Puma warned last week that its net income for 2013 would be positive but significantly below the figure of €70.2 million reported for 2012, due to a new one-off charge of €130 million that will be booked in the fourth quarter. While the company already spent €177.5 million on restructuring charges last year, the new items chiefly consist of impairment charges related to non-current assets. The charges also include a few relatively small extra restructuring measures, such as the closure of the group's product development center in Vietnam and the transfer of its international product team from London to Herzogenaurach.
The Vietnamese facility brought together sample teams from factories working together with Puma in the area, but the company now prefers to move these teams back into the factories themselves, in order to accelerate the development process and to reduce costs. The number of international product teams will be reduced from three to two, closing down the development center in London and leaving those in Herzogenaurach and Boston.
The profit warning came as Puma suffered another sales decline of 8.9 percent to €813.1 million for the third quarter, which amounted to a drop of just 1.4 percent in constant currencies.
Unlike the situation for the two global market leaders, Puma's gross margin continued to decline, down by 1.1 percentage points to 47.1 percent for the quarter, due to an increasingly unfavorable mix of products, exchange rate changes and some discounting. The operating margin before special items was also down by 1.2 percentage points to 9.9 percent for the quarter, despite a reduction of 8.2 percent in operating expenses.
Yet Puma's new chief executive, Bjørn Gulden, was eager to point out that the decline in gross margin had decelerated and that the operating margin still amounted to a sizeable profit – dispelling any suggestion that Puma was in financial disarray. Puma ended the quarter with net earnings of €52.7 million, which compares with €12.2 million for the same period last year, when income was impacted by major restructuring charges.
Excluding exchange rate changes, Puma's sales advanced by 3.4 percent in apparel and by 5.7 percent in accessories, owing to growing sales of football accessories, socks and underwear. Gulden regarded the rise in accessories as evidence that the brand is still attractive, since accessories tend to sell on the back of brand strength. Cobra Puma Golf did not suffer from the same pressure as the golf business at Adidas, partly due to the fact that it remains much smaller.
Puma's sales retreated by 7.1 percent in footwear. This is an alarming development according to Gulden, who regards the sporting goods market as being footwear-driven. Footwear still made up 46.5 percent of Puma's entire turnover for the quarter.
Puma's sales were down by 4.6 percent to €378.3 million in Europe, the Middle East and Africa (EMEA), a decline of 1.7 percent in constant currencies, chiefly due to weak Southern European markets. The company highlighted strong improvements in Russia and Turkey as well as in the U.K., which it hopes will set the trend for other European markets in the coming years. The brand's turnover in the U.K. was supported by strong sales of lifestyle products and women's fitness apparel.
Underlying sales in the Americas were nearly flat, up by 0.7 percent in constant currencies, but they dropped by 7.8 percent in euros to €261.1 million for the quarter. Gulden said that sales had remained robust in North America and in Argentina. No mention was made of Brazil (at least before questions), one of the major markets that Gulden has not yet had the time to visit.
In Asia-Pacific, sales declined by no less than 18.2 percent to €173.7 million for the quarter, off by 3.7 percent in constant currencies. India is the only Asian country where Puma continued to do well. Puma is still fighting for retail space in China, where it only started to invest directly on a larger scale when market-wide inventory issues had already set in. Hopes for Chinese expansion are pinned on the new national and regional management.
For the first nine months of this year, Puma's sales eased by 7.3 percent to €2,287 million, which was a decline of 2.5 percent in constant currencies. Again, footwear was the worst affected category, with underlying sales down by 7.4 percent for the nine months, compared with a decline of 1.2 percent for apparel and an increase of 9.5 percent for accessories.
Excluding exchange rate changes, sales were down by 3.6 percent in EMEA and by 4.5 percent in Asia-Pacific, while they inched up by 0.4 percent in North America. The group's gross margin slid by 2.0 percentage points to 47.5 percent and its operating margin before special items was down by 1.8 percentage point to 8.3 percent. The company ended the nine months with net profit of €120.5 million, up by 6.9 percent compared with the same period last year.
Meanwhile, Puma has moved ahead swiftly with its cost savings and store closures, earning praise from Gulden that the plan launched by Franz Koch had been well executed so far. Puma had earmarked about 90 stores for closure and has already shuttered about 60 of them. Puma's own retail sales still reached €446 million for the first three quarters of this year, which was a rise of 7.1 percent in constant currencies.
Another part of the restructuring measures entailed the closure of three warehouses and a reduction of the product ranges by 10 percent this year, compared with the targeted cuts of 30 percent by 2015. The company reiterated its expectations that sales would decline at a low to mid-single digit rate in constant currencies for the full year.
