold out. Why is Boost so special? Because together with our partner at BASF, the world's leading chemicals company, we have created a completely new foam cushioning material that we are convinced over time will obsolete the 20-plus year material veteran of our industry, EVA foam. With its distinctive and unique midsole cell structure, Boost provides more energy return than any other foam cushioning material, combining soft comfort with responsive energy for the ultimate running experience.
After countless kilometers, it performs more consistently and doesn't lose its cushioning properties like standard EVA foam. To show you what it really can, let's take a look- For those of you who are here in Herzog, you will get to try it live later and receive further insights from our adidas Sport Performance colleagues. Welcome, James and Eric. Beyond running, we also have lots in store in our other categories in 2013. In basketball, we will continue to disrupt the market with great new innovations in footwear and apparel, as well as by leveraging new assets like John Wall or Ricky Rubio. During the summer, you will already start to see the next great innovation in football as we commence our preparations for the 2014 FIFA World Cup, with the Confederations Cup set to ignite football fever in Latin America.
We will also raise the game in icon building and brand activation. This year, we will build core signature collections around several of our superstars, including four-time Ballon d'Or winner and record-breaking goal scorer, Lionel Messi. This week, we launch Team Messi, a major digital initiative which you will hear more about as we go through the year. In terms of digital innovation in general, we will be partnering with Google on an exciting project which will show how creativity and technology can work together to provide consumers with new and innovative ways to engage with our brand. We have other major campaigns planned for adidas as well to drive deeper consumer connection, such as the new impactful women's campaign, which is called "My Girls," and a global Originals campaign, "Unite All Originals." With Originals and Sport Style, here we will also see a new milestone in 2013.
In 2012, we broke the EUR 3 billion revenue mark for the first time, with Sport Style sales increasing 16% or 21% in euro terms to over EUR 3.2 billion. Given the growth that we expect from adidas Originals and the adidas NEO Label in 2013, this means our adidas Sport Style division on its own will surpass the third-largest player in the sporting goods industry in terms of size this year. Let me move over to Reebok. As we have now stabilized the business to ensure we drive growth, we will commence a major brand and category offensive in fitness in 2013. Our new category approach, which we call the House of Fitness, allows Reebok to engage with consumers regardless of how they choose to stay fit. It focuses on five key areas, fitness training, fitness running, studio activities, including yoga, dance and aerobics, walking, as well as classics.
The positive news, when I look back at 2012, these categories, which now represent almost 90% of Reebok's business, grew low single digits, with fitness training up 30% and classics up 6%. To accelerate this momentum, several new footwear and apparel collections will be launched throughout the year. In running, we will introduce 3 new platforms, including SubLite and ATV. In fitness training, Reebok will introduce the Reebok Delta apparel collection, which takes design inspirations from the CrossFit community. In addition to new products, we will activate new, exciting partnerships to authenticate and give credibility to Reebok in each category. Renowned yoga instructor Tara Stiles, the Spartan Race series of obstacle races, and the Red Bull X-Alps are just a taste of what's to come over the next two years.
Bringing it all together in 2013, the Reebok brand will also speak to the consumer with one voice by launching a new global marketing campaign. The campaign, which is called "Live with Fire," will be the brand's first concerted effort to inspire the fitness consumer to live a life of passion, intent, and purpose. Everything I see so far confirms we are gaining traction for Reebok with retailers and consumers. I fully expect a return to growth for Reebok once we have anniversaried the last of the NFL-related comparisons in the first quarter. At TaylorMade-adidas Golf, our fast pace of new launches will also continue. The new RocketBladez irons have already sent our market share skywards to over 30% since launch.
