Thanks very much, Hayley. Good afternoon or good morning, and welcome to our third quarter 2020 results conference call. First of all, I would like to express that we highly appreciate your flexibility as we had to move forward this call due to a regular senior management meeting that is taking place later today. As you can imagine, we have to hold this meeting virtually, and in order to allow colleagues from around the world to join, we need to still start right after this call. Thanks very much for your flexibility.
Our presenters in today's call will be our CEO, Kasper Rørsted, and our CFO, Harm Ohlmeyer. We will kick it off in a second with the prepared remarks from Kasper and Harm, followed by the Q&A session. During the Q&A session, I would again ask you to limit your questions to two, to allow as many people as possible to ask their questions. Since we don't have that much time today, I would now like to hand it over to Kasper.
Thank you very much, Sebastian. First, I'll provide you with a high level of where we stand, then we'll review our business and financials in the third quarter, and then Harm will give you an update on how we continue to operationally deal with certainties and opportunities. At the end, we'll take a look at our current trading outlook and, of course, take you through our product pipeline and answer any questions you might have. The good part is that sport finally came back and our athletes are again winning on the pitch. Whether it's Bayern Munich taking the Champions League, Dominic Thiem taking the U.S. Open, All Blacks defeating Australia, or having Peres not only setting one, but setting two half-marathon records in our new Adizero Adios Pro shoe, really shows sport is back, but also shows our commitment to where we came from.
Football and running, this is where adidas was born. When sport returned, we also were better able to connect with the consumers, whether through our HomeTeam campaign with the second chapter on social media, where we've had more than a half a billion views in Ready for Sport, or on our online site where our consumers who connect have a much higher intent to buy than the average, or it's Ready for Sport that showed how we can successfully combine brand and commercial opportunities. The importance of sport is back is not to be underestimated. Of course, we want the fans back in the stadium also. We're also connecting at the grassroots levels. The amateur game is also returning, which is important for every individual around the world that does sport outdoor and indoor.
In order to support amateurs at all levels in Europe, we've donated more than 150,000 kits to set up 10,000 teams across Europe. This is our pledge to bring amateur football back and change lives through the power of sport. We're also excited to have Amanda join at the beginning of 2021. Amanda will become our new Executive Board Member responsible for global HR. She's held numerous executive positions for different divisions and companies, among others, BNP Paribas and JP Morgan. She has more than 24 years of HR experience in global organizations, and we're delighted that she's taking the opportunity to come to adidas and help us move our overall HR agenda forward. Within our agenda, it's also about creating lasting change. In July, we set clear commitments to fight racism and accelerate inclusion globally.
In August, we relaunched our internal Fair Play Code of Conduct to strengthen our connection to integrity. In September, we held our first Global Day of Inclusion for all employees to engage, reflect, and learn about the topic. On this day, I personally discussed the importance of inclusion with the Olympic champion, Edwin Moses, and throughout Q4, all employees are completing a 30-hour diversity and inclusion training. It shows the seriousness of our commitment to creating lasting change within our company. It was also great to see that we were ranked the best place to work as a sports company by Forbes. We are the highest-ranked sports company on the Forbes World's Best Employee 2020 list. Ranking is based on response to the pandemic and scores on image, financials, talent development, gender equality, and sustainability.
Immensely proud moment for us to top the list as the best sports company to work for. Which brings me to the business. A big part of the business is, of course, the products that we sell and deliver to our consumers. Whether it's our Superstar that saw amazing growth of 68% in the past quarter, also driven by relationship with Beyoncé, the relaunch of our ZX and the ZX 2K Boost, the launch of away jersey clubs, whether it's Manchester, Arsenal, Bayern Munich, Real Madrid, or Juventus, all getting excitement back in football. The X Ghosted football boot, the MYSHELTER outdoor proposition, or the Reebok Legacy, where we saw strong e-com performance with 100% sell-through on the initial launch. Bringing the right products to the consumer.
As you can see, which I didn't mention, the Lego shoe. Most of us grew up with Lego. Having a collaboration with an iconic toy manufacturer gave an enormous resonance on the brand side, both for Lego and for adidas. We also saw the positive store opening trend continue throughout the third quarter. When we last reported, 92% of our stores were open at the end of July. At the time, we expected the store opening trends to remain positive, and this assumption has proven right. Store opening rate remained above 90% and stood at 96% at the end of the third quarter. Some of that reversed in recent weeks. More about that later when I discuss the outlook, but overall, an improvement throughout the third quarter as we anticipated.
Which also levered the third quarter in the context that we're putting it into here. We have a clear focus in this uncertain environment on arriving at a healthy inventory level at the year-end, and generating profitable sell-through of our products, and being disciplined about wholesale sell-in. This helped improve our going-in position in 2021. Has clearly paid off in the third quarter. Their inventories were materially reduced during the quarter with more than EUR 500 million, with a reasonable level of discounting. E-com continued to increase with 53%, with a double-digit increase in full price, driving 13% growth in D2C. What we continue to see is that the retail traffic is significant below prior year and has recently slightly weakened again. More about that later. Of course, the risk of further lockdowns requires a disciplined stance on both orders and shipment.
I do want to say in this context, that we've done our utmost to manage our P&L and balance sheet in a balanced and a prudent way, to make certain that we protect the company in the utmost way, and more have taken cautious decisions when it comes to our balance sheet and our P&L than aggressive decisions, as nobody can know, neither us nor you, where this will take us, and that has been the focus throughout the third quarter. We saw the P&L show strong and profitable recovery in Q3. The revenue declined 3% in the third quarter, so that meaning almost staying at previous level. If you take an opening rate of stores of 96% into account, assume that it's similar for wholesale and have less traffic, it's very much in line with what you would call normal trading.
