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Executives

John-Paul O'Meara - Vice President of Investor Relations

Herbert Hainer - Chairman of Executive Board and Chief Executive Officer

Robin J. Stalker - Chief Financial Officer and Member of Executive Board

Analysts

Matthias Eifert - MainFirst Bank AG, Research Division

Antoine Belge - HSBC, Research Division

Jurgen Kolb - Kepler Cheuvreux, Research Division

Chiara Battistini - JP Morgan Chase & Co, Research Division

Julian Easthope - Barclays Capital, Research Division

Michael Kuhn - Deutsche Bank AG, Research Division

Rogerio Fujimori - Crédit Suisse AG, Research Division

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Adidas AG (OTCPK:ADDDF) Q1 2014 Earnings Call May 6, 2014 9:00 AM ET

Operator

Good day, and welcome to the Adidas Group Conference Call for Q1 2014 Financial Results. Today's conference is being recorded.

At this time, would like to turn the conference over to John-Paul O'Meara, please go ahead, sir.

John-Paul O'Meara

Yes, operator, thank you very much, and good afternoon, everybody. Our presenters today here in the room are Herbert Hainer, our group CEO; and Robin Stalker, our group's CFO. To allow for ease of comparison, all sales and revenue-related growth rates will be discussed on a currency-neutral basis unless otherwise specified.

And so with that, let's get started and over to you Herbert.

Herbert Hainer

Yes, thanks, JP, and good afternoon, ladies and gentlemen. Our financial results for the first quarter reflects a challenging start to 2014 that we had expected. However, looking in depth to our results, there are many positive underlying trends. Therefore, we can look forward to an accelerated period of growth and momentum for the group for the remainder of 2014.

The key financial results of the first quarter were as follows: Sales were stable currency neutral, but declined 6% in euro to EUR 3.5 billion. Gross margin decreased 1 percentage point to EUR 49.1%. Operating margin declined 3.2 percentage points to 8.6% and net income attributable to shareholders was EUR 204 million.

Two factors in particular had significant financial impacts in the first quarter. The first is related to strategic changes we are implementing at TaylorMade-adidas Golf. We are in the process of realigning key shipment and product launch cycles to more appropriately mirror market demand patterns. The goal of this change is clear, to extend and drive higher margins throughout the product cycle and to reduce inventory risks, shipping closer to key retail selling periods. This change, as well as a continuing challenges in the underlying golf market where rounds played were down 35% in the U.S. in the first quarter, resulted in a fixed decline of 34% to TaylorMade-adidas Golf. In total, this impacted group operating profit by around EUR 80 million.

Secondly, we continue to suffer from shopping unfavorable movements in several currencies versus the euro and the U.S. dollar, such as the Argentinian peso, Russian ruble, Brazilian real, Turkish lira and Australian dollar. This again put a significant strain on our reported sales and achieved margins.

Our sales were reduced by EUR 235 million from adverse currency translation or the equivalent of 6 percentage points of growth. Gross margin was negatively affected by the devaluation of the Russian ruble, as well as by less favorable hedging rates. Taking the translational and transactional effects of currency together, we estimate that these impacts reduced our operating profits by around EUR 50 million.

While these 2 issues dictated the group's financial results in the first quarter, they mask some very encouraging underlying developments which we are seeing form our business units around the globe. So let me give you a few examples. From a geographic perspective, we continue to dominate in the emerging markets, while sales in European emerging markets, Latin America and Greater China grew 28%, 19% and 5% respectively.

In owned retail, we saw a significant acceleration in growth, with comparable store sales increasing 8%. In addition to the first rollout of our new store format HomeCourt, which we installed in Beijing and Bluewater U.K, and Neighborhood which we installed in Berlin, was a key highlight in the quarter, ushering in a new era of retail experience for the consumer.

At adidas, sales increased 5% with closing every region except for North America, which I'll come back to. This is a year of football, a key competitive battleground, where we are clearly back on the attack. Our football category sales were up 27%, demonstrating once more our leadership positions and innovative strength in the category, with impressive double-digit growth rates in the Western Europe, Latin America, Russia and North America.

Key to it all has been a firework of product launches. We brought the beauty of the Brazilian rainforest in the tradition of carnival to the pitch, we expose our Earth and Carnival footwear package. We introduced the world's first knitted football boots, featuring an upper that is knitted from heel to toe, providing a bespoke second skin fit that retains the strength of a conventional boot. And just a few weeks later, at the beginning of March, we unveiled another groundbreaking innovation, the Primeknit FF, the world's first all-in-one knitted football boot and sock hybrid giving players a glimpse of the football boots of the future.

We celebrated Lionel Messi's new all-time club record of 371 goals for FC Barcelona, with a limited edition of the adizero F50 Messi 371 boot, which has thrilled Messi's highly-engaged fan community in the social media world.

We introduced our adizero F50 Crazy Light concept with Gareth Bale, resulting in the huge media pickup, especially in the world of social media. Weighing just -- weighting just 135 grams, this game-changing shoe is the lightest football boot ever.

