Welcome to adidas conference call for the first quarter 2019 results. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Sebastian Steffen. Please go ahead, sir.
Thanks very much, Allison, good afternoon, ladies and gentlemen. Welcome to our first quarter results conference call. Our presenters today are our CEO, Kasper Rorsted, as well as Harm Ohlmeyer, our CFO. First, Kasper and Harm will walk you through our Q1 numbers and the outlook for the remainder of the year. Afterwards, we will have time for your questions. As always, I would ask you to limit your questions to a maximum of two to give as many people as possible the chance to ask a question. Just one more comment before we start. Unless otherwise stated, all top-line growth rates are currency neutral, and all numbers include the impact of the IFRS 16 accounting change. With that, I would say we kick it off. Enough from me. Over to you, Kasper.
Thank you very much. I'll start with the business update. We're very happy that we've been able to sign Beyoncé as a creative partner for our company. We believe that within our three strategic priorities, Open Source, we're taking our successful approach to the next level now. With Beyoncé, with Kanye West, with Pharrell Williams, with Stella McCartney, we have an extremely strong off-the-pitch team, and of course, on the pitch, we continue to invest in sports assets, but we're extremely happy with the signing of Beyoncé. We'll be focusing on co-creation of exciting performance and of lifestyle products, and all products will be co-branded, including Ivy Park, which Beyoncé is going to launch with adidas. The first and very limited products will be released towards the end of 2019. At the day of the announcement, we had more than 1 billion impressions.
I think it shows the magnitude and the reach that Beyoncé have, and we're confident that this will be a big asset for us moving forward, one that will have brand impact in 2019 and the years beyond, of course, also direct business impact. It was also a quarter where a number of products and activities were launched with great success. Our UB19 came out to a great start. It hit all the sales numbers that we expected, and we did have high expectations. We have introduced four colors when we started, and since then, we've introduced several colorways. The Nite Jogger was also launched in limited edition and also lived up to the product expectations that we had. Let me just pause there for a second because I think it's important to reflect back on how the start last year went.
The start last year went with two launches that we were not happy with. This is in contrast to this year. That's also why, which I'll speak about at the end, why we have confidence that we'll hit the increased or accelerated growth numbers by the end of the year. We spoke about in Europe versus in the U.S., our FUTURECRAFT.LOOP, the first fully recyclable shoe, which is a natural extension of what we're doing with our Parley, and Parley continues to be very successful. The fully recyclable shoe is in the short term, more brand play, but as of 2021 and beyond, it will have a similar impact to what we're seeing from Parley. We launched our Primeknit Luxe bra that gets us into a higher-end part of the women's market. We launched Instagram checkout that means that consumers can buy our products within the Instagram app.
Reebok was the talk of the show in Shanghai during the Fashion Week. From a product standpoint and from an activity standpoint, it was the first quarter that was very much according to plan. When I look upon the strength and the weaknesses of the first quarter, the supply chain shortages did have an impact, as we communicated in March, on the growth rate, particularly in North America, as you can see from the numbers. The European growth recovery is expected, as communicated, to take place in the latter part of the second half. We're making the progress that we need to make, but we will not see it in the numbers before the end of the year. Despite the fact that we made a lot of progress on Reebok's profitability and announced a profitable Reebok for 2018, we still need to drive growth back into Reebok.
That is the ultimate target, as we've said, for 2020. Just to reiterate, the target was to have a growing Reebok by 2020 and a profitable Reebok by 2020. Of course, we'd like to have a growing Reebok before 2020, but our target is by 2020. We are seeing OpEx leverage being matched by investments for the D2C growth. As you'll see in the past, we've had a very strong D2C growth, and our D2C growth was up at 18%. Of course, that has had a significant impact on our operating overhead. That is where you're going to see the impact from a business standpoint. However, there are many positive parts in the past quarter. We'll continue to make progress in our strategic growth areas. We saw double-digit growth in Greater China and e-commerce.
In our 3 strategic growth areas, North America, China, and e-com grew adjusted 14%, so 14% higher than the rest of the company for obvious reasons. It has shown in the past and also in the future that having a high focus on a number of key areas does pay off. We saw successful activation of our key launches. I spoke about the UB19 and Nite Jogger. They're performing according to expectation. We saw an ongoing gross margin strength supported by a favorable FX, and Harm will take us through the details of this. We continue to see strong profitability improvements, a continuation of our double-digit bottom-line growth also when you make adjustments for when margin spend has taken place. Which brings me now to the numbers and a highlight for the first quarter.
Our revenue increase was 4% in currency neutral terms and 6% in nominal terms, bringing our revenue to close to EUR 5.9 billion. Our gross margin was up 250 basis points to 53.6%, supported by, as I said, favorable FX. Our operating margin was up 140 basis points to 14.9%, despite the higher investments. Our net income from continued operations increased 16% to EUR 631 million. That means that on a nominal-to-nominal level, we are growing our income almost at a factor of three, that we're growing our top line. Our basic EPS from continued operation was up 19%. Of course, the delta between the 16% and 19% is coming from the reduced share count from our share buyback program. We're seeing strong progress in our strategic growth areas. North America grew 5% on top of a 23% increase in the previous year. Greater China up 16% on top of a 26%.
