Ladies and gentlemen, thank you for standing by. I am Haley, your Chorus Call operator. Welcome, and thank you for joining the adidas AG Q2 2019 conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by 1 on your touch-tone telephone. Please press the star key followed by 0 for operator assistance. I would now like to turn the conference over to Sebastian Steffen, Senior Vice President of Investor Relations. Please go ahead.
Thanks very much, Haley, and good afternoon, ladies and gentlemen. Also from my end, a warm welcome to our second quarter results conference call. Our presenters today are our CEO, Kasper Rørsted, and our CFO, Harm Ohlmeyer. Before I will hand over to Kasper in a second for his prepared remarks, I would like to once again ask you to limit your questions to two during our Q&A session. In addition, please keep in mind that all figures that we will be talking about will be stated on a currency-neutral basis and will be discussed for our continued operations. Now, without any further ado, over to you, Kasper.
Thank you very much, Sebastian. Before we go into the details of today's call, let me just inform you about the extension of our management board contracts with Karen Parkin and Harm Ohlmeyer, which was decided yesterday at our supervisory board meeting, which is good corporate governance in Germany, which means that we have also a strong management team moving forward. Of course, we are very happy with this development. Let me move in to the business update. The quarter was in many ways characterized by a set of new products being brought into the marketplace. We saw a further rollout of our UB19, Ultraboost 19, which has been taken up exceptionally well by the consumer. The Nite Jogger started its global launch and activation in April and is now starting to roll out in more volume. Among others, we upgrade our Paris flagship store.
We had our Run for the Oceans event that a couple of years ago had 50,000 runners and today has 2.2 million. We see the efforts that we're putting into planet is paying off. The last one is our partnership with Missoni, where we look upon and say, when we use external creators, we continue to drive brand heat into our product sets in many different ways. Of course, it's more volumes, but super important to ensure that all our consumers see newness in our product, not only coming from adidas but also from our creator base. Overall, a quarter with a lot of new products on the street. What were the strengths and weaknesses of our quarter? We continue to see progress in our strategic growth areas, particularly the double-digit growth we saw in China and our e-commerce business. China, 14%, and e-com up 37%.
On the new products, they start to gain commercial traction in our D2C business, driving our D2C business up to double-digit growth. What we see is where we control the space, we continue to see a very positive uptick for our products. We saw Reebok coming back to positive growth. As you know, last year, we returned to profitability. Our target is to have an ongoing profitable growth business with Reebok by 2020. We continue to make progress, and you're starting to see the next steps here. Of course, we need to make sure that we do it in a more sustainable way, and that is our target by 2020. There are also matters that didn't go quite to our satisfaction.
Not surprisingly came the shortage from our supply chain, as we saw in the first quarter, also had its impact on the second quarter, particularly weighing on the growth and the profitability of the U.S. Harm will speak more about it in details, the late arrivals and the way we ship products into the U.S. had a negative impact on our overall margin situation in the U.S. We're now seeing growth in our wholesale business. Many of our new products that we introduced in the second quarter are not yet at scale, which of course, is also having impact our growth. We saw a decline in our sports performance business, mainly due to football.
Last year, we had a very successful World Cup which had a big uptick in our second quarter. That is also singular the reason why you're seeing negative growth in Russia in the second quarter after a very strong first quarter. Underlying with that World Cup, this would have been positive. Lastly, we're seeing OpEx leverage being masked by increased marketing spend, but also our expansion in the overall D2C space, not only new stores, but our continued focus on our online business. Coming to the numbers, our revenue increased 4% currency neutral and 5% in nominal terms to EUR 5.5 billion. Our gross margin went up 120 basis points to 53.5%, predominantly driven by FX. Our operating margin went up 40 basis points to 11.7% despite increased brand investment, and of course, D2C costs, where you're seeing a big part of where all our growth is coming from.
The net income from continued operations increased 10% to EUR 462 million, our basic EPS up 13% to €2.33. The delta, as you know, is due to the share buyback program we launched and which we're executing well on. Harm will also give you an update on this later in the call. When we look upon our strategic growth areas, America came in at 5% impacted by the supply chain shortages. Let me just stay here for a second. We expect supply chain or constraints in the first, second, and also in the third quarter. They will be more or less sorted out by the fourth and will have no impact next year. There is no change to the guidance we've given you around the decisions we've taken around our supply chain. Of course, you are seeing the impacts of North America.
Greater China, 14% growth, very strong. Our e-commerce, 37% growth. The focus on our three strategic growth areas, North America, Greater China, and e-commerce, continues to pay off, and we would have seen, as I said, a higher growth rate had we not had the supply constraints in North America. The adidas brand grows in most markets. Our footwear growth accelerated overall. The brand grew by 4%. Sports Performance declined by 2%, as I said, predominantly driven by football. Also negative is running, but we're seeing double-digit growth in training and basketball. Sport Inspired grew 9%, reflecting growth in Originals and Yeezy. Of course, the absolute size difference between the two is quite substantial. It's very important that we have a solid growth in our Originals business, which is the biggest foundation that we have. We saw footwear revenue increase 5%.