Our running business also remained strong. We had a good start to the year, with sales in the category up 7% driven by strong double-digit growth in Western Europe, emerging markets and Japan. We shipped 1 million players featuring our Boost technology in the quarter, which continues to set the pace in major marathons and thrilled running consumers around the world.

As the volumes grew throughout the year, this growth rate will accelerate in the coming quarters. We also had a great momentum in training where sales increased 8%. Apparel is a big focus area for us this year, as you look to build a new period of sustained growth in the category and reassert our leadership in this space.

A great example is the Climachill concept, which is already resonating extremely well with consumers and retailers. Endorsed and supported by a digital marketing campaign with David Beckham, we have already had 4.6 million views on Youtube, making Glamatil our most successful apparel technology launched through digital marketing ever.

In lifestyle, while we are still trading through some softer trends for Originals in North America and Western Europe, our Originals and Sport Style business grew by 3%. Double-digit growth in all of our emerging markets offset softer trends in Western Europe and North America due to weakness in Originals.

However, I believe we are approaching the tipping point in these regions. Product launches, such as the Original ZX Flux, are enjoying encouraging early signs from Western Europe, with sell-throughs clearly outpacing our major competitor at Foot Locker Europe.

We also have had strong response to our new collaborations with Topshop and Farm as well as record conversion from the Stan Smith relaunch. And as you know, we have an array of hotly-anticipated initiatives in the pipeline, be it Kanye West or Pharrell Williams amongst others to bring momentum back to the category.

Speaking of momentum, another area of outstanding growth in the quarter was at the adidas new label, where sales increased by 24%, with double-digit growth in all regions. Our Selena Gomez collaboration took on a whole new dynamic in its second year, with over 500,000 conversations on Twitter in the first 2 days after the collection launch.

We also continue to roll out our store test sites, opening 2 stores in Poland and one in Germany, right here close to our headquarter in Herzogenaurach.

And finally at Reebok, we recorded our first consecutive quarter of growth for the brand, with sales increasing 3%. More importantly, we also achieved a further solid growth margin increase of 50 basis points to 39.6% despite the currency headwinds we face throughout the group.

Reebok continues to build strong consumer loyalty, with a fit generation. No other brand in our industry has embraced its rapidly growing consumer demographic. As we drive a high level of gradual brand engagement through our strategic collaborations with CrossFit, Spartan Race and Les Mills. Our commitment to fitness as a sport is clearly resonating.

To broaden our offering, we launched promising new footwear concepts such as ZQuick for running and training, the All Terrain series for obstacle racing and the Skyscape shoe, an extremely comfortable walking shoe for women. Our visually striking and activity specific apparel offering for a growing number of fitness activity is also growing from strength to strength, which grows at 14% during the quarter.

And we also continue to see nice momentum in Classics, where sales increased 19% in the quarter, with strong demand for retail basketball products as well as the GL 6000 series. All of the successes that we are seeing from Adidas and Reebok underpin our confidence in the direction of our business. Over the last weeks, as more of our new concepts are hitting the market, we are hearing and seeing firsthand from retailers that we are not only maintaining momentum where we are strong, but also turning the corner in our most challenging markets and categories.

In Western Europe, where we have been under competitive attack in the last 12 months, we have stabilized our position with adidas and Reebok growing at a low single digit rate in the first quarter. With Germany and Poland at the strong double-digit rates, good comps in our own-retail and visible improvements in orders for our latest innovations, you will see a good acceleration in the region in the coming quarters. And don't forget that this year we will be completing our One Euro project, we definitely expect benefits and synergies as we plan and build for 2015.

On that note, let me also come back to North America, where group sales were down 20% in the first quarter. While TaylorMade-adidas Golf accounted for more than half of the safety plan in that region, adidas and Reebok also had a low start to the year declining 13% and 8% respectively. For adidas, the decline in the quarter was mainly due to Originals and basketball. In Originals, we acknowledge that we missed some fashion trends in the market over the past 12 months. While in basketball, footwear sales declined in the first quarter due to the comparisons with the ramp-up for the Derrick Rose return in the prior year.

At Reebok, sales mainly declined due to running footwear in the wholesale channel, importantly through all of our other fitness-related products as well as Classics, are doing extremely well.

Obviously my work colleagues and I definitely are not happy with our performance in North America, but let me assure you of one thing. We are fully committed to driving long-term success for the group in this market. When it comes to our brand positioning, we are convinced that we are focusing on the right areas. Nonetheless, our biggest obstacle has been realistic quality of our execution, particularly in the wholesale channel. When I look at our own retail, sales were up 13% in the quarter, clearly showing the strong consumer desire and conversion of our brands when they are presented in the right way.

Therefore, North America, we are accelerating change internally with the completion of the joint operating model for adidas and Reebok and the appointment of Mark King who has been responsible for taking TaylorMade-adidas Golf to the top of golf industry.