With new longer metalwoods, like the R1 and the RocketBallz Stage 2, a major offensive in golf footwear with Adizero and the potential for Adams Golf, I fully expect the distance between ourselves and our nearest rivals to further widen in 2013. As a group, we are therefore very well positioned to again achieve record sales in 2013. For the full year, we expect currency-neutral sales to increase at the mid-single-digit rate, with growth across all brands, regions, and channels. In terms of phasing, sales growth is expected to be weighted towards the second half of the year, mainly mirroring our product launch schedule, as well as the build-up to the FIFA World Cup in 2014. 2013 will also see a step change in the pace of gross margin and operating margin expansion. We expect our gross margin to increase to a level between 48% and 48.5%.
Our operating margin will improve considerably, in line with our previously announced guidance of approaching 9%. This in turn will lead to another year of double-digit earnings growth, with earnings per share increasing at a rate of 12% to 16% to a level between €4.25 and €4.40. In summary, ladies and gentlemen, it is certainly not by chance that I started my presentation today with the motto, "Pushing boundaries." Alone from our extraordinary product innovations and great designs, our group's ability to push boundaries has helped athletes to go faster, hit further, and achieve the impossible at the pinnacle of sport for decades. However, pushing boundaries at our group definitely goes far beyond this definition. It lives in every aspect of our business. Every day, we collectively strive to bring a culture of pushing boundaries to life by constantly motivating and challenging each other to improve.
Adi Dassler is often quoted as saying, "Strive for perfection. There is always something you can improve." This is exactly the spirit you will see from our group over the next 12 months. This is the edge that will ensure our group's continued success along Route 2015. Thank you very much for your attention, and now Robin and myself will be happy to answer all your questions.
Thank you, Herbert. For those on the telephone, you may now start registering your questions by pushing star one on your touch-tone phones. I will give you a few seconds to start registering your calls. Just want to announce one other thing today. We have today launched our iPhone app as well for investor relations, so now it's not just the iPad anymore. We're fully on board. I'd like to take the first three sets of questions here in the room. Who would like to ask the first question? Let's come over here, Michael Kuhn. If you could announce the name of your firm and your own name for your first set of questions, that will also help us out. Thanks.
Okay. Michael Kuhn from Deutsche Bank. A few questions from my side. Firstly, on Q4 and some of the effects mentioned. Is the 200 basis points gross margin improvement a clean development, or are there any special factors that we should consider? On like-for-like and OpEx in Q4, +1% like-for-like sales in retail, and you mentioned NFL and the tough comps. What would be a clean number? Could you help us here? OpEx, on the other hand, up quite substantially. Were there any special effects or what should we expect in terms of OpEx dynamics going forward? Secondly, you mentioned your CapEx plans of EUR 500 million to EUR 550 million for the upcoming year, which is quite a considerable increase. Is there any special project included in that, or is it just investments on a broad scale? Thank you.
Okay, thanks very much, Michael. Our fourth quarter is always a little bit difficult to extrapolate because it's a fairly small quarter compared to the other quarters, obviously. No, you can't extrapolate the gross margin, unfortunately. 200 basis points is very nice. There's nothing really significant in one-offs in that. There's about a 40 basis points impact from the Reebok India, and there's a few million, single-digit million impact in the costs also because of that. Michael, I think here, the best guidance is to look at what we're saying for 2013, in that we have a pretty good window of margin of 48% to 48.5%, and we've also given clear guidance on our operating margin now going up again to approaching the 9 percentage points. I'd say 9.0%. Second point was about CapEx.
It tends to be, in our CapEx, about a third to retail, a third to some of the infrastructure, and a third to the IT. You've seen here, as you came into Herzogenaurach, you've seen a few buildings outside there. We've also got a major warehouse initiative in northern Germany, also costing us money in 2013. There's nothing particular that I would highlight that's different to what we've had in the past.
Well, we're not a very big CapEx company, actually. I mean, EUR 500 million for our sort of size of business I don't believe is very large. I think our cash flow allows us to keep it at this sort of level. We're definitely not planning on anything significantly different in the future. I would say that's a good reasonable guidance for the next couple of years.
Let's come here to Matthias and then Jürgen.
