PUMA AG reported that consolidated sales increased 27.7% to 349 million ($415.2 mm) for the 2005 fourth quarter. Currency neutral sales were up by 22% for the period. In Euro terms, Footwear rose by 25.8% to 221 million ($262.9 mm), while Apparel increased 31.8% to 101 million ($120.2 mm) and Accessories rose 28.9% to 27 million ($32.1 mm).
By regions, EMEA increased sales better than expected at 6%, America was significantly up by 83.9% (currency-adjusted 66.6%) and Asia/Pacific by 9.5% (7.3%). The gross profit margin reached 50%, a slight decrease versus last year. Due to further expansion of the own retail business and investments in product development, operating expenses increased from 36% to 36.7% of sales. Pre-tax profit increased by 11.3% to last years quarter and earnings per share improved 16% from 2.38 ($2.83) to 2.76 ($3.58).
Consolidated sales for full year 2005 were marked by yet another record high for the company increasing 16.2% to 1.78 billion ($2.22 bn) from 1.53 billion ($1.90 bn) in 2004. Currency-adjusted, sales were up 15.8%, which PUMA said was “significantly above the original expectations.” The Footwear segment posted a 16.2% increase in sales to 1.18 billion. Apparel sales were up by 13.9% to 474 million. Accessories sales posted an increase of 25% bringing sales to 129 million.
Sales in the EMEA region were up by 5.6%, rising to 1.11 billion, above initial expectations. EMEA currently accounts for 62.2% of consolidated sales, compared to 68.4% last year. Divided into segments, Footwear rose by 1.5%, Apparel by 11%, and Accessories by as much as 26.2%. The gross profit margin reached 54.3%, compared with 53.3% in the previous year. As a percentage of regional sales the operating margin (EBIT) reached 27.4% after 27.8% in the previous year. The order volume developed very positively and closed the year at 624 million or a 3.5% increase in comparison with the previous year.
Sales in America jumped 57.4% to 476 million, or a 55.9% increase when measure in US Dollars. The regions share of consolidated sales increased from 19.8% to 26.8% of total sales. All product segments contributed to the growth at double-digit rates, with Footwear growing 70.2% (currency adjusted: 68.9%), Apparel increasing 27.6% (26%) and Accessories improving by 40.1% (37%). The US market in particular contributed significantly to the overall performance in this region with currency-neutral sales growth of over 50%, which brought sales to $472 million.
The gross profit margin in the America region showed a slight decrease of 40 basis points to 48.9%. The operating margin remained constant at the previous years level of 19.6%.
Including the acquisition in Argentina and Canada, orders on hand at the 2005 year-end were up once again significantly by 109.4% (currency adjusted 85.7%) in the overall region. Growth in the U.S. continued to accelerate. As of December 31, 2005 orders on hand increased 63.6% to $262 million.
Asia/Pacific sales rose by 8.5% to 196 million, which corresponds to a currency-neutral increase of 11.1%. Overall, the Asia/Pacific region contributed 11% to consolidated sales. Divided into product segments, Footwear revenues rose by 6.2% (currency-adjusted 8.7%), Apparel improved by 5.9% (2.2%) and Accessories grew by 17.6% (20.3%).
The gross profit margin improved by 140 basis points from 48.1% to 49.5%. The operating margin was at 21.0%, compared to 21.9% in the previous year.
For the first time, the Apparel business in Japan as well as the PUMA business in China, Hong Kong and Taiwan will be consolidated with effect as of January 1, 2006. Orders on hand in this region increased to 159 million as of December 31, 2005, or an increase of nearly 100% from the previous years level.
The worldwide PUMA brand sales, comprised of consolidated and license sales, increased 18.4% to almost 2.4 billion fro the full year. Currency-adjusted sales were up by 18%. Footwear sales improved 17.7% to 1.33 billion. Apparel sales were up by 16.5% to 828 million and Accessories jumped 30.2% to 233 million.
Since the licensed sales are realized outside the PUMA Group, they are not consolidated. Overall, Licensed sales were up significantly by 25.4% climbing to 610 million, or 24.7% after currency adjustment. Royalty and commission income earned with license sales totaled 56 million compared to 44 million in the previous year, a 27.4% increase.
The expansion of the Groups owned-retail operations was continued in the financial year. A total of 20 concept stores were opened worldwide, giving PUMA a total of 66 concept stores at year-end, including seven stores operated by licensees. In 2005, sales from own retail were up by 47.2%, rising to 247 million. The share of consolidated sales rose from 11% to 13.9%.
The full year gross profit margin climbed to 52.3% from the previous years level of 51.9%. This corresponds to a margin improvement of 40 basis points. Both, the product and regional effects were more than compensated for by favorable exchange rates. In absolute figures, gross profit was up by a total of 17.1%, rising from 794 million to 930 million.