As I said before, around North America, the supply chain shortages is weighing in on the growth in apparel because we've had either no delivery or late delivery for certain products that came in, which is why we gave the guidance we did in the month of March. Moving on to Reebok. Reebok revenue increased 3%, driven by double-digit growth in North America and Latin America, but also seeing growth coming out of Europe. We're seeing growth in classics driven by a robust increase in footwear. The gross margin is slightly down by 160 basis points to 43.2 after several years of expansion of our gross margin. We're now getting closer to the model with Reebok, but I still want to say the end target is 2020, and before then, it will be too early to declare victory.
Coming to our e-commerce business, up 37%, and also underlying traffic, where we don't report that. In actual terms, we're seeing a strong increase in underlying traffic. We're also seeing the overall growth is coming from double-digit growth across all regions. We launched our Creators Club in U.K. and Germany, which is a loyalty program which has been taken extremely well up in the countries where it's been launched with more than 15 million members. Our adidas app is now live in close to 30 countries. We continue to make progress in our strategic area, digital, and that will continue to be a cornerstone also moving forward. Let me just again repeat what we've said many times. The single most important store in the world is and will remain our dot-com business.
For this overview, I'd like to hand over to Harm, who will now take you through the financials more in detail, and then at the end, I will wrap up, and we'll have the Q&A. Harm, please.
All right. Thank you, Kasper. I would like to start with the growth by the market segments. Before I discuss our three main markets in more detail, let's briefly look into our three other markets, which all proved their resilience in the face of various challenges. Starting with emerging markets, increasing 12%, despite headwinds from geopolitics in some countries, and the segment's operating margin actually expanded by 490 basis points to now 28.5%, mainly driven by the strong gross margin expansion of 180 basis points. Revenues in Latin America increased 5% despite a challenging macro backdrop, and the segment's operating margin decreased by 190 basis points to now 14.6% as continued investment into our brand more than offset the stable gross margin. Of course, Latin America saw the slightly impact still in Q2 by the comps of the World Cup 2018.
The same for Russia/CIS, down 4% due to the tough comparisons related to the 2018 World Cup, the segment's operating margin slightly decreased by 110 basis points as the gross margin normalized. It was only partly offset by lower OpEx ratio. Just as a side, your information, you might have noticed that other businesses declined by 24% in the quarter. This is mainly because we shifted our clearance unit that has been essentially driven into our market segments. It's a small portion. It's a big portion in other businesses, but it's a small portion in the markets. Just as an additional transparency, and we're not going to get that question later on. When it comes to North America, as Kasper mentioned, the top line, the margin impact of our supply chain shortages. Overall, the market growing 6%, currency neutral.
The adidas brand revenue is up 5%, both on the sport performance and on the sport-inspired side. Both are growing. The Reebok brand revenues increased to 10%, driven by double-digit growth in classics, and the gross margin actually decreased by 150 basis points to 39.3%. Better product channel mix and lower sourcing costs more than offset by higher air freight cost and less favorable pricing mix. Just on the gross margin, I want to mention again, air freight is a significant piece of that. You get an idea in the gross margin what the significance of the air freight was in North America. As Kasper said, it's not just the lateness, but even if you get the air freight in, you might be late. It's impacting sell-throughs being late in the market. You get charged back from accounts. That's what you see in the gross margin.
You get a feel for the profitability impact of the supply chain challenges that we had. At the same time, we remain committed to the market and keep investing on the brand marketing side, but also in our DC network and our infrastructure overall as we continue to invest in North America. When it comes to Asia-Pacific, significant growth driven by Greater China. Overall, 8%. Greater China was 14% in the second quarter after 16% in the first quarter. adidas brand sales up 9%, driven by double-digit growth in sport-inspired. Reebok brand down by 11% due to declines in both sport and classics, but also their gross margin up by 230 basis points to now 59.7%. This primarily driven by positive FX impact, but definitely also better product channel mix and lower sourcing cost. Again, there again, the majority is on FX impact driven by the currencies.
Operating margin up 60 basis points to 34.9%, again, the gross margin expansion partially offset by OpEx investments. As you see, China being up 14%, the region being up 8%, definitely there's a healthy Southeast Asia. In the more mature market, Japan and Korea, especially the latter, is being challenged. One of the effects is less tourists in Korea. These are the markets that are being challenged in Asia. When it comes to Europe, after four quarters of decline, as we indicated for many quarters already, we are now at a stable top line with currency neutral sales being flat. The adidas brand, which is a majority part of it, is being flat as well. Growth in sport inspired, offset by a slight decline in sport performance, also the sport performance side primarily impacted by the 2018 World Cup.
It's a football business on the jerseys, definitely happening in the second quarter last year as well. The Reebok brand up 4%, driven by growth in classics, and the gross margin improved by 390 basis points to now 52.2%. Also there, it's a combination of FX, better channel mix, and lower sourcing cost. Clearly the majority of that is FX related, as we already indicated in Q1. As an outlook in Europe as well, we continue to expect the region to return to growth in the second half. With that, we're also expecting growth for the full year in Europe as we communicated earlier. When it comes to the overall P&L, net sales and nominal turns up 5% and currency neutral, as we said, 4%. Gross margin, again expanded by 120 basis points to now 53.5% over prior year.