Under the guidance of my colleague, Roland Auschel, who will take over responsibility for the market at the board level, as well as a strong support from Eric Liedtke, his brand management team, we are putting on top minds and talents fully behind this market as we build towards our next strategic plan.

While this team will focus their attention on building a more robust group executional strategy for the market in the long-term. In the short term, we already see improving trends for both brands in North America and I expect adidas and Reebok to reverse the negative trend from the first quarter and to grow in North America for the full year.

Our new Originals initiatives, which I have already mentioned, higher volumes of Boost running shoes and the introduction of our award-winning Boost technology into basketball are all driving increasing demand and orders for adidas for the second half of the year.

At Reebok, as we increase the depths and scale of our fitness offering and introduce more volumes of our latest running products during the summer months, we also see growing momentum in the region.

And not just in North America. At the global retailer event we held for Reebok at the end April, for our most important retail partners and key accounts around the world, we have also received unprecedented feedback on our ranges, collections and concepts for spring/summer 2015. But up to now, Reebok's successes have been driven mainly from controlled space related markets and channel. I firmly believe this will be a turning point to unlocking the wholesale potential of the brand.

That's all ladies and gentlemen. As I stated earlier, I'm looking forward to increasing momentum for our group in the coming months. As a result, I can confirm our full-year guidance as given in March with only some only minor changes.

The weak start of the golf market in 2014 is likely to be TaylorMade-adidas Golf sales will be moderately below the prior year level on a currency-neutral basis. This, however, will be offset by owned retail, which we expect to be at the upper end of the currency-neutral range of high-single digit to low double-digit growth initially expected for the year.

While we still have to be wary of currencies and [indiscernible] financials, the first quarter will be the low point of our performance this year. I expect a strong second quarter to point the way forward. And after all, with the 2014 FIFA World Cup taking center stage, it will definitely be an adidas quarter.

Later this month, we will unleash our largest football offensive ever ahead of the 2014 FIFA World Cup. The energy and intensity of our companion product concepts will be a clear statement and sign of things to come from our group as we drive forward the realization of our strategic goals and our 2014 financial guidance.

Also watch out for even more Boost as we unleash more volume of some most innovative technology, driving to more than 9 million payers across all categories for the full year.

And watch out for a host of great new products in collaborations from Originals, as we reclaim growth and stamp our authority as the most desired and authentic label in the world of sports.

With that ladies and gentlemen, let me now hand you over to Robin to take you through the financials in more detail.

Robin J. Stalker

Great. Thanks very much, Herbert, and good afternoon, ladies and gentlemen. As you've just heard, our financials in the first quarter were significantly impacted by the changes we are implementing to the business followed by TaylorMade-adidas Golf, as well as by negative currency impacts. Throughout my comments today, I will therefore focus on those topics and how they impacted our financial results throughout the various P&L items.

So let's start with the gross margin development. The group's gross margin decreased 1 percentage point to 49.1% and this development was mainly due to the following negative effects. Firstly, while our euro U.S. dollar hedging rates is at a similar level to 2013, hedging for most other currency pairs were at less favorable rates. Amongst others, the Japanese yen. Altogether these favorable hedging rates accounted for 70 basis points of the group's gross margin decline. Secondly, on top of it, due to the rapid currency devaluation, it seems since the beginning of the year we enjoyed significant trends actual negatives in the gross margin. This was mainly related to the sharp decline in the Russian ruble, which on its own had a negative impact on the group's gross margin of about 30 basis points. Thirdly, lower gross margins at TaylorMade-adidas Golf impacted the group margin by about 40 basis points. And finally, higher input costs impacted gross margin negatively by about 20 basis points. These negatives were partly offset positive mix effects from strong growth in own-retail and solid improvement in the Reebok margin of 50 basis points and a better overall product and pricing mix.

Turning to the operating expenses, other operating income and expenses were flat in euros, or increased 5% currency neutral. This was mainly as a result of the higher number of stores, compared to year ago, as well as an increase in sales and marketing working budget expenditure, which increased 6% currency neutral. This was in turn primarily due to higher expenditures of Reebok. As a percentage of sales, the group's sales and marketing working budget grew 90 basis points to 12.6%.

Group operating profit declined 31%, or EUR 139 million to EUR 303 million. This translates into an operating margin of 8.6%, down 3.2 percentage compared to a year ago.

The majority of this decline, or EUR 80 million, relates to TaylorMade-adidas Golf and roughly EUR 50 million relates to currency translation and hedging impacts.

Turning briefly now to the nonoperating items of the P&L, net financial expenses decreased 9%, while net interest expenses were down 14%. This good progress was partly offset by negative exchange-rate variances. The first quarter tax rate increased 140 basis points to 48.9%, mainly due to a less favorable earnings mix. This, however, is in line with our guidance for full-year tax rate at a level of around 28.5%. As a result, net income attributable to shareholders decreased to EUR 204 million in the first quarter of 2014 from EUR 308 million in the prior year.

