The Cat leaps in the quarter

Puma ended the 2010 financial year with a buoyant quarter, enabling it to proclaim that it was “Back on the Attack” – the name given to the five-year plan, outlined by the management last year, to reach sales of at least €4 billion by 2015.

Puma's consolidated sales soared by 28.2 percent to €623.4 million for the quarter, which was still an increase of 16.1 percent in constant currencies. On the same basis, sales jumped by 8.8 percent in Europe, the Middle East and Africa (Emea) and by 131.1 percent in Asia Pacific. Yet the most impressive performance came from the Americas, where Puma enjoyed a sales hike of 27.8 percent, driven by Latin America.

Puma's three product categories contributed almost equally to the surge, each of them reporting sales increases of more than 15 percent in constant currencies for the quarter. The accessories unit was helped by the inclusion of Cobra, the golf equipment brand acquired by Puma last year.

Puma's outstanding performance in the Americas was partly marred by an unfavorable change in the regional mix of its sales, with an increased share of sales in the low-margin U.S. market. This contributed to a decline of 5 full percentage points in its gross margin to 45.4 percent for the quarter. Apart from the regional mix, the gross margin was also under pressure from less favorable hedging and more close-out sales, as well as slightly higher sourcing costs. The takeover of Cobra further affected Puma's profitability, since the golf equipment business operates with lower margins.

Jochen Zeitz, Puma's chief executive, pointed out that Puma's gross margin remained outstanding from an industry-wide perspective. Furthermore, the comparison with last year was distorted by an exceptionally high gross margin of 50.4 percent for the last quarter of 2009. There were few close-out sales at the time, because inventories were particularly low. The gross margin for the last quarter of 2010 has returned closer to the level of 2008.

Otherwise, Puma's performance improved markedly as the year went by. The first half remained weak, but this was more than compensated by surging sales in the second half. The company ended up with global brand sales of €2,862.1 million for the full year, an increase of 9.8 percent in euros and 3.1 percent in constant currencies. Its consolidated revenues were up by 10.6 percent to a record of €2,706.4 million, an increase of 3.6 percent in constant currencies.

This increase was entirely driven by a steep sales rise in the Americas, fueled by sales increases in Latin America as well as North America. In constant currencies, Puma's sales in the Americas climbed by 20 percent, while they retreated by 2.5 percent in Emea and by 2.6 percent in Asia Pacific. Sales improved in China in the second half, but this came after a rough first half.

Puma lifted its own retail sales by 3 percent to €470 million, amounting to 17.4 percent of the group's revenues, even though the number of its stores was slightly reduced. By category in all distribution channels, footwear crept up by 1.1 percent on a currency-neutral basis for the year, while apparel managed a rise of 3.8 percent and accessories increased by 14.9 percent, again aided by Cobra.

Among the highlights, the company pointed to the football World Cup in South Africa, where Puma outfitted seven teams. Puma supported the Red Bull racing team ; which produced the youngest Formula One world champion ever, Sebastian Vettel. The Clever Little Bag, its sustainable packaging system combining a box and a bag, drew a lot of interest.

For the full year, the company's gross margin stood at 49.7 percent, down by 1.1 percentage points. It decreased by 0.9 percentage points to 48.9 percent for footwear and by 0.7 percent to 50.6 percent for apparel. The drop was larger for accessories, down by 3.5 percent to 50.6 percent, chiefly due to the acquisition of Cobra.

Puma's gross margin fell by 1.6 percentage points to 50.6 percent in Emea, and by another 1.6 percentage points to 46.6 percent for the Americas. On the other hand, it inched up by 1.2 percentage points to 52 percent in Asia Pacific.

Zeitz said he expected some more margin deterioration for this year, but not to the same extent as in the last quarter of 2010. He predicted that the group's gross margin for the year would be slightly below the level of 2010. Increases in sourcing costs will be felt most acutely in 2012, he said, but by then the company would have taken steps to pass them on to consumers, through wide increases in recommended retail prices starting with the spring 2012 range. Such hikes have only been implemented on a selective basis so far.

Operating expenses went up last year, partly due to the launch of Puma Spain and the integration of Cobra. However, the cost-cutting measures introduced in the last years enabled Puma to deflate its costs as a percentage of sales, down by 1.5 percent to 37.9 percent. Marketing and retail costs were almost unchanged.

The company's operating profit before one-off items rose by 12.7 percent to €337.8 million for the year, amounting to an operating margin of 12.5 percent, up by 0.3 percentage points. However, Puma's operating profit did include an extraordinary expense of €31 million due to the alleged large-scale fraud uncovered at Puma Hellas, its joint venture with Glou in Greece.

Puma said it had asserted all of its claims according to criminal law in Greece, targeting its minority partner in the joint venture and two members of the management of Puma Hellas, but it had no concrete news on the matter. After thorough examination of the Greek accounts, it does not expect any further one-off expenses related to this fiasco.

It should be pointed out that, in the context of the Greek irregularities, Puma's accounts had to be restated for 2009. The company's Ebit for 2009 were thereby reduced by €106.5 million to €146.4 million. On this basis, and including the one-off expense of €31 million for 2010, Puma's operating profit for 2010 more than doubled to €306.8 million, implying an operating margin of 11.3 percent. It ended the year with net earnings of €202.2 million, up from €79.6 million in 2009.

Zeitz predicted that Puma's sales would continue to rise at mid to high single digit for this year and 2012. Operating expenses as a percentage of sales should increase for these two years due to the investments required for the Back on the Attack strategy, and decrease thereafter. Assuming that it would only suffer a modest increase in sourcing costs, the company anticipates delivering a mid single-digit increase in net earnings for the same two years.

Among the highlights for this year, the company is going to back up strongly the launch of its Faas range of running shoes, which means “fast” in Jamaican. Puma is gearing up for the Athletics World Championships to be held in Seoul at the end of August, which should prominently feature Usain Bolt – the Jamaican runner with whom Puma has extended its partnership until at least the end of 2013. Two weeks ago it unveiled a partnership with Cedella Marley, daughter of the reggae legend, to design a sports lifestyle range for the Jamaican team at the London Olympics next year. Separately, Puma will also line up for the start of its second Volvo Ocean Race, starting in October in Alicante.

Puma will close a chapter in its turbulent history this year anyway, since the company will go ahead with the replacement of the chief executive who redressed, reshaped and steered the company for 17 years. The new chief executive should start after Puma's shareholders' meeting in April approves the change in the company's statutes to become a Societas Europeae. Zeitz will remain executive chairman of Puma's board, as well as chief sustainability officer and head of a new sports lifestyle division at PPR Group, the French conglomerate that owns Puma.

Puma's shares fell by 1.8 percent on the Frankfurt stock exchange yesterday, chiefly due to disappointment about its dividend, which remains unchanged at €1.8 per share in spite of the company's vastly improved turnover.