The operating expenses, I want to focus there right away on the marketing and the operating overhead expenses on our new segments as we reported. You see, we keep investing into marketing with 5% up in line with the top line, still at a very high level with 13.5%. We keep investing into the brand across the world and the operating overheads up by EUR 100 million or +7%. This is primarily driven by the expansion of the D2C business. As a reminder, wholesale was declined or was down by 2% and D2C growing by 16%. That's what you see in the mix effect, even more pronounced on the operating expenses. The majority of that is contributing to the +7%. You see the benefit of that partly in the gross margins as well.
When it comes to the operating profit, we expanded it by 40 basis points to now 11.7%. The net income, as Kasper mentioned earlier, up by 10%. If we would do that before the IFRS 16, actually it would have been 12% on the net income. We also talked about the earnings per share being up given the share buyback plan. I also want to mention when it comes to the operating profit, because we had quite a debate last year in Q2 2018 about the other operating income with the new segment that we're reporting. If I take what we still report in other operating income that you see on the third line, we still would have had EUR 42 million benefit last year in Q2 that we compensated in this quarter as well.
There was a net of EUR 42 million other operating income due to litigation gains and some release of operational accruals in Q2 2018 that did not repeat in 2019. Definitely want to get some credit for that a year later. When it comes to the gross margin decline in the second half, I talked about it on several road shows already, and I want to be consistent on this. First and foremost, there will be less favorable sourcing cost and increased use of air freight. As Kasper said, we are not out of the weeds in the third quarter. It will end in the fourth quarter because the supply chain will have been fixed. You also know that a lot of companies are moving out of China, and it's not getting easier to get capacity up, and it's not for free.
That's something you will already see in the second half. As we plan to return back to growth and win with the key comes in the second half, you will see a more balanced growth across the channels. Wholesale is expected to grow in the second half. That will have an impact on the gross margin. We always said that we have selective price investments in Europe. It's not across the board, but you see it already from Q1 to Q2, that the benefits on the same hedging is less in Q2 compared to Q1, and that will continue in the second half through the selective price setups that we have. The tailwind, of course, from FX hedges will fade, not just in Europe but also in China. We've had very favorable hedges in the first half compared to last year.
Lastly, definitely we'll get into tougher comparison, not from a net sales point of view, but from a margin point of view in the second half. I specifically want to mention again, the successful democratization of Yeezy last year in September, that we will not going to repeat in Q3, and that will also weigh on the margin because it's a highly attractive business for us. Overall, this is the direction, and that's why we are saying, taking all these factors into account, we confirm our full-year guidance for gross margin expansion to a level of around 52%. These are the main factors leading to that.
When it comes to the average operating working capital, we see we are still very disciplined with inventories only up 5%, receivables according to our wholesale business only up 1%, and payables due to our efforts also on non-trade procurement and being more disciplined toward our external vendors, up 14%. Again, I'm very, very happy with the 18.3%, but also there, as we accelerate in the second half and moving into 2020, don't expect that this can be repeated necessarily. I always said that a level around 90% is something that I'm very satisfied with. 18.3%, given where we are in the business, is good, and we should be proud of that in the organization. Going forward, 90% is probably an acceptable level for us going forward.
When it comes to the net cash and equity position, despite the share buyback, we still have a very positive development of the net cash and the net debt as well, with EUR 362 million, EUR 273 million up, and the equity ratio is down by 790 basis points, but that is solely due to the IFRS 16 change, and just an accounting matter. When it comes to shareholder return, I just want to give you a quick update on the share buyback. We actually completed in the amount of EUR 301 million in the first half. That is not exactly what will bring us to the EUR 800 million, because the share price developed very favorably in the first half, as you all know. That's why the buyback finished at the lower end of our range.
We already committed a second tranche for the second half that will lead us to around EUR 800 million. We are fully committed to that. After EUR 1 billion in 2018, we will get to around EUR 800 million in 2019, and then we will complete by May 2021 the EUR 3 billion share buyback program consistently and always being in the market. With that, I would like to hand over to Kasper again.
Thank you very much, Harm. Let me just speak a bit about the outlook before we get to the questions and answers sessions. As we always spoken about, we believe we have the right elements in place to ensure that we hit our 2020 numbers. That means we'll continue to drive innovation into the marketplace through different vehicles. We'll continue to invest with impact, as we called, into brand desire and into our business models to ensure that we drive better scalability into our business. Again, if you were to look upon the headcount numbers, you will see more of a stable headcount also this quarter. You can see we're starting to see some of the elements showing its early signs.
Our target is to deliver overall wholesale net income growth on the back of a sustainable operating margin expansion, which is very much in line with the guidance we've not only given for this year, but as you know, also the long-term guidance. We have and will continue to address issues when and if they come up. Europe is expected to return to growth by the end of this year and have a sustainable growth pattern into next year. Our supply shortages will be completely passed out when we're done with the fourth quarter, then we'll have a normalized year next year. I just want to remind everybody that through Q1 to Q3, we will continue to see impact. We did, and we'll continue to see so. We also continue to bring new products into the marketplace.