This translates into basic earnings per share of $0.98 and diluted earnings per share of $0.96. Now the diluted effect results from additional potential shares that could be created in relation to the group's outstanding convertible bond, the details of which and the interest and number of shares are available in the notes to the account.

Let me now spend a few minutes on our segments. Wholesale revenues increased 1%, mainly due to growth at adidas Sports performance led by football, training and running category. Revenues at adidas Originals and Sport Style were below the prior-year level, as growth at adidas Neo was more than offset by sales declines at adidas Originals. Sales at Reebok declined as Growth and Fitness Training and Classics were more than offset by sales declines in public categories.

Gross margin for the segment was down 50 basis points to 43.8%, as the positive effect from a more favorable pricing mix was more than offset by negative currency effects following the devaluation of the currencies such as the Argentine peso and the Brazilian real.

Segmented operating margin for wholesale declined 40 basis points to 35.6%, as the result of the gross margin decrease, which more than offset the positive effect of lower segmental operating expenses as a percentage of sales.

Looking at retail, revenues increased 22%, as the result of double-digit growth at both adidas and Reebok. Comparable store sales accelerated significantly during the first quarter to 8%, with gross across all regions and all store types. By brand, adidas comp store sales grew 9% and Reebok comp store sales increased 4%.

Our e-commerce business continued to grow strong double-digit rates, with sales up 72%.

Retail gross margin decreased 80 basis points to 59.9%. The positive effect from a more favorable product mix was more than offset by a less favorable pricing and regional sales mix. In particular, the devaluation of the Russian ruble versus the euro and the U.S. dollar was a major headwind and negatively impacted the segmental gross margin by about 90 basis points.

Segmental operating margin for retail was down 80 basis points to 13.2% as a result of the slower gross margin in the first quarter 2014.

Segmental operating expenses as a percentage of sales have remained stable at 46.8%, which does show good leverage considering we have opened 283 stores net since the first quarter of 2013.

Coming back to the 8% comparable store sales growth, retail trading was particularly robust in emerging markets, where our brands enjoyed strong traffic and consumer sentiment. This resulted in double-digit comp store sales increases in European emerging market, Greater China and Latin America.

In terms of our store development, at the end of the first quarter, we operated 2,741 stores, a net increase of one store versus the end of 2013. Of the total number of stores, 1,558 were adidas and 411 were Reebok branded. In addition, the adidas group retail segment operated 772 factory outlets.

During the first quarter, we opened 70 new stores and closed 69, while 41 stores were remodeled.

As in the prior year, the number of store openings is expected to accelerate throughout the year. As a result, we continue to forecast the number of stores openings in 2014 to increase by 250 stores net compared to the end of 2013.

Now let me spend a minute on other businesses, where revenues decreased 27%, driven by a 34% decline at TaylorMade-adidas Golf. The pronounced decrease at TaylorMade-adidas Golf is mainly due to a change on the timing of product launches, as we have strategically pulled forward product launches in the fourth quarter of 2014 to quickly reestablish key price points in the market after a heavy clearance period in quarter 3.

This, as well as continued weakness in the golf market, resulted in double-digit sales declines in metalwoods and irons in the first quarter of 2014.

The segmental gross margin decreased 5.5 percentage points to 39.0% as a result of lower product margins at TaylorMade-adidas Golf, due to lower volume of new product, which more than offset higher product margins at both Rockport and Reebok-CCM Hockey.

Segmental operating margin was down to 8.8 percentage points to 19.5%. This was a result of the gross margin decrease as well as the negative impact from higher segmental operating expenses as a percentage of sales.

Finally, looking at the balance sheet, operating working capital as a percentage of sales grew 80 basis points to 21.1%. And this was mainly caused by an increase in inventories, up 18% on a currency-neutral basis. As a result of our expectations for growth in the coming quarters, as well as the higher inventories in Russia, CIS, compared to year ago.

In terms of capital structure, we ended the quarter with net borrowings of EUR 254 million, compared to EUR 180 million last year. Now this development is mainly a result of higher capital expenditure during the first quarter of 2014. In addition, currency translation had a negative effect of about EUR 12 million.

Our equity ratio remains at a very strong level of 48.8% at the end of the first quarter, compared to 49.7% in the prior year.

So all in all, ladies and gentlemen, to sum up our comments for today, yes, the first quarter has been a challenging start of the year with currency effects being a major drag on our group results. Nevertheless, the solid underlying trends we are seeing in the business give us every confidence in achieving our full year 2014 guidance.

And with that, let me thank you for your attention, and Herbert and I are now happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question from Matthias Eifert of MainFirst.

Matthias Eifert - MainFirst Bank AG, Research Division

Yes, I'm Matthias Eifert from MainFirst. First question would be about, when adidas had the running business in the U.S., how was that going? And in particular, Boost and SpringBlade, how that is selling through in the market there? And secondly also about Running, but yes on the Reebok side, you mentioned too many running shoes in the market, which caused the weakness in the Reebok U.S. business in the quarter, what exactly happened there? And related to the whole Running topic, you said more than 9 million Boost shoes should be sold this year. Does it include what you expect from the basketball business? And how much in a basketball business and launch in the third quarter is related to the D Rose and about him coming back to the game?