Hi. Matthias Ebbert from Handelsblatt. First question to you, Herbert. You said China as an overall market is not that bad, if I look into how bad competitors are doing, I think there are some difficulties. Can you give us some of your insights when you think these difficulties are worked through? Then we might be even seeing an acceleration from your side, I would be happy if you maintain the double-digit growth. Second question would be, you mentioned a second innovation on running this year. Is it another product platform similar to Boost or extension of some of the existing ones? My third question would be about basketball. Is there any other player showing potential to launch a signature shoe besides Rose 3?
I think injury of him has also shown that you probably need to broaden the bases of players, not to be too dependent on one guy. Can you give us a bit more insight on that, please?
Yeah. Thanks very much, Matthias. Let me start with China. As most of you who follow us already quite some time, you might remember that in 2009, when after the Olympics in Beijing, we ran into problems in the Chinese market. We had a lot of over-inventories. I told you already at that time that we will use this opportunity to clean up the market and to build our relationship with the Chinese consumer and the retailer on a complete new platform. We invested into our retail partners. We put infrastructure in that we could exchange datas much faster, which I also told you, because then we can read the sell-throughs, we can refill the product, we can steer our inventory much better.
Today, I think it's fair to say, when you ask the key retailers in China, we have the best sell-through rates, therefore they achieve the best margin with our product, and they have the lowest inventory. Of course, we have done a lot of marketing activities to stimulate the consumer, as I've said in my presentation. I definitely do believe that we are doing a better job than many others in the Chinese market in the moment. You will definitely see continued growth from us in the years ahead. There is no doubt. Second point was the second innovation in footwear. This is an exciting product, which is called Springblade. As you have our marketing gurus, especially Eric Liedtke, who is running our Sport Performance division on the adidas side, later with you on the Boost side.
He definitely can explain to you what Springblade is, it is a complete new technology on the footwear side as well. Last question was basketball. Yeah, you are right. We will further broaden our base with players. It's not only about players but also with players. As I have said, we have transferred John Wall from Reebok to adidas. We have Ricky Rubio on board. We are still looking for some more players which we bring on board. Obviously, we want to have the best one, the young rookies, the stars. This is not as easy. We definitely strengthen our portfolio. Don't forget, we strengthen our relationship with the NBA into the basketball game with key retailers in the U.S. for basketball.
Last but not least, we are bringing out permanently new product, as you have seen with the adiZero Crazy Light, the D Rose. Even he didn't play now for, I think it's eight to nine months. We activated him permanently, and you have seen the numbers on basketball for 2012. There is no doubt we need basketball to be successful for our success in the U.S., and this is what we will further drive. Be not surprised if we will have positive numbers next year again. I am sure. Jürgen?
Thanks. Jürgen Kolb from Cheuvreux. Three questions. First, on Reebok, the Vulcabras situation in Latin America. Can you update us on that situation? Is there anything negative that might pop up in this year or next year, maybe an update here. Secondly, what's your expectation in terms of FX, in terms of currencies? Obviously some currencies are playing a little bit of a hiccup here. What's your expectation there, and how much can you control that? Thirdly, on Boost, again, Energy Boost, maybe a little bit of your additional plans in terms of rollout. When will it come to a broader retail format, your expectations and hopes for additional categories maybe, and also as the product is probably not yet fully available, the TPU. In terms of profitability, is that shoe more attractive for you?
I mean, the retail price is significantly higher, is that something where you can also squeeze in some extra 10, 20, 50 base points?
Let me start with the first one, with Vulcabras. You know that we have our joint venture partner in Brazil and in Argentina, this is not always an easy relationship Vulcabras have definitely some challenges with their own brands and with their own business on the market. Nevertheless, we try to work as good as we can. We are quite successful in Argentina. Brazil is more under pressure. In addition to that, our contract is running out in 2015. We have a few challenges, I don't expect any big negative impact in 2013. Let me just answer the third as well before Robin goes to the sixth question. Boost, in terms of availability, don't worry, we have a few pairs out for you guys. Don't underestimate it. We want to sell around 1 million pairs of Boost this year.