Let me be very clear, we could have easily delivered an even better top-line performance, but we stayed true to our very prudent approach, and will continue to do so. Growth in D2C, which was 13%, reflect a strong demand for our products, but we kept our disciplined stance to sell-in, which weighted on the wholesale business, which was negative. This might have a negative impact on our top-line development in 2020, but it is the right thing to do to ensure that we have the best position going into 2021. We saw a EUR 1.1 billion improvement in operating profit versus prior quarter, and we saw a 30 percentage points growth improvement compared to prior quarter. Harm will take you through that in later detail, but it was a substantial improvement quarter-over-quarter.
When we look upon our strategic growth areas, adidas North America came in at -1% , generated positive growth in the first two months of the quarter. For obvious reasons, we did not see any going back to school sales because nobody or very few went back to school. The positive impact from pent-up demand and fiscal stimulus faded in the month of September. We saw Greater China at - 5%. We saw double-digit growth in our D2C business, driven by both own retail and e-com, despite physical traffic still significant below our prior year. I know there's been questions around this. I just want to reiterate, we have seen very strong double-digit growth in our D2C business.
What we have done is we've seen the franchise business lack due to our cautious approach to sell-in, in order to focus on healthy inventory levels, and we do expect China to be back to healthy growth in the fourth quarter. E-com up 51%, despite a store opening rate of more than 90%, and we saw exceptional growth in our e-com continue. As mentioned before, we achieved this growth with a significant higher full price sell-through in e-com compared to Q2. Our e-com continues to drive profitable growth. Nearly 150 million Creators Club members at the end of the third quarter. That meant we added 70 million in the last-
Nine months.
Nine months, yeah. Excuse me. 70 million in the last nine months, an enormous growth in our member base. Members account for two-thirds of e-com sales. Known consumer is much more profitable consumer, more on the value of members later. CONFIRMED app we launched in the U.S. and also China, which are predominantly for exclusive product drops. When it comes to our two brands, the adidas brand saw growth in Originals of 4% and Running at 2%. Originals footwear were up mid-single digits amid exceptional growth of the Superstar franchise, with our growth in Running as our iconic Ultraboost franchise continued to grow at high single-digit rates even throughout the pandemic. The Reebok brand was down 7%. Reebok has a lower exposure to the Running or Outdoor category, which is predominantly where we've seen our growth coming in the Sporting category.
Reebok also has a higher exposure to North America, a market that so far has recovered more slowly than Europe. While we're speaking about Reebok, let me just say that we're aware of the media coverage over the last weeks. I ask for your understanding, but would like to say right away that as a matter of company policy, we will not be commenting on rumors or speculations. What I can tell you is, that we continue to work on our 2025 strategic business plan, which we will be presenting to you in March next year. With that, I'll hand over to Harm.
Thank you, Kasper, good morning, good afternoon, everyone on the call, ladies and gentlemen. As always, let's start with an overview of the market segments. A look at the world map illustrates our strong recovery in Q3, with currency neutral sales in Russia, CIS, and Europe already returning back to growth with +11% and 4% respectively. In North America, we recorded a slight top-line decline of 1%, with positive sales growth over the first two months of the quarter as consumer spending was temporarily supported by fiscal stimulus. The operating margin increase of nearly 6 percentage points in North America resulted from gross margin improvements due to less use of air freight, which was needed last year to mitigate the impact of the supply chain shortages, as well as strict cost control during the quarter. Sales in Asia Pacific declined by 7%, with Greater China recording a 5% decrease.
As already mentioned, in China, we achieved double-digit growth in D2C with 33%, which underlines the strong sell-through of our product. At the same time, however, the franchise business lagged due to our disciplined approach to sell-in. As Kasper mentioned, we project China to return to growth in Q4 while we maintain our clear focus on healthy inventories and profitable sell-through. This might have an adverse impact on our revenue development in the short term, but it helps us protect the brand and improves our market position going into 2021. In Latin America with -13% and emerging markets with -10%, the overall environment remained challenging as the pandemic continued to disrupt operations and several stores remained closed. Let's take a look at the P&L. The top line was facing translation headwinds throughout the second half.
In Q3, we recorded a negative translation impact of 4 percentage points, mainly due to the weaker U.S. dollar. As you can see from FX spot rates, this headwind will persist in Q4, and we are not going to feel any significant benefit from it in gross margin before late 2021 and going into 2022, given our hedging policy 12 - 18 months out. Our gross margin was down only 2.1 percentage point to a level of 50%. As expected, a favorable channel and market mix was offset by negative currencies and the promotional environment, and more details to follow on a separate slide. Operating expenses were down 11% as a result of strict cost control. Marketing was down 23% as we continued to suspend marketing that would be ineffective due to social distancing, but we remain very visible through our social channels.
We, of course, also continue to double down on digital marketing in order to remain connected with consumers, add members into our ecosystem, and support our growth in e-commerce. Operating overhead decreased 5% as lower business-related expenses offset increased logistics cost resulting from the continued exceptional growth in e-commerce. We have achieved a fast return to double-digit operating margin. Operating profit of EUR 794 million reflects a margin of 13.3% just three months after Q2, having been maybe the most challenging quarter in our history. Let's take a more detailed look at the gross margin development in Q3. Similar to Q2, lower sourcing cost and the more favorable channel and market mix, primarily due to the ongoing exceptional e-com growth, had a positive impact on our gross margin in the quarter.
I want to be very clear that we also had no positive impact of any one-time effects in the third quarter, and there was no reversal of any accruals from the previous quarters. It's clearly an underlying consideration. These positive effects were more than offset by negative currency developments and a less favorable pricing mix. While the promotional activity continued to weigh on our margin development in Q3, the negative impact from discounting was significantly lower compared to Q2. This is a direct result of our focus on healthy inventories, profitable sell-through, and disciplined sell-in. These principles will continue to guide us through Q4 and lead to a further moderation of promotional activity. We are expecting our gross margin to be around the prior year level in Q4, despite continued FX headwinds. Let's take a look at our operating profit recovery.