Herbert Hainer

Okay, Matthias, this is Herbert. Let me start with the first one, the Running business in the U.S. It was slightly down in the first quarter, SpringBlade and Boost doing very well. Unfortunately, we had not enough Boost for the first quarter, because as you know, we had, during 2014, higher demand than what we could deliver and we had some other markets where we started first, but now we are delivering also the U.S. market and we will first improve our situation there -- I already said during my presentation. In terms of Reebok, we are running against some comparables from previous year with -- in the Running category with thick and flex. This is why we are down on the Running category, but as I said, we are already up on all the others and the Running category will come back with a cyclic series when we run out of the comparables. Basketball, we will bring Boost in the third quarter through basketball back. Obviously, this is a smaller part, the biggest part was a 9 million Boost is by far running, as you can imagine, but basketball is included in this 9 million pairs. And obviously, we're all hoping that Derrick Rose is back on the court. He most probably will play during the summer for the American National Team and then obviously play for the games. And in addition, you might definitely have seen that some of our players, John Wall and Damian Lillard, developed very well during last season and still in the playoffs. So John Wall brought the Washington Wizards against Chicago Bulls to the next round, which we are extremely happy. We do believe that with the next draft, where 3 key guys are in, we have already won, as you might have heard. So we are definitely very optimistic about the basketball business going forward. Still, competitive in America, as you know, but we are definitely optimistic.

Operator

We will now take the next question from Antoine Belge of HSBC.

Antoine Belge - HSBC, Research Division

Yes, good afternoon. It's Antoine Belge of HSBC. Three questions, if I may. First of all, on -- regarding the golf market. I understand that you are expecting much more innovation in the following quarters, but is your expectation of growth resuming here is so based on an assumption that the market itself will recover somewhat. Second question regarding the World Cup. Can you explain to us if the timing of deliveries is different from the 2 previous World Cup, for instance? I don't recall that so many deliveries had been in advance in Q4 in previous edition or so -- and not all the -- that we're all doing happening in Q2. So was there any difference in timing compared to the previous World Cup? And finally, regarding Originals. What gives you the confidence that we should be seeing an improvement for the remainder of the year? Is it based on your wholesale orders? Can you maybe give us a bit of backup there?

Herbert Hainer

Okay, Antoine. Starting with the first question, the golf market. Honestly, I don't see a big improvement in the golf market in 2014. Obviously, second, third and fourth quarter will be better because the weather has turned. And you might remember that the first quarter it was very cold, especially on the East Coast in America, which is by far the biggest market. Yes, we are bringing, on a constant basis, new products to the market. We also can remain our market leadership in metalwoods and in irons. But unfortunately, the markets are going down, as we have seen on the rounds played. And this is causing some higher inventories in the market with all the players. And this is why we didn't ship so many products in the first quarter to the market. So overall, I don't see in -- I don't think that in 2014, we will see a big boom in the golf market. Obviously, as I said, we're bringing a lot of new products to the market, which will help. Secondly, the World Cup. It is, as in the previous World Cups, the biggest shipping months are Q4 the year before and then Q2, which we are now in. And now the World Cup fever starts. We're shipping all the jerseys again, the balls, et cetera, et cetera. Therefore, as I said before, the second quarter is definitely a football quarter. And it's definitely an adidas quarter. And finally, back on the Originals. On the Originals, its twofold. On the one hand, it's the product side. As I said, we have -- you might have seen it. We relaunched Stan Smith after we took it away from the market for quite some time, huge success. And then, we are bringing in other new products in collaboration, like Topshop or The Farm collection, which is Brazil-inspired by a Brazilian designer. But the biggest success, by far, is synthetics Flux Shoe. This is the fastest sold shoe in the last 2 weeks at Foot Locker Europe, outpacing, as I said, our competitor's best shoe, which was the Roshe. And we are selling better than this. But this is one part. The other part is that you also have heard that we made some extremely exciting collaborations with a lot of stars and celebrities in the music scene, be it Kanye West, be it Pharrell Williams, which you see him permanently in adidas checkered with 3 stripes in front of Oscar nomination or on some other TV programs like [indiscernible] and The Voice. But we also have made collaboration with Nigo, the Japanese designer, with Rita Ora. And this we see already coming back in the market, and bringing momentum back to our Originals business.

Antoine Belge - HSBC, Research Division

Just as a confirmation. So nothing special this year compared to the previous -- yes, I know that always the balls were delivering in Q4. And I don't recall that as much jerseys from the national team were like pr-delivered ahead of [indiscernible], maybe my memory is failing me.

