Puma sees 2022 sales up at least 10%, headwinds from higher costs, China

With its traditional conservative approach, Puma said it expects currency-adjusted sales to increase by “at least 10 percent” in all the regions in 2022, despite a very strong order book, but warned that higher freight and raw material costs would weigh on profits, while an ongoing consumer boycott in China continues to limit growth in that important, high-margin market.

Still, the company is guiding for an operating profit (Ebit) this year of €600-700 million, up from the record €557 million seen in 2021, with a corresponding improvement in net profit. The development of the gross profit and operating expense ratios will continue to be highly dependent on the degree and duration of the Chinese boycott and the negative impact of the Covid-19 pandemic on sales. Meanwhile, inflationary pressures on energy, raw material and shipping costs, as well as lingering operating inefficiencies due to Covid-19, are expected to have a ”dilutive” impact on profitability.

The guidance indicates that Puma should be able to reach an Ebit margin of over 8 percent, reducing marketing and other expenses if the gross margin is under pressure. The company’s CEO, Bjorn Gulden, said he was still “very confident” that the company would reach a 10 percent Ebit margin in the short term, perhaps even in 2023, as planned, but admitted that there were still too many “moving parts” at play.

A new business plan will likely be presented to investors later this year. Meanwhile, the company proposes to resume its dividends after a record year, with a relatively high payout ratio of 34.8 percent.

Wholesale growing faster than DTC

In the fourth quarter of 2021, Puma’s sales increased by a reported 16.2 percent to €1,767.1 million, with a growth of 14.3 percent at constant currency rates. Puma’s wholesale revenues expanded by 16.5 percent at constant rates to €1,208.1 million, while the direct-to-consumer business increased by 9.7 percent to €559 million. Although sales in owned & operated retail grew by 21.5 percent in local currencies, e-commerce declined by 6.8 percent, a decrease attributed solely to the market environment in China. Western brands, including Puma, have seen sales suffer in China after indicating they wouldn’t use cotton produced in the Xinjiang region due to alleged human rights abuses.

Gulden reaffirmed Puma’s wish to be “the best partner” for its retail clients in terms of deliveries, financing and payments. The wholesale ratio in the total turnover has decreased from 78.6 percent in 2015 to 74.7 percent in 2021. The company is still targeting a relatively high 70 percent ratio in the longer term.

Meanwhile, Puma is gearing up to launch new store concepts after the pandemic is over. It is finalizing the logistics for its e-commerce, which is now embracing most of the countries in the world - after adding Argentina and Mexico last year - and it is gearing up to launch its first shopping app, starting with India. The U.S., Japan and Europe will follow before the end of this year. It is also planning to start dabbling with the metaverse before the end of the first quarter.

Puma’s gross margin for the quarter inched up to 48.2 percent from 48.0 percent in the year-earlier period, driven by better sell-through and a reduction in promotional activity, partially offset by geographical and channel mix effects, negative currency impacts and higher freight rates. The operating margin narrowed to 3.7 percent from 4.2 percent.

Net earnings decreased to €7.9 million in the quarter from €24.7 million the year earlier. Operating expenses climbed from 44.0 percent to 45.0 percent of sales as Puma stepped up marketing expenses. Also, more retail stores were in operation, and sales-related distribution and warehousing costs increased because of the disruption of the supply chain.

Geographically, sales growth in the last three months of 2021 was led by the Americas, where the top line went up by 31.3 percent at constant rates to €727.3 million, with particularly strong growth in North America. The management indicated that it has been shifting inventories and resources from China to that market, adding that it has also been enjoying very strong growth in countries such as Argentina and Brazil over the past 24 months.

Puma’s sales in the EMEA region rose by 14.9 percent at a constant rate to €573.3 million, driven by growth in Western Europe alongside emerging markets like Russia, South Africa and Turkey. Asked about the current situation between Russia and Ukraine, Gulden could not predict its effect on the company but noted that the two countries represent less than 5 percent of Puma’s global sales.

He also noted that Puma’s market share in athletic footwear has improved in major European markets, reaching levels of 19.8 percent in France, 19.6 percent in Italy, 13.3 percent in Spain and 11.1 percent in Germany.

On the other hand, sales in the Asia-Pacific region declined by 5.4 percent due to the current market environment in Greater China tied to Covid-19 restrictions and geopolitical tensions, while sales in almost all other markets in the region reported double-digit growth. Excluding Greater China, sales in the region were up by 30 percent.

Gulden noted that Puma’s business in China fell abruptly after a social media storm against Western brands that began on March 26. After a 40 percent increase in the first quarter, they fell by 5 percent in the second quarter, 17 percent in the third quarter, and 27 percent in the fourth quarter.