E-commerce grew 40% on top of 27%. As I said, the growth of these three combined when you adjust for the double counting, it was 14%. Great progress on our strategic growth areas. Of course, we would like to have seen more North America, but this is where the biggest part, almost all our supply constraints, came into the numbers. The adidas brand grows in most markets. We came in and grew 5%. The sports performance grows 3%, high single-digit growth in training and running, which was offset by tough comparables by football. As you remember, we had a very strong football event last year in Russia. We saw sport inspired growth by 6%, and this was in the first quarter supported by a strong Yeezy growth.
Just to give you guidance for Yeezy growth for the year, we do not expect any significant growth from Yeezy year-over-year for the fiscal year 2019. This is what you see in the first quarter, is simply a sequential view of it, but we do not expect any significant growth from Yeezy in this year. What we've seen, we've seen a balanced growth, mid-single digit increases in both footwear and apparel. On Reebok, we continue to see further margin improvements, up 290 basis points, bringing us to 44.7%. It's still substantially below the level of adidas, but a big step in the right direction. Revenue decreased 6% due to declines in most markets. We saw growth in classics driven by double-digit increase in apparel.
As I said, our target has been and will remain to bring Reebok back to growth by 2020 and remain the profitable situation that we've had, of course, aiming at improvement. We continue to see exceptional growth in our e-commerce, driving digital consumer engagement up 40%, driven by double-digit growth across all regions. We're driving traffic and engagement rates through exclusive releases such as the Alphaedge 4D and other releases. The one-to-one engagement, which is a key part of Creating the New strategy, is really paying off in our digital world. The adidas app is now live in 27 countries, and we have more than 9 million downloads by the end of first quarter. Again, the focus on digital and our dot-com as the most important store in the world continues to pay off.
I would now like to hand over to Harm, who'll give you more details on the financials. Harm, please.
Thank you, Kasper. Good morning. Good afternoon, ladies and gentlemen. Please allow me to give some more updates on the financials. As always, I would like to start with the markets. As always, I will discuss North America, Asia Pacific, and Europe in more detail in subsequent slides. Let's briefly look into our three remaining markets, which all proved their resilience among various challenges. Starting with Latin America. Revenues down 3% against a challenging macro backdrop, but we were able to improve the region's gross margin by two percentage points to 46.4% and protected our profitability. Please also bear in mind that Latin America with the federations that we have with Argentina, Mexico, and Colombia, have been more pronounced towards the World Cup 2018, and this will have a different picture in the quarters to come.
In emerging markets, revenues increased 10% despite headwinds from geopolitics in some countries and the segment's operating margin expanded 2.1 percentage points, driven by both gross margin and OpEx leverage. Also there, we are back to growth after some years of consolidation there. Back to growth in emerging markets. Then to Russia. Sales in Russia grew 22% despite the non-recurrence of the World Cup. This is actually a 21% comp in retail, and the segment's operating margin increased by 3.6 percentage points as a lower OpEx ratio more than offset gross margin normalization following the World Cup. Also in Russia, bear in mind, this has been fantastic results in Q1, but in Q2 and to some degree in Q3, you got to comp the event-based sales during the World Cup. Don't look at Q1 as an indication for Q2 and Q3 in Russia.
When it comes to North America, top line growth of 3%. Currency neutral, the adidas brand revenues up 5%, driven by growth in sport performance. The Reebok brand decreases by 12%, despite growth in classics. Overall, the gross margin increases by 50 basis points to 38.3%, driven by a lower sourcing cost as well as better product and channel mix. Overall, the operating margin increases by 1.3 percentage points to 10.8% on the back of the gross margin expansion and OpEx leverage. Again, as Kasper mentioned earlier, supply chain shortages negatively impacted North America, in particular in Q1. When it comes to Asia Pacific, strong double-digit growth driven by Greater China. Overall, 12% currency neutral. adidas brand sales increases 13%, driven by double-digit growth in sport performance and sport-inspired. Reebok brand revenues down 7%, despite growth in classics.
Gross margin overall up by 2.7 percentage points to 58.7 due to lower sourcing costs, positive FX, a better channel and product mix. Of course, China contributes to this mix as well with their growth having a higher gross margin profitability overall. All of this leads to the operating margin increase of 2.6 percentage points, mainly driven by the gross margin expansion. As you mentioned earlier, China contributed 60% to the overall growth in Asia Pacific. When it comes to Europe, currency-neutral sales decreased by 3%. The adidas brand exactly down by 3% as well, despite growth in training and running. Specifically there, we always talked about the challenge that we have in the lifestyle distribution, the segmentation. Also there, indication for the second half, good growth in training and running. Reebok brand sales decreased by 7%, despite growth in running.
The gross margin improved by 6.1 percentage points to 51.7. Again, a significant positive FX impact. Also here, similar to other markets, lower sourcing cost and a better channel mix. Also here, I will come to some more details over the development of the gross margin later on in some more details. Overall, given the gross margin, operating margin is up by 4.6 percentage points in Europe to now to 26.2%. On top of it, I want to mention the inventories in Europe at quarter end, that they have been down by high single digits compared to a year ago, so minus 8%. Again, reflecting that we are not pushing into the channel. We are disciplined based on the sell-through that we have in the market, and that's what you see represents a high quality of the management, the overall working capital also in Europe.
