Puma posted a loss in the fourth quarter as a result of charges tied to its “transformation and cost reduction program.” Boosted by double-digit sales growth in Asia and North America, Puma’s consolidated sales increased by nearly 12 percent in Euro terms or 8.7 percent currency adjusted to €804.7 million ($1.0 bn) in the fourth quarter.
2012 Fourth Quarter Highlights
- Puma’s consolidated sales climb by 11.7 percent in Euro terms to €804.7 million ($1.0 bn).
- Gross profit margin declines to 44.6 percent due to inventory clearance.
- EBIT before special items falls slightly to €42.8 million (U.S. $53.5 mm).
- Special items of €98.2 million ($122.8 mm) booked in the quarter.
- Net earnings come in at €-42.6 million ($53.0 mm), impacted by special items.
- Puma’s full year consolidated sales rise by 8.7 percent in Euro terms to just under €3.3 billion ($4.6 bn).
- Gross profit margin abates to 48.3 percent.
- EBIT before special items softens by 12.8 percent to €290.7 million ($404.1 mm).
- Special items of €177.5 million ($246.7 mm) caused by Transformation and Cost Reduction Program, Spain Arbitration and restructuring of businesses in Greece, Cyprus and Bulgaria.
- EBIT including special items totals €113.2 million ($157.3 mm).
- EPS amount to €4.69($6.53) after €15.36 last year.
- Transition Period defined within our strategy extended into 2013
- Launch of “The Nature of Performance” brand platform and new product innovations to revitalize Performance categories
- Management expects 2013 sales unchanged from the 2012 level
- Management envisages an increase in EBIT before special items of low- to mid-single digits and a significant improvement of net earnings
Strong performances in Asia and North America give impetus to Puma’s Fourth Quarter Sales Growth
Puma delivered a strong sales performance in the fourth quarter of 2012. Boosted by double-digit sales growth in Asia and North America, Puma’s consolidated sales increased by nearly 12 percent in Euro terms or 8.7 percent currency adjusted to €804.7 million ($1.0 bn) from October 1 to December 31. The numbers were supported by the performance of Cobra Puma Golf, with its products resonating exceptionally well with consumers.
Sales Performance by Segment
All of Puma’s product segments grew in the fourth quarter of 2012. Footwear was up by 8.6 percent in Euro terms to €367.9 million ($460 mm). On the Performance side, Puma’s Faas footwear family continued to appeal to consumers while the Puma Suede range fuelled sales in Puma’s Lifestyle footwear business.
Apparel climbed by 15.2 percent in Euro terms to €316.6 million ($396 mm) after increasing demand for Fitness & Training gear. Accessories rose by 12.3 percent in reported terms to €120.1 million ($150 mm) driven by our US joint ventures Janed and Wheat as well as our Cobra Puma Golf business.
Sales Performance by Region
While Puma’s sales increased in all regions, performance in the Asia/Pacific region was exceptionally satisfactory during the fourth quarter. Sales rose by 16.2 percent to €246.7 million ($309 mm) while Puma expanded in virtually all markets. Japan and India in particular excelled on the back of demand for evoSPEED Apparel products. Seasonal factors also played a part, with winter collections gaining traction with consumers, especially Puma branded duffel coats and parka collections in Korea, China and Japan.
Puma was also able to reverse the slight declines from previous quarters in the EMEA region, with sales rising by 7.0 percent in Euro terms to €253.4 million ($317 mm). This performance was supported by strong growth in Germany, Sweden and Switzerland delivering satisfying growth rates. Puma’s Lifestyle footwear ranges sold well, especially the Puma Suede in developed countries as well as our Motorsport collections in emerging markets.
In the Americas, Puma continued to increase sales at a favorable rate, improving by 12.2 percent in reported terms to €304.5 million ($381 mm). This growth was driven mainly by the Cobra Puma Golf business as well as by undiminished demand for Fitness, Lifestyle and Motorsport products.
Sales Performance Retail
Puma’s retail business increased by a significant 23.0 percent, with the company operating 60 additional stores when compared to the fourth quarter of last year. As in the three previous quarters, our comparable store sales developed positively, while E-commerce sales rose by 23.4 percent over the same period.
Margin, Expenses and Profitability
Puma’s fourth quarter gross profit margin declined from 46.7 percent to 44.6 percent. The Footwear margin fell sharply from 46.6 percent to 41.8 percent, due to inventory clearances during the quarter and unfavorable hedging rates as well as a shift in the regional mix. The gross profit margin for Apparel, however, improved from 45.9 percent to 46.6 percent and Accessories declined from 49.0 percent to 48.0 percent.
Operating expenses in the fourth quarter continued to rise, by 10.0 percent from €292.3 million to €321.5 million ($402 mm). This was equivalent to 40.0 percent of sales and an OPEX ratio improvement from 40.6 percent in 2011. The absolute increase in operating expenses is mostly attributable to higher marketing and retail expenses on the back of our increased retail portfolio as well as continuing IT and supply chain infrastructure improvements.
The EBIT before special items fell by 11.2 percent to €42.8 million ($53.5 mm) in the fourth quarter from last year’s €48.1 million and also as a percentage of sales, from 6.7 percent to 5.3 percent.
In addition to the special items of €79.3 million ($99.1 mm) reported in the third quarter, Puma recorded a further €98.2 million in special items for the last three months of 2012. These additional items consist of the arbitral award in December related to the trademark rights in Spain, the restructuring of our distribution set-up and the closure of our subsidiaries in Greece, Cyprus and Bulgaria, as well as the streamlining of our product and endorsement portfolio.
The fourth quarter financial result further improved from €-8.9 million to neutral, largely as a result of a decline of foreign exchange impacts.
EBT in the fourth quarter fell from €39.3 million to €-55.4 million ($69 mm). Net earnings consequently also declined from €33.1 million to a loss of €-42.6 million ($53 mm) in the quarter and Earnings per share followed suit, reduced from €2.21 to €-2.85 ($3.57). These drops all stem from the special items booked in the quarter.
Puma reaches 2012 Full Year Sales Target
2012 was an exceptional year for Puma in many ways. The Football Euro Cup in June, the conclusion of Puma’s second Volvo Ocean Race in July and the Summer Olympics in August turned 2012 into a year full of major sports highlights. These events provided the perfect platform for Puma to generate global brand visibility and desirability.
In terms of product, 2013 will be a pioneering year for Puma, as the company re-energizes its Performance positioning through the introduction of a new cross-category brand platform: The Nature of Performance. The Nature of Performance unifies all of Puma’s performance categories with a consistent voice, look and feel and serves as the inspiration for a collection of innovative new products in the Football, Running, Training, Fitness and Golf categories.
Puma’s management began to implement the company’s Transformation and Cost Reduction Program throughout the second half of 2012, laying the groundwork for substantial financial improvements going forward. The program entails the set up of a new business model in Europe by reducing the number of reporting entities from 23 countries to seven areas as well as a strong European management paradigm. The areas DACH (Germany, Austria, Switzerland), IBERIA (Spain, Portugