Good day, ladies and gentlemen, welcome to the adidas Group Q1 2012 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to John-Paul O'Meara. Please go ahead, sir.
Good afternoon, everyone, hope you're all doing well today. We will have our first quarter conference call, and our presenters will be Herbert Hainer, adidas Group CEO, and Robin Stalker, our Group CFO. They will give you more detail on our outstanding first quarter performance, and update you on our outlook for the remainder of the year. With that, I'll hand over to Herbert.
Thanks very much, JP, good morning or good afternoon, ladies and gentlemen. We have started the second year of our Route 2015 strategic plan exactly like the first. Setting a blistering pace, leaving the competition in our wake. With currency neutral sales increasing 14% or 17% in euro terms to over EUR 3.8 billion, we recorded our fifth straight quarter of double-digit revenue growth. Group operating margin improved 1.1 percentage points to 10.7%, driving earnings per share up 38% to a new first quarter record of EUR 1.38 or EUR 289 million in net income. Our balance sheet continues to be in top shape with net debt down 30% year-over-year and operating working capital as a percentage of sales remaining close to record lows at 20.7%. What's behind this period of unprecedented growth and success the group is enjoying? Well, I think it's quite simple.
It's the result of our focused and consistent investment into our brands, channels, and markets. Plus, it's our disciplined approach to managing our market opportunities during this period of economic uncertainty. In this respect, it is striking when looking at our result set. In several regions, we have been able to decouple from many of the macro issues and industry headwinds. It's been a lot of work, our drive for excellence and execution in everything we do and the attention we give to understanding local market dynamics is clearly evident in our performance around the world. Let me take you through three examples of this seen in our first quarter. First, let's look at Greater China. With growth of 26% currency neutral, there is no doubt that we are gaining share in this key market. Why?
First, because we have rebuilt our business patiently and with discipline since 2009. Second, we have kept a razor-sharp focus on the quality of distribution, optimizing the number and type of stores as well as their locations. Third, we have refined our product offering, brand marketing, and visual merchandising to match a more sophisticated and mature Chinese consumer. I can assure you, our strong brands in Greater China will continue. Feedback from our partners clearly shows that adidas is the brand with the most momentum. This fact is also verified by our own retail store development, where traffic is high and comparable store sales increased 10% in the first quarter. Another example is Western Europe. Here in our home market, our success is driven by our deep understanding of how to execute in a mature market by continuously leveraging our strengths.
With revenue growth of 7%, we have not only secured but built on the significant market share gains of the last year. We are achieving this by paying close attention to where the consumer shops, putting the right product in the right channels, improving consumer interaction through high-quality in-store and shop-in-shop initiatives, as well as best-in-class customer replenishment programs. This is particularly the case in the U.K. and Poland, which, as you know, has the backdrop of the world's biggest sporting event this summer. Sales in these markets are up 19% and 35% currency neutral respectively, putting us on a clear trajectory to achieve market leadership positions in these countries, using the event platform as a catapult for our strategic plans. Finally, in North America, our business remains very strong. Sales at adidas and TaylorMade-adidas Golf increased 10% and 33% respectively.
At Reebok, excluding the impact from the various license changes and toning, sales were up 5% currency neutral. More importantly, you can see that our presence at retail, particularly in the mall, improves with each and every quarter. This is visible in the market share gains of all our brands and validates that our strategies to win over the next generation consumer are in full swing. adidas, in particular, has seen very strong growth in footwear market share, which now stands at a double-digit level, and sell-in momentum was strong in Q1 with footwear sales up 22%. This of course, would not be possible without being able to excite consumers and customers with the ultimate in product innovations and brand experiences. These three markets give you some great examples of just how well we are executing across the globe.
Let me spend a few minutes on the brands and the categories. At adidas, currency neutral sales increased 16%, our eighth consecutive quarter of double-digit growth. Even more impressive is the fact that adidas sales are up at double-digit rates in all regions. All of our core categories continue to gain momentum. Those that are touched by the major sport events have definitely been a key highlight. Football is obviously at the top of the list, with sales increasing 23%. Looking forward, conditions are perfect for us to extend our market share lead with some very significant product introductions and brand activation events now hitting the market. For example, the best-selling boot in the market, the adizero F50, will be joined on-field this Saturday by the new and highly anticipated Predator Lethal Zones, which launched on Tuesday.
On May 19th, we will witness an all-adidas UEFA Champions League final between two of European football heavyweights, Bayern Munich and Chelsea. We also have just started introducing the new jerseys and match balls for the 2012-2013 club season. Today, for example, we are presenting the third generation of the Bundesliga match ball, the Torfabrik, of which we have sold more than 1 million balls in Germany since its introduction in 2010. All of this is even before the main event, the European Football Championship, kicks off in Warsaw on June 8th. Our Olympic-related product is also doing very well, with the Team GB offering designed together with Stella McCartney exceeding all of our expectations. Another important category for us, especially in an Olympic year, is running.
Sales are up 16%, driven by the continued success of our lightweight Adizero offerings, where sales are up over 40% and the introduction of our most breathable running shoe to date, the new ClimaCool Seduction, which has seen sales in our Clima franchises jump over 80%. Given the close relation between running and the Olympics, we are also very visible in the market with our marketing installments, "Are You Ready to Run?" and "We All Run." In basketball, we also continue to see robust sales growth, with footwear in particular up a very strong 23%. The adiZero Crazy Light 2, weighing just 9.5 ounces and nearly 10% lighter than the nearest competitor's basketball shoe, was launched at the $140 price point just over a week ago, as our brand momentum enables us to move up the price ladder.
To wrap up on adidas in outdoor and sports style, growth rates show no sign of slowing versus the prior year, increasing 45% and 24% respectively. In particular, we are very satisfied with our new development, where sales were up almost 30% in the quarter. I'm also pleased to report, even though it is early days yet, our eight test stores in Germany are showing very encouraging signs, with traffic exceeding expectations and the stores achieving our goals in terms of selling to a higher number of customers. Moving over to Reebok. Sales declined 7% currency neutral, in line with our expectations. However, excluding the impact from shifting the reporting of U.S.-related NHL sales to the Reebok-CCM Hockey segment, the end of the NFL license, and excluding toning, Reebok brand sales increased 10% currency neutral.
The NFL impact, however, was rather small in the quarter as the contract just ended in March. Reebok has some challenges to overcome in Western Europe this year due to the weak economic environment. As retailers currently focus on the major sporting events, we nevertheless continue to see good progress in most other regions. In North America, sales were up 5% on a like-for-like basis and excluding toning, and profitability improved markedly due to a better price mix and an overall stronger product offering. In all other regions, sales were up for the quarter as we expanded performance-related offerings like Zig and RealFlex and introduced some new classic products. On the latter, we're now starting to see some decent traction, with global classic sales up 7% currency neutral.
Taking all these factors together, this is having a positive impact on margins with an improvement of 60 basis points in the brand's gross margin. Therefore, while I would have liked to have been able to show more top-line growth, our progress with the brand continues. Looking forward, our plans for 2013 will include some major product and technology launches, and we will be sharing more on this with you on our investor trip in September. To finish on Reebok, and as you will have seen on Monday's announcement, unfortunately, we discovered commercial irregularities at our Reebok business in India. As there has been some misinterpretation, to be clear, this issue only relates to Reebok and its legal entity in India and has nothing to do with the adidas brand or the adidas legal entity in that market.
Due to the sensitivity of the ongoing investigation, we cannot comment further than we already did on Monday. However, let me assure you that we have and will continue to vigorously pursue a course of action to protect our group's interest. The situation in India, although unfortunate, will allow us to now accelerate plans to improve a specific underperforming part of our business, which was already in the scope of our Route 2015 profit-enhancing initiatives. Under the new leadership team, which was announced at the end of March, we will now accelerate and more aggressively restructure our business activities in India, including significant changes to our commercial business practices. The implementation of new commercial initiatives and terms could result in a reduction of our Reebok franchisee store base with partners by about one-third, as we focus on maximizing our future profitability in the market.
These, along with other planned actions, could lead to additional one-time charges in the remaining quarters of 2012 in an estimated amount of up to 70 million EUR. Rest assured, our goal is to begin 2013 with a clean sheet in this market. Finally, for today, I want to finish on a part of our business that often gets overlooked by the media and the financial community, TaylorMade-adidas Golf. Our performance at TaylorMade-adidas Golf in the first quarter was simply breathtaking. With 32% currency-neutral growth, the segment achieved its highest growth rate in almost nine years. This is even more significant as it comes on top of a 20% growth last year. What's behind the success? Well, ladies and gentlemen, it's the innovative product lineup we have for today's golfer across all categories.
Sales grew at double-digit rates in all club categories, apparel and footwear, with metalwoods up 28% and irons growing an amazing 64%. Our U.S. market share in metalwoods was a staggering 50% in the first quarter at retail, and the gap to our closest competitor in irons has also expanded to now eight points, with a share of almost 26%. Even more importantly, the strong increase in sales allowed TaylorMade-adidas Golf to double its operating profit compared to a year ago. After achieving our goal to become the largest and the best performance golf company, we now are ready to pursue an even greater ambition: to be the best golf company in the world across all geographies, products, and customer demographics. In line with this goal, we have found the perfect fit with our planned acquisition of Adams Golf.
The proposed combination of TaylorMade-adidas Golf and Adams Golf brings together two highly complementary sets of brands, combining TaylorMade-adidas Golf's focus on the younger and the low to mid-handicap golfer, with Adams Golf's focus on game improvement, as well as senior and women's golfer. The total transaction cost is around EUR 53 million, and we expect the deal to close later this quarter. Ladies and gentlemen, looking at the big picture, we are right where we want to be. We are maneuvering through the still challenging economic environment in a diligent way, while at the same time ensuring we capture the opportunities that will deliver on our promise to secure long-term quality growth and enduring success for our group. All in all, there is no doubt that these results confirm the outstanding momentum and global power of the adidas Group.
Let me now hand you over to Robin to take you through the financials and updated outlook in more detail.
Great. Thank you very much, Herbert, and a very good afternoon, ladies and gentlemen. As Herbert outlined, we enjoyed an exceptional start to 2012, with strong growth throughout the group. As you've already been able to digest our headline figures over the past few days, I'm only going to focus on a few topics today, which from my perspective include three important takeaways. First, our strong margin development despite significant gross margin pressures. Second, the power of this group and our potential to leverage. Thirdly, the competitive advantage we are gaining from our balanced approach towards inventory management. Starting with margins. Just as in other quarters, higher sourcing costs caused us quite a challenge, alone eating up 4.7 percentage points of group gross margin in the first quarter.
However, through focus and execution throughout the value chain, we were able to lessen the impact to only 70 basis points. The biggest offsetting factors were, firstly, the overproportionate growth of sales in our retail segment, which carries higher margins. Secondly, we had a more favorable product and regional sales mix, the latter mainly related to strong growth in higher-margin markets such as Greater China. Finally, our hedging also provided some tailwind. However, I do not foresee this continuing throughout the year. In fact, it will be a slight negative in the coming quarters. Despite the group gross margin decrease, our operating margin improved a considerable 1.1 percentage points versus the prior year, coming in at 10.7%. This resulted in group operating profit increasing 30% to EUR 409 million.
While higher other operating income and royalty and commission income contributed to this development, more importantly, we were again able to leverage our strong top-line growth to bring down other operating expenses as a percentage of sales by 1.6 percentage points to 38.4%. This was the fifth consecutive quarter our operating expenses increased at a lower rate compared to sales, a testament, I believe, to our efforts to improve and leverage our investments. Looking at our segments, retail again was a star performer, with segmental operating margin increasing by 1.1 percentage points to 16.6%. This confirms that the strategies and initiatives we are putting in place to drive retail excellence continue to bear fruit. For the quarter, sales and marketing working budget expenditures increased 2%, amounting to EUR 426 million. As a percentage of sales, the ratio came down 1.6 percentage points to 11.1%.
For the full year, I expect this metric to be at a similar level versus 2011. That's around 12.7%. As in most event years, our marketing spending this year will be focused on the event quarters, which are here, the Q2 and Q3. To complete the P&L picture, net financial expenses decreased 32%, which is mainly a reflection of an 84% increase in interest income, as well as a 70% decrease in negative exchange rate effects. The first quarter tax rate came down one percentage point to 25.5%, which was predominantly due to a more favorable regional earnings mix. Please note that for the full year, I continue to expect that our tax rate to be slightly above the 2011 level of around 28.5%. As a result, net income attributed to shareholders increased 38% to EUR 289 million.
This translates into basic and diluted EPS of EUR 1.38, that's up from EUR 1 a year ago. Although we issued a convertible bond in mid-March for an aggregate nominal amount of EUR 500 million, there was no dilutive effect in the first quarter. While I'm on the subject of this extremely successful bond placement, let me help you with your future calculations on how to calculate an eventual dilutive effect. While it is clear you will need to adjust the number of shares by 5.99 million, don't forget you will also have to add back an after-tax amount of around EUR 9 million to net income attribute shareholders. This means that the convertible should only be about 1% dilutive. Looking briefly at revenues. By segment, currency-neutral wholesale revenues increased 10%, driven by growth in all regions except North America.
Other Asian markets and Greater China performed exceptionally well, growing at 29% and 27% on a currency neutral basis, respectively. In the retail segment, sales grew 16% on a currency neutral basis or 20% in EUR terms to EUR 693 million. Our comparable store sales continued to drive our retail performance, posting a 9% currency neutral increase, with North America and Latin America being the outstanding highlights as comp store sales increased here 17% and 14% respectively. At the end of the first quarter, we operated 2,422 stores, a net increase of 21 stores or 1% versus December last year. During the period, we opened 110 new stores and closed 89 stores, while 30 stores were remodeled. In addition, 58 concept stores were reclassified as stores in other retail formats, and one concept store was reclassified as a factory outlet.
Finally, the pinnacle of our Q1 performance by segment was that of our other businesses, where sales rocketed 32% currency neutral. This outstanding performance was mainly a result of the phenomenal 32% sales increase that you've heard from Herbert at TaylorMade-adidas Golf. Sales at Reebok-CCM Hockey also increased strongly at 69% currency neutral, supported by the NHL license shift from Reebok. Even excluding this effect, Reebok-CCM Hockey sales soared at a strong double-digit rate. Rockport sales also improved versus Q1 2011, with growth of 7% currency neutral. Looking now to the balance sheet, ladies and gentlemen, we also have some really positive news to share with you today. The hard work and extra discipline we have instilled throughout the organization on working capital management since the economic crisis began is now turning into what I consider a real competitive advantage.
At the end of March, our group inventory growth rate again slowed to 13% currency neutral from 16% in the prior quarter. In addition, the inventory aging profile continued to improve. Considering our consistent efforts to balance inventory management between planning for growth and keeping markets and channels clean and fresh, I believe we are in the industry's best and healthiest inventory position. This will ensure we can capitalize on our tremendous product pipeline, which will allow our brands to continue to excite consumers and customers around the world. The last point on the Q1 results, the strong operating cash flow generation over the last 12 months contributed to a meaningful reduction of net borrowings. At the end of March, our net debt stood at EUR 640 million, equating to a decrease of EUR 274 million or 30% versus the prior year.
In addition, our equity ratio has also improved considerably, increasing 2.9 percentage points to 48.1% at the end of the first quarter. Taking into account this exceptionally strong first quarter financial performance, which was better than we had initially expected, the continuing strong momentum of our brands in key markets, as well as the negative impacts from potential one-time charges related to our planned restructuring activities at Reebok India, we are in a position to increase our outlook for 2012. Full-year sales are now expected to grow at a rate approaching 10% on a currency neutral basis compared to our original projection of a mid to high single-digit increase. This is as a result of an increase in sales expectations in wholesale and other businesses. Despite first half input cost pressures, we continue to forecast a stable gross margin compared to the prior year.
In addition, operating margin is expected to increase to a level approaching 8%, despite the negative one-time charges of up to EUR 70 million.
Putting it all together, net income attributable to shareholders is expected to increase at a rate of between 12% and 17% to a new record level of between EUR 750 million and EUR 785 million, translating into basic earnings per share of EUR 3.58 and EUR 3.75. This is also above our initial guidance, in which we had projected an increase of between 10% and 15%. In summary, our strong start to the year is a testament to the consistent investments we have made in building brand equity. This is clear across our brands and channels, in our industry-leading growth rates, and into the direction of our margins. With our strong balance sheet and clean inventories, we have all the resources we need to continue driving forward with our Route 2015 ambition. Now, Herbert and I will be happy to take your questions.
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press star one on your telephone keypad. We will pause for a moment to allow everyone to signal. We will take our first question from Andreas Inderst from BNP Paribas. Please go ahead.
Good afternoon, gentlemen, congratulations to the strong start to the year. My first question is on brand adidas. Excellent momentum, ongoing positive momentum, I have to say. You said your market share is now over 10% in North America, you also gained nice market shares in Europe. Can you share any market share targets maybe for the next two years? What are the biggest operational risks you see in the North American market and the European market for brand adidas? That's my first one. The second one on India. I assume you have sales significantly less than EUR 300 million in India, yet your one-off costs will be around EUR 70 million or up to EUR 70 million. That's quite a lot. Maybe you can elaborate a little bit more what you want to achieve there.
Maybe you can split or provide a phasing of the one-offs through the year. Related to that, what will be the EPS guidance excluding your EUR 70 million one-offs? Thank you.
Andreas. Let me start with the first one, market shares, North America and Europe. Obviously, we haven't given out any market share targets, but there is no doubt that especially in North America, as I always have said, we have still a lot of potential in my opinion, and we are concentrating on building our business on a sustainable, solid platform with key pillars in basketball, in running, in training, in football, as you know. Obviously, you see the first results. Same is true to Europe. Even we have some economical challenges in Europe, as you know. I think our results of plus 7% in the first quarter are quite exceptional. This will definitely continue as we have now the UEFA European Football Championship ahead of us, the Olympics. Overall, I just can confirm what you mentioned.
We have extremely strong momentum with brand adidas. I definitely do see it going forward. Concerning to India, I think you will understand that we have an ongoing investigation there, and therefore we cannot comment on any individual items, what you have asked. We definitely do believe that in three months from now, when we do the second quarter call, that we can give you more details on India.
What's the guidance actually on EPS, excluding all your one-offs?
Andreas, perhaps I can answer that one. We've given you the guidance. We've clearly said what we think may be one-offs. At the moment, we can't quantify that any better. As Herbert said, we'll be in a better position, no doubt, to talk about this in the second quarter. We've taken the best estimate we have. We've given you the guidance on that basis.
Okay, good. Thank you.
We will now take our next question from Mathias Eifert from MainFirst. Please go ahead.
Yes. Hi, this is Mathias Eifert from MainFirst. First question on the Reebok gross margin improvement. Was it purely an effect of shifting the NHL business to CCM, or is it even up excluding that effect? As I would assume it has a lower gross margin. Secondly, in North America, your wholesale sales was down 2%. Is that all driven by the Reebok toning effect? Can you give us a bit more detail on that? Because I want to understand how that fits together with your comment about the market share gains. Lastly, can you give us a bit more detail on your strong growth in style? Was that equally shared by Neo and Originals, or is there a big difference in terms of those growth rates?
Okay, Mathias, I'll take the first couple. We're really pleased with the underlying improvement or continuing improvement in the Reebok gross margin. There is definitely an underlying improvement, not just, although you're correct, it has been helped by the shift of the NHL product into CCM Hockey. It's a fairly small amount. There's definitely an underlying improvement. You can see that through the mix in the faster growth in the retail segment with higher margins. That's definitely continuing the way we wanted to. We've closed the gap, I think of the first quarter, Reebok to adidas about normally the gap now of that eight percentage point. In terms of the wholesale business, yes, this was impacted by the shift, but otherwise I don't think there's anything material in that number.
To answer your third question, Mathias, on style, as you're following us quite some time, we have seen that over the last couple of years, we were very successful in driving our style business mainly through adidas Originals. Once again, this is the big driver. We are very happy with our NEO business, which is up 30% in the first quarter, but it is too small yet to have this big impact. It's still the underlying Originals business, of course, coupled with NEO and the other style variances, which are all growing.
Excellent. Thank you.
We will now take our next question from Jürgen Kolb from Cheuvreux. Please go ahead.
Thank you very much. First of all, on Japan, I think you experienced a very nice rebound in the first quarter there. Just help us, again, the drivers of that, obviously some kind of a jump from the tragic events last year there, but it should also have a very positive impact in the second quarter as I think your stores are now all open. The rebound in Japan should also materialize in Q2 and Q3 if I'm right here. Secondly, on the input costs, again, a very strong increase there. Any additional comment that this might now have peaked and you're expecting this pressure to ease in the coming quarters? Lastly, on Reebok, you mentioned a new product range to be launched next year.
Is there also a new marketing campaign this year that you are planning to issue in order to give the brand additional support, maybe here specifically in Western Europe or your plans for Reebok for the rest of this year, Western Europe, but also in the U.S.? Thank you.
Okay, Jürgen, let me take the first and the third one. Robin will answer the input costs. Japan, you know that we have a very strong business in Japan. We are clear market leader. As you have seen in 2011, our sales decreased only by 4% during the whole of the year. Our business is quite solid, and this is also reflected in the first quarter year. Sales in the second part of March, the comparables have helped us a little bit. Overall, it is because of our strong business in Japan, and this will definitely continue within the next quarter and during the year. Third question on Reebok, we just have launched a few week ago our new campaign, the sport of fitness has arrived. We will drive this further.
We see, especially on our new product, the RealFlex, very good sell-throughs across the world, also in Europe. Zig is still doing very good in the U.S., Japan, Korea. The concept's definitely working. Obviously, in the moment, we are fighting against the strong comparables with EasyTone from last year, but the overall business is definitely going in the right direction. You will see that, especially in 2013 spring, we are coming with new product concepts and definitely exciting merchandise which we bring to market.
The simple answer, Jürgen, for the input prices, although we also don't have a crystal ball for the future years, definitely for this year, we think this increase has peaked in the first quarter. We are guiding obviously to our continued to be around what it was at the end of last year for the full year 2012, that this is now behind us, this peak.
Okay. A quick one on hedging. Where are we standing in terms of hedging to the dollar right now, if I may ask?
For 2012, obviously fully hedged, we're around about the 137. We're about 50% or so hedged for next year, that's a little bit worse, obviously, probably around about the 135.
35. Very good. Thank you, gentlemen.
You're welcome.
We will now take our next question from Michael Kunz from Deutsche Bank. Please go ahead.
Yeah, good afternoon, gentlemen. Also a couple of questions. Firstly, your royalty income was up quite significantly year-over-year. I think the quarterly report mentions adidas as the major driver behind it. I would be interested in what products drove that development and what we should expect over the upcoming quarters. Secondly, on your opening plans in your store network, there are quite some fluctuations right now. Could you give us an indication what we could expect for the different store categories by the end of the year? Also for e-commerce sales and maybe an indication what your e-commerce sales were in the first quarter. Finally, I would be interested in Let's say, a clean Reebok growth figure.
Obviously, you gave us a figure ex toning and ex the license business, maybe just the underlying development, because I think it's fair to include toning here because I think that's essentially the underlying development. Thank you.
Okay. Michael, yes, you're correct. The royalty increase, the royalty income increase is largely because of revenues from adidas license. Part of this is particularly in this year related to the product for the events where we have licenses, obviously. In terms of e-commerce, the e-commerce sales have grown considerably this quarter up about 60%. I think you also had a question about the underlying Reebok growth. I think Herbert mentioned 30% after we exclude toning, if we only account for the shift of the NHL and the NFL, then we have a decrease of 5%.
Any indication of the current size of e-commerce?
No, Michael, we don't publish any figures for the e-commerce business.
Okay. One follow-up. I think the question was also asked already. Nothing on the investigation in India, but could you shed some light what sales you actually have in your Indian operation to have a, let's say, context for the potential one-off?
Michael, as we have said, you will understand that we don't comment on the India case because this is ongoing investigation. In terms of size, we do not publish any numbers for individual countries, but I can tell you that India is not within our three biggest countries in Asia, which is China, Japan, and Korea.
Okay. One very last question. Regarding your guidance, you've given a one-off number to us and an operating margin guidance of approaching 8%. If we strip out the one-off effect, we are probably at around 8.5% or approaching 8.5%. Is that a fair assumption to use as clean number and could you thereby derive an operating leverage for this year of about 90 basis points?
Michael, I understand the calculation. You'd love to have us confirm, but we're not going to do that at the moment. I think you're identifying a couple of areas where you're seeing this company is delivering leverage. That's a tick. We obviously in this year had some one-offs. Exactly how high those one-offs are, we'll be able to quantify better for you as we go through this year, and I'm sure they'll confirm good underlying improvement in our profitability. We cannot do anything other than what we've just given to you in guidance today.
Okay. Thank you very much.
You're welcome.
We will now take our next question from Antoine Belge from HSBC.
Yes. Antoine Belge, HSBC. Three questions. First of all, can you come back a bit on the performance in Greater China, which was very strong? How confident can we be that this growth has been also reflected in a strong sell-out and not just feeding through the distribution in China? Second question on SG&A, I think you mentioned that, quite rightly, that over the last couple of quarters, you've been showing some leverage. What about Q2 and Q3 on the back of the events? Shouldn't we expect that here there could be some negative leverage with a lot of spending on the back of the events? Finally, regarding the margin of the group in the U.S., I know that you don't disclose margin by geographies, but in your guidance for 2012, where margin overall are increasing, what would be the contribution of margin in the U.S.?
Do you expect those to increase or because of Reebok, this year could be a bit more flattish in terms of margin in the U.S.? Thank you.
