Puma fixed the basics, predicts faster growth from H2

Puma said that it had managed to “fix the basics” and to set an adequate strategic direction for the brand and the company, as it outlined broadly flat sales and improved earnings in 2014, after much increased spending on marketing.

Bjørn Gulden, the company's chief executive, stated in a conference call about the quarterly and annual results that Puma had started its turnaround last year. But he emphasized that, due to the structure of the industry, it would take time for Puma to be entirely rebuilt for sustainable growth. It appears from the current projections that the impact of the latest investments should transpire more convincingly from the second half of the year.

The company's sales jumped by 6.3 percent in constant currencies for the fourth quarter, which amounted to an increase of 7.5 percent in euros to €750.8 million. Gulden was most encouraged by the rise in sales of footwear, up by 4.3 percent in constant currencies. This marks the second consecutive quarter of growth for footwear, which he had earmarked as a priority for the brand when he outlined the turnaround strategy in November 2013. Apparel sales improved by 3.6 percent in constant currencies, compared with an increase of 17.1 percent for accessories in spite of the sluggishness in the golf market.

Puma's sales for the quarter were most buoyant in the Americas, where they soared by 19.3 percent in euros to €319.3 million and by 15.0 percent in constant currencies. Sales in the United States were bolstered by the brand's partnership with Foot Locker, which saw it open five standalone Puma Lab stores and about 150 such facilities within Foot Locker stores. The heightened exposure has encouraged other prominent retailers to give more space to the brand. Puma is working with Foot Locker on an accelerated delivery program, meaning that it adjusts its offering to the response in stores more rapidly. While sales were robust in North America, they jumped at double-digit rates in nearly all countries in Latin America.

Sales in Europe, the Middle East and Africa (EMEA) declined by 0.5 percent in euros to €224.8 million but they inched up by 0.6 percent in constant currencies as strong sales in the U.K. made up for weakness in some other European countries.

When it comes to Russia, Gulden said that sales increased at double-digit rates in rubles last year and continued to rise significantly until the second week of January, which marked the Russian holiday season. However, this increase was annihilated in euros by the collapse of the ruble. While sales advanced by about 25 percent in rubles for the fourth quarter, they declined by 13 percent in euros. For the entire year Russian sales were up by 7.4 percent in rubles but they fell by 10.6 percent in euros. Russian sales have decreased significantly in local currencies as well from the second half of January, amid increased uncertainties about the situation in and around the Ukraine.

The company implemented some price increases in its own Russian stores and will continue to do so this year. Puma has not raised wholesale prices for products that are currently in Russian stores, but has increased them for products to be delivered in the second half of the year. Furthermore, Puma may have to withhold some deliveries to Russia this year. Products for Russian stores are shipped from a bonded warehouse in Austria, where Puma may hold some of the orders if Russian retailers are struggling to sell out.

Gulden emphasized that he saw major upside for Puma sales in virtually all European countries. Among other initiatives to improve distribution, Puma has just started to expand its partnership with Foot Locker in Europe, with a standalone Puma Lab to open in Milan at the end of the month. The group said there could be about 100 smaller versions in Foot Locker stores in the years to come.

Quarterly sales also increased in Asia-Pacific, up by 1.0 percent in euros to €206.7 million and by 0.7 percent in constant currencies. They were driven by increases in China and India, while sales were under pressure in Japan. The company blamed this mostly on the Japanese golf market, which “kind of collapsed,” as Gulden put it. The chief executive also pointed to South Korea as a market that is currently difficult and where Puma's sales declined for the quarter.

The group's gross margin advanced by 1.8 percentage points to 45.0 percent for the quarter, owing to lower discounts and a more favorable product mix. The gross margin for footwear advanced by 2.1 percentage points but remained quite low at 41.6 percent. The apparel gross margin jumped by 2.4 percentage points to 47.1 percent, while the margin for accessories contracted slightly, by 0.6 percentage points to 47.8 percent. This was again blamed on the weakness of the golf market.

While Puma managed to push operating expenditures down in the previous quarters, they moved up again by 8.6 percent in the last quarter of 2014, due to investments in marketing. The campaign launched in August was described as the largest-ever for the Puma brand. Publicizing the Forever Faster tagline, it targeted customers in 35 countries. After three months it had generated 1 billion TV impressions in the campaign's target group and 31 million online views.