We have started with our own stores, as I said, and the rollout will be during the whole year. Our plan is, over the next couple of years, to bring Boost, more or less, the Boost technology in all of our shoes. It will not be the running category, it will be basketball, it will be training, and you will see this category because this is such an advantage to that what is existing on the market. We would be stupid not to further roll it out into other product categories as well.
It's a very good question, Jürgen, in terms of currencies. This is the world we live in. There's considerable movement in the currency pairs. We report in EUR. Obviously, we had some tailwind in 2012 through the appreciation of the EUR against some of our trading currencies. In 2013, I think it may be going a little bit the other way. The biggest call-out here is obviously the JPY. There's been significant pressure on that. I think at this stage, it's a bit early to suggest exactly what the developments are going to be. We keep an eye on it, obviously. There's little we can do about the translation where our business is. In terms of, however, the dollar-euro, we continue to hedge that in terms of our purchasing. Here we've got a hedge rate at the moment for 2013.
We're pretty much fully hedged, which is just above the 132, which is inferior to what we had, obviously, in 2012, which was about the 137-138. That will give us a little bit of a headwind also, that is in, obviously, in our guidance reflected.
Jürgen just reminded me that I didn't answer the question on the margin of Boost. We are here to make profit. To get to our 9% operating margin, we have to earn money with every shoe.
Next, we'll take two sets of questions from the telephone, please.
As a reminder, ladies and gentlemen, to ask a question, please press star 1 on your telephone keypad. We will now take our next question from Erwan Rambourg of HSBC. Please go ahead.
Hi, good afternoon. Erwan Rambourg from HSBC. A few questions, if I may. Herbert, I think you mentioned to the press that you were expecting TaylorMade to have single-digit growth in 2013. I'm just wondering if this is down to the fact that the basis of comparison in terms of growth is tough or if the market overall for golf had toughened. Related to that, given all the moving parts on Reebok last year and the good performance of adidas, if you had to rank, in your view, brands in the portfolio for this year in terms of growth, could you give us a sense of what that ranking would be? Secondly, I was just wondering if you can help us understand when the end of the U.S. pain will happen, i.e., when the sort of one-offs on Reebok will stop weighing.
I believe this might be Q2, but I just want to guess. I just want you to confirm when growth rates will normalize in the U.S. Thirdly, I think you mentioned also to the press that you didn't have in mind any acquisitions in the near future. I was wondering if we could expect in the future, again, all things being equal, the dividend payout to increase. It's already at the sort of high end of your range of 20%-40%. Can it go beyond that? Thank you.
Let me start with your first question on TMAG. The single-digit growth is definitely a reflection of the fast growth which we had over the last several years. As I also said in my presentation, we definitely want to make sure that we have a quality growth. We don't want to overheat the market, but we definitely do believe with all the new products which we are bringing in, we will further grow in top line and of course, driving our profits within TMAG to a higher level. The second one was the ranking of the brands in terms of growth perspective. We want to grow with all the three brands, and this year is easy calculating when we growing with TMAG single-digit, and overall, we said that we want to grow mid-single-digit.
Obviously, the adidas brand has to grow as well because this is the biggest part. We also have made a commitment that we want to grow the Reebok business in 2013. You will definitely see all the three brands are growing in 2013. There was a question on acquisition. No, we don't have any plans for acquisition because I definitely do believe that we have still enough work to do with our Reebok brand, and we also do believe that we have enough potential with all our three brands, be it adidas, Reebok, or TMAG, to further grow to the level what we have given out for our Route 2015 plan.
As Robin has said already in his presentation, we want to give the money back to the shareholders, and within our guidance of 20%-40%, we are now at 35.7%, and this is definitely what we want to continue to give the money back.
