Lavish spending around the football World Cup sharply depressed Puma’s margins and earnings for the 2nd quarter but a vigorous rise in turnover prompted the company to lift its sales target for the next four years.
Sales rose by 38.2 percent to €546.6 million for the quarter, although this tally was inflated at 22 percent by the first-time consolidation of the distribution in several markets where Puma bought out former licensing contracts. Including licensed sales, which fell sharply for the same reason, Puma’s brand sales for the quarter went up by 17.1 percent to €620 million.
After a sales decline of 5.4 percent in this year’s opening quarter, Europe managed a rise of 8.9 percent to €261.1 million in the second one. America continued to ride high with a sales increase of 58.2 percent to €171.7 million, including a 46.1 percent sales rise for the USA.
The quarterly sales jump includes a 40 percent increase in sales of football products, but Puma has probably benefited from the World Cup even more from the beginning of the 3rd quarter, after the Puma-clad Italians clinched their victory. The quarterly growth was chiefly fuelled by apparel, which saw sales rise by 81.2 percent to €182 million, compared with a 23.7 percent increase for footwear to €328 million.
Football clearly outshone other sports during the period, but the launch of Puma’s new range of golf products was well received by the trade and enjoyed a strong boost publicity-wise when Geoff Ogilvy won the U.S. Open in Puma gear. The brand is entering four more new categories this year and it has pledged to crack at least another one each year until 2010, starting with swimwear in 2007.
Gross margins remained appetizing at 51.4 percent for the quarter but they were still down considerably from 53.2 percent at the same time last year. Puma attributed this mainly to the change in the regional mix. Strong growth in America and Asia is reducing the relative weight of European sales, which again yielded the highest gross margins at 54.7 percent for the quarter, compared with 47.9 percent in the Americas and 49.3 percent in Asia.
Earnings were further hit by hefty expenses for the World Cup, as well as investments in regional expansion, retail and other marketing activities, which lifted selling, general and administrative expenses by a whopping 54.4 percent for the quarter. Net earnings therefore slid by 14.9 percent to €50.1 million, still better than the company had predicted.
Adding the first quarter, marketing and retail expenses rocketed by 61.7 percent as Puma arm-wrestled with its much weightier competitors in the football business, Adidas and Nike. Puma’s marketing and retail budget represented about 17.4 percent of sales in the first half, compared with 14.4 percent for the same period last year.
Along with the World Cup, the rising costs reflected the ongoing expansion of Puma’s own retail network. By the end of the period it comprised 78 concept stores, including four stores run by license partners, making up about 13 percent of Puma’s sales.
Revenues for the half-year period rose by 33.3 percent to €1.189 billion, but again consolidations contributed 20.4 percentage points to the increase. Branded sales rose by 16.1 percent to €1.356 billion for the first six months, up by 14.3 percent in constant currencies. Due to the weak first quarter European sales inched up by 0.4 percent to €600.4 million, while American sales shot up by 74.5 percent to €353.6 million.
Gross margins fell to 51.9 percent for the half-year, compared with 53.3 percent for the same period last year, again on account of regional shifts. Combined with the much higher expenses, the lower margins reduced net earnings by 4.4 percent to €143.2 million for the six months.
Puma’s prospects remain more than buoyant, given an increase of 32.2 percent in future orders at the end of June, or 34.5 percent in constant currencies, with double-digit increases in all regions. Footwear orders rose by 28 percent in constant currencies, against increases of 50.1 percent for apparel and 45.8 percent for accessories.
The company therefore reaffirmed its expectations that sales would grow by up to 35 percent for the full year, while gross margins should range from 50 to 51 percent and the full-year decline in earnings should not reach more than a single digit. However Jochen Zeitz, chief executive, adjusted the targets of the company’s strategic plan until 2010, lifting Puma’s estimated sales potential to €4 billion, up from €3.5 billion.
In fact, Puma generated roughly €100 million more sales at the end of 2005 than predicted when it unveiled the new business plan in July. Another €100 million of additional growth is to come from higher than expected expansion in Asia and South America. A third chunk of €200 million should come from extra sales in established categories, and another €100 million from new categories.