Let me start with the first one, China. Obviously, you have seen China is the star in the first quarter, but also when you look back in 2011, we have been growing already by around 20%. Remember, two years ago, we told you that we will patiently build the business back after the financial crisis in China with a much more sustainable and healthier business model. This was what we have done, especially with our key accounts, where we connected ourselves with IT systems that we can read fast and better what happens in the store. Therefore, our sell-through numbers are better. Our inventory is cleaner. We can monitor it closer. This 26% increase was not just a one-off. We will continue to see good growth going further in China. Our inventory is in a very healthy, good aging, and low position.
I must say, I've never been more pleased with the China business than in the moment. I also do foresee for the next years that we can grow our business double digits there. The third question was on the margin of the U.S. We also told you already in the past that we do believe raising our profile and therefore raising our average selling prices with better and more innovative products, we strive for better margin. I think the adidas adiZero Crazy Light basketball shoe is the best example. It's the lightest shoe in the basketball industry, has a high demand by the consumer, therefore we can raise prices and therefore we get better margins and we will continue to do so.
Antoine, in terms of the SG&A, there's always going to be fluctuations from quarter to quarter depending on timing and marketing, and that's going to be the case this year also. I think I'd point you to the full year guidance. The point is we're getting more leverage from our operating expenses, this you will see throughout this year and definitely by the end of this year, you will be able to reflect upon that being a contributor to an improvement in our operating margin.
Okay. Thank you very much. Maybe just a follow-up on inventories as a whole. They've had a very decent evolution in Q1. Is it something that was any one-offs there, what should we expect in terms of inventory growth, especially compared to your top line growth guidance?
This is this balance we have to try and keep that I was trying to refer to in my prepared comments, that obviously we want to be able to be in a position to quickly service the consumers that need and want our products. At the same time, manage our working capital as efficiently as possible. I think we've shown that the whole group has a focus on this, that we are continuing to improve this. You've seen it come down as a percentage of growth over the last several quarters. The quality of the inventories should be as clean as possible, I think you can see us always striving to have further improvements in that, there were definitely no one-offs in the first quarter that led to this good figure.
Okay, thanks.
We will now take our next question from Louise Singlehurst from Morgan Stanley. Please go ahead.
Hi, good afternoon. Three questions from me as well. Firstly, can you please give us an update on how the retail rollout of Neo is going? Also if you have anything further planned for this year. If you have any further comments to add on the performance of the existing Germany stores. Secondly, with regards to China, it's clear that you're taking market share from the local peers. In terms of sellout trends in China at your wholesalers, would you be able to give us some color in terms of how you're doing versus your local and also the domestic competitors? Do you think that growth can continue to come from floor space expansion, especially at the higher CSOCs? Just lastly, on Reebok, do you think that Reebok can continue to sustain its market share in the U.S. this year and also going forward?
Thank you.
Let me start with Neo. As I have said in the speech already, we have opened 8 out of the 10 planned stores in Germany, and the other 2 will follow in the next weeks. All the first indications which we see so far are quite exciting. Still I think it's a little bit too early to draw ready conclusions out of it, but we are very happy with the frequent, with the traffic, with the girls, as I said, which are coming into our store. We get extremely good comments when we do our market research about the freshness, the youngness, the colorfulness of the brand. This all indicates that the assumptions which we took when we entered into the Neo business are the right ones.
As I also said, we definitely will use 2012 to test in Europe new store format, Magical Mirror, as you might have seen, new product concept that we are prepared before we roll it out in Europe. By the way, as you know, we have close to 1,000 stores in China in Neo, and this is also going in the right direction. Second one, this brings me immediately to China. Honestly, I do believe we are not only gaining market share compared to the local competitors, I think also to the international competitors, because I don't think that the market is growing by 26%, and especially a few of the smaller international brands have a hard time. I can just repeat what I said before. I think we have done our homework in China.
We have a complete new team installed two and a half years ago, and they're working according to plan. This definitely pays off. Last but not least, Reebok in the U.S. I think, and this will be confirmed when you talk to retailers, that in the last 24 months, we have done a very good job in the U.S., exciting consumer with new concepts for Reebok, bringing new consumers back to Reebok with EasyTone, with Zig, with Flex. Flex, by the way, is selling extremely good. Also, Zig is doing well in the U.S. Classics is now starting to rebuild. You know that we have taken Swizz Beatz under contract, and he is helping us, especially in the celebrity and music scene. All what I see is going in the right direction.
As I said, EasyTone, we have strong comparisons for the first six months of this year. In general, I definitely think the business there is going in the right direction.