When it comes to the P&L, I want to repeat again the 6% nominal growth, which is a 4% currency-neutral growth. Again, the gross margin at a record high with 250 basis points above prior year. The operating expenses with 9% up. There I want to highlight that the operating overhead expenses was 14% up. Again, our goal is to develop a truly scalable business model. We keep investing into our major ONE adidas initiatives. The ONE adidas initiatives are not just contributing to overhead reduction, they also contribute to margin expansion, especially when it comes to sourcing and range reduction as part of ONE adidas. We keep investing into global business services, nontrade procurement. We will never be finished in digital. We keep investing over proportional and also in the DC network as well. We are recording the first benefits of those initiatives.
However, as we continue to invest into scalability at the same time, those improvements don't fully drop through in the first quarter yet. In addition, Kasper mentioned that already, over proportionate growth in D2C in Q1, with 18% contributed significantly to the operating overhead increase, which is largely compensated for the higher gross margins. This, I will come to that structure will change slightly and different in the future quarters. Net income, 60% up, means we grow the bottom line at more than twice the pace of the reported sales of 6%. Excluding the negative impact of IFRS that we also have been transparent about, the net income growth would have been even 18%. The earnings per share growth is growing by 19%, as you see the difference to net income given the share buyback that we continue to do in 2019.
Let me talk a little bit about the quarterly gross margin. This is definitely a question that I'm expecting later on in the call as well. When it comes to the gross margin at the expansion of 250 basis points, I first and foremost want to say that this is an indication of the quality of the growth of the top line. Also in D2C, it's an indication that the sell-through also in our own channels is of high quality. Otherwise, we couldn't show these margin improvements. In Q1, gross margin was additionally supported by FX developments, as I mentioned earlier, lower sourcing cost, positive channel mix, and an over proportional growth of D2C. However, from here on, we expect gross margin to be more muted due to various underlying drivers reversing and strategic decisions taking effect.
First and foremost, we are going to reasonably increase the use of air freight from Q2 as part of the mitigating impact of supply chain shortages in Q1. Please bear in mind, it has been too short of a notice to have significant impact on flying in products for Q1. It will be more significant in Q2 and to some degree in Q3. As Kasper mentioned, supply chain challenges will be fixed by the end of the year. That's something you should see in the gross margin. We expect a more balanced growth across the channels in the second quarter as wholesale will respond to the new products that are working already well in our own channels, whether it's e-commerce or in physical retail. We keep investing selectively into price points, particularly in Europe, that are funded out of the gross margin.
Please bear in mind, our new management team just started in summer 2018. Spring/Summer has been largely cooked from a pricing point of view, you will see it more significant in Fall/Winter 2019 to also drive the top line in Fall/Winter 2019, especially in Europe. Also the hedges on the sourcing side will be less favorable in the second half, still favorable compared to prior year, but less favorable compared to the first half that you're going to see. As the chart also indicates, the prior year comparisons will getting tougher in the second half or in the future quarters than it was in the first quarter. As a result of all of these measures, gross margins should not be expected to keep expanding at the pace seen in Q1.
We also confirm our full year guidance of around 52%, which might, however, reflect a certain level of conservatism. As in previous years, if we come in slightly better than we originally have guided, we will be tactical and say, "Keep investing into the brand," because we are here for the long run. Please bear that in mind. If we are slightly better, we will be opportunistic into the marketing spend as well. This is what you will see in future quarters. When it comes to the average operating working capital, another highlight, inventories, as I mentioned, are under strict control with 2% currency neutral up. Receivables are in line of our business development with 6%.
You see the continuation of not just our non-trade procurement initiatives, but also some of the sourcing, moving outside of China, going back into China, where the payables are up by 28%. This is more a one-time effect that we see once partly in 2018 and partly in 2019 that leads to an operating working capital of open net sales of 18.6%. I always indicated we are happy to be below 20%. We always had a dream to get to 19%, so the 18.6% is definitely something that we should be all proud of. It's also not an indication that this should continue to improve over the next quarters. I would be very happy if we are in a corridor of between 19%-20%. That's what we are striving for.
When we come to the net cash and equity position, again, we have a net cash position of EUR 908 million at quarter end. Shareholders equity was up more than EUR 500 million compared to prior year. When you look at the drop in the equity ratio, it is mainly due to the balance sheet extension in context of IFRS 16, as these obligations have been capitalized on the balance sheet. We click to the shareholder return and the share buyback update. As you know, we are committed to our EUR 3 billion share buyback until May 2021. After the EUR 1 billion 2018, we gave an indication of roughly EUR 800 million in 2019. So far in the first quarter, we have repurchased 5.8 million shares in the value of EUR 152 million.
We are remaining committed to the plan that we originally indicated of roughly EUR 800 million for the full year in 2019. With that, we're also confirming that we're going to execute the EUR 3 billion for the period that has been agreed to, that's May 2021. With that, I would like to hand over to Kasper again to talk a little bit about the outlook.
