Weak margins and extra costs sink Puma’s profit despite robust sales

Puma ended the past year with a robust quarter, enabling the company to reach its sales target for the year. But its income was hammered by sagging margins as well as the heavy costs of its restructuring plan, which is expected to lead to flat sales for this year.

The company achieved a consolidated sales increase of 11.7 percent to €804.7 million for the last quarter, up by 8.7 percent in constant currencies. Apparel generated the most impressive rise, with sales up by 11.8 percent in constant currencies, compared with 6.0 percent for footwear and 9.1 percent for accessories.

Puma even managed a sales hike of 7.0 percent for the three months to €253.4 million in Europe, the Middle East and Africa (EMEA), where it had been under pressure in previous quarters. This amounted to an increase of 5.2 percent in constant currencies, pushed by strong sales in Germany, Sweden and Switzerland. Instead, Puma's performance was rather poor in France, Italy and the U.K.

The company's sales jumped by 12.2 percent to €304.5 million in the Americas, up by 8.6 percent in constant currencies. Strong improvements in North America were driven by Cobra Puma Golf.

Meanwhile, sales in the Asia-Pacific region advanced by 16.2 percent to €246.7 million, which was an increase of 12.6 percent in constant currencies. The company said nearly all countries had contributed: Japan and India distinguished themselves with buoyant sales of apparel in the Evospeed range launched last year, while South Korea, China and Japan did well with duffel coats and parkas.

Another part of the sales hike came from Puma's own retail business, up by 23 percent for the quarter, with 60 more stores than in the same period of the previous year and an improvement in comparable store sales.

However, the expansion was partly achieved with abundant discounts, as Puma struggled to clean up its inventories. This affected the company's gross margin, which contracted by 2.1 percentage points to 44.6 percent for the quarter – almost entirely due to the reduction in the gross margin for footwear, which shrank by 4.8 percentage points to 41.8 percent. While the cleanup hit Puma's gross margin, the upside is that inventories inched up by just 3 percent at the end of the quarter compared with the same time last year, down from an increase of 21 percent at the end of the third quarter.

Other factors for the drop in the gross margin were the continued increase in wage costs in the Far East, which pushed up input costs, as well as heightened investments in marketing around the big international sports events of the past summer. Puma ended the quarter with earnings before interest and tax (Ebit) of €42.8 million, down by 11.2 percent, before onetime items.

However, the company's profit was annihilated by restructuring and other onetime costs reaching €98.2 million for the quarter. It therefore suffered a net loss of €42.6 million for the three months, compared with income of €33.1 million for the same period last year. The breakdown of the costs, which were larger than expected, is detailed below.

Owing to its strong last quarter, Puma managed a consolidated sales increase of 8.7 percent to €3,271 million for the full year, up by 4.6 percent in constant currencies. Sales of footwear contracted by 0.1 percent in constant currencies for the year, which was more than compensated by increases of 6.6 percent for apparel and 16.6 percent for accessories. The latter was inflated by the consolidation of new joint ventures.

Puma's sales in the EMEA region slipped by 0.8 percent for the year to €1,302 million, which was a decline of 1.6 percent in constant currencies. The company did well in Germany, Russia and Turkey but its sales fell in Western Europe as a whole. On the other hand, Puma's turnover jumped by 16.6 percent to €1,127 million in the Americas, and the increase still reached 10.6 percent in constant currencies. North America, Mexico and Argentina were some the most buoyant markets for Puma in the region last year.

In the Asia-Pacific region, the company delivered a sales jump of 15.3 percent to nearly €842 million, up by 7.4 percent before exchange rate changes, with Japan and India again leading the way. Puma said that the market situation was still tight in China, but the adjustments implemented last year had been well-received. As previously reported, the brand has come up with ranges that are more suitable for Chinese consumers and also tweaked its marketing campaigns to make them more accessible for the country's public.

Puma's own retail sales reached 19.1 percent of its turnover last year, compared with 17.9 percent in 2011. They climbed by 21.2 percent to just under €624 million.

The group's gross margin was down by 1.3 percentage points to 48.3 percent for the year, for much the same reasons as in the quarter. Again, the bulk of the decline came from footwear, for which Puma's gross margin fell by 2.6 percentage points to 46.5 percent.

Meanwhile, marketing and retail expenses were on the rise, up by 10.7 percent to €609 million, which amounted to 18.6 percent of sales compared with a rate of 18.3 percent in 2011. The hike was due to store openings and marketing support for the Puma brand around the European football championships and the London Olympics. Research and development costs were up as well, due to the company's investments in its performance ranges.

Even before onetime items, operating income (Ebit) was down by 12.8 percent to just under €291 million for the year. With these extra costs amounting to €177.5 million, Puma's net income was reduced to just €70.2 million, down from €230.1 million the previous year.

The company's costs for the restructuring plan alone ended up reaching €124.9 million for the entire year. Puma had previously budgeted costs of €100 million but Franz Koch, the group's departing chief executive, explained that it had added some cost reduction measures along the way and that the termination of some extra endorsement deals had proved costly.

On top of that, the company had to fork out about €28 million for the closure of its operations in Greece, Cyprus and Bulgaria. Puma was hit in October 2010 by alleged large-scale fraud at its Greek joint venture with Glou, Puma Hellas, which was majority controlled by Puma but managed by Glou. It then dispatched one of its longtime executives, Miguel Andrade, to clear up the situation and evaluate Puma's prospects in the country. The judicial cases are still pending.

The company has decided to appoint a distributor, Sportswind, to sell its products in Greece as well as Cyprus and Bulgaria. Sportswind should also take care of running Puma's stores in these countries. Puma said that this was the most efficient way to limit its exposure to the Greek market, at a time when it is focusing on its restructuring plans. However, the exact modalities of the changeover remain unclear: Puma said it still employs 105 people in Greece and Cyprus, but it's not yet certain whether they will retain their jobs. Puma's Greek management team is staying in place for the time being.

Another onetime expense of €24.6 million came from the payment due by Puma to retrieve its trademark rights in Spain. Puma has been embroiled in an arbitration case with Estudio 2000, its former Spanish licensee, since Puma decided to start its own business in Spain at the beginning of 2010. Puma insisted that its licensing agreement with Estudio 2000 had come to an end. A few months later an arbitration tribunal granted the Spanish trademark rights to Puma, but ordered the company to pay €98 million in compensation to Estudio 2000. This sum was nearly halved to €42.2 million in a new ruling last December. Puma booked €24.6 million as a onetime item, while the remaining €17 million was capitalized as trademark rights.

Analysts appeared disgruntled by the management's prediction that sales would be roughly flat for this year, both in reported terms and in constant currencies. Koch said that Puma would focus on the implementation of its restructuring plan, which itself put pressure on sales, with the closure of corporate stores and a contraction of the product ranges, for example. He further emphasized that Puma had no intention of pushing sales to the detriment of brand-building. The flat turnover projected for this year makes it unlikely for Puma to reach its previously stated target of at least €4 billion in sales by 2015 – at least without any acquisitions.

Koch also indicated that Puma's gross margin should remain under pressure this year. The issue of rising wage costs is still topical, and the margin should also be affected by the closure of stores, which will lead to a lower proportion of high-margin sales. Then again, the company predicts that its Ebit before any special items will increase at a low- to mid-single-digit rate, and that its net income will significantly improve, in the absence of nonrecurring costs.