Europe weighs on Puma’s results

Puma's sales expansion slowed down in the first quarter of this year, rising by only 6.1 percent to €820.9 million, due to a 1.7 percent fall in European revenues to €368.0 million. Franz Koch, the company's chief executive, said that European sales had been affected by the tight economic situation, but also by Puma's inadequate response to consumer demand in some European markets.

Furthermore, regional sales suffered from the late arrival of winter, which slowed the in-take of spring collections. At constant currency rates, global sales rose by 4.2 percent and European sales dipped by 1.4 percent.

These figures came as a disappointment, since investors had expected Puma's consolidated quarterly sales to exceed €840 million. Puma's global brand sales, which aggregate consolidated sales and revenues from licenses, rose by 5.5 percent to €856.0 million.

In Europe, consolidated sales found support in Germany, the U.K., Turkey and Spain. Spanish revenues were lifted by the opening of a subsidiary two years ago to replace Puma's long-time Spanish licensee, Estudio 2000, and by the reinforcement of local management.

However, European sales were dampened by worse-than-expected performances in France, Italy and Scandinavia. Koch admitted that, beyond the rough economic circumstances in some of these markets, Puma failed to “resonate” with local consumers, particularly in the lifestyle footwear and motorsports categories.

These issues have encouraged Puma to review its European structure. On April 1, Sergio Bucher started as general manager for Europe, a position that did not previously exist with the same level of responsibility. Bucher's remit includes the supervision of wholesale and retail sales in Germany, Italy, France and the U.K – four markets that previously reported directly to Puma's headquarters. Koch said that the group expected to finalize restructuring plans for its activities in Europe, the Middle East and Africa (Emea) by the end of May. Further details on the matter will be provided when Puma publishes its second-quarter results on July 26.

Sales in the Americas were up by 10.9 percent to €260.8 million, with an increase of 8.5 percent in constant currencies, driven by strong double-digit growth in Argentina, Brazil and Mexico. The company's turnover in North America was underpinned by new joint ventures for accessories with Wheat and Janed.

The company said that sales in the U.S. grew at a satisfactory level but that the athletic market continued to be problematic both in the mall and specialty stores. Koch added that the group had been discussing its strategy in the U.S., which he regards as “a strategic priority” for the group.

Puma's sales in Asia-Pacific rose by 17.2 percent to €192.1 million, owing to high double-digit growth rates in Japan, South Korea and India. Asian sales were up by 10.2 percent in constant currencies, but China only contributed a single-digit expansion rate for the quarter. Koch said that the market was flooded with inventory, mostly generated by struggling local brands. The group's investments in China will focus on lifestyle, running, training and motorsports, which Koch described as highly relevant for the market due to China's attraction to European car brands such as Ferrari and BMW.

By category, sales were down by 0.6 percent to €414.6 million for footwear, they rose by 10.7 percent to €267.6 million for apparel and surged by 21.2 percent to €138.7 million for accessories. On a currency-adjusted basis, revenues were down by 2.1 percent for shoes, they rose by 8.0 percent for apparel and increased by 19.0 percent for accessories.

Footwear suffered from a tough comparison base and a challenging business environment. The group said it saw promising results from some product launches. The ultralight Archive Lite shoe model is enjoying strong demand in Italy, where it is sold by the Athletes World retail chain, as well as in France and Japan. The style is also selling well in Canada, while it is too early to assess its performance in the U.S., where it has just hit the shelves. The lightweight concept has been extended to other styles scheduled to be available in the fourth quarter.

The new outdoor Ecosphere division enjoyed a double-digit growth rate in the quarter, driven by apparel. The division is in the process of launching performance products for sailing, trail running and outdoor.

At the end of May, the group will launch a new performance collection inspired by the sprinter Usain Bolt and spanning all of Puma's sports footwear and apparel categories. The company is also working on “disruptive innovations.” Koch claims that for the 2013 spring/summer season, Puma will create a “new and unique” performance footwear category.

Apparel sales were lifted by the brand's running, lifestyle and golf ranges. Puma anticipates an increase in apparel sales on the back of the Uefa Euro 2012 football tournament held in Poland and Ukraine from June 8 to July 1. Accessories revenues were driven by Cobra Puma Golf. The company added that sales of football products continued to grow due to marketing investments and a stronger product range. Retail sales were up by 15.2 percent to €122.0 million, with new store openings and positive comparable sales.

The group's gross profit margin narrowed to 51.2 percent in the first quarter, from 52.4 percent a year earlier. The decline mostly came from Europe, where the tough economic situation prevented Puma from passing on all its cost increases to consumers. Margins also suffered from a negative impact on currency hedging as well as a shift in the regional and product mix.

The group's gross margin shrank to 51.9 percent from 54.2 percent in Emea, it slipped to 47.5 percent from 48.1 percent in the Americas and rose to 54.8 percent from 54.7 percent in Asia-Pacific. The margin for footwear softened to 49.5 percent from 51.3 percent, it dropped to 53.5 percent from 53.7 percent for apparel and declined to 51.9 percent from 54.0 percent for accessories. The profitability of the accessories segment was affected by the inclusion of the American sock and bodywear business, which carries lower margins. The Ebit margin narrowed to 12.4 percent from 14.4 percent and net profits fell by 4.9 percent to €73.9 million.

Puma boosted its inventories by 26.4 percent to €587.1 million in view of anticipated sales growth in the coming quarters and higher average prices per item. The management reiterated its full-year sales target of a high single-digit growth rate, while earnings are expected to rise by a mid-single digit rate in 2012.