Let me look at the comparison of Q2 to Q3. Operating profit of EUR 794 million in Q3 marks an improvement of more than EUR 1.1 billion compared to the second quarter. We achieved this by strict cost control throughout Q3 and were able to avoid deleverage on the back of a declining top line. The P&L development in the third quarter is a clear proof point of our operational flexibility. Following the P&L discussion, let's now look at the balance sheet. Net debt amounted to EUR 1.1 billion at quarter end. While this represents a deterioration compared to the net cash position one year ago, the net debt position is still modest in historical context and is up only EUR 300 million versus the end of Q2. Our equity ratio remains solid at over 30%. Look at the operating working capital.
The average operating working capital as a percentage of sales increased to 23.2%. Inventories were up 35% currency neutral year-over-year. This increase still reflects the inevitable lower than expected product sell-through caused by the broad-based store closures during the first half of the year, as well as traffic below prior year levels after stores reopened. Compared to the end of Q2, we reduced inventory by 10%, or more importantly, by EUR 500 million as our inventory normalization is progressing exactly according to plan. I will further speak about the inventory development on a separate slide. Receivables were down 14% currency neutral year-over-year, reflecting a continued emphasis on cash collections. Payables were down 26% currency neutral as our payment terms with vendors are also normalizing given our comfortable liquidity position. Now let's take a deeper look at our operational setup.
As we execute through the coronavirus pandemic, we continue to strike the balance between short-term challenges and long-term opportunities. Let me reiterate that the health and safety of all people and communities remains our top priority, of course, even more so as cases are on the rise again. We will cover four additional priorities in this section. First, the operational flexibility. I will give you an update on inventories as we work towards a normalized inventory level by year-end. The financial flexibility, and I'm going to provide you an overview about the steps we took to increase our financial flexibility at favorable conditions. Thirdly, about digital opportunities, and Kasper will then explain how we leverage our digital ecosystem and how we drove membership and profitable growth.
At last but not least, Kasper will walk you through the latest developments in our D2C business and show how we actively drive the channel shift to build direct relationships with the consumers, both online and offline. Let's start with our inventory position. As you know, we had an inventory buildup of around EUR 1.1 billion during the first half of the year, when the impact from the pandemic was the worst and more than 70% of our stores were closed at the peak. In the third quarter, we reduced inventories by more than EUR 500 million, so already worked through roughly half of the inventory buildup. We have done so with a reasonable level of discounting, as you can tell from the 14 percentage points higher full price share in our e-com business in Q3.
We continue to execute on our proven plan and are confident to arrive at a largely normalized inventory level by year-end. Let's remind ourselves what our game plan was to finish at a normalized inventory level. First, we are flexibly driving our product pipeline. We continue to launch products in an agile way, deciding about the most successful route to market at short notice to adapt to changing market conditions. Many cases, we are executing fully digital. Product launches in our digital ecosystem continue to be well-received by consumers. We doubled down on e-com to ensure we serve consumers in the best possible way during the lockdowns in spring and keep ramping up. Thirdly, in addition, we are making increased use of our factory outlets around the world.
Fourthly, specifically in Q4, we will leverage the current sales events, whether it is Singles Day in China, whether it is in the Cyber Week or what we also did with a digital dedicated day to our members, to our Creators Club members. This is the success online as offline. Let's go over the cash position. Our cash position at the end of Q3 improved by around EUR 1.2 billion compared to June 30th, mainly due to the following financing activities. As our operating working capital needs peaked during the summer months, we had drawn down EUR 500 million of the KfW facility in July in order to keep full financial flexibility and maintain a certain liquidity buffer at any point in time, given prevailing uncertainties.
We also received the proceeds from placing euro bonds in an amount of EUR 1 billion at the beginning of September in our first transaction as an investment-grade rated issuer. This brings our total cash position to EUR 3.2 billion at the end of September. Please be aware that we received the proceeds from our EUR 500 million sustainability bond in the beginning of October, this cash inflow did not fall to the balance sheet in the third quarter. I want to take a moment to give you a consolidated view of the steps taken to further optimize our capital and cost. We issued investment-grade bonds in an amount of EUR 1.5 billion overall at very favorable conditions. As announced earlier today, we have also secured a new EUR 1.5 billion syndicated loan facility with several of our partner banks.
The new loan facility will run until 2025 with a syndicate of partner banks with Deutsche Bank and HSBC as lead arrangers. This brings the total of our recent financing activities to EUR 3 billion and led us to replace the syndicated loan facility under participation of KfW with immediate effect. The EUR 500 million portion drawn in July was already paid back in October, including interest and fees, which had been agreed at customary market conditions. The KfW facility was crucial as a safety net in April when other sources of financing were unavailable. I would like to thank again the German government for its rapid support and giving certainty, not just to 60,000 employees, but also to many of our partners, whether these are suppliers or vendors that we work through the crisis. While uncertainties prevailed, we are now facing them with a considerably strengthened financial profile, hence do not need the KfW facility as an additional safety net anymore.
To summarize, let's look at this timeline and everything that we have accomplished on the financing side in just a few months. We entered 2020 with a strong financial profile before facing an unprecedented situation that posed challenges even for healthy companies like ours. Fast-forward to today, we are investment-grade rated and have issued bonds at favorable conditions, as well as secured a new syndicated loan with our partner banks. Having replaced the KfW facility, we have total available liquidity of EUR 3.6 billion and can access capital markets for additional liquidity at all times, thanks to our strong investment-grade credit ratings. I'm proud of what we have achieved in such a short period of time, and now let me hand over to Kasper again to take you through the digital and the D2C opportunities.