Thank you very much, Harm. For 2019, let me just reiterate the focus areas that we spoke to all of you about in March. We'll continue to leverage multiple dimension of innovation, whether it's within our product area, through our creators, or through social media and digital, we will continue to drive high quality of growth into our business. A high quality of growth with the single aim of growing market share and growing margins. We'll continue to invest with impact. That means into brand desire, so keep a very high brand investment and into a scalable business model. I think you can see that when you look upon the operating overhead, at the same time, there were no increase in our headcount.
We're investing into the business that will have a long-term impact while having a very, very strong focus on the key revenue, our cost drivers, which are headcount. Our aim is to deliver all proportional net income growth according to our guidance. We're committed to that on the back of a sustainable operating margin expansion. As I said, the essence of Creating the New is market share expansion and margin expansion. When challenges arise that we attack them decisively, fast, and in a very pragmatic, but also way that sets the tone for the culture we have in our company, which is a performance-based culture. Let me just give you a short update to the supply chain shortages.
Overall, the impact is as communicated, roughly between EUR 200 million and EUR 400 million from a revenue standpoint, mainly in North America, and particularly in the second and partially in the third quarter. All required decisions have been taken by now, tactical and strategic. Let me just mention what we've done tactically. We've gone to all our suppliers and understood where we can get digital capacity. Expanded within our current suppliers within the scope they had from a utilization standpoint. We've moved to overtime with those where it makes sense, and we've also bought new capacity. We should know that this is helping us, but it's helping us to mitigate exactly when the range we indicated. That's why we have taken all the steps necessary that we can take to mitigate.
The one part that you're not seeing in the numbers yet, Harm was very clear about that, is the upcoming air freight cost, which will be substantial for the following two quarters to come. For the midterm, that means as of 2020, we have contracts in place that ensures us that we will have no supply constraint as of 2020. That means what we're speaking about right now is a temporary setback that is hitting the first three quarters, predominantly first three quarters of this year, and to the tune that we indicated, previous to you. All decisions have been taken to mitigate what we can mitigate. All decisions have been taken to ensure that we will not have a problem by 2020 and beyond. Why do we believe that we're going to have a top-line acceleration in the second half? Which is the assumption for how we're guiding.
We've been guiding, let me just reiterate that, is 3%-4% growth for the first half, that remains unchanged, and a 5%-8% growth rate for the full year. The reason why we're confident that we're going to see an acceleration is, one, the product engine will continue to contribute. We're scaling the recent launches, which in contrast to last year, this year has been successful. We expect Europe to return to growth by the end of the second half. We see the Euro 2020 coming in and having impact on the fourth quarter. We're seeing the impact of the supply chain shortages to eventually fade, particularly in the fourth quarter, and we're seeing a lower prior year comparisons to ease. Last year, we saw a 10% growth in the first half and a 6% growth in the second half.
of course, on a like-to-like basis, we are comparing ourselves with a growth rate, which is four percentage points lower than the previous year. That brings me to the outlook that we are confirming. That's an increase of revenue of 5%-8%, an increase in the gross margin to 52%, an increase in the operating margin between 50 and 70 basis points to 11.3%-11.5%, and that means an increase of eight to 12 percentage points for net income. The net income will then be between EUR 18.45 and EUR 19.15, and this is including the IFRS guidance. As Harm said, that is a one-time impact it will have. It does not change anything with the underlying business. It's on a like-for-like.
In the summary, we've had a successful start in 2019 according to the plan and the assumptions that we gave you in March. We see a continuation of the double-digit bottom-line growth in Q1. We have the building blocks in place to accelerate our growth in the second half, 2019 will be another year of high-quality top and bottom-line growth, and the entire focus is on executing Creating the New in the second last year of our strategy period to ensure we fulfill our long-term guidance that we've given you approximately two years ago for our Creating the New strategy. With this, I'd like to thank you for your attention so far, and Harm and I would now be happy to take your questions. For that, I will hand over to Sebastian Steffen.
Thanks very much, Kasper. Thanks very much, Harm. Alison, we are now ready to take the questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We'll take the first question from John Guy from MainFirst Bank. Please go ahead.
Yes, thanks very much indeed. Good afternoon, Kasper, Harm, and Sebastian. Two questions, please. First question on womenswear and the exciting announcement and the collaboration with Beyoncé. Obviously, besides a very strong Instagram account and very high global impression that you've already seen, can you maybe just elaborate a little bit more in terms of how you think about the womenswear business? It's a bigger opportunity than the menswear and still represents under 30% or close to 25% of your sales, so I'd be interested to hear a little bit about that. My second question is around FUTURECRAFT.LOOP. That's a really interesting concept and I think really enhances even more your ESG credentials, given Parley as well.
With the recyclable nature of performance running and footwear in general, how far away do you think we are from a subscription-based footwear replacement model for consumers, and what do you think that that could mean for your business going forward? Thanks very much.