In terms of product segments, the margin in Apparel rose from 49.7% to 51.8% and in Accessories from 49% to 50.4%. The Footwear margin decreased slightly from 53.1% to 52.7%, which was attributable exclusively to the regional distribution of sales.
Operating expenses for financial year 2005 consisting of selling, general and administrative expenses rose by 22.7% to 564 million. Due to further investments in company-owned retail operations and the related higher operative expenditures, the cost structure increased from 30% to 31.7% of sales.
Investments in marketing/retail totaled 272 million or 15.3% of sales, compared to the previous years level of 215 million or 14%. Product development and design expenses rose by 13.8% to 42 million, remaining constant at 2.4% of sales. Other selling, administration and general expenses were up by 20% to 250 million. As a percentage of sales, this corresponds to an increase from 13.6% to 14%. The increase is partly due to the first-time valuation of the share-based compensation system for Management.
Depreciation rose by 26% to 24 million. This increase is mainly due to the expansion of own retail operations and the related investments.
Operating profit (EBIT) improved by 10.8% to 398 million. As a percentage of sales this corresponds to an operating margin of 22.4%.
Net earnings grew 10.5% to 286 million, showing double-digit growth for the seventh consecutive year. Once again, this result clearly exceeded Managements expectations. The net rate of return expressed as a percentage of sales was 16.1%, compared to 16.9% in the previous year. Earnings per share were up 10.2%, climbing from 16.14 to 17.79, while diluted earnings per share rose 11.7%.from 15.82 to 17.68.
Inventories were up 18.5% to 238 million and trade receivables increased by 65% to 278 million. In particular, the regional expansion as well as the conversion of two distributors to Joint Ventures contributed to a disproportionately high increase in current assets.
Order Backlog
Orders on hand at the end of the year increased for the tenth consecutive time and topped the billion Euro mark for the first time. Total orders jumped 30% from 823 million to 1.07 billion in a strong 30% increase. Currency-adjusted orders were up by 25.7% from the previous year.
The order books also contain orders of the new subsidiaries and joint ventures, which are consolidated for the first time as of January 1, 2006. Even without the regional expansion, the orders increase of 16.6% is also significantly in the double-digits.
Classified by segments, Footwear accounted for 714 million of consolidated orders after being 580 million in the previous year. This corresponds to growth of 23%. Apparel orders showed a significant increase by 50.1%, and thus jumped significantly from 196 million to 295 million. Orders in the Accessories segment were up 31.5%, rising from 46 million to 61 million.
Outlook
Due to a significant improvement in the orders position for the EMEA region, a stronger than expected order volume in America and the accelerated integration of now six license markets into the Group as early as the beginning of the year, PUMA raised the original sales target for the first year of Phase IV. On a currency neutral basis, a growth of approximately 30% on consolidated sales, and a new record high of approximately 2.30 billion is now expected.
The planned sales growth should extend throughout all regions. Due to the takeovers of individual license markets, the regional distribution of sales will improve as planned. The share of Asia/Pacific should grow from 11% to 20% of consolidated revenue. America should continue to yield 27% of consolidated sales, while the EMEA region is expected to decline as planned from 62% to approximately 53%.
As already announced at the launch of Phase IV, the regional sales shift will impact the average gross profit margin. Overall, the gross profit margin in 2006 is expected to fluctuate within the range of 50% and 51%.
The takeover of six license markets into the consolidated group will lead to a corresponding reduction in royalty and commission income. Selling, general and administrative expenses will be impacted in particular by high marketing expenses for the World Soccer Championships and other PUMA campaigns, as well as by planned expansion of the Groups retail operations and higher expenses for product development, design and distribution. Overall, however, due to the higher sales expectations, operating expenses will rise only by approximately 35% of sales, compared to the originally expected 37%.
The operating margin is expected to decrease to approximately 15% as a result of brand building investments in 2006 and licensee conversion. Based on the very positive order position and the faster than expected implementation of Phase IV measures, Management now expects an operating profit of at least 350 million, compared to the original expectation of between 300 and 330 million. The tax rate is expected to be in the 31% to 33% range.
Despite the planned strategic expenditure, consolidated earnings are expected to be only 10% to 15% below the previous years level, compared to the announced 20%. Thus, in absolute figures consolidated earnings are expected to significantly exceed the original expectations.
Beginning in financial year 2006, the consolidated group will be expanded by companies in Japan, Taiwan, China, Hong Kong, Argentina and Canada. The structuring of contracts with some joint venture companies is such that a disclosure of minority interests is not required since, in economic terms, these companies are fully controlled by PUMA as of January 1, 2006.
PUMA created a large number of new jobs domestically and internationally in financial year 2005. On an annual average, the total workforce of 4,425 employees increased by 27.3% from the previous years level of 3,475 employees. As of December 31, 2005 PUMA employed 5,092 employees worldwide, compared to 3,910 employees as of the 2004 balance sheet date. This corresponds to an increase by 1,182 employees, or 30.2%.
