Puma impatiently awaits fresh leadership after a “rough” quarter

Puma downgraded its forecasts for this year after what it described as a “rough quarter” with shrinking sales and profits to start the year. However, Puma emphasized that it was forging ahead with its reorganization and pinning strong hopes on its new chief executive, Björn Gulden, who will take charge from the start of July.

The company was taken aback in the first quarter by slumping sales in markets such as France, Italy and Japan. It suffered from a fall in sales of team sports products, due to the lack of a large-scale international football tournament this year, and from a weakened demand for motor sports products in several markets.

Unlike the situation at Adidas, Puma was also hit by a decline in its gross margin, down by 2.1 percentage points to 49.1 percent, due to unfavorable input costs; discounts to clear footwear inventories; and a weaker hedging position than for the same period last year, which contributed 0.7 percentage points to the drop. Two other factors were the fact that Puma had fewer sales of high-margin products in football and motor sports, and that it got a smaller share of revenues from high-margin countries in Europe and Asia.

Puma had previously predicted that its sales would be roughly flat for the full year, both in reported terms and in constant currencies, but it now expects a low to mid-single digit drop excluding currency swings. With that, the sales target set as part of Puma's five-year strategic plan, to reach a turnover of at least €4 billion by 2015, appears increasingly remote. Because of the change in management, there was no conference call with financial analysts, but in a conference call for journalists yesterday, Michael Lämmermann, chief financial officer, admitted that the €4 billion sales goal was no longer topping the list of priorities.

Furthermore, when it reported its figures for 2012 in February, the group was still confident that it could achieve a low to mid-single digit growth in earnings before interest and tax (Ebit) before special items in 2013. With the predicted decline in sales and a gross profit margin that is still under pressure, Puma warned that this projected Ebit rise is unlikely to materialize.

Lämmermann said that the pressure on Puma's gross margin would probably ease as the year progressed, but he still thought that the gross margin would be off by at least one full percentage point for the year. He was wary of providing further guidance on operating income, particularly as Puma prepares for the arrival of Gulden. Puma is still convinced that its net income will increase for the full year but that's a far cry from the earlier forecast that net income would rise “significantly” this year.

The group's sales for the first quarter slipped by 4.8 percent to €781.6 million, which was a decline of 2.3 percent in constant currencies. Puma's underlying sales were down by 1.1 percent in apparel and by 7.8 percent in footwear, despite some well-received investments such as the launch of the Mobium Elite running footwear range. Sales of accessories increased by 11.9 percent, driven by Cobra Puma Golf as well as Puma's joint venture in North America for socks and bodywear.

The downturn was worst in Europe, the Middle East and Africa (Emea), where sales shrank by 5.5 percent to €347.9 million, off by 4.8 percent in constant currencies. The company pointed to a decline in overall retail spending, as well as an unusually long winter. It suffered most in France and Italy, while it still did well in Russia, Turkey and the German-speaking countries.

While the drop in sales of team sports products is understandable, the company acknowledged that it has to tackle much wider issues in Europe: From product development to brand perception and marketing, much would have to be overhauled to improve Puma's standing in sports performance in the European market, Lämmermann said.

Even in Asia-Pacific, the group's sales were down by 9.7 percent to €173.4 million, and that was still a decline of 2.9 percent in constant currencies. The company partly blamed this on the long and harsh winter in Japan, and it was disappointed by the weak take-up of its fitness and training products in China. Then again, the brand did well in India, with fast-rising sales of running and team sports products, and in Australia.

Puma's paltry sales in China are a particularly annoying headache for the company. Both the group's manager and its majority shareholder, Kering Group (formerly PPR), are well aware of the importance of the market, Lämmermann said. Philippe Bocquillon, the former Adidas manager appointed at the helm of Puma China, is currently working on a new strategy that will focus on strengthening sales of Puma's performance products in China. But Lämmermann admitted that the strategy would have to be particularly sharp for Puma to gain ground in the current market situation.

Only in the Americas did Puma manage a sales increase in constant currencies, up by 1.8 percent, but its turnover there in euros was down by 0.2 percent to €260.2 million. The underlying rise was driven by Mexico and Brazil, especially by Puma's Brazilian business in the team sports category through its partnership with the football club of Botafogo in Rio de Janeiro, sealed last year. The lifestyle range was in stronger demand in Argentina, while Cobra Puma Golf contributed to a sales increase in North America.

Puma's own retail sales jumped by 13.9 percent in constant currencies to reach a level of €135 million, amounting to 17.3 percent of its turnover for the quarter. The group pointed to soaring online sales, particularly in North America.

With declining sales and the drop in gross margin, Puma's Ebit retreated to €79 million for the quarter, which was a drop of 22.6 percent, in spite of cost savings of about €12 million for the three months. The operating profit margin was down by 2.3 percentage points to 10.1 percent. The company ended the quarter with net income of €50.3 million, down by 32 percent.

The “rough” aspect of the quarter was somewhat mitigated by excitement around Borussia Dortmund, the German team outfitted by Puma that will play the Champion's League final in Wembley against the Adidas-clad Bayern Munich later this month. Puma said it sold about 300,000 Borussia jerseys for the season so far, and the team's performance would support its intended strategy to rebuild a stronger basis for its performance products. On the other hand, Lämmermann declined to comment on British reports that Puma has clinched a deal to sponsor Arsenal at a whopping price of £30 million (€35.3m-$45.8m) per year for five years, replacing Nike. More on this below.

Puma also insisted that it was moving ahead swiftly with its reorganization. It has implemented a new structure with regional units in Europe and business units working by category throughout the company. The group has also closed about half of the 90 stores it wanted to shutter. Further cost reduction measures helped to slash down operating expenses by 3.9 percent to €310 million for the quarter.

French reporters indicated that Gulden has already started working on Puma on a part-time basis together with Jean-François Palus, managing director at the Kering Group and chairman of Puma's administrative board. While introducing a new jersey for the Girondins de Bordeaux football team last week, the French executive reportedly added that Gulden would be almost fully on board from the start of June as a consultant.