At the same time, its European sales rose by 11 percent in the first quarter, by 81 percent in the second one, by 14 percent in the third one and by 10 percent in the fourth one.

By product category, footwear sales were up 15.6 percent in local currencies to €755.0 million, while apparel saw 11.7 percent growth to €727.3 million. Sales of accessories, which include Cobra golf clubs, grew by 17.4 percent to €284.7 million. Performance categories such as running, training, golf, basketball and other team sports drove the sales increases, but lifestyle items went up as well.

Puma confirmed its intention to move into the outdoor sector, starting with trail running shoes and apparel. Gulden said it is also planning to launch a full line of products for the growing sport of padel tennis, including shoes, clothing and racquets.

A 30% sales increase for the year

For the full year, sales increased by a reported 30.0 percent, or 31.7 percent at constant exchange rates, to a record €6,805.4 million, with double-digit sales across all regions and product categories. Sales were also 29.8 percent above their 2019 level at constant exchange rates. Wholesale revenues rose by 35.0 percent to €5,080.6 million at constant rates. Sales through the DTC channel increased at a lower rate of 22.8 percent to €1,724.8 million, with growth in owned & operated retail stores of 30.3 percent and e-commerce growth of 11.3 percent.

Sales in the Americas jumped by 53.9 percent in local currencies to €2,636.9 million, surpassing the €2 billion threshold for the first time. In the EMEA region, almost all countries posted double-digit growth, taking the overall increase to 28.2 percent at constant rates. Sales in the Asia-Pacific region grew by 10.6 percent, as strong growth in markets like India, Japan and Oceania more than compensated for sales woes in China, where the company’s revenues grew by only 6 percent, like in 2020. Excluding China, Asia-Pacific was up by 19 percent last year.

Footwear sales rose by 36.0 percent on a currency-adjusted basis to €3,163.6 million, while apparel grew by 28.6 percent to €2,517.3 million, and accessories went up by 27.2 percent to €1,124.5 million.

The gross profit margin grew for the year to 47.9 percent from 47.0 percent in 2020, with gains in footwear to 47.3 percent from 45.7 percent, in apparel to 48.9 percent from 48.5 percent, and in accessories to 47.1 percent from 47.0 percent.

Ebit for the year jumped to a record level of €557.1 million from €440.2 million due to the strong sales growth, the higher gross profit margin and continued operating expense controls. The Ebit margin jumped to 8.2 percent from 4.2 percent in 2020 and was also above the 8.0 percent level of 2019. The Ebitda margin inflated by 3.1 percentage points to 12.7 percent. Operating expenses went up by 20.3 percent to €2,724.6 million, but the operating expense ratio declined to 40.0 percent from 43.3 percent. Net earnings surged to €309.6 million from €78.9 million the year earlier.

Benefitting from a seller’s market

Elaborating further on the current supply situation, Gulden said he felt that Puma is now “in good shape” in terms of inventories, possibly giving the brand a chance to gain market share thanks to better and faster deliveries than some of its competitors. Its total inventories were up by 26.4 percent on Dec. 31 as compared to a year earlier, although the bulk of them is still in transit. “I think that the retailers are going to take everything they can,” he said because the demand is higher than the available supply.

There is still a big backlog of orders that should have been delivered in the fourth quarter, but Puma’s production partners have been very cooperative. They supplied higher volumes than expected in the fourth quarter, and the productivity of the factories in China has been higher than anticipated despite the Chinese New Year. As a result, while available inventories on hand were up by only 10.5 percent at the end of 2021, the level of inventories in transit was 56.7 percent higher than a year earlier. Puma did not cancel any orders during the pandemic, but it shifted its sourcing mix lately, with Vietnam falling by three percentage points to 32 percent of the 2021 total and China growing by a similar rate to 29 percent.

Gulden said he expected the current freight bottlenecks to continue to improve. While the normal cost of shipping a container from China to Hamburg is now in a range of about €10,000, Puma has negotiated rates of between €2,000 and €4,000, but they are going to shift to a €6,000-€8,000 range from the second half of this year.

Prices began to go up about six months ago at the retail level, and the process will inevitably continue. Gulden predicts a high single-digit increase in prices by the end of this year. Coupled with other inflationary factors, Puma is reacting to the rising costs with gradual, selected and “smart” price increases on new higher-end styles, especially in the second half and the beginning of 2023, but it doesn’t want to be the first brand in the market to do so. Asked whether he expects consumers to react negatively in a context of waning consumer confidence, he indicated that Puma and its peers are probably in a relatively good position compared with other types of products because of rising sports participation and positive trends in casualization, comfort and sports-inspired lifestyles.