I spoke about the Nite Jogger that we've been very happy with, and we're starting to launch as we speak. We're also starting to bring the first new additions in our UB19, which was launched in February. It's coming into volume, and right now has been very successful across the board, where we're celebrating Ultraboost technology. Our Ultraboost OG also remains in very high demand, particularly when we do bespoke versions, whether it's a country version or a regional version or city version. One of the biggest launches we have is our Home of Classics, where we're bringing 10 different white leather sneakers into the collection. Whether it's Supercourt or Twigo or Lacombe, we're continuing to focus on driving our originals business forward.
Our Home of Classics is an important launch this year, but also will be a milestone for how we drive business next year. We're also using innovation to drive new launches. Our Futurecraft 4D that many of you know, we have dramatically expanded the volume this year, and one of the coolest shoe we actually launched this year was the Futurecraft 4D in combination with the Parley, which was immediately sold out, but is driving innovation and brand heat in. We also continue to develop Boost. Many of you have asked what's after Boost. We believe there will be many different iterations of Boost moving forward, and that's why it's important that we continue to drive new products into the marketplace. With Boost HD, we found a way to put 20% more Boost into a midsole without increasing its size, as the density of the pellets is higher.
The result is an increase in stability without any sacrifice of the great energy return that Boost is known for. It's the first product to feature Boost HD and was launched in June, still very early days, this is, of course, we'll continue to expand our Boost franchise. We're also, of course, using our collaborations, whether it's Toy Story, where we brought a limited edition of UB19 into the market. Marvel, where we brought a new creation into the market, Manchester United and Ultraboost, or the latest adidas by Pharrell, the Solar Hu release updates to celebrate with new colorways. By the way, as many of you know, we're celebrating our 70th anniversary tomorrow, and both Pharrell but also Stan Smith will be here.
These are to mention a few. I could also mention AriZona Iced or the Victoria Beckham products that we have through Reebok. All new releases and new products that are coming into the market through our creator partners, as you know, that we don't only create ourselves, but we also are very much into cool relationships with creators across the globe that bring products into the market that are unique. Looking upon why we believe that the top line will accelerate in the second half, we believe we have the building blocks in place. We believe that we have the right products, and I spoke about them throughout the presentation, that will scale more in the second half due to launch dates. We will see Europe return to growth in the second half, and we've put the foundation for recovery in. We're seeing the upcoming Euro 2020.
We're going to see the first positive impulses in the fourth quarter, early Chinese New Year in Q4. The impact of our supply chain will fade, particularly in the fourth quarter. We also have a lower base. Last year, we had 10% growth, 10%, 8%, and 4%. We feel quite confident when we look upon our guidance based on reaching the guidance we gave for the first half, 3%-4%, coming out at 4%. We have a guidance for 5%-8% for the remaining of the year, which indicates or assumes an acceleration for the second half, and we are fully confident that that acceleration will come. However, let me also give you some guidance how the quarters are going to come, because I think it's interesting or it's important for you to understand.
We expect this sequential top line acceleration towards the end of the year. We're going to see a modest improvement in Q3, followed up by a step in Q4, which we're going to see, as Harm spoke about, a gross margin decline in the second quarter, the second half due to air freight costs, fading tailwinds, and also investing into tough comps. We're going to see OpEx spend more evenly distributed across the quarters, which will impact the operating margin and profile development. We're going to see a bottom line growth skewed towards the fourth quarter. What I'm saying here is very important. We believe that the third quarter net income to be down year-over-year due to the top line facing and margin profile. Last year, we had an operating margin of 15.3 in the third quarter.
This was due to the largest ever Yeezy launch we had. This will not repeat itself. For us, there is no news in what we're saying. We just want to make sure that you don't get surprised when you see, A, an accelerating top line, which we're guiding to you, but with a kick in the fourth quarter and a declining year-over-year, third quarter profit improvement, simply because we're not going to have a 15.3% profit margin due to the fact that we're not having a large Yeezy launch. This is not new. This was calculated all the time. I'm just saying, don't be surprised. We have confirmed our guidance, and we're very certain that we're going to hit our guidance. Which brings me to our guidance.
We expect net sales of 5%-8%, a gross margin around 52, as Harm spoke to you about, an operating margin increase of 50-70 basis points. You can see the impact before and after RFS. Right now, there's absolutely no change to the guidance we went out and gave in Q1, confirmed now here in Q2. This is what you should expect for adidas in the second half. Summarizing up, first half, according to plan, that was three to four, we came out at four. We continue to see a double-digit bottom line growth, 13% for the first half, 10% for Q2. We have the building blocks in place to accelerate our top line in the second half. 2019 will be another year of top and bottom line growth.
We are still very much focused on the execution of the Creating the New to ensure that we not only hit the guidance we've given for this year, but of course, also the long-term guidance we've given for our complete 2020 period. With this, I'd like to thank you for listening, and then Harm and I will be happy to take your questions. Thank you very much.
Ladies and gentlemen, at this time, we'll begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone 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 selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. First question comes from the line of Antoine Belge of HSBC. Please go ahead.
