Buoyant sales in China turned Asia Pacific into the fastest-growing regional market for Puma in the first quarter. But the brand continued to raise its underlying sales at double-digit rates in other markets and to take advantage of operating leverage, which encouraged it to slightly raise its guidance for the full year.
Puma's sales were up by 12.5 percent to €1,131 million for the three months, which was an increase of 21.5 percent in constant currencies. Its gross profit margin moved up by 1.1 percentage point to 48.2 percent, due to a more favorable regional mix, a higher share of new product sales and continued sourcing improvements.
Pushed up by the rise in sales and gross margin as well as tight management of operating expenses, Puma's operating profit (Ebit) soared to €112.2 million, up from €70.2 million in the year-ago period. This amounted to an operating profit margin of 9.9 percent, up from 7.0 percent for the same quarter in 2017. The company ended the three months with net income of €67.4 million, up by 35.8 percent.
Puma predicts that its sales will increase by 10 to 12 percent in constant currencies for the year, instead of just 10 percent as previously anticipated. The operating profit should come in at between €310 million and €330 million, compared with the previous guidance of €305 million to €325 million, and it should end 2018 with significantly improved net earnings.
| Puma Consolidated Income Statement | |||
| (Million Euros, Quarter ended March 31) | |||
| 2018 | 2017 | % | |
| Net Sales | 1,131.1 | 1,005.1 | 12.5 |
| Cost of Sales | 545.5 | 473.2 | 15.3 |
| Royalty/Commissions | 4.1 | 3.8 | 7.9 |
| Other Operating Expenses | 437.3 | 406.8 | 7.5 |
| Operating Result | 112.2 | 70.2 | 59.8 |
| Financial Result | (10.5) | 0.7 | - |
| Pre-Tax | 101.8 | 70.8 | 43.8 |
| Tax | 28.1 | 19.7 | 42.6 |
| Minority Interests | 6.3 | 1.5 | 320.0 |
| Net Income | 67.4 | 49.6 | 35.9 |
| Euro/Share (Diluted) | 4.5 | 3.3 | 35.8 |
This appears quite conservative, compared with the performance in the first quarter, but the company explained that several uncertainties have recently arisen. Apart from currency swings and political instabilities, this particularly pertains to a potential increase in import duties for Chinese-made products in the U.S. market, which have already led Puma to adjust its development and sourcing arrangements.
Björn Gulden, Puma's chief executive, said that the company makes about one third of its products in China and is studying transfers of sourcing to countries such as Vietnam and Indonesia for footwear, and Cambodia and Bangladesh for apparel. It has started dual development for some products meant to be manufactured in China, preparing to get them also made in other Asian countries, to make sure that it could rapidly switch in case of significant changes in tariffs.
Gulden described the uncertainty as causing headaches for the company and its sourcing staff. But he added that Puma's relatively small size compared with the industry leaders could turn out to be an advantage in this situation, as it could more easily transfer production from one country to the other. It has already shifted some production out of China due to rising labor costs in the last two years, and Gulden pointed out that this has become relatively easy, due to the fact that many factories across Asia are owned by the same groups.
For the first three months, the unspecified growth in the Chinese market helped to raised Puma's sales in Asia-Pacific to €302.6 million, up by 24.1 percent in euros and by 34.8 percent in constant currencies. The brand has been pulling out of a negative trend in Japan and South Korea.
The growth in China was driven by improved productivity in existing stores and more Puma store openings. But Gulden said that the brand had a long way to go, since Puma is sold through about 1,400 stores around the country, compared with over 10,000 for some of its rivals, meaning that it was barely reaching the second and third-tier cities. If Puma moved some of its sourcing to other countries, the extra capacity in China could come in handy to serve soaring Chinese demand.
Demand remained robust in Europe, the Middle East and Africa, with a sales increase of 15.9 percent to €480.7 million, up by 18.6 percent in constant currencies. Puma's sales in the Americas advanced by just 0.4 percent to €347.7 million, but this was a rise of 15.6 percent in constant currencies.
Footwear sales were up by 26.3 percent in constant currencies for the quarter, ahead of apparel at 20.4 percent and accessories at 10.6 percent. The company pointed to running, training and sport fashion as three of the most buoyant categories.
Gulden remained upbeat about the brand's prospects in football as well. Although Italy's absence from the World Cup later this year was badly disappointing for the brand, it will outfit four teams in Russia. Puma already had partnerships with Switzerland and Uruguay, and in the last weeks it added endorsement deals with Senegal and Serbia. Gulden said Italy's absence meant Puma had to write off material for apparel production and it had to clarify plans with retailers, but the loss in sales was taken in the last two quarters.
The chief executive said the brand has a strong order book in football shoes, driven by its Puma One and Future franchises. From the second half, the company will have extra exposure in football through its new partnerships with Olympique de Marseille, AC Milan and Borussia Mönchengladbach. Puma has teamed up with Sao Paulo Palmeiras from next year as well.
As previously reported, Kering is reducing its stake in Puma and putting Volcom on the bloc to concentrate on its more profitable, fast-growing luxury goods brands. It didn't include Puma or Volcom in its consolidated results for the first quarter, which showed an increase of 27.1 percent to €3,107.8 million, led by Gucci. Puma and Volcom were treated as discontinued operations, with Volcom and other operations recording declines of 4.9 percent in constant currencies and 11.4 percent in euros to €106.2 million.