Operating profit jumped to €10.6 million, up from €1.1 million for the same period in 2013, before special items that amounted to €129 million for the same quarter in 2013. The operating result was therefore much improved and Puma ended the quarter with a net loss of €4.6 million, compared with a loss of €127.1 million.

A major highlight for the quarter was the multi-year partnership announced between Puma and Rihanna, the American singer. Gulden had previously indicated that Puma was on the look-out for a female icon who could embody the brand along the same lines as Usain Bolt or Mario Balotelli for men. The company apparently didn't find any female athlete who fitted the job description but Rihanna was portrayed as an outstandingly fit performer and a strong woman who matched the brand's attitude.

Rihanna will take part in a campaign around Puma's training range this year, then launch her own range of women-focused training gear as one of Puma's creative directors from the spring of 2016. Gulden emphasized that Rihanna would help to establish connections with women who are taking up training and driving a marked increase in female sports participation in countries like China and India.

For the full year, Puma's turnover slipped by 0.4 percent to €2,972 million but it increased by 3.3 percent in constant currencies. Due to the weaker first half, footwear sales were still down for the full year, with a decline of 6.5 percent in euros to €1,282.7 million. This amounted to a drop of 2.4 percent in constant currencies. On the same basis, apparel sales amplified by 7.6 percent and sales of accessories jumped by 9.3 percent.

Sales in Puma's own stores reached €618 million, which was an increase of 3.9 percent in constant currencies and signified growth in comparable sales. Sales from own retailing, both in stores and online, thus amounted to about 20.8 percent of the group's turnover, which Gulden described as a satisfactory level.

However, the company is rolling out a new retail format, starting with stores in Puma's home town of Herzogenaurach, Prague and Hong Kong, and preparing to launch a revamped and more global version of its website. Gulden said that some subsidiaries and licensees currently have independent setups for their online sales. He wants to establish a unified website managed out of Boston, which should be ready or almost there by the end of the year. Instead of handling their websites independently, all countries should be linked to this global website with their local offer.

The Americas stood out for the entire year, with a sales increase of 1.3 percent to €1,069.9 million, which was a rise of 6.7 percent in constant currencies. Demand was most abundant in the United States, Canada, Argentina and Mexico.

EMEA was still weak for Puma last year, with regional sales slipping by 1.0 percent to €1,205.8 million, but the company managed an increase of 1.3 percent in constant currencies. Sales remained weak in Italy and France, although Puma has seen some improvements in orders from that country. Apart from the U.K., which delivered strong sales for the entire year, Russia was another country that contributed outstanding sales increases in constant currencies.

Sales in Asia-Pacific dwindled by 2.1 percent to €696.3 million for the year, but again the trend was positive with an increase of 1.9 percent in constant currencies. China and India contributed to the rise throughout the year, as did most other countries in the region, but the regional tally was affected by the weakness of the Japanese market.

The group's gross profit margin crawled up by 0.1 percentage points to 46.6 percent, despite a sharp impact from currency exchange rate changes. The margin in footwear shrank by 1.1 percentage point to 42.6 percent for the year, but this was compensated for by an increase in gross margin of 1.2 percentage points to 49.5 percent in apparel and by 0.2 percentage points to 50.0 percent in accessories.

While the declining price of oil-based materials is favorable for input costs, Gulden said that the impact of oil prices wasn't as important as one might expect in the sports industry and the company's sourcing partners still had to deal with growing labor costs. To counteract some of the currency risks as well as trading barriers, the company is already sourcing some products locally in countries like Argentina. The launch of the Ignite shoe with an upper knitted in Italy and the sole injected in Italy is another example of small-scale local production.

Operating expenditures increased by 4.9 percent to nearly €1,277 million due to the advertising campaign started in the second half of the year, as well as new sponsorship contracts, which were somewhat mitigated by cuts in other areas. Ebit dropped to €128.0 million, down from €191.4 million before special items the previous year. The Ebit margin thus reached 4.3 percent, which the company said was in the range of its target.

After special items of €129 million in 2013, the company's operating result had reached just €62.5 million and net earnings dwindled to €5.3 million that year. Without any such special items in 2014, Puma ended the year with much improved net earnings of €64.1 million.

While the results do not amount to a spectacular turnaround and the profit margins are still meager, Gulden said that the company had delivered in its assignment to stem the decline in Puma's sales and move ahead with strategic priorities – to clarify the brand positioning, simplify ranges and designs, improve distribution and upgrade the company's operations, among others.