Thanks very much.
We will now take our next question from Andrew Mobbs from Redburn. Please go ahead.
Thank you. Two quick ones, please, from me. The first, I appreciate it varies a lot by brand and market. Could you give us some kind of indication of the average selling price increase versus volume increase within the Q1 sales growth of 14%? The second one, you haven't made any comment on the Reebok joint venture situation in Latin America, which impacted, I guess, sales in Q4. Could you give us some indication of what's going on there, and is that part of the reason behind the improvement in Q1 versus Q4? Thank you.
Andrew, no, we don't have any color for you on the average selling prices. We know they're improving, obviously, but I can't break that down for you.
On the Reebok joint venture in Latin America, obviously, we don't break it out separately, but you have seen that our business in Latin America in the Q1 on Reebok is good, it's growing. We are working closely with our joint venture partner, and things are going according to plan. I think it's also fair to say that we have some hurdles with tariffs and import duties, et cetera, in Brazil and Argentina, which doesn't make our life easier.
Okay, perfect. Can I perhaps just a very quick follow-up one?
Obviously through the input price increases, this immediately brings our inventory value up. I can't give you exactly the number, what it would be in quantity, but in quantity, it's definitely much lower than the 30% in value. This also indicates quite clearly our good inventory management, because when you see that on the one hand, we are growing 13% and we are bringing our inventory down quarter by quarter, and having, by the way, a very, very young and very healthy inventory. I think that our guys are definitely doing a very good job in managing this.
Okay. Thank you.
We will now take our next question from Cédric Lecasble from Raymond James. Please go ahead.
Yes, good afternoon, gentlemen. This is Cédric Lecasble from Raymond James. I have two follow-ups, if I may. First one on marketing budget spending. You used to say that an average level for the group was between 13% and 13.5%. This year is an important year with big events, you are guiding on less than 13% at 12.7%. Does it mean that you are leveraging in better terms your marketing expenditure? Is this something structural? Do you believe this ratio will continue to be lower than 13% and probably lower than it was in the past, despite big events? That's question number one. Question number two, on Reebok, we understand the phasing between toning with still strong comps, easier comps going forward, the declining toning sales, and the ramp-up in the other products.
When do you think the balance of the two will lead to more positive growth trends for Reebok overall? Thank you.
Question number one, marketing budget. I think we always have said that we will spend between 12% and 13%, you should not assume that in an event year, our marketing working budget is going across this boundary because, as we have said already several times, we're trying now to phase our product introductions, our new brand campaigns, and all of the big sporting events throughout the year. That we have, on the one hand, a more or less stable spending on our marketing working budget and therefore permanently talking to our consumers and in the in-between years, it's much more about product concepts and new innovations, whereas in the event years, we talk much more about the events. You can imagine that with the sales growth which we are experiencing, that we want to bring the marketing working budget step by step slightly down.
Nevertheless, let me also make it clear that I see marketing working budget as an investment in our consumers, and therefore, we will always spend a certain amount which we think we need to excite our consumers and drive our sales. Second point, Reebok, I think you can expect a more like for like on the second half, where the toning influence in 2011 was not as strong anymore as it was in the first half of 2011.
Could you help us, maybe, if I may, on the share of the toning sales in the total sales, just to have an idea of when this toning thing is over?
No, we don't comment on any shares of a product concept within the total sales.
Okay, you are expecting better growth or positive growth for Reebok in H2?
No. Let me also be clear. We don't see toning completely over. We do believe that we can rebuild the business. Obviously, as you know, one of our competitors has put out a lot of inventory with low sales, and this has hurt the market in 2011. This is continuing into 2012. We definitely do believe in the toning business. All the market research which we are doing is clearly telling us, A, that there is a consumer out who is excited by the product, and B, that Reebok has definitely been the one who has been the most innovative on the toning side. This is what we want to use. We still have a lot of countries where toning is doing very well, especially in Asia, but also in Russia, in some of the emerging markets.
Therefore, we will come back with the first new collection in the second half of 2012. In spring, summer 2013, you will see a complete new era of toning products.
Thank you very much.
You're welcome.
Ladies and gentlemen, that completes our call for today. We will report our first half year results on the 2nd of August. As Herbert teased in his comments today, we will also host an investor trip this year to the U.S. in September, and more details on that will come out in the next few days. Thank you very much, and enjoy the rest of your day.
That will conclude today's conference call, ladies and gentlemen. Thank you for your participation.