Thank you. I just had this question on normalization of growth rates in the U.S.
Yes. We know, but I just hand over to my dear finance colleague. He is definitely better suited to answer that.
Okay. I think you are asking about the normalization of the Reebok business in America, and especially because of the NFL contract and that you will still see some impact in the first quarter. Your assumption is correct that from the second quarter on, it should be normalized.
Thank you very much. Bye.
We will now take our next question from Andreas Inderst of Exane BNP Paribas. Please go ahead.
Good afternoon, everyone. I have three questions. The first one on Reebok India. Up to the third quarter, you have guided up to EUR 70 million one-offs to clean up the market. I just want to calculate a real clean EBIT margin for full year 2012. Maybe you can help. How much did you spend overall? Was it more than EUR 70 million, given that you cut roughly 2% the workforce at Reebok? That's my first question. Second question relates to your working capital. Nice improvements on the inventory side. Robin, what can we expect going forward from inventory management? What kind of potential do you see to further improve your turns? Maybe you can quantify the impacts maybe for the midterm. My third question relates to the lifestyle segment. Very nice development in the fourth quarter and also the full year.
I believe you guide high single digit, low double digits for 2013. On adidas NEO, how is it going here? You have already introduced the collection broadly to the market in emerging markets and in North America. How is the store rollout or the test stores going in Germany, and what can we expect in terms of rollout in Continental Europe? Thank you.
I'll take the first two questions. Herbert will answer the third one. I know you'd love to get it as clean as possible. I can repeat the Reebok India impact in 2012 is about that EUR 70 million. It's almost exactly on the EUR 70 million. We were just a little bit under that about the third quarter. There was limited impact in the fourth quarter. Let me make it clear that this EUR 70 million is the difference between what our initial expectations were for the business or the contribution 2012 in India, what's actually happened because of our, as you correctly said, clean up efforts in India. We've closed franchising shops. I think we've closed about 400 shops. We've paid our minimum guarantees. We've also had, obviously, a loss of sales and margin on that period.
That was a mixture of many things that clearly impacted our profit and loss in 2012. In terms of the second question, working capital. I guided last year that our operating working capital as a percentage of sales was probably likely to slightly deteriorate or increase in 2012, where we're actually able to do better. I guide again with a little bit of caution that it's getting very difficult to further improve this, because as we grow our retail business, we do carry inventory a little bit longer, obviously. I'm optimistic that we will continue to manage our working capital extremely diligently. I think at the level of working capital as it is at the moment, 20.0%, that's a pretty good level to just try and maintain. What I would say, however, is in the inventory specifically, you talked about stock turns.
Although we will be carrying more inventory, I think there is some opportunity in improving our stock turns, particularly when I look at some of our large retail operations, and here I'm referring specifically to Russia. There are opportunities in our supply chain to further improve the speed of delivery to market, shorten the lead times, presumably keep less inventory on hand. I'm not giving up on it. I think there's still opportunities to improve, but I think I can't promise too much on this area over the next year.
Answering your third question, Andreas, on NEO. Obviously, we are quite happy with the performance of NEO, as you have seen, 14% growth in 2012, and especially because we are targeting a new consumer group, as you know. Therefore, we are quite happy. This is mainly driven by China and by Russia. Also, you asked about the 10 test stores in Germany, which we all have opened since summer last year, and we said we will do a test phase of around 12 months. This will end in summer this year, and then we will fully review our analysis and all what we have seen and define the next steps. I can tell you that overall, we are very pleased with the learnings and the performance of the 10 test stores.
It definitely wouldn't be a surprise if we decide to further roll out NEO stores in Europe starting in the second half of 2012.
Yeah. Okay. Maybe coming back to India, the EUR 70 million. Let's ask the question differently. You said it's a difference between initial expectations and what in the end came out. How much of the EUR 70 million will you recoup, let's say in 2013, 2014?