Yes. Good afternoon, Antoine Belge at HSBC. Two questions. First of all, you listed quite a long list of reasons why the gross margin should be down in H2. Is it possible to be a bit more precise, especially on the two, maybe the most important one, FX and channel mix? Out of the 180 basis points gross margin improvement, what was precisely the impact of FX and channel mix? Do you expect those two to be negative in H2 or just to be less than in H1? Also, if gross margin are down in H2, is it possible for you to escape a gross margin decline in 2020 when then the U.S. dollar trends will be a bit more challenging? My second question is regarding Asia, 8% was slightly below the, just on one quarter, below the target for the year of 10%.
China didn't really slow much. Can you highlight maybe one or two other Asian markets which explain the slowdown? Thank you.
I will take the second, Harm will take the first. We saw a slight slowdown in China, as you saw two points, the remaining was really Korea. We're seeing a fairly solid business across the board, that's the two. That is, I'm not trying to be short my answer, I'm saying that is the fact of where it is, 14% growth in China still is very, very strong. As Harm said, the Korea business is predominantly due to the consistent slowdown in traffic, choice tracking. That's where it is. Harm?
Yeah, on the first one on the gross margin, yes, I listed the five examples why the second half is rather declining compared to the first half. Again, it's not negative on the FX in the second half, but it's fading and is not giving us a lot of tailwind. There are two things happening. On the one hand, the tailwind is fading. On the other hand, all the work that we did over the previous years on FOB mitigation is slightly coming to an end as it's getting more convoluted in the supply chain or the manufacturing capacities in Asia with a lot of brands moving out of China into other markets. That's what we're seeing in the second half of 2019.
I don't want to disclose more details of that, but rest assured that majority of the benefits are coming out of FX and FOB mitigation, and some of it will be used strategically for repricing, specifically in Europe. That's where we are. Good question towards 2020. Of course, it's not getting easier in 2020, but we're not giving a guidance today. We know what we have done from a hedging point of view. We know where the currencies are today, but currencies are still moving, I would say, on a daily basis. We also have some benefits next year as we have addressed the supply chain shortages. We will have less air freight. There will be some positives as well that we have negatives this year. That's what we need to manage and we come with the guidance in March 2020 then.
Maybe just a follow-up. Regarding the channel mix, so air was quite positive, so you don't want to disclose it for H1. For H2, I understand that wholesale should pick up, but is it your assumption that wholesale will outgrow DTC in the second half?
No, you shouldn't assume this, but the key thing is that wholesale gets back to growth. Again, the primary growth factor that you saw was 37% is e-commerce, and in the overall mix, we are still at a 10% of the total. That's why I think the mix effect on the margin isn't as significant from a channel point of view yet.
Thank you.
Thanks, Antoine.
The next question is from the line of Jürgen Kolb of Kepler Cheuvreux. Please go ahead.
Yes, thank you very much. Two questions. You mentioned that basketball was actually picking up in the performance category. Maybe a few words, what really drove that positive development? I think we've heard that, I haven't heard of that for a long time, that basketball was mentioned as a positive in the performance category. Secondly, on the cost lines, you mentioned you were investing in the scalability of the business model and you were seeing higher costs associated with the D2C business. Maybe some of the core elements of these, where the money is going, where your investments are going in these two areas, so that we may better understand what the core elements of investments are in these two elements, probably also being a factor for 2020. Thank you.
Hi, Jürgen. This is Kasper. I'll take the first one on the basketball side. As you know, we've had a declining basketball business for a while also because we got out of the NBA contract and the legacy that it brought along with us to make sure that we sold out the last jerseys. What we are seeing, we're actually seeing quite solid growth or good growth in both our footwear and apparel business. While the business is still small, it's, I would say, a good sign in the right direction that we're seeing a continued pickup of our products in a market that where we've not seen a lot of growth for many years. There's no doubt that we gained market share in this quarter, but of course, we need to continue to expand our business. The business is predominantly in the U.S. and China.
That's about 90% of the business. That's the summary in basketball, footwear, and apparel both growing, North America, and China.
Yeah, on the cost side, Jürgen, primarily the growth that you're seeing is impacted by our direct-to-consumer growth. In addition to the direct-to-consumer growth, of course, we invested into our DC network, not just in China, but also in the U.K. and also in the U.S., as we indicated earlier. Of course, given the growth with e-commerce, there is tremendous shipping cost to its end consumer, which is part of it. We keep investing into our digital environment, whether it's in apps, our Creators Club. This is where the money is going. On the other hand, you do not see the benefits of our One adidas initiative yet around non-trade procurement and global business services. We're coming to the end of these investments. The benefits will be more visible in 2020.
Okay. Thank you.
Thanks, Jürgen.
The next question is from Graham Renwick of Berenberg. Please go ahead.
Hi. Good afternoon, everyone. Just two questions from me, please. Firstly, on the revenue guidance, the reiterated guidance implies a wide range for the second half of 6%-12%. Given you have greater visibility now on order books across the second half, just wondered why the range was still this wide. What have you assumed for coming at the top end of the range versus the bottom end? There are clearly a lot of tailwinds you highlighted that should support a solid acceleration across the second half. Just wondered where you still see the biggest risks or uncertainty. Secondly, on the Beyoncé partnership, when it was announced, I think you were still at that stage trying to work out what the partnership with Beyoncé would look like commercially. Three months on, can you offer any detail on what commercial terms would be now with Beyoncé?