Herbert Hainer

No, no. But there are some specifics, Antoine. So the ball is always launched beginning of December, and also the new jerseys ahead of Christmas because this is always a big business on Christmas. But then, in the first quarter, it slows down. And then, when the momentum for the World Cup comes, which is starting now after the Champions League final, then we will bring a new -- complete new football footwear package, the Battle Pack, which you might have heard. We are bringing the ball for the final, besides of all the other Brazuca derivatives, as you know, Antoine, and supposed the new fan-based merchandising program and so on and so forth. So therefore, the second quarter, in terms of football-related product, is definitely stronger than the first quarter.

Operator

We will now take the next question from Jurgen Kolb of Kepler Cheuvreux.

Jurgen Kolb - Kepler Cheuvreux, Research Division

Three questions also from my side. First, on TaylorMade. When did you make the decision to change the pattern of deliveries here? And how shall we see the coming quarters? Shall we see a major ramp up in the second quarter in terms of product innovations and product launches? And do you also see other competitors following your shift in product cycle? That's so far on TaylorMade. Then, secondly, you talked about the football business, which apparently was up 27% in this quarter. Can you break it down a little bit into apparel and footwear, please? Have you seen similar growth rates, specifically on the footwear category? And then, lastly on the U.S., which seems to be an ongoing topic here, I guess. What do you think you can do differently in order to present the brand much more successfully at the wholesale level? I mean, I think in the past you've tried various things, but so far we haven't really seen the breakthrough. So what are you thinking about how to really get the brand stronger in the U.S. market?

Herbert Hainer

Okay. Let me start with the golf market. We announced this already. You might remember, during the summer months last year, that we started the first quarter shipping higher volumes because we want to get them a longer life cycle from January then to April, May, June. But unfortunately, the first quarter, as I said was, weather-wise, very bad, rounds were played down again. But we started already last year. I mean, we are, by far, the leader in the golf market. And I definitely do believe that others will follow, because if we are the earliest one who bring in new products and then everybody will follow. Yes, we do bring new products during the course of the year into the golf market. And this will help us to get close to a similar sales result as last year. But this is a hell of lot to go still, as we are with USD 1.7 billion, by far the number #1, as you know. Second point was on footfall. So apparel was a stronger growth than footwear. And the last one was on U.S. And this is a good one because this gives me an opportunity also to make a statement on the U.S. I mean, yes, we are, by far, not growing as fast in the U.S. as Nike. But we have been growing in the last 2 years. Don't get it wrong. So we were growing double digit in 2011 and in 2012. But what is even more important, we have clearly increased our margin in the U.S. market. And this is what we played in the last 3 years. We have, as you might have seen, we have raised prices. We worked with the retailers on all the trade terms, how we go to market and, therefore, we increased our profitability in U.S. market significantly, which obviously helped us to get to our numbers for the total group. Where I do feel opportunities in the future is quite clearly, as I said, we were nicely growing in our own stores by 13%, even more so in our concept stores. And this clearly shows me when we had the opportunity to showcase collection to the consumer in the width and the depth and the concepts holistically, then we have a better chance. And this will be one of our focus points with the key retailers in the future going forward and making sure that we get with all the key retailers in the sporting goods in the mall, that we get the presentations in the future. Obviously, this depends on the in-store visuals, which are providing and working together with them, how we bring products to markets, et cetera. But this will definitely be the key to success for us in the U.S.

Jurgen Kolb - Kepler Cheuvreux, Research Division

Okay. And one quick follow-up on the Originals. You indicated that you may have missed some trends. Any learnings from that? I -- we all know that you have scouting people on the ground. But for some reason and for some time, obviously, you must have missed some trends. So any changes to that so that, that doesn't reoccur?

Herbert Hainer

Yes. First and foremost, I think, Jurgen, it's fair to say that we have had such a nice ride on Originals for the last 10 years, I guess, up to EUR 2.7 billion or EUR 2.8 billion. And, yes, we missed the trend a little bit, especially in the U.S. where there was a trend to more athletic running silhouette for the leisure product and not back to the old styles or the brackets like light trainers, et cetera. But as I said, we have adapted relatively fast to that. As I said, we see tremendous success already in Europe. And I'm sure you are out in the market and asking one or the other retailers who see it. And then, through this, we'll relatively see it happen in the U.S. as well. So therefore, we're quite optimistic back for the Originals.

Operator

We will now take the next question from Chiara Battistini of JPMorgan.

Chiara Battistini - JP Morgan Chase & Co, Research Division

Just a couple of questions for me, please. First of all, just a follow-up on the World Cup. And you mentioned, I mean, quarter 1 up 27% and you mentioned quarter 2 should be stronger than quarter 1. So shall we expect an acceleration there? And then, question number two, on the inventory. It's up 18% x FX. So we're on the high side. So I was wondering whether you could give us some more color on the breakdown of these inventories? And to what extent these are related to build up ahead of the growth that you're expecting in the second half of the year? And to what extent this is excess inventories that you need -- you still need to clean up in Russia, especially?

Herbert Hainer

Coming back to football. I didn't mean that we are growing fast in the second quarter than the 27%. I've said that the quarter this time, because of the World Cup, will be -- the second quarter will be bigger than the first quarter.

