PUMA looked to the International markets a bit more in the third quarter to help post another record period, counting on the Americas to deliver a bigger piece of the revenue pie as Europe retail continues to challenge the industry.
The company said the brand has trended well above the industry in the region, but said the overall market is weak, particularly in Apparel and in Germany. The shift of a higher percentage of sales to the Americas had a positive effect on the bottom line as FX rate benefits were the primary contributor pushing gross margins to a record level.
Total third quarter consolidated sales increased 16.5% on a currency-neutral basis, or by 14.6% to 460.9 million ($563.6 mm) when measured in Euros. In currency-neutral terms, Footwear sales grew 13.9% to 300.6 million ($367.6 mm), Apparel increased 19.3% to 129.6 million ($158.5 mm) and Accessories were up 27.1% to 30.7 million ($37.5 mm).
Global branded sales for the brand, which include consolidated sales and licensee sales, totaled 590.0 million ($721.5 mm) during Q3, a currency- neutral gain of 17.2%, or a 15.2% gain in Euro terms. Licensed sales contributed with an increase of 19.7% (17.3% in Euro terms) to global sales.
Owned-retail accounted for 9.5% of nine-month YTD sales and delivered 47 million ($57.5 mm) in revenue in the third quarter. PUMA added two new concept stores during the period — for a total of 39 stores at quarter-end — and saw comps increase in double-digits for the quarter. The company did not want to quantify the number of outlet stores opened. They are also focusing a great deal on shop-in-shop concepts at multi-brand retailers.
PUMA gross margin increased 240 basis points to 52.8% — a company record — from 50.4% of sales in the comparable quarter last year. The gain was said to be a result of favorable product mix as well as the strong Euro.
In a conference call with analysts, chairman and CEO Jochen Zeitz said 130 basis points of the gain came from benefits associated with currency exchange rates, while product mix added another 100 basis points, and owned retail provided 10 basis points.
While margins rose nicely across all categories, Footwear contributed the most in pushing the total GM over the keystone threshold, growing 250 basis points to 54.0% from 51.5% in Q3 last year. Apparel improved 210 basis points to 50.2% from 48.1% and Accessories GM grew 240 basis points to 51.6% versus 49.2% in the year-ago quarter.
Sales in Europe were up 11.1% to 313.5 million ($383.4 mm) in the third quarter, now making up 68% of total sales versus 70% in Q3 last year. Gross margin for the quarter improved 280 basis points to 55.5% from 52.7% in the year-ago quarter. Year-to-date, the strongest growth was seen in the Apparel segment, with a 28.5% increase. Footwear increased 14.8% and Accessories grew 15.1% for the YTD period.
The Americas, which includes the U.S., saw currency-neutral sales increase 26.8% for the third quarter to 83.9 million ($102.6 mm). Zeitz said U.S. sales increased 16%, presumably in U.S. dollar terms.
The Americas region accounted for 18.2% of group sales in Q3 2004, up 50 basis points from 17.7% of sales last year. Gross margin for the Americas rose 200 basis points to 47.2% of sales compared to 45.2% of sales in the year-ago period. On a U.S. dollar basis, all product segments contributed with a significant increase in the YTD period, with Footwear up 19.2%, Apparel up 27.1%, and Accessories up 66.4% versus last year.
Asia/Pacific reported sales of 48.0 million ($58.7 mm) in Q3 compared to 41.6 million ($46.9 mm) last year, contributing about 10.4% of sales for the quarter.
Gross margin improved 130 basis points to 50.2% of sales from 48.9% in Q3 last year. Zeitz said the brand is “particularly strong” in Japan. For the nine-month YTD period, Accessories sales jumped 88.1%, Footwear increased 34.9%, and Apparel grew 20.6%.
Owned-retail is a challenge in China, with all retail presence there now driven by shop-in-shop projects with established retailers. The key here is getting a much-coveted but difficult-to-acquire retail license for China, a milestone management expects to achieve next year.
PUMA Raises Guidance on Strong YTD…
Africa/Middle East region sales jumped 110.7% to 15.5 million ($19.0 mm) in Q3, making up 3.4% of total group sales versus just 1.8% in the 2003 third quarter. Gross margin jumped 450 basis points to 35.7% of sales from 31.2% in Q3 last year. For the YTD period, Accessories increased 96.3%, Apparel increased 88% and Footwear grew 48.9%.
Total future orders at the end of Q3 increased 19% on a currency-neutral basis. In Euro terms, total orders were up by 17.2% to 757 million ($933.5 mm) from 645.6 million ($748.7 mm) at quarter-end last year.
First quarter 2005 futures, which was said to represent roughly 70% of the backlog figure, rose 13% versus last year, while Q4 2004 open orders increased “well over” 20%, due in large part to a number of pull-forward orders in both the U.S. and Europe.
Mr. Zeitz said he does not see a lot of re-orders for the brand, a reality created due to strategic moves to limit market exposure. Much of this can be attributed to the fact that the brands top styles continue to turn over, with this years Top 10 looking very different from last years top models. He said they planned to reduce the re-order business “significantly” below the 15% level seen last year.
Zeitz said Q3 at-once shipments were at about the same level as last years Q3, greatly reducing their impact on a percent of sales basis. He said this new plan, coupled with the impact of owned-retail should bring actual sales more in line with the backlog figure for each quarter. He referenced Q3 backlog numbers that showed a 15% increase at year-end last year and this years 14.6% actual increase for the quarter. Net-net is that the Q4 2004 and Q1 2005 quarters should come in close to their current backlog increase.
Currency-neutral Footwear future orders were up 18.2%, or 16.3% in Euro terms, to 540 million ($656 mm).
Accessories continued to show the strongest growth adding 51.3%, or 50.1% in Euro terms, to last years order book, which now totals 42 million ($52 mm). Apparel orders increased by 15.3%, or 13.8% in Euro terms, to 174 million ($215 mm).
Europe backlog totaled 500 million ($666 mm) at the end of September, which translates to an increase of 12% versus last years level. Future orders in the Americas also accelerated versus end of June, with like-for-like orders now up by a strong 45.9%, with the U.S. posting a 40% increase over the next two quarters. In Euro terms, orders increased 32.5% to 130 million ($160 mm). The Asia order book stands at 95 million ($117 mm) which is an increase of 15.5% compared to last year. Africa/Middle East future orders were up 72.4% to 31 million ($38 mm).
Net earnings increased 23.2% to 85.0 million ($103.9 mm) in Q3, or 5.21 ($6.48) per diluted share, compared to earnings of 69.0 million ($77.7 mm), or 4.33 ($4.88) per diluted share in the year-ago period. Return on sales was 18.4% of net sales.
Looking ahead, Mr. Zeitz said it would be a “fair assumption” to expect growth in Europe to be below the 10% level, while the Americas and Asia surpass that figure. He sees strength “across the board” in Footwear and Accessories in the U.S., but does not see Apparel as much of a growth opportunity there.
PUMA confirmed top-line growth estimates of approximately 20% for the full year, but increased gross margin guidance to “above 51%” versus the previous range of 50% to 51% of sales. Based on SG&A projected at roughly 29% of sales, and a resulting operating margin of “clearly above 20%, net earnings for the full year are now expected to grow between 35% and 40% (13.20 to 13.26 per share), versus previous guidance of 30% earnings growth.