Have you started to design products? Do you have a clearer view on the product launch timeline? Will you be using Beyoncé in marketing campaigns ahead of the initial launch? Appreciate that product launches are unlikely to be material themselves in the near term, just trying to get a sense on when this could start to drive a lot of brand heat for you, particularly in the women's category. Thank you.
Starting with the second half guidance, we don't narrow the guidance because we try to stick to the guidance that we have, and we don't comment whether it's the upper end or the lower end. We do think that we need to see an acceleration, and we are seeing that's why we explained the building blocks. As you saw, it's going to be more fourth quarter than the third quarter simply because of the supply constraints. Maybe also on the guidance of the income growth. Last year, as you saw, we made an operating margin of 15.3%. We had some criticism from some of you that why are we doing such a normal, big launch. Because we're not doing it this year, then we have subsequent lower income. That is as simple as that is.
I would be very careful putting any kind of overrating of that into it. We're trying to spread the Yeezy business as equally across the year. What you've seen in the first and the second quarter has been an expansion of the margin. You're not going to see that in the third quarter. You'll see that in the fourth quarter, that's why we're also confirming the margin guidance for the full year. That is how basic that is. As I said, I would just ask everybody not to make it more complex than that. On the Beyoncé, we'll start seeing the first products this year. For obvious reasons, we're not going to give you any insight. Part of the way you actually drive brand heat and excitement around a Beyoncé or Pharrell or Kanye is also the element of surprise.
We are building a product line out. As I said, we'll see the first product launches this year. You should assume, which you also stated correctly, it will have limited revenue impact this year.
Okay, thank you.
The next question is from the line of Elena Mariani of Morgan Stanley. Please go ahead.
Hi, good afternoon. A couple of questions from me, please. Going back on your FX hedging policy, is it something more that you could share with us? FX seems to have a much more volatile impact for you versus peers. You've guided very much precisely on the second half of the year, what we should expect. You did not in the first half of the year when the surprise was positive. What are you doing differently versus your peers? How should we expect this to impact fiscal year 2020, on the basis of what you've hedged already today? This would be very helpful given that it seems to be one of the most important factors in your quarterly swings. A second question on the supply chain constraints.
Could you help us understand a little bit more which precise measures you've taken to solve the issues? Some of your OEMs have mentioned that you might have raised some of the manufacturing prices up to 30%, just to make sure you could secure some capacity. Is it getting more and more difficult to secure capacity? What is the impact that we should expect to come from these measures, both in the second half of this year and also in 2020? Thank you.
Yeah. First on the FX hedging, Elena. First and foremost, our hedging policy is always 12 to 18 months out. We want to cover our product costs that we are more reliable in our guidance in our quarters. You can go back in the spring, summer 2019, if you go 12 to 18 months back, we had a different U.S. dollar. That's why it was more positive in the first half. Of course, the dollar, despite the fact that a lot of banks told us it's weakening, it hasn't. That's why the second half wasn't as good or as well hedged as the first half was. Again, the benefit was much better in the first half.
Secondly, compared to the competition, our business has a lower % of overall net sales in the U.S., where you would have a natural hedge through the net sales. The main competitor has a benefit there because our share in Europe and also in China is higher than theirs. That's why they have more of a natural hedge that we are missing. That's why North America is so strategic for us also in the mid and the long run, even from a hedging point of view. Let me speak about the supply constraint. As we already explained, following the first quarter, we were in a supply constraint situation. When you go out and ask for more capacity, most of the capacity is already used.
The way you get access to capacity in the short term is through overtime or through very expensive idle capacity where there's very little. The second part is, which is a cost associated with it, and Harm has been quite clear on that has been then the subsequent consequences of air freight. We have mitigated as much as we could in the first, second, and also the third quarter, and that is why you're seeing pretty much a more and more unconstrained situation in the fourth quarter and also going into the new year. You should assume for the capacity we have next year is very close to normalized rates. It does not preclude that the overall pricing is going up, but that's a market situation.
The marginal increase that we had this year where we had supply constraint, of course, we're not continuing next year because we're not in overtime. We enter a normalized manufacturing scenario. Next year you should assume you don't have neither the same amount of air freight nor the same marginal cost on the last product.
Understood. Thank you very much.
Thanks, Elena.
The next question is from the line of Andreas Inderst of Macquarie. Please go ahead.
Yeah. Thank you. Good afternoon, everyone. My first question is on North America. There is lots of talk about a consumer slowdown, weakness, promotional environment, not necessarily in the sporting goods space, but maybe you can elaborate on that. Your take would be highly appreciated on that. Second question is on Europe. You seem to be quite confident that you will see improvements in the second half of the year. You have clearly outlined several drivers. Given the development in H1 group wise and also in Europe, do you feel you are broadly in line with your expectations slightly ahead, or do you have to step up materially, versus your budget? Thank you.