I will answer the questions in a reversible sequence. We believe Futurecraft is a natural next step from our Parley business. Our Parley business has been flourishing over the last number of years. We've sold five million pairs of shoes last year, 11 million pairs this year. This is really phase 2 of Parley, and that's why it's the top of the pyramid. The Futurecraft shoe that was introduced will be brought to market by 2021, so it has no impact commercially so far. We'll continue to expand our franchise around Parley and the entire push around sustainable product set. A very natural step in that direction. More concrete to your proposal, we still think there's going to be a long way away still from having a subscription-based service for running product, also because the acquisition cost is still fairly low.
If you have a subscription base, normally you would have to be able to recycle it, and then we come back to our shoe. We're not going to have any volume shoe in this category, probably between 2022 to 2024 time range. We don't think it will have an impact in the imminent future. When it comes to Beyoncé, with the creation of our strategy, Creating the New, we did call out women's as a particularly strong opportunity for us because it is an underrepresented part of our business. While we, in most years, have had an accretive growth of women's business compared to the company business, we're still by no means where we need to be. There's no doubt that Beyoncé will help us in this area.
Stella McCartney has been a great first step and still is with Stella, Beyoncé has a reach which is unique to almost any other, I would say, female person in the world, and we think that with the cooperation of her, we can dramatically accelerate that. That will not have a substantial revenue impact in this strategy period. I just want to set the expectation right. We have seen with Kanye, whom we have a very, very successful relationship. In order to build that, we're speaking about a three to five to seven year range. While we'll bring the first products out by the end of this year, the Beyoncé product will not have a substantial impact. From a brand standpoint, it will strengthen our position within the female consumer.
Thanks very much indeed, Kasper.
The next question comes from Jürgen Kolb from Kepler Cheuvreux. Please go ahead.
Yes, thank you very much. On Yeezy, I think you mentioned that you have the plan to not have a material upgrade or launch calendar for Yeezy in this year. I was wondering what triggered that decision, given the strong success, especially in Q4 last year. Maybe some additional words on that one. Lastly, or secondly, on Reebok, obviously 2020 is the target. What is still to be done in order to make that franchise a more profitable one? In terms of growth, when do you think we can really see the first move towards a more sustainable development here? Thank you.
As it relates to Yeezy, we need to separate the total financial impact and the launch calendar. What you will see is, you will see a dramatic increase in the number of launches that we'll be doing this year, but you're not going to see any increase or significant increase in the number of products that would land. You're going to see many more different products, but not actual increase in the number. This is to make sure that we continue to keep the Yeezy product range a very, I would say, hyped product range. We'll see many more products in the market, but many of the launches we'll make with very, very few volume. It has now reached a business size that we feel very comfortable with. We might also grow it over time.
Right now, the commercial plan for this year is not to grow the volume of any significance from a marketing standpoint. The plan is to have significantly more launches than the past year, so we can start building the next set of volume launches that could come maybe in 2021 or 2022. On the Reebok side, we've said all along that we need to revitalize the brand, we need to get more attractive products out. When we took you through the annual numbers a couple of months ago, I believe we indicated that our marketing spend for the Reebok brand was higher relative than the one for adidas. It will be the same this year. We'll continue to invest into the brand to ensure that we make the brand relevant with the consumer.
We have resisted the temptation of being very aggressive from a push standpoint and drive commercial deals or promotional deals for the sake of getting top line, there's no doubt the two things we need to do, better products and more relevance for the consumer from a brand standpoint.
Mm-hmm. Very good. Understood. Thank you very much.
The next question comes from Antoine Belge from HSBC.
Yes. Can you hear me? Yeah. Hi.
Yeah, we hear you. Over to you.
Yeah. Hi, it's Antoine Belge at HSBC. Two questions. First of all, with regards to Greater China, you achieved 16% growth, but I think now the growth is less driven by store expansion and more by like for like on online. Can you maybe elaborate on market trends and on how you're driving those like for likes? My second question relates more to your top-line guidance. I think Harm agreed that in terms of gross margin, there was clearly more visibility than maybe a few months ago.
In terms of top line, would you say that you're more confident compared at the beginning of March, especially on those two areas, Europe, where you expect to come back to growth at some stage, and also, about the supply chain issues, you said they would be resolved later in the year, but would you say that that situation is more under control now? Thank you.
Thanks, Antoine. Yeah, two questions. First, going to China, with the 16% growth, indeed, as we mentioned earlier, it's not that we're accelerating our store openings there. It's more driven by comms this year, but we also stay committed to a point of sale network of around 12,000 stores. Of course, we open new ones, but we also close some of these. You're absolutely right, the numbers that you're seeing right now are largely comm-driven, but we also remain opportunistic, and we keep opening stores, just not to the extent that we have seen in the previous years. When it comes to the confidence of net sales, of course, the more we get into the year, the more visibility we get. Fundamentally, there's no change compared to what we have seen six weeks ago. It's the same structure that we announced six weeks ago.
It will be 3%-4% in the first half, to accelerate in the second half to get to the guidance for the full year of 5%-8%. Of course, as we go into the year, we have better transparency on what the timing of supply chain shortages are, how we mitigate these, as you mentioned earlier. The better we understand that, the more transparency we have on it as well. Generally speaking, it's unchanged from a confidence point of view compared to six weeks ago.
