Puma had to adjust its sales and earnings forecast downwards, partly because the reduction of its business with Foot Locker in the USA turned out to be larger than expected. Although Puma’s total U.S. sales fell only slightly in the first quarter of 2007, U.S. orders at the end of March were down by 17.6 percent in dollars. Foot Locker remained Puma’s largest customer worldwide during the quarter. The Wild Cat has achieved disproportionately high growth with the world’s largest sporting goods retailer over the last years, and the decline could be regarded as a healthy adjustment.
The company now estimates that it will end the year with a currency-neutral sales gain of between 1 and 5 percent, instead of the 5-10 percent growth predicted in February. Paired with high new investments related to the Volvo Ocean Race, this should lead to flat margins for the year, instead of the previous forecast of a profit increase of least 10 percent.
Gross margins ended up at 52.2 percent for the first quarter, but they are expected to decline to a ratio between 50 to 51 percent for the full year. While Puma will not have the same extraordinary expenses related to the World Cup of football as last year, and in fact marketing and retail expenses were down to 15.2 percent of sales in the first quarter, as compared to 15.6 percent in the year-ago period, allowing the company to reduce total operating costs slightly to 31.6 percent of sales.
However total operating costs should grow to around 35 percent of sales for the full year because of the Volvo Ocean Race, which is being described by the management as an opportunity that the company didn’t want to pass up because of its image enhancement features. Last week in Boston Puma presented its project around the race, which will start in October 2008 in Alicante and run until April 2009, covering 11 countries. Puma will enter its own boat and will be the supplier and licensee of replica merchandise for the race. This coincides with the launch in mid-2008 of a nautical range under the Puma brand.
For the first quarter of 2007, the company saw its consolidated sales rise by 2 percent to €655.8 million, up by 7.4 percent without currency effects. In constant currencies, sales rose in all parts of the world, up by 8 percent in Europe, the Middle East and Africa (EMEA), by 4.5 percent in the Americas and by 8.6 percent in Asia/Pacific.
The company’s chief executive, Jochen Zeitz, said that sales had expanded across Europe, even in Germany where the situation has improved since mid-2006. It has remained the same in the UK. The French market is still healthy for Puma, while Italy has become “more of a challenge.” Puma continues to make progress in Eastern Europe, but it continues to have challenges in Russia because the distribution there is not developing as expected.
In absolute terms, Puma’s sales were badly hit by the strength of the euro against the dollar. EMEA sales rose by 6.4 percent to €360.9 million, but the Americas suffered a decline of 4.1 percent to €174.3 million, and currency effects also wiped off Asian growth, with reported numbers ending down 0.9 percent at €120.6 million for the quarter. Including sales by licensees, which jumped by 13.3 percent to €106.3 million, global sales under the Puma brand stood at €762.1 million for the quarter, up by 3.5 percent, or 8.9 percent in constant currencies. With an increase of 9 percent for the quarter in local currencies, footwear performed better than apparel, whose sales went up by 4.8 percent.
Gross margins were down by only 0.2 percentage points to 52.2 percent, due to a fall of 1 percentage point for apparel. Puma could not uphold its margins in Europe, where they fell by 1.5 percentage points to 53.7 percent, but they jumped by 2.2 percentage points in the Americas to 49.7 percent. Earnings before interest and tax (EBIT) were up by 2.3 percent to €134.8 million and net profits were up by 3.7 percent to €96.6 million.
On a currency-adjusted basis, Puma’s global orders inched up by just 1.4 percent at the end of the quarter, with decreases of 0.8 percent in the EMEA region, 8.6 percent in the Americas and 20.0 percent in the Asia/Pacific area. Orders for clothing are better than those for shoes. Besides the new relationship with Foot Locker, the drop was related to earlier shipments from the production factories. Part of the decline was also attributed to the boosting effect of the World Cup of football on orders taken for the 2nd quarter of last year. Orders for the third quarter showed a bigger single-digit increase.
Meanwhile PPR Group, which acquired 27.1 percent of Puma from the Herz siblings at a price of €330 per share in April, has confirmed that it plans to issue its formal bid document for the remaining shares at the same price toward the middle of May. The French company lifted its own sales by 5.6 percent to €4,447 million in the first quarter of 2007. This included a 15.9 percent comparable sales hike to €936.8 million for PPR’s luxury goods business, which could benefit from synergies with Puma over the next years. Another standout was the Sportsman’s Guide, the American mail order business acquired by PPR in 2006, which saw its sales increase by 10 percent for the quarter. The company specializes in sales of outdoor products, while one of its offshoots focuses on golf. However, this fast-growing operation is unlikely to beef up Puma’s softening business in the USA, because its positioning is somewhat price-aggressive.