I knew you'd be looking at that. The thing is, it's difficult to say exactly how much that would be. What I obviously will not be repeating in 2013 are the closure of franchisee cost and the restructuring that we did. We will get some sales back, so some of that EUR 70 presumably will come back. I don't believe, however, it'll be a tremendous amount because the sales volume or the sales expectations that we have for Reebok India 2013 are still a lot lower than what our initial expectations were for Reebok India 2012. You get a little bit of that EUR 70 back, definitely, but not all of it.
Okay.
Thanks, Andreas. Let's move back to the room. John, you're up next.
Thanks very much. It's John Guy from Berenberg. Just a few questions, please. The first one with regards to the stock, up 1% on an FX neutral basis. When you're looking at that well-managed stock, are there any specific areas where you think the stock is maybe slightly too high, or is that evenly balanced across all the regions? It's the first question. Second question with regards to, not acquisitions, but disposals. Is there any comment that you can give around potential progress around the disposal of the Reebok Hockey business? I think that you had a few interested parties, was just wondering if there's any update there. Thank you.
I'll take the first question then. No, the very good thing about the development of our inventories over the last several quarters now is that this really is across the board. We have been able to install good disciplines throughout all of our operating units, to keep a focus on it. We're obviously doing a tremendous amount also in the supply chain to become even more efficient in what is already a good supply chain. It's not just a one particular area. I think the area where I would identify some potential improvement is what I just answered in the previous question about those major retail operations where we have rather long supply chains at the moment. That would be, Russia would be the key one there.
John, you're right. We're always getting interests for parts of our business, we definitely had some interested parties looking to our hockey business. We spoke to them, we haven't got from anyone an offer where we thought this is satisfying to our needs. You know that we have quite a lot of innovations which we're bringing to the hockey business, be it the RBZ sticks, which we take over from TaylorMade into the hockey business, which is the most sold stick yet. Maybe the NHL lockout hasn't helped there as well, we are not under pressure. Therefore, we decided, no, we stop the sales process. We will continue to drive our business, make it more profitable and growing, and this is the status of the moment. You're welcome.
Andreas, next.
Hello. Andreas Riemann, Commerzbank. Two questions from my side. In 2014, there will be next FIFA World Cup in Brazil. The question is, are you planning to use this event to focus more on Latin America because this is not one of your core regions, actually? The second one on retail, you closed 260 stores. The question is, how many of the closures are basically openings next door, or what are real closures? Given that you are becoming a bigger retailer, probably you can collect more data points. Is this number going to come down in the future?
In terms of football, obviously this is a big event for us as we are the football brand number one in the world as we are the sponsor of the FIFA World Cup, and we will have a lot of teams there. Obviously, the qualification is not finished yet, when you just think about Mexico, Argentina, out of the Latin America area, Paraguay, and so on and so forth. Yeah, this will be a big event for us, we will use it to further drive our business in Latin America. When you said Latin America is not a core area for us, Latin America is definitely the area where we grow the fastest in the last 10 years. This business is relevant for us.
There we have a very good market position in most of the countries. Therefore, we definitely will use the World Cup in 2014, starting even with the Confederations Cup this year, to show to the consumer what we are all about.
Andreas, yes, you're picking up that we are becoming a much more sophisticated retailer. We're learning a lot, obviously, about retail. One of these learnings is that you do need to close stores, obviously, as soon as you identify that they're probably potentially not as profitable as you thought they would be. There may be a number, particularly in some of the emerging markets where there's been a larger shop opened in a close proximity. My understanding is that you should expect a continuation of a fine-tuning of our platform. We have over 2,400 stores at the moment, and closing a couple of hundred and opening a couple of hundred will continue to be part of our management of our retail footprint.
We're definitely getting more data points. We're definitely understanding more about where it's appropriate to invest. We have also a very sophisticated view together with our wholesale guys about our integrated distribution plan for all of our major markets and major cities as to where we want to be in retail, or where we want to be in franchising, or where we want to be with direct wholesale business. That's getting more and more sophisticated, you should continue to expect us to be closing stores in the future as well.