Okay, maybe just a follow-up just on Europe. Is the return to growth really linked to the first shipments of your 2020, or there is still hope that Europe could come back to growth before Q4?
It's not linked to 2020. We clearly said the first half will still be negative in Europe, but the second half is growth. For the full year, we intend to grow. That's easy mathematics. If the first half is decline, the second half is growth. Overall, we want to return back to growth, but it has nothing to do with 2020. It will happen in 2019.
Thank you.
The next question comes from Piral Dadhania from Royal Bank of Canada.
Hi, good afternoon. Thanks for taking my two questions as well, please. Please could you elaborate a little bit more on the channel dynamics we've seen in the first quarter? On my estimations, it feels like most of the top-line growth was driven by retail, with wholesale flat to slightly down in the first quarter. Could you just give us an indication of how you expect that to evolve and what the order book looks like as we progress through the year? I think you commented on new launches expected to accelerate as we move through, but just wanted a bit more color on that, firstly. Secondly, just on marketing spend, again, the phasing as we progress through the year. There's a step down relative to the high prior year comp given the World Cup. What type of % of sales should we expect for the full year?
Thank you very much.
We're going to see on the margins, I will continue to spend probably absolute more than last year. That means you're going to see a slight leverage. The plan is and will remain every time we see opportunity, we will continue to push into the brands. You should expect a slight leverage but not a material leverage. The first quarter, just to put that into context, is purely a sequence. You should not read in to the relative number of guidance for the future is that we expect to be slightly above previous year, which give you a slight leverage. On the channel mix, I'll hand over to Harm.
On the channel mix indeed, you are right. We have a flat environment in wholesale. We had a D2C growth of 18%. This is again, a specific quarter in Q1. Looking forward, don't expect this to be the channel mix. As I indicated earlier, the new product launches are working well in our own channels, and we expect them to help the wholesale growth in the second half, and that's what we're seeing in the order book as well. Every quarter will have slightly different ratios going forward as the mix is changing more towards an acceleration of wholesale, and that's something you will see in a, I don't want to call it declining, but in a less favorable gross margin.
Also on the other hand, it will be more favorable on the operating overhead as well, as you will see then leverage in the future quarters as wholesale is growing then more than in Q1, and the D2C share is not as prominent as it is in Q1. Every quarter will be slightly different from a ratio point of view, but that's something you should expect. For the full year, as we said, we want to grow, of course, in e-commerce significantly. We want to have positive comps in retail, but we also definitely want to come back with growth in wholesale.
Fantastic. Very clear. Thank you.
The next question comes from Elena Mariani from Morgan Stanley. Please go ahead.
Hi. Good afternoon, gentlemen. Thanks for taking my two questions. My first one is again on your top-line guidance. As you said, you now have better visibility into the second half of the year. Still, your guided range is pretty wide. If we assume a 3%-4% growth in the first half, in the second half you would need to achieve something between 6%, 7% up to low double digit. Would you be more comfortable now with the bottom range of the guidance given all the additional supply chain constraint that you're probably going to have also in the second half of the year? If not, could you help us understand the bridge between the 6%-7% and 12% that you could achieve in the second half? What could bring you to the top end of the range? That would be my first question.
My second question is about your footwear growth. It was 3% in the first quarter. My understanding is that the supply chain constraints are mostly related to mid-range apparel. Do you see this figure as satisfactory? Maybe could you perhaps comment on which products have worked well, which ones have not worked well? What gives you confidence in a re-acceleration here? Any indication would be very helpful. Thank you.
Thank you. This is Kasper. I'll take your first question. I think it's super important that we give as reliable guidance as absolutely possible. That also means that it will be quote-unquote unreliable if we were to discuss our guidance every quarter. We're not going to change our guidance. We believe that we have guided for the full year on all the right items that we have in the annual report on the most appropriate way. Should anything change, in the last number of years, we've tried to change our guidance in the third year up or down, and until then, we do not believe, unless something material was happening.
It's only six weeks ago that we gave the current guidance, and we believe that the current guidance is appropriate and correct in all the areas. That's why I can't comment more on the guidance than we already have done as we gave it six weeks ago. I'll hand over for Harm for the footwear part of the question.
On footwear, indeed, it's driven by a decline on the Reebok side, on the footwear side. It's definitely with some of the key accounts in the lifestyle distribution that we talked about before. That is not just limited to Europe. We see it to some degree in the U.S. as well on the lifestyle distribution. That's what you see in Q1. As we mentioned earlier, we also had successful launches with UB19. It started in Q1, it will accelerate from there. The Nite Jogger only was seriously launched in April. These are things that drive not just Q2, but the second half then as well to accelerate on the footwear side again. This is really the underlying reasons.
Thank you very much.
The next question comes from Andreas Inderst from Macquarie.
Yeah, hi. Good afternoon, everyone. I have a question on Europe. Our channel checks and talks with industry experts suggest Decathlon will sell adidas products again in Europe. First, can you actually confirm this? If we are correct, why did Decathlon decide to work again with adidas? What is the timeline of the launch? Thank you very much.