Primordial investments in products are already transpiring in the ranges that are hitting the market, such as the latest Evo Power football boot. It was launched at the start of this month and worn at the final of the Africa Cup of Nations by players such as Yaya Touré of Ivory Coast, which won the tournament against Ghana. Both finalists are Puma teams. The boot launch was accompanied with a marketing campaign in which Mario Balotelli and Cesc Fàbregas face off and display their skills.

The Evo Speed football boot to be launched in the second half of this year is touted as the lightest on the market at 103 grams. The Evo program is to be continued next year for the Copa America and the European football championships.

Another innovation launched a few weeks ago is the much-awaited Ignite running shoe. New Yorkers learned about it at an event held on Times Square with Usain Bolt and the company has scheduled similar events in ten major cities.

The Ignite shoe has a striking outsole developed over several years in partnership with BASF, the German chemicals firm. The Ignite range is to be expanded with more running and training shoes. Among them, the Ignite Proknit scheduled for the second half of this year is the shoe that has an upper knitted in Germany, while the sole is to be injected in Italy.

Another pillar of the latest range consists of tennis classics, which are becoming increasingly fashionable in the sneaker market. A few months ago Puma re-issued the Becker OG, a classic mid-top shoe worn by Boris Becker when he won Wimbledon in 1985, aged just 17 years.

Another priority for the coming months is to improve IT and other infrastructure, for which Puma appointed Lars Sørensen as chief operating officer last August. As an example of structural improvements, Gulden said that Puma had simplified its sourcing. While this was previously handled by 81 separate subsidiaries, sourcing has been centralized into a single entity, meaning a single point of contact for the manufacturers. They will be consolidated into regional order centers, so that inventories may be shared.

The management board has already been much simplified. Since the departure of the chief commercial officer Stefano Caroti last December, there are only three members on the board. Along with Sørensen they are Michael Lämmermann, the chief financial officer, and Gulden himself. The Norwegian is currently taking care of marketing and sales. He said Puma was likely to have a chief marketing officer at some point but sales probably did not require a dedicated global director, because sales strategies were bound to be regional or local.

As it continues to reap the benefits of its investments, the company expects to reach mid-single digit growth in its turnover in constant currencies this year. Gulden said that sales should be flattish in the first half, when Puma benefited from the run-up to the World Cup last year. It outfitted eight of the teams at the event and delivered many of the related products in the second quarter last year. Then again, the company should enjoy stronger sales growth in the second half this year.

The chief executive pleaded that, where Puma did obtain prominent and appealing displays, sell-through was convincing. He thus emphasized that the level of growth would very much depend on Puma's success in obtaining the right shelf space.

The gross margin should be supported by a better product mix and lower discounts, but adversely affected by currency exchange rate changes. The company is still hoping to achieve a slight improvement in its gross margin for the full year. Like many other sporting goods companies, Puma sources more than 90 percent of its products in dollars, which it has hedged at $1.31 for 2015.

Operating expenditures should remain outsized, due to the fact that media spend will be substantial in both the first and second half of the year (while that only applied for the second half of the year in 2014). Puma acknowledges that exchange rate changes, and particularly the strengthening of the US dollar against nearly all other currencies, should have a significantly negative impact on profitability this year. However, Puma has taken measures to counteract this impact and thus predicted that Ebit and net earnings would increase slightly.

Gulden said that an operating margin of 8 to 12 percent should be attainable for a well-run company in the sports industry. Puma is still far from that because it has over-invested in marketing and IT to make the brand more appealing and the company more efficient, but growth in the top line and a more efficient organization should both bring relief to the cost structure, he added.

The drop in Puma's annual operating profit led to a 62.9 percent in decline in the operating earnings of Kering's Sport & Lifestyle segment, which also includes Volcom and Electric, down to €137.5 million. Segment sales slid by 0.1 percent to €3,245.1 million for the year, but were up by 3.5 percent on a comparable basis, with a 6.4 percent increase in the final quarter.

Together, Volcom and Electric improved their operating earnings by 11.8 percent to €9.5 million in 2014 on 4.0 percent higher sales of €254.9 million.

In spite of an unusual sales decline for Gucci, Kering's luxury goods segment raised its sales by 6 percent, but delivered an 18.1 percent lower operating profit (more on this segment in Shoe Intelligence). The group generated strong cash flow from operations on 4 percent higher consolidated revenues of €10.4 billion from continuing operations, but recorded a €479 million net loss from discontinued operations in 2014, including a €355 million writeoff for Redcats.