Thank you very much, Harm. Before I go into the membership part of our digital portfolio, let me just give you a couple of numbers which I think are interesting to reflect upon. This year, we'll come out with a number in e-com substantially above EUR 4 billion. When we started 2016, our number was EUR 600 million. With a number north of EUR 4 billion, our e-com business alone would make us a top five sport brand globally. When we started our membership programs only 12 months ago, we only had 50 million. Now we have 150 million. We are seeing an enormous increase across the board, whether it's on digital business, whether it's a membership, whether it's a transaction on our dotcom or within our app portfolio.
The reason why it is so important with members is that they are the heart of our digital opportunity because they are the most loyal customer and they help us drive profitability growth at scale. You can see the numbers growth I just spoke about when it came to members. Members have a 20% higher average order value than non-members. However, they do not only spend more, they also shop more frequently and have a 60% higher average order frequency compared to non-members. With a net promoter score above 70, we know they're completely committed to our brand and our programs. In total, members have a 2.4 times higher lifetime value compared to non-members. With our unique app ecosystem, we're doing a lot to attract even more consumers and keep them engaged.
We are now the only sport brand that reward members for both physical and purchasing activity through our app ecosystem. Running and training apps acquire membership points when working out and in the adidas app and our newly launched CONFIRMED app, we reward purchases for the physical exercise that you have done. Let me give you another example of how we drive membership. In October, we had Creators Club Week, our first festival for members only. The week had various events in place to engage existing members, incentivize new members to sign up. We provide exclusive interviews with some of our most prominent assets like Karlie Kloss or Paul Pogba, to name a few, and behind-the-scenes videos. We had over 30 raffles for members to win unique products. We had limited edition releases with more than 70 newly signed for our members, and the results speaks for themselves.
Not only did we acquire 2 million new members within just a week, we also generate revenue of nearly EUR 100 million during that week, overachieving our revenue target by more than 40%. We don't only look at the digital opportunity in isolation, but take a D2C view across online and offline. We sharpen the storytelling in our stores, which was another important driver of the D2C-led recovery in the third quarter. As an example, we boosted the sell-out of our Clean Classics collection with product displays made from recycled materials and gesture-control screens in our stores. In this way, we explained our sustainability story and the commitment to end plastic waste to our consumers with impact. We also keep investing in physical stores in relevant locations. In London, we opened a new Originals flagship store in one of London's most creative boroughs.
In a time of uncertainty, the Carnaby store is designed to bring people together, showcase products, and celebrate our heritage. As such, it will be an integral part of our new Key City ecosystem and help to drive engagement with our London consumer. I can only encourage many of you who live in London to come and see the store when it opens up again when the close down is over. It is a unique investment into London, again, following our flagship store that we opened just a year ago on Oxford Street. As the corona pandemic still evokes restrictions, let me now provide you with an update on global owned retail traffic and conversion trends as observed during the third quarter. You should probably assume that our trend is not far away from that of our partners.
Our efforts to revitalize retail continue to improve traffic in stores throughout the third quarter. However, traffic still remains below the prior year level due to social distancing guidelines, which have become even stricter in recent weeks, leading to a stabilization of traffic trends in October. In November, we have even started to see a slight deterioration of traffic in open stores as stricter social distancing guidelines were put in place, particularly in Europe. On the other hand, conversion rates continue to remain elevated compared to prior year level as consumers that visit stores tend to have a clear buying intent. Let me just stay here for a second and say the following. We are one of the first who've been clear on what's happening in the market because it's happening now. We wouldn't have said that three weeks ago.
For everyone, when you have closed down, it impacts all kinds of stores, ours and others. When you see stores close over the weekend like in Italy, it has an impact on adidas like it has on everybody else, and I want to make certain that I bring this across. This is not an adidas-specific point. This is what happens when stores closes down, and of course, what we do expect is a subsequent take-up on the e-com side. Within this environment, we're actually driving the channel shift towards our D2C business. As a result, our D2C share year to date is up 10 percentage points compared to prior year and have now reached a level of 40%. Establishing direct relationship to consumers across both digital and physical touchpoints provides us with insights as well as opportunities for profitable growth.
At the same time, we're exiting thousands of non-strategic wholesale accounts, particularly in the U.S., to win where the win is, but not only in the U.S. At the same time, we are scaling our effective and cost-efficient self-service model for more and more our remaining wholesale partners. The best way to drive D2C is, of course, through strong products, and we have that in our pipeline. Again, we are driving a fundamental shift in the business model within adidas, and corona has accelerated that shift that will help us gain more control of our business moving forward, but of course, also drive higher margins through an end-to-end business to the consumer, which brings me to the outlook. Before I go there, I do want to speak about our products because we sell products to consumers that love sport and love leisure.
We continue to innovate along many dimensions. With Futurecraft Strung, we brought our 4D technology into textiles to create a lightweight upper made out of a single piece of material. This is the first kind of prototype in our industry, combining athlete data, additive manufacturing, and robotics. It's another breakthrough for us, but of course also for our consumers. When it comes to Reebok, we have had many breakthroughs in terms of sustainability. The latest one comes from the Reebok brand, and that's the introduction of Forever Floatride GROW. This is a plant-based running shoe with an eucalyptus tree upper as we continue to innovate in fabrics and in materials. When we look upon the ZX 2K Boost, we continue to leverage our product archive by combining iconic styles and Boost technology to win in the lifestyle running category.
After having successfully launched or pre-launched the ZX 2K Boost with the selective drops, we now go wide and scale the franchise along a global blockbuster campaign. Within the global Ready for Sport campaign, we activate COLD.RDY, the fourth and final apparel launch of our new apparel performance collection. Winter is just around the corner, and COLD.RDY keeps our consumers warm and comfortable in harsh conditions. More than ever, is it important to have the right products at the right time. With gyms closing down across the world, people will increasingly continue to exercise outdoor, and having the right winter material for our consumers to exercise outdoor will allow us to win. Ninja. Our collaborative approach to innovation also comes to life with our e-gaming activity with Ninja, one of the most popular e-gamers out there.