As you know, we've been working with Decathlon for a long period of time in the past. They took a strategic decision to abandon a number of brands or have a very selective range. That made us, along with Decathlon, agree approximately two years ago that the fit was not good. Decathlon, I believe, made a management change, but you should ask Decathlon about that, and that followed a strategy change, and that meant that we are now re-engaging with Decathlon. On the European numbers, you should be aware of that the Decathlon business in the first quarter is negative. We wouldn't give you a forecast for the outlook for the remainder of the year. Of course, we would expect over time to build out Decathlon's business.
A strategic change within Decathlon. I think that if you were to understand really the background, I think they're the best place to, I would say, direct that question.
Okay. Thank you. My second question on North America, adidas brand plus 5% driven by performance, that's good to see. You highlighted some challenges in the more sports-inspired channel. What do you expect to be the key drivers beyond the Nite Jogger and the supply chain constraints, which should be sorted by H2? What's beyond Nite Jogger driving the sports lifestyle accounts in North America? Thank you.
As indicated previously, Andreas, we definitely have some challenges on the lifestyle side in terms of the product launches have not perfectly worked in 2018. That's why the Nite Jogger is a good start, but we have more packages coming in the second half that will definitely bring that distribution back to where it needs to be because we clearly lost some market share in that distribution. Again, without counting all the products that are going to come, but you will see some of these already in Q2, then we're scaling that in the second half. I remain confident when it comes to the lifestyle distribution based on the learnings and the not-so-successful launch in 2018.
Good. Thank you.
The next question comes from Erinn Murphy from Evercore ISI.
Hi, it's Erinn Murphy from Evercore ISI. Two questions for me. Thank you and good afternoon. First, on digital acceleration in the quarter, it was 40% versus 24% in the fourth quarter. Could you talk about any of the key drivers that drove this acceleration, and then maybe relatedly what you're seeing from your new tiered loyalty program? My second question is a follow-up on Beyoncé. Can you just speak about how you're thinking about initial distribution of this launch? Will it be a global launch all at the same time? Are there specific channels or markets that you're targeting initially? Any changes to the price positioning from what Ivy Park had currently in the market? Thank you.
Thank you very much. I'll start with the second question. It would be too early and too premature to make any detailed comments on where we're going to take Beyoncé. It's clear that she is a high-end brand, to put it that way, the lady herself, and we're going to make use of that, and you can see what we said, that we have more than 1 million impressions in the first 24 months. Any detail as to product positioning and distribution would be premature, and that's why I would like to pass them on to a later call because we're still working through a number of the details. When it comes to the 40% growth, let me just go back and then state what I've said in previous quarters also. Our growth in online is very dependent upon which launches we have within a given quarter.
That's why I would caution you to overly read into a number. We had a 76% growth, if I remember correctly, in the third quarter. We had a substantially lower growth in the fourth quarter. Now we've had a strong launch of products in the first quarter, along with our Instagram checkout that I mentioned. That then drives a 40% growth. What, of course, we are focusing on is ensuring that we have a consistent set of launches. There will be varying growth rates quarter by quarter, depending on which kind of launch we're having and also which kind of volume behind the launch. As an example, if we launch the FUTURECRAFT.LOOP through our online channel, we know it drives high levels of traffic. It does drive lesser of volume because we're volume constraining the product. That's why you can't read overly much into it.
We're still committed to hit around the EUR 4 billion mark by 2020. We're very focused from an investment standpoint on that channel because it is the single most important channel for us worldwide. The 40% was driven by a number of factors. Product launches, Instagram was probably the two most relevant.
Great. Thank you, gentlemen.
The next question comes from Simon Irwin from Credit Suisse.
Good afternoon. Could you just take us through a little bit of the shape of the P&L in the U.S. and in China? Particularly in the U.S., I would have expected if it had been a strong D2C quarter. I assume it's one of your biggest markets for D2C, that the gross margin would have been up more and the OpEx leverage less, and you've kind of done the reverse. Maybe you can just start by giving us a bit of color around footwear versus apparel in the U.S. Then obviously China, that's a huge quarter. I think it's a record margin for APAC. Again, a big quarter for margin. Is D2C significant there? Or is that a kind of big shift into D2C that's driving that additional margin?
Yeah. First on North America, as you indicated, yes, the gross margin is slightly up in North America. Again, you can read that in the numbers, it's 50 basis points up. Again, we believe there's still the opportunity on the gross margin in such a competitive market, but it also linked to the supply chain shortages that we have. If everything would work to perfection, we could definitely drive a better margin in North America. Given the challenges that we have and some of the late supplies that we have, it's definitely not helping the margin right now in North America. That's really where we are.
Given the growth that we had in 2018 and the growth that we want to return to after the supply chain shortages, there should be more leverage on the operating overhead, primarily in North America, as it's a one-market scenario, not as complex as Europe. When it comes to China, I don't want to disclose any details on the China P&L anymore because we have now a market segment that is called Asia Pacific. We continue to announce the top-line growth, which is 16%. Of course, also in China, we said at a previous quarter as well that we started somewhat late with e-commerce, and we're definitely accelerating e-commerce with one significant initiative because of the digital innovation hubs that we have in China. It's definitely driving the top line and the profitability of any online initiatives that we do in China.
