Puma is taking numerous new initiatives to help sustain its growth, which is flattening out now in the USA as well as in Europe. Profit margins were higher than expected in the 3rd quarter, however, leading to a drop in net income of only 5.2 percent to €87.1 million in spite of heavy spending, and the management feels that the brand has some room for higher profits now in the low-margin U.S. market.
One of the new initiatives is a partnership with Ducati, the premier Italian motorcycle manufacturer which has previously worked with Fila. Besides acting as the official footwear supplier of the Ducati Corse racing teams as of next year, Puma will develop and co-brand with Ducati a dedicated line of products under a separate licensing deal, also starting in 2007. Intended to consolidate Puma’s involvement in the motor sports market, the cooperation will initially last for three years.
On the retail front, Puma has introduced a new modular store design, inspired to the image of a ship container, where all the fixture elements are mounted on the walls, laid on the floor or suspended from the ceiling, using magnets and allowing a maximum of mix and match. The new store fit was inaugurated with a new Puma store opened on Union Square in Manhattan last month. It is being replicated at new locations in Portland, Oregon and in Beijing as well as in Puma’s oldest store, opened in Santa Monica, California, in 1999, and in its important location on Carnaby Street in London.
The new store fit will be used for all the new openings and will be gradually extended to the present network of concept stores, which now number 83 including 79 company-owned units. The network is growing faster than anticipated, with 17 new doors opened in the first nine months of this year. They represented 13.1 percent of Puma’s total revenues during the period, up from 12.2 percent in the same period a year earlier.
Puma continued to spend heavily on marketing and retailing during the latest 9-month period, with a ratio of 16.6 percent of revenues as compared to 13.9 percent a year ago. While the emphasis was on the sports side of its image in connection with the World Cup of football, a new advertising campaign launched in the 3rd quarter stressed more its fashion and lifestyle components.
Combined with strong investments in its new overseas subsidiaries and other infrastructures and operations, this led to company to post a lower operating margin (EBIT) of 17.2 percent for the 9-month period and of 17.6 percent for the 3rd quarter, but they were both higher than the management had predicted as part of the Phase IV expansion program announced in mid-2005. A year ago the EBIT margin stood at 24.0 percent for the nine months and at 24.1 percent for the quarter.
Quarterly gross margins declined in all the regions. They fell from 45.7 to 46.8 percent in the Americas and from 51.8 to 50.6 percent in the Asia-Pacific region. The gross margin for the Europe, Middle East and Africa (EMEA) region decreased from 54.9 to a still high 54.2 percent level.
European margins were only slightly affected by the new European anti-dumping duties on non-athletic shoes from China and Vietnam. Puma says it didn’t have any major problems in shifting a large portion of its Chinese shoe production to Indonesia and Vietnam. The gross margin was off to 51.2 percent globally for footwear, compared with 53.1 percent a year ago. It declined from 52.6 to 51.2 percent in apparel, but it improved from 51.5 to 54 percent for accessories.
Puma’s sales in the EMEA region were up by 9.4 percent to €378 million in the 3rd quarter. The only country where the brand is still suffering is the UK, where the new management is aiming to broaden the range of products presented in the stores.
Consolidated global revenues increased by 30.3 percent to €699.2 million during the latest quarter, or by 32.2 percent in local currencies, but they were up by only 12.2 percent on a currency-neutral basis and excluding the acquisition of the distribution in many countries including Japan, Taiwan, Hong Kong, China, Argentina, Mexico and Canada. On this basis, they were up by 3.8 percent in the EMEA region, by 9.3 percent in the Asia-Pacific region and by 38.2 percent in the Americas. Sales in the U.S. market grew by 23.1 percent but were still up by 41.8 percent for the first nine months of the year.
Currency-adjusted, global sales of footwear increased by 21.5 percent in the latest quarter, but apparel did again better with an increase of 58.5 percent, and accessories were up by 23.9 percent. Including the turnover generated by Puma’s remaining licensees around the world, total sales under the brand improved by 12.5 percent to €786 million during the quarter, with a 13.7 percent increase in constant currencies.
Looking at the whole 9-month period ended Sept. 30, branded sales increased by 14.7 percent to €2,142 million, rising by 14.0 percent in local currencies. Consolidated sales were up by 32.2 percent to €1,889 million in euros and by 31.7 percent in local currencies. Organic growth stood at 12.8 percent and new consolidations added 19.4 percentage points.
Excluding acquisitions, currency-neutral orders were up by 7 percent the end of the quarter, with increases of 2.6 percent in EMEA, 12 percent in Asia-Pacific and 15 percent in the Americas. The rise in European orders was encouraging as it occurred in spite of conservative buying by some key accounts and the fact that the year-ago figures had been boosted by early ordering of World Cup products However, after a jump of 78 percent a year ago, the U.S. market is showing only a slight increase from one year ago. The growth in the Americas is being driven by very strong gains in Brazil and in the Panama Canal area.
The management cautioned that most of the orders in hand were for delivery in the 4th quarter and that they could not be easily compared with the levels of one year ago because Puma has instituted a new 4-season ordering cycle in the majority of the countries around the world, starting with the collections due to be delivered for Spring 2007. The company is approaching its customers four times a year instead of only two in order to minimize order cancellations and to get closer to the market.
The management is offering no new guidance yet for 2007, except to confirm that earnings will again be on the rise, but it stands by its recently upgraded forecast of currency-adjusted sales increase of 35 percent and a high single-digit decline in net profit for the full 2006 financial year. While the gross margin will likely fall below 50 percent for the traditionally weak 4th quarter, it should hit the higher end of the previously given range of 50-51 percent for the full year, while operating profit should settle as expected at around €360 million.
Jochen Zeitz, chairman of the executive board and chief executive, announced that Martin Gänsler, who is now 53 years old, plans to retire at the end of 2007. Currently #2 as vice chairman of the executive board, Gänser has been with Puma for 25 years. He has been in charge of R&D, design and sourcing since 1998, and he will be actively involved in the search for his successor.
Puma has already said that it wants to make a stronger statement in the important running segment of its sports business. To this effect the company has hired a 37-year-old Frenchman, Frank Heissat, as its new international business unit manager for running, replacing Benoit D’Argenlieux who is leaving the Wild Cat after less than two years in the post. Heissat left recently Boards & More, where he ran the Mistral brand for a little while after acting as international manager of Oxbow. He worked previously for Nike and for Atari Video.