Starting with the last question, we had negative growth in the first quarter of 2019. We have zero growth, so neutral position in the second. What you are seeing, you are seeing what we, of course, are betting on a sustainable improvement, and that you're going to see, maybe not linear, but throughout the remainder of the year. Year will come back to growth, as we said in the fourth quarter, and we'll be in a growth scenario next year. We have no reason to believe that the improvement we're seeing is not going to be of a sustainable character. It has taken us four quarters to turn around, and I think that was more or less what was it last year that we looked upon a sustainable improvement and not a short term, whether it be a disappointment.
With all the indicators that I spoke about, and of course also the football that you asked, the football comparison, you don't have a football element in the second half, or you do have one, which is the Euro. We believe that the assumptions that we put in place are the appropriate ones. U.S. continues to be a very positive market. We're not seeing a substantial slowdown in the U.S. Of course, we've seen a slowdown in our business due to some of the factors that I mentioned. The competitive pressure, I would say, remains high in all the key markets.
I can't say that it's been any higher or any lower from a substantial standpoint in the second quarter. It's still a good trading environment. U.S. continues to be competitive. When you bring new products in, like some of the ones we discussed, either through our own or through our creators, we continue to see great demand for our products in the market.
Thank you.
The next question is from the line of Piral Dadhania of RBC. Please go ahead.
Yeah. Hi, thanks for taking my two questions as well. On e-commerce, if I may, obviously another very strong quarter of growth. Could you just help us understand the contribution of growth across the key platforms? Is it coming mainly from your website? Is Instagram contributing? Is your app now outsized in terms of contribution? How is Creators Club impacting that revenue growth? What do you think is the midterm growth rate for the e-commerce channel going forward? To get to that EUR 4 billion target, I think, that you've set, it requires a sustained level of high growth. Is that still sort of the base case assumption? Secondly, just on Reebok, first positive growth in a number of quarters now, is this the beginning of the turnaround? Should we expect a sustained positive growth trajectory for Reebok as we go into 2020 and beyond? Thank you.
Yeah, Piral, Harm speaking. Just on the e-com side. It is indeed primarily still the website, but in the website, it's primarily the mobile traffic that we're converting. That's the biggest piece that we're seeing. Of course, the app is successful as well, but again, it's a minor piece of the overall business, but as important for the loyal consumers that we have to convert them higher, to get more frequency out of them. Of course, linked to that is also the Creators Club or Instagram checkout. The majority of the business is the traditional website, but the traffic is more and more coming from mobile, especially when it's in China. It's almost completely mobile. That's really what we're seeing on the website.
In the midterm, we're not going to give a guidance beyond what we have in 2020, and that's where we want to get to as part of our targets. You can expect that it's an over proportional growth of online sales. That's why we keep investing into all aspects of our digital endeavors.
On the Reebok side, you saw, I would say, the first very last step last year when we brought the Reebok brand back to profitability. Right now, you're seeing the first quarter of growth. We deliberately not say whether this is sustainable. What we are saying is that by the end of 2020, we have a sustainable model where we are growing profitably. We're not going to give sequential guidance. We'll give, of course, guidance when we get to next year, but we're not going to give sequential guidance. You should assume that we're working diligently. To be honest, I cannot rule out that we're going to have one or the other quarter without growth, but of course, the target, our commitment is to deliver what we promised you by 2020, sustainable, profitable growth.
Okay, thank you. Just on that, Kasper, do you feel that the business is in the right place? Obviously, profitability has been stabilized and improved, do you feel like all the building blocks and the ingredients are in place to now drive forward? I'm not asking you to commit to sequential quarters of growth, do you feel that the business is now in the right place and you're happy with it from that perspective?
If you grow the way we're growing right now, I can't be happy. I don't think we should be satisfied either. We're getting more and more building blocks in place, but I still think we have a way to go. We have shown that we can make a lot of progress, but I don't think by any means we're finished with getting Reebok to the state where it needs to be. Without going into further details of what we need to do, I still think there's work to do, and the entire management team have a business review meeting with Reebok next Monday, where the following one in two weeks' time, I was there last week, and most of our people also spend time on it, so on the right way, but we don't yet have all the building blocks in place.
Better this year than last year, which is why the numbers are better.
Brilliant. Thank you.
The next question is from the line of Erinn Murphy of Piper Jaffray. Please go ahead.
Great. Thanks. Good afternoon. Two questions for me. First is on China. Could you talk a little bit more about what you saw in terms of the digital trends in China versus the offline business? Where are you seeing, or what did you see in terms of store growth there? My second question, in North America, Harm, could you quantify how much air freight impacted the EBIT margin decline this quarter? Just given the supply constraints through the third quarter, are you expecting EBIT for the North American region to remain pressure for the year? Thank you.
We still see, I'll take the China. We still see a good mix between brick and mortar and online growth. When we open very large boxes, we just open a very large box or the biggest we have in Chongqing, which is the largest city in China. What we're going to expect very, very large, high number of visitors in our current biggest store in China. In Shanghai, we have 20,000 and 30,000 visitors a day. We expect that to continue. We see when the brand experience is good, we're seeing a very high interest. At the same time, digital is at the forefront in China, I would say, also from a worldwide perspective, and that's why we built a digital team in China. You should assume that the digital growth will by far outpace the physical growth.