Yes, we continue to build out our own retail business there as well. Again, bear in mind, we're not going to disclose any more details. Overall, the success of China is contributing to significant success of Asia.
Okay. Just to follow up on the U.S. or North America, was there a negative product mix, i.e., was apparel weaker than footwear in the quarter?
We are going the details by market then on a product type, don't expect it to significant impact in that shift.
All right. Thank you.
Alison, we have time for two more questions, please.
Hello.
No problem. The next question is from Jayne Mistry from Deutsche Bank.
Hi. Good afternoon, everyone. I've got two questions. The first is on Western Europe. Could you give us a bit more detail around the price margin in Q1 in the region, and how much of the 600 basis point increase in price margins was driven by currency? My second question is on tax rate. In Q1, the tax rate was about 26%. Do you expect this to also be 26% for the full year? Thank you.
Yeah. First one on the margin, Europe, indeed, a significant improvement of 6.1 percentage points. Again, most significantly was the FX impact as, of course, on top of some lower sourcing cost. Again, one of the initiatives is ONE adidas, that is also consolidation of the ranges. We are getting better margins out of the consolidation of the ranges, and it is a better channel mix, as we indicated earlier. When you do more in retail and in e-commerce, and primarily in Europe, what I mentioned earlier also for the company, wholesale is in a declining scenario, and the growth of e-commerce and retail is contributing to that as well. As I also indicated, the management team only came together as a new team in summer 2018. Spring, summer 2019, prices have been set by then or largely set by then, other than Q2.
That is where you see more strategic price points starting in Q2, but definitely going into the second half as well, that the margin is to some degree fading compared to the improvements that you saw in Q1. Again, it is primarily driven by FX, lower sourcing cost, and then the channel mix, less so by a product mix or market mix. These are really the three significant drivers. When it comes to the tax rate, indeed a favorable development. Please bear in mind, we are still at the high end of the tax rate in Germany across the DAX 30, even with the tax rate that we had in Q1. That is driven by market mix and primarily by the continuation of the improvement of the profitability in the U.S. Given our tax structure, that is definitely helping to contribute to a lower tax rate.
That is what we continue to drive towards for the full year as well. Without giving any guidance, we are pretty happy with the development in Q1 on the tax rate side.
Thank you. Just to follow up on Western Europe, you mentioned your consolidation ranges. Are you now happy with your SKU count?
Well, largely, I wouldn't say we are finished, but we made tremendous progress over the last three years. There are still some optimization in the one or the other category, but we also need the trends that the consumers are setting with more colors, with different materials. It's a moving thing, but overall, we made tremendous progress, and that progress is reflected in the gross margin as well from an operational point of view outside of FX. I think without giving you a number, we made tremendous progress, but still some
Some work to be done category by category.
Thanks very much, Jayne and Allison, we have the last question now, please.
Certainly. The last question comes from Omar Saad from Evercore ISI.
Thank you for taking my question. Another great quarter. Congratulations.
Thanks very much, Omar.
Of course. I wanted to dig in on the digital acceleration a little bit more. I know you said there's some key product launches. Maybe you can give a little bit more detail around that. I also think I heard you mention that the shoppable Instagram, was a factor as well. Maybe you can give us a little bit more insight on that. I just wanted to dive in a little bit, my second question, back in the gross margin, such a strong performance. I know some of the drivers are transitory. Maybe help us understand the mixed D2C piece, size versus FX and the lower promotionality. Help us understand what we'll be able to see flow through throughout the year and on a longer-term basis to drive the gross margin. Thanks.
Thank you for the question. I'll take the first one, Omar, and then Harm will take the second one. Just to put the 40 into perspective, we grew 36 last year, so we're pretty much in the same ballpark. Of course, we're growing 40 on a higher base than the 36 was, but the 40 is more or less the range that we need to be in, probably 35%-36% to 43%-44% to get to the EUR 4 billion. There is no doubt that Instagram did have a positive impact. What we are seeing and what we'll continue to see is that when we take our 4D Futurecraft shoes through this channel, it does drive revenue.
When we take limited launches, either on apparel products or footwear products, the expansion of the number of launches we have with Kanye this year, where a significant amount of those will be online, will drive traffic to our online store and subsequently generate business outside the Kanye franchise. That's how we're looking upon it. Really make certain that we drive more launches through our online store, be a more effective store and an easier to buy store. When we look upon the stats, which we do very regularly, I'll repeat what I've said since I've been CEO of the company. At every single management meeting we've had so far, every single one, digital's been on the agenda. Of course, we go through all the key metrics, and one of the most important one is the increase in conversion.
We've worked very diligently on making certain that with the shift from stationary engagement to a mobile device, we've been able to dramatically increase the conversion rate on the mobile device because the mobile device had a lower conversion rate than the stationary device. We're looking upon data conversion rate launches, checkout capability, buy opportunity, and of course, also the app is going to help us. More than nine million downloads. It's not only the initial download, it is getting the consumers in one connection to us that allows us to make certain that we reach out to those consumers that are most loyal and have the highest probability of buying. That's why the app is so important for us. The 40% in the context of last year was more or less in the same range. The difference is we upgraded