Bernd, please.
Thanks. [Bernd Moehn], LBBW. Just a question on the gross margin once again. You're guiding for another increase this year, and we briefly talked about the input costs. How do you see things evolve? I guess the pressure on labor cost will continue, seeing Cambodian workers rejecting pay hikes of 18% recently. I guess the pressure is on here. How do you see material prices evolve in 2013? You're guiding for an increase. Do you feel that your countermeasures, i.e., accelerated growth in retail, and all the other factors that you've explained to us recently, do you see that going strong in 2013 too? Perhaps you can just enlighten us a little bit more on that.
Fundamentally, I think we believe in our industry that we will continue over the next few years to see increased pressures on our FOBs. The fundamentals, both in wages but also in raw materials, are such that it's likely that rubber or other oil-based derivatives are going to continue to be at this high cost level or maybe even get more expensive. Definitely, as you commented yourself on the wages, that's clearly a case. However, for 2013, we don't see, through the negotiations we've had or the visibility that we already have for 2013, significant increases in the raw materials. We do see continued pressure on wages.
We are confident that not just through the efforts that we make to continue to be even better in our supply chain, but also through the dynamics of our business and product mix, as you highlighted, retail growing faster, emerging markets also with higher margins, that will overcompensate for whatever those pressures are. I don't think we can see them going away.
Maybe I can add one more point. As we have told you already 18 months ago, we're also looking at all our products, how we can re-engineer them and put more value with lower costs into the business. Just the knitted footwear piece is one of the initiatives, but we have a lot of others, and they all have helped already in 2012, despite the high cost pressure which we had from the FOB side to keep our margin.
Operator, we will take our last question today from the telephone, please.
Thank you. We will now take our next question from Louise Singlehurst of Morgan Stanley. Please go ahead.
Hi, good afternoon to you all. two questions from me, please. Just firstly, focus on the U.S. market. There is clearly a huge amount of market share for adidas Group when we look at some of the share data in that market. Can you just talk about the discussions with wholesalers? Are you taking more floor space within those stores? When we think about the new launches, i.e. Boost this year, is that incremental, or does it start to replace something like the lightweight running that seems to be waning in terms of popularity? My second question is slightly related to that. Just thinking about the advertising spend. I was impressed to see that advertising as a percentage of sales slightly came down in 2012. Should we expect that to be ramped up, particularly in the U.S., over the next couple of years as you take market share?
Thank you.
Let me ask the first question in terms of market share growth in the U.S. and floor space. The one goes with the other, in my opinion. When you have seen what we have done the last three years in the U.S. market, where we have grown more or less every double digit, 9% last year. This means that we are winning shelf space and we are winning the minds and the hearts of the consumer, especially of the high school kid. This will further help us to drive our sales. We are doing more shop-in-shop solutions with key customers in the U.S., especially in the mall and in the sporting goods channel, where we find our high school kid consumer.
This you will see in the future that we will have a stronger presence in the stores through the different categories, and this obviously will help us to get better sales and therefore also better market shares. In terms of advertising or marketing spend in the U.S., we definitely do believe that we have found the right formula to spend what is necessary to drive our sales in a qualitative way in the U.S., which means, on the one hand, that we drive our sales and build further our business, but we also want to drive our margin in the U.S. This you see year by year getting better. Once again, it all comes back to that what we said in the presentation. We want to have quality growth, not just volume.
Ladies and gentlemen, that completes our conference call for today. Thank you for those who joined on the line. You may now disconnect. If you give us guys in the room a few seconds to reset, we'll start at 3:30 P.M. with our adidas Sport Performance presentation on running. Our next date will be May 3 for our Q1 results. Thank you very much for coming to Herzogenaurach in person today. We really appreciate that.