With early access to Creators Club members, the Chase the Spark collection inspires consumers to chase the things they're passionate about, as Ninja does with e-gaming. Another example for current collaboration is one with Disney, which yields a series of limited Star Wars releases across several major footwear franchises. Finally, Ivy Park. We could not be more excited about the release of the second Ivy Park collection and the blockbuster campaign, This Is My Park, with Beyoncé. The collection includes apparel featuring inclusive sizing and gender-neutral performance gear, footwear, and accessories. The launch of the full collection resulted in outstanding media coverage and great consumer engagement, leading to a complete sell-out in the U.S. within only 24 hours. We have many more hype releases that drive brand desire also coming, and of course, also with Beyoncé.
Our Prada Superstar launch in September was more than 30 times oversubscribed. Yeezy remains in high demand with strong sell-through. Over the course of the fourth quarter, we plan 113 drops, so more than one drop a day, ensuring excitement around the brand will remain high throughout the period. We are seeing stores in part of Europe closing again, as are everybody else. We continue to successfully execute our product launches since the start of the fourth quarter. Recently, new lockdowns in Europe led to store closures, reducing our store opening rate in this market to approximately 60%. Our global store opening rate is between 92% and 93% as of today, down from 96% at the end of the third quarter. In addition, stricter distancing guidelines have a negative impact on traffic in our stores in Europe that are open.
We were on track for growth in Q4 when new lockdowns in Europe came. The fourth quarter started well in October, and we were on track to return to growth in Q4. Case numbers accelerated dramatically, and new lockdowns came into effect in parts of Europe, weighing on our store opening rate and the traffic in open stores. As a result, our top line is now predicted to develop similar to Q4 as it did in Q3, implying a low- to mid-single-digit currency-neutral revenue decline. This is against a strong comparable base as of last Q4 sales, which were supported by first product introductions related to the Euro 2020 and early shipments due to a different timing of Chinese New Year. If you were to adjust for those two, we would be on above of performance in the fourth quarter this year compared to last year.
Last year, the fourth quarter growth was 19%. Despite these difficult comps, revenue would have returned to growth in absence of new lockdowns in Europe. As Harm already mentioned, our focus on profitable sell-through and disciplined sell-in is expected to lead to a Q4 gross margin that is flat year-over-year. As a result, we expect Q4 operating profit to between EUR 100 million and EUR 200 million. The key assumptions upon which we based our guidance is that we don't see any additional major lockdown coming into effect, specifically assumes that more than 90% of the company's global store fleet will remain operational through Q4, and it also assumes that traffic will not materially deteriorate from the levels experiencing in the quarter so far.
While 2020 have brought a lot of challenges along, it's also made us a better company. We're moving our company fundamentally forward in our cultural evolution. We are operationally becoming much, much better when it comes to sourcing, sell-in, and campaign and product launches. We've not only strengthened our P&L, but also our balance sheet. Our direct consumer business has taken a huge step forward from a 30% share of the business to a 40% share of the business. Let me kindly remind you of our upcoming Investor and Media Day on March 10, 2021. We'll provide you with an update on our strategic priorities and ambitions for 2025. It's unlikely that we'll be able to host you in Herzogenaurach. We'll make sure to turn this into an insightful virtual event. With this, I'd like to come to the conclusion.
In summary, our top and bottom line are very close to previous years, despite the fact that we've managed our business very prudently in the third quarter. We will continue to focus on healthy inventories, profitable sell-through, and disciplined sell-in, and a prudent set-up. We are on track towards normalized inventories by the year-end level, and our financial flexibility has dramatically increased at very favorable terms. We are better positioned for short-term uncertainty and long-term growth drivers. At the end, what stands in front of everything else is the health and safety of our employees and partners that will continue to remain top priority for us as a company. With this, take your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from the line of Antoine Belge of HSBC. Please go ahead.
Hello. Hi. It's Antoine at HSBC. Can you hear me?
Yes, we can hear you loud and clear, Antoine.
Okay. Two questions. Maybe the first one is on China. I think you mentioned why you restrained the selling in Q3. Can you elaborate a little bit more on the market conditions there? I think you mentioned that there are still a lot of inventories. To what extent it is an industry-wide issue, and to what extent you think that maybe you also have too many inventories of your own products. My second question relates to marketing. I think the marketing expenses were down 23% in Q3, we said only 3%. What could be the sort of a pattern in terms of the recovery in the amount you're spending? Also in Q3, do you believe that you've been spending less than competitors or more or less you maintain your share voice? Thank you.
China is and will continue to remain a healthy market with growth. It also grew in the third quarter. For obvious reasons, there are excess inventory for everybody. As you can see, we grew and we had strong double-digit growth in our D2C channel in the third quarter. We did restrain the sell-in to our franchise partners. We do expect return to growth in the fourth quarter. Overall, the fundamentals in China remain very strong. We are seeing right now the first indications of 11.11. We are seeing healthy growth in that environment also. It is a market, quote-unquote, normalization that's happening where everybody's getting rid of excess inventory. You do it in different ways. The underlying fundamentals in China remain very strong. That's why we also predict growth also in the fourth quarter.
Antoine, on your question on the marketing being 23% down, of course, we spent significant in the second quarter, then in lieu of no major events like no Olympics, no European Championship, there was limited reason to spend tremendous in Q3. We also took a deep dive into the marketing by line item, drove a lot of efficiency and spending smarter as well in the third quarter. Rest assured, we will start spending it in Q4 as sport is coming back to the pitch, at least outside of some European countries. We are positive about the fourth quarter, and we keep investing for the sustainable growth of this company.