Robin J. Stalker

Thank you, Chiara. For the...

Herbert Hainer

[indiscernible] Sorry.

Robin J. Stalker

Chiara, for the inventories, yes, as I said, we have a large increase in the inventories due to goods in transit, which gives me the confidence that this is a product that we are anticipating is going to be sold in the next few quarters. We still have, however, as a part of this growth year-over-year, the Russian inventories, which you will recall, we really only had a growth in Russian inventories in the second half of last year. And the release of those -- or the better comp only really comes in the second half of this year, also. So and but from a trend and from the aging, whatever that you say, very good. It the anticipation of increased sales over the next 2 quarters.

Operator

We will now take the next question from Julian Easthope of Barclays.

Julian Easthope - Barclays Capital, Research Division

Of course, I have 3 questions. First of all, starting off from Russia, given all those issues that have been going on there. I just wondered if you'd seen any sorts of the changes towards the end of the quarter, or how it's actually progressing. We heard from our partners here that there has been strength within St. Petersburg and Moscow, but other areas have been weaker. I just wonder if you could sort of, say, give a bit more kind of detail on the Russian business. Second is the distribution center in Osnabrück. I think it's been up and running for a quarter now with all the products going through. And I just wondered how that was actually performing relative to expectation and whether or not you can see some inventory benefit for that by the end of the year? And lastly, a thing that came up on [indiscernible] earlier on and saying that you'd actually received some bids for Rockport and were considering selling it. I just wondered if you could confirm that.

Herbert Hainer

Okay, Julian, let me start with Russia. As you have seen, we had a very strong first quarter in Russia, with plus 29%. And obviously, all the turmoil in the Ukraine is not, how should I say, strengthening the confidence of consumers in the Ukraine. Because in Russia, we don’t see it at all. But you also should have in mind that Ukraine is less than 10% of our total Russian business. So far, knock on woods, we haven't seen a negative impact. But obviously, we are watching it very carefully. And our management is working diligently with the whole situation. And hopefully, it will be peacefully resolved soon. Second question was regarding to CDC. No converts, again. It works well. We brought it to life last year. And so far, we don't have any issues. I mean, this Russian thing, I think, which, as you related, this is now working flawlessly. And we definitely have learned our lesson at the offset. And what was the...

Robin J. Stalker

Rockport.

Herbert Hainer

And Rockport, yes. I mean, I think I have said it already several times that Rockport is not the strategic asset for us in the group. Nevertheless, we worked hard to improve the product, to improve the distribution and, therefore, we are growing the Rockport business last year by 6%. It will grow again this year. And I think this is one of the most attractive brands out there. Therefore, we get a lot of inquiries and interest. And we, as a management, we think that it's our duty to listen to these people. And therefore, we have asked Guggenheim, our financial advisor, to help you to talk to these people and see what the situation is out there. This is exactly where we are in the moment.

Operator

We will now take the next question from Michael Kuhn of Deutsche Bank.

Michael Kuhn - Deutsche Bank AG, Research Division

Also 3 from my side. Firstly, on China, growth of some 5% in the quarter. It was a little less than what we've seen over the recent quarters and maybe some more details on that and what you would expect for the rest of the year. And secondly, one follow-up on TaylorMade and the new trade -- stable trading pattern going forward. The brand was very volatile over recent quarters. Yes, so maybe kind of a more stable growth rate going forward. And lastly, on management responsibilities. If I understood you correctly, I think, on board level, Mr. Auschel will take over responsibility for the U.S. market. I think, in late 2011, you, Mr. Hainer, took over responsibility for that market. Now it seems it struggles a little and then probably needs lots of care. So I'm asking myself, why we see that management change now? Maybe you can comment on that quickly.

Herbert Hainer

Yes. Let me start already with the third question and making sure that you don’t have the impression I just want to get rid of the U.S., because it's dragging in the first quarter because then you won't have to give me the benefit for the last quarter last year as well where we grew double digit. Now the reason is quite simple. We instrumented Roland in August or September last year as the board member for sales worldwide. And I said it already at that time. I just will finish, in America, the joint operating model and then Roland will take over America as well. And then, he's responsible for sales worldwide for both brands, Reebok and adidas. So we finished our term with the installation of the new President and therefore it's quite normal that Roland takes it over. As I said, this was already announced 6 months ago. In terms of TaylorMade, when you ask for a stable grading pattern, honestly, I do believe it still takes 2014 until the whole inventory in the market has flushed through. And I don't speak out not only about the TaylorMade product. It depends on the whole market and then we will come hopefully back to stable trading patterns, as you said. We will continue in bringing products, as I said, in the first quarter, earlier then for beginning of the new season that we give them a longer life cycle and hopefully, therefore, achieve higher margins. The first question was on China, the 5%. I must say I'm quite happy with the 5% in China, because when you saw our gross patterns since the Olympic Games in 2008, where we then in 2009 first cleaned the market and then we said we will set up an information system with our 2 key partners, that we know exactly what's going in the stores, that we can drive down inventories with our retail partners and, therefore, bring fresh products on a constant basis and bring continuous growth to these markets. And I'm sure that you have realized, in the last few years, that we are growing faster than our main competitor there. And I must say, I'm happy with this growth rate because this is healthy growth and a sustainable growth.

Operator

We will now take the next question from Rogerio Fujimori of Crédit Suisse.

Rogerio Fujimori - Crédit Suisse AG, Research Division

I was wondering if you could talk a little bit about Japan, thoughts on market conditions post VAT hike. Also, a follow-up on China. I was just wondering if you could talk a little bit about your wholesale sequential trends and how, in particular, adidas performance is doing in China. And my third question, just curious to hear an update on the development of miCoach smartphone watch and the potential of wearable technology for adidas.

Herbert Hainer

Okay. Let me first start with Japan. Overall, as we have indicated last year when we changed our right term system in Japan, we had a certain shift within our sales pattern. But overall, I'm quite happy with the Japanese market. You know that we are, by far, market leader in Japan. I think the World Cup -- or the next month will give us another opportunity with the Japanese team playing in Brazil. And as I said, I think we have a very stable position in the Japanese market with close relationship to our retail partners. And therefore, I am cautiously optimistic as the market is not growing that fast in Japan, as you know. In China, to -- I think your question was on wholesale pattern. 95% of our sales in China are wholesale, with the biggest customers Baili and YY, but a lot of others as you know. But this is all wholesale-related. We only have 150, 160 owned stores out of the 8,000 which we have over there.

Robin J. Stalker

miCoach. [indiscernible]. Maybe -- could you repeat the third the third question? I think, you had a question about miCoach.

Rogerio Fujimori - Crédit Suisse AG, Research Division

Yes. Just an update on the development of your smartphone watch and the overall potential for wearable technology for adidas?

Herbert Hainer

Okay, yes. As you have seen that we had a quite successful launch of the miCoach. The system, I would call it a Ferrari within all these systems and our next step will be to bring it down from a EUR 400 price point, which we had in the moment, to maybe a EUR 200 price point, or even a little bit lower, that we then can go into further volumes. You might have seen that we brought out, in the meantime, the smartphone which is the next evolution of being smart and smart products. And this is how we will continue in the future.

Operator

We will now take the next question from Chris Svezia of Susquehanna Financial Group.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

I have 4 questions. Number one, the U.K., I'm just curious, I know it's been a pretty competitive market place there, just sort of thoughts on that market as the year unfolds. Second question is Reebok. Nice performance there. Just some color on the sustainability of the gross margin improvement, how we should think about that for the balance of the year. Then the third question is, when you talk about accelerating growth in the second quarter for the entire company, is that a linear growth rate? In other words, is it continue to build? Is it sustainable throughout the balance of the year? Or is second quarter, really, the strongest year-over-year growth quarter for the company? And lastly, just on TaylorMade channel inventory. Margins were down in the quarter. I'm just curious about your thoughts about how we think about the margin profile at TaylorMade given how you're bringing product to market for the balance of the year.

Robin J. Stalker

Maybe [indiscernible] Okay. Let me start with the Reebok gross margin. Yes, this is very definitely sustainable. In fact, one of our key operational goals with Reebok is, not just obviously to grow the top line, but also to fundamentally improve the profitability of this brand. And you've seen us being able to do this. We were up, even in the last quarter, 50 basis points. And that is despite significant negative currency trends, as you will be aware. And so, we're still only at a level of about 39.6%. Our aim was to be at a level of 40% by 2015. We're definitely going to achieve that and overachieve it. And so, my comment here is, yes, Reebok gross margin improvements are sustainable. To the growth trends for the rest of the year, I mean, traditionally our third quarter is always the strongest quarter or the most important quarter. That will be the same, I think, this year. But clearly, as Herbert said, we're looking at the second quarter also being a good quarter particularly in light of the poor first quarter. But it's the second and third quarters that will be the highlight quarters in 2014.

Herbert Hainer

Coming to the first question in the U.K. The U.K. was slightly down in the first quarter. But it's improving as we saw already during the month of April. With the Originals pushes, I said before, the aesthetics lacks, the Topshop collaboration I mentioned, but we also see this is coming back at the football area with Chelsea and the Champions League, et cetera. So we definitely see an improvement in the U.K. business. The fourth quarter was on TaylorMade and on the margins. Yes, I do believe it will see an uptick in the margin going forward. But honestly, it will not explode, as I said, because there is a lot of product in the market, not only from us, from our competitors as well. But yes, we definitely will see a better margin going forward in the rest of the year.

John-Paul O'Meara

Thanks, Chris. And thank you, ladies and gentlemen. That completes our conference call for today. Our next event will be our half-year results, which we will report on the 7th of August. And we wish you all a great summer. And enjoy the World Cup, where I'm sure adidas will again be the winner.

Operator

That will conclude today's conference call. Thank you for your participation.

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