At the same time, we still see opportunities for opening up stores, particularly in lower tier cities across the Chinese continent because it is such a vast country. We don't give guidance on the number of stores. Of course, we are seeing a slowdown in the opening of new doors, which is also the guidance we have given in the past. We're seeing a different size of the box and a slowdown the opening. Of course, we'll continue to open new doors where appropriate.
On the EBIT impact of air freight in North America, we're not going to give the details of that, Erinn. What I can tell you as a direction, when you look at the gross margin decline of 150 basis points, a significant part of that is impacted by air freight. That's where we leave it. When it comes to the EBIT, there are other things in there as well, as I mentioned earlier, from a brand investment, from an infrastructure investment. When it comes to the gross margin, significant part of that is impacted by air freight.
Okay. Fair enough. Thank you.
Thanks, Erinn. Haley, we have time for two more questions.
The next question is from the line of John Kernan of Cowen. Please go ahead.
Hi, thanks for taking my question.
Sure. Hi, John.
Can you talk about, you've reached the high end of your margin guidance for 2020. Your high end of your guidance for this year implies that you've reached the 2020 target. Can you just talk about some of the operating leverage that's embedded in the second half guidance and what specific line items you're seeing the ability to lower within that OpEx ratio?
Yeah, John, sure. When you say we have achieved the guidance for 2020, yes, we are definitely, when you look at the first half, we made good progress. As we always said in the fourth quarter is always a quarter where we have a lower operating margin historically. It will be more balanced this year. Of course, we talked lengthy already earlier about the impact on Q3 where we target to be below prior year on the net income line and of course correspondingly in the operating margin as well. Again, we continue to spend on the marketing side. We continue to invest into our business. We are committed to our e-commerce growth. We drive some of the operating overheads.
As I said earlier, you will see the first visible benefits of One adidas in 2020 as some of these investments come to an end in 2019 and it have been built. That's the direction that we're going to go. Please keep being reminded that in Q3 it will be a different operating profit than we had in prior year. In Q4, we'll get, again, not similar to the previous year, but we want to get a more balanced quarter by quarter going forward.
Got it. Then maybe just a quick follow-up. We've seen some more Yeezy launches here in the U.S. in the first half of 2019, even more so than the second half of last year's. The sell-throughs have been extremely strong in both the primary and resale markets. Just wondering what should we expect out of Yeezy going forward? Is it this type of launch cadence that we should expect in the back half of the year as well? Thank you.
Thank you for asking this question because it's actually really paramount to the way our business is running right now. Last year, we had fewer launches with larger volumes. What we have now is we have more launches with less volume, so the business is being spread much more out. The launch you just spoke about, the last one was where we had a different launch every hour. You could buy one, a different shoe every hour, of course, with a limited volume. What we are doing is we're spreading out to avoid having these very large elements in one quarter, which basically makes the comparison very different. You should assume that we'll bring more Yeezy products in. As we speak, the volume will not fundamentally change. We're not fundamentally growing our Yeezy business. We think it's a very good level here.
Might see slight growth but not substantial growth at all. It's going to be spread much more evenly out, which of course also will mean that you're not going to have the very large variances in one quarter or still from a margin standpoint because it's simply not how we're going to launch the product. What you saw in the U.S. with a launch with different models every hour, you will see, I will not disclose it, but you'll see that in one of the regions also this quarter in Europe, this quarter in the rest of the world, but of course not with the volume that we saw last Q3.
Excellent. Thank you.
Thanks.
The next question comes from the line of Simon Irwin of Credit Suisse. Please go ahead.
Morning. Oh, sorry. Afternoon. Two questions on product. Can you just talk a little bit more about Ultraboost 19, in terms of how you expect to scale it through the rest of this year and into next? I don't think I've seen anything on Instagram about it for the last quarter or so, and obviously prices are still well above mass market. Secondly, I know you've already been asked about Beyoncé, but just conceptually, where are you looking to position it? Is this going to be kind of Yeezy style pricing? Will you be looking to bring in product at around upper end of existing product?
On the UB 19, as we said, it has been a successful launch and it's a stage, as we've seen with other products also which is typical, that you don't have unlimited supply. That's why we're also not seeing any price takedown. The sell-through is good. We have had substantial social media activity across the board, but we continue to see a growth of our Ultraboost business with more than 30% this year. Ultraboost, not only the UB 19 but also the OG continues to do very well and we're very happy with the development. I'm sorry to close on a low. I'm not going to give you any details on the Beyoncé.
We think that we don't want to let, what they call, the cat out of the bag before we're there, and we think we'll be excited what we have to say, but we're not going to give any details on it beyond what we've given today, which means that you're going to see the first products hitting by the end of the year in a very small volume. With this, I'd like to hand back to Sebastian.
Okay. Thanks very much, Kasper. Thanks very much, Harm. This completes our conference call for today. As you know, our next reporting day will be the 6th of November for our third quarter results. We look forward to speaking and seeing many of you over the next couple of weeks and months. As always, if you have any questions in the meantime, please don't hesitate to reach out to Adrian, myself, or any other member of the IR team. With that, I would like to thank you for participating in today's call. Bye-bye, and have a great day.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.