The next question is from Geoff Lowery of Redburn. Please go ahead.
Good morning, team. Could you talk, or afternoon even, could you talk a little bit more about your performance in Europe in Q3, and how you would have been thinking about the outlook in the absence of lockdowns? Joined up with that, how do you think about your buy for next year, given the uncertainty over whether there's Euros, whether there's Olympics? How do you approach that uncertainty at this juncture? Thank you.
Hey, Geoff. Yeah, thanks for the question. Clearly, we would have expected growth also going into the fourth quarter for Europe. We had a good trajectory in Q3. We had a tremendous achievement in October as well, returning back to growth or continue the growth pattern in Europe. Again, and then the lockdown came in. Definitely, very clearly a good trajectory in October and very positive development in Europe, and it would have been back to growth overall in the fourth quarter. We're not going to comment on what we are going to buy for spring, summer 2021 or fall, winter 2021. Rest assured, we are a growth company, and we want to return back to growth in 2021. Of course, the buy needs to be seen in comparison how we finish at a reasonable level at year-end with inventories. We have no reason to be too cautious going into 2021 as we are a growth company, and that's what you will see in 2021.
Okay, understood. Does the softer Q4 than we might have expected a month ago impact on your ability to get inventories where you want them by year-end? Are there mitigating measures you can make to still deliver normalized inventories?
No, definitely not in a material way. What we are seeing right now, of course, we are utilizing the commercial events, whether it's Singles Day as we speak, and then there's still the Cyber Week coming. We're absolutely on plan and will not impact our year-end inventory in a material way.
Great. Thank you.
The next question is from Jürgen Kolb of Kepler Cheuvreux. Please go ahead.
Thanks very much. Two questions. With the refinancing of your KfW loan, what's your stance in terms of resuming your dividend payments and maybe even the share buyback program? Kasper, you mentioned that this whole online development actually is fundamentally shifting your business. Maybe you can elaborate a little bit more on what that means really for the entire organization and where this share of online business can go to given on the current trajectory that you're seeing these marketplaces. Thank you very much.
Yeah, thanks, Jürgen. On the refinancing of KfW, of course, as we just terminated the contract as we speak, it's not the right time to talk about dividends yet. Of course, as you know, historically, we always had been very consistent in our dividend policy. We have a clear logic. We have a clear financing financial policy. Whenever there's excess cash, we will return it back to the investors. Again, this could be through dividends and share buyback in the future. Today is not the time to talk about it.
When it comes to the digital growth, I think the positive thing we've seen is we've seen a dramatic acceleration, not only in the business that we have achieved through D2C and digital, but also to the underlying infrastructure that we have built this year because we have taken resources from all parts of the company and strengthened our technology platform that we built. We built new apps. We relocated several hundred people from other parts of the organization into e-com. If you look upon and try to think about 2025, you can rest assured that the D2C side of our business will play a very important role. Of course, the starting point has now been dramatically improved because our starting point is 10 points higher than it was a year ago.
I'm not going to try to model that through for you, but as you would understand it has material upside for us if we're running a D2C model. It might imply higher operating overheads, but it does imply substantially higher margins. That you can see the third point also that we are coming out with a margin almost at previous year level. I think it's 70 basis points away from previous year. It is for us as a company, a strategic very, very important step and it's accelerating our move to D2C probably on a two to three horizon.
Very good. Appreciate it. Thanks very much, guys. Good luck.
Thanks, Jürgen.
The next question is from Graham Renwick of Berenberg. Please go ahead.
Good afternoon, everyone. Thanks for taking my question. Just two, please. First on trading, I just wondered to what extent your growth in Q3 may have been constrained by the order cancellations you made earlier in the crisis, particularly on new product launches. Do you find yourself in a position where consumer demand recovered a lot faster than you expected and wholesale partners were demanding higher volumes of fresh product that you perhaps weren't able to fully satisfy? I think Nike flagged constraints in the period given cancellations earlier in the year and some peers who didn't cancel performed a bit stronger.
Secondly, on discounting and inventories. I just wanted to square the fact that you have significantly reduced the level of discounting in Q3 and you're guiding for flat gross margins in Q4, which is positive, but you still have a high inventory level to clear across Q4. Of the EUR 500 million remaining excess stock, I just wondered how much of that you plan to repurpose and hold into next year to sell at full price. Of the remaining stock, do you largely expect to clear that all through commercial events such as Singles' Day and Black Friday where you would have to have built up stock to discount anyway even in a normal year?
I guess overall is it fair to say that you're expecting the final EUR 500 million of excess stock to be cleared with much more limited impact to margins than perhaps the first EUR 500 million of excess stock and that's what gives you confidence in that flat gross margin guidance for Q4? Thank you.
Well, thanks Graham for the two very well-articulated questions with a lot of sub-questions within the questions. Well, the first one is definitely there have been no constraints from a supply point of view in Q3. To be very clear again, we could have grown in that quarter if we wanted to, but we are very disciplined in the sell-in and we want to make sure that we remain in a pull model and not shipping in more relative to the inventories that we have seen at our franchisees in China been very disciplined. Of course, it helps our margin not in just in Q3 but also in Q4. When it comes to the inventories, there's a minimal part that we will repurpose going into 2021. There will be some third federation jerseys. There will be some Olympic products.
The majority of the products will be cleared through the commercial events that I just talked about, whether it's Singles' Day or Cyber Week or Double Twelve and other events that we have during the course of the next six to seven weeks. We have actually done tremendous progress already in October, which of course can't disclose, but we are again right on plan. We will sell a lot in our more than 1,000 factory outlets, and this is getting better inventory for them as well because it's fresh product from either spring, summer 2020 or partly even fall, winter 2020. Also there you shouldn't see a margin drag by placing these or selling these products because these commercial events have existed the prior year as well. Of course, we make them a little bigger as the overall industry is still clearing inventory but we remain very disciplined.
Again, for us it's not about delivering the quarter on the top line, it's the overall P&L that matters for us and that's why you see a positive development of the gross margin as well from Q3 into Q4.
That's great. Thank you very much.
The next question is from Cédric Lecasble of Stifel. Please go ahead.
Yes. Good afternoon, Cédric Lecasble from Stifel. I have two additional questions. The first one, to square up the gross margin in Q4, should we understand that the regional mix in Q4 will play a strong impact on your gross margin components that you didn't have in Q3 with Europe and North America outperforming Asia? As far as FX headwind is concerned, should we consider the same kind of headwind in 4Q than in 3Q on the gross margin? The second question is on your SG&A trends. You are forecasting similar top-line trends. Should we model similar SG&A trends? You had costs overall overheads down approximately 5%. Should we expect that to be similar in Q4? Thank you very much.
Well, three questions there, Cédric. First on the gross margin. The regional mix should not play a significant factor. We are returning back to growth in China, there's significant Singles Day as well in that number. We will see good growth in one or the other market as well. Do not expect a significant marketing mix. On FX, it's similar to in Q4 what we had in Q3. There might be some minor impact of spring/summer 2021 billing rates or hedging already going into Q4, it's minor. Assume it's a similar impact in Q4 than is in Q3.
When it comes to the operating expenses or the SG&A line overall, as we had more certainty how we are going out of the crisis, with what you have seen in Q3 already and our guidance for Q4, we start investing more diligently again, whether it's on the marketing side or also into project or catching up on some of the IT projects that we have delayed or canceled that we get ready for 2021. Again, we are and we will remain a growth company, and that's what we're getting prepared for already in Q4.
Very clear. Thank you.
Thanks, Cédric.
The next question is from Adam Cochrane of Citi. Please go ahead.
Good morning. The two questions from me. As you look at the costs and the efficiencies that you've managed to do across the organization in the last six months, is there any bits of those which can be permanently taken out, a change in the way that you do business, either head office or in country, that we can sort of use as a way to think about a higher margin maybe as we look forward? Secondly, you talked about the wholesale self-service for some of your partners. Can you just explain a bit more as to what that is, please?
Let me just take the two questions. If you look upon what's not come back in the near term is, of course, a lot of the T&E costs that's simply not going to come back. We took a decision not to do any restructuring throughout the crisis because we believe that returning back to growth is actually a better way of managing the relative cost. Frankly, the timing and the cost of taking people out is not justifiable when we know that we are going to return back to growth. What we are seeing is we are seeing a fundamental shift in our D2C business, and that then drives a different cost profile. You will see costs coming in, partly in the operating overhead and the shipping cost because of the handling cost and the digital cost.
You might see, or you probably will see less operating overheads leverage moving forward. You will see expansion of the gross margin due to the D2C business and subsequent expansion of the overall margin. That has been accelerated throughout the COVID. If you look upon the overall cost profile, you're not going to see bigger changes there, but you are going to see mixed channel changes, how we conduct our business. That was number one. Number two was?
Wholesale CLICK.
Yeah. The wholesale, what we've worked on over the last many years is how do we just engage with the wholesale partners through a digital setup? Providing them a catalog whereby they order, you don't have access to sales reps anymore. You order directly from a predefined set of products. We pre-select products for different wholesale partners, that, of course, will continue to expand rolling out globally. In parallel, we are reducing the number of point of sales we are with wholesale partners whom we do not deem to be competitive moving forward. That is, of course, being then cannibalized by our D2C business. The biggest change is really the D2C business and the change it has within our company.
On that, in terms of the efficiency point, I suppose I was thinking some companies have talked about they're taking time out of their supply chain by using digital meetings, digital production, rather than physical sales reps. Are you doing all these things as well, I presume?
Sorry for not going there. What we are doing is digital creation. We have an end-to-end creation of our products. We have digital catalogs. If you were to look upon, and if you took a big U.S. partner of ours, when we do the sell into Kohl's, everything is through digital catalogs. That, of course, you take not only time out of the equation, you also take the entire sampling out. Sampling is a substantial amount. It's double-digit millions of samples, in expense you have every year. You take sample cost out and you put a complete different speed into the model. The end-to-end digital element of it fundamentally changes the way we not only manufacture product or design products, bring design to factories, but also to sell in to our wholesale community across the board.
Thank you.
By the way, if you go online right now, if you look upon how we market our product in a 3D setup, how we get sizing much better through digital tools. It's totally different now than it was two or three years ago. Look upon the storytelling of Beyoncé on our website. Totally different than we've ever done.
The next question is from Edouard Aubin of Morgan Stanley. Please go ahead.
Good afternoon, team. Just two questions from me, one on DTC in the U.S. again, and one on Yeezy. Your main competitor in the U.S. has announced, I guess, its intention to accelerate substantially its move to DTC and rationalize its wholesale network. How much oxygen will that provide to adidas in terms of shelf space in the U.S. going forward? Related to that, how do you intend to balance, as you just said, Kasper, potentially the increase in wholesale sales in the U.S. with your overall focus on DTC and better control of your distribution? The second question is on Yeezy. I guess, Kanye West signed an agreement with Gap over the summer. To what extent will that impact supply at adidas going forward? I guess, given Gap's lower price point in general, could that kind of chip on the or impact the halo effect of Yeezy on the adidas full range? Thank you.
I wouldn't call shelf space oxygen, I would call it shelf space. I think this is the fine balance to walk as I look upon relative absolute terms. I think that with the winners of the brick-and-mortars, if you take the JDs of this world to mention one or more, of course, we want to continue to push our shelf space within these customers because they also have a digital business, and categorize them only as brick-and-mortar would be wrong. It's a mixture between absolute and relative. Of course, it will give us some opportunity, but I think that the big challenge is to restrain from going into a wholesale account that has a limited lifespan, and that is what we're doing at this stage, limiting ourselves. We're getting out of those.
We are probably as aggressively as our competitors in the U.S. growing our DTC business. I don't think there's a lot of difference. Right now, if I take the digital business into account from our wholesale partners, I think that we're very much neck to neck if we are not leading. In this space, we can definitely measure ourself against the best, but it's just being very, I would say, disciplined around which shelf space do you want, because if you go in and get tempted to take something that has a very short-term lifespan, it doesn't really help you. We're looking upon the absolute size of the DTC business and the relative size, and it's going to be a mix of both.
When it comes to the Yeezy brand, we have exclusivity for footwear. We actually have seen absolutely no impact or negative impact from the relationship that Kanye has with Gap. We're very happy that he's engaged in that relationship. It's a relationship between him and Gap. Our relationship with Kanye has been extremely successful this year and continue to be so, and there's absolutely no impact or crossover impact between the apparel and the footwear side.
Okay. Thank you.
Hayley, we have time for two more questions.
The next question is from Warwick Okines of Exane BNP Paribas. Please go ahead.
Yeah. Good afternoon. I've got two questions actually. The first is also on wholesale accounts. In the slide deck, you mentioned the exit of non-strategic wholesale accounts. Can you just give us some help to understand the pace or scale of this, or how much your thinking has developed this year? Then Kasper, back in August, you said you thought you had the best product pipeline that you'd had for three years. Do you think you're seeing the benefits to brand heat from this yet, or is it still too early to really see the benefits? Thank you.
On the first one, we'll give you a very clear indication when we meet in March and where we think our DTC business can go to. As you can see, it's grown 10% points just this year, but we'll give you indication where we believe that's going to be. I'm still very convinced about the quality of our products. We have 113 hype drops. I don't think that we're exploiting our hype drops well enough because this is the amount of drops we have. I don't think we're seeing the full benefit of the products we have today.
Right now, if you do a lineup, as I said, I still believe that we have the best product lineup for the last three years, and that is also when we go through the hype drops, either those we already had in the third quarter or those we've had now in the fourth quarter. We've seen a higher oversubscription to hype drops than we've seen in the last three years, and that is of course substantiating my point. I don't think it's fully recognized at this stage. Because I think the consumer right now is a more fickle consumer than we've seen in the past, where the consumer tends to shop online and doing a lot of promotional shopping online. However, I'm still very confident that we'll get back into a very solid growth rate in 2021. Not only because of the products we're carrying in and the pipeline that we have, but also because of the inventory positions and the prudence of our P&L and the balance sheet that we're exiting the year with.
Thank you.
The next question is from John Kernan of Cowen. Please go ahead.
Yes, excellent. Thanks for taking my question. I just wanted to go back to the theme of sport and how you think global sport in general is set up for 2021. How you're positioned within the theme of sport and the recovery, in team sports and also global professional sports as we go in through the year with the potential for the Olympics to be a major catalyst as well. Thank you.
My guess is as good as yours. There's no doubt that the sport fan is deeply frustrated because he or she can't go to the stadium, and that has an impact whether you sell T-shirts or hoodies or whatever you sell, or merchandising around it. The highest likelihood is, and I'm speaking with as much or little background knowledge as you do is, until we have a sustainable vaccine in place, you're going to have constraints of people getting access to stadiums. If you go to the Euro or the Olympics, the participation of fans in stadiums will solely depend upon the health and safety of that.
As soon as that comes back, of course, we're going to see a huge, I would say, push, not only in engagement around the brand, because that's where you really substantiate the brand, but of course also the commercial opportunity. That's true for adidas, that's true for others. Until then, what you'll continue to see is people using our products in outdoor activities or in safe environment. Of course, the big game changer is going to be getting back into the stadiums, outdoor, indoor, and start enjoying sport in an environment with thousands and thousands of fans. That's only going to happen, I believe, when you have a vaccine, and you could see what happened on the market yesterday when Pfizer gave the first signs of hope, and that seems to be materializing sometime next year.
As I, in closing, my guess is as good as yours when that's going to create a safe environment. That's the upside for us, by the way, if you look upon it. That's why we feel comfortable and very optimistic about 2021.
Certainly something to look forward to. Maybe just one quick follow-up on the confidence of your wholesale partners as we head into spring, summer season 2021. In general, health and wellness was a category that won during COVID-19. I'm just wondering how the confidence of some of these wholesale partners rebuild their books for the first half of 2021, how that confidence is playing out.
Right now, very strong. I was in contact with five of our largest customers over the last four days. Very confident and strong, of course. Right now, from a financial standpoint, our bad debt provisions were proven to be almost over-prudent. We see a very strong position from the Foot Lockers, the JDs of this world going in. Of course, they're impacted by the, I would say, temporary close downs or lockdowns right now in Europe. Overall, the confidence level has been quite high.
Okay. Thanks very much, John. Thanks very much, Kasper and Harm. Ladies and gentlemen, this concludes our Q3 results conference call. Let me again remind you of our upcoming Investor and Media Day on March 10, 2021. Unfortunately, it looks like we will not be able to welcome you physically here on our campus in Herzogenaurach. Instead, we're planning to connect with you in a virtual way on that day, something that has worked quite well over the last couple of months. Please save this date and mark your calendars accordingly. A formal invitation will, of course, follow early next year. In that spirit, if you have any further questions today, tomorrow, next week or over the next couple of months, please don't hesitate to reach out to Adrian, Christoph or myself.
That leaves me again, thanking you for the participation, for your flexibility, saying bye-bye, and most importantly in these days, stay safe and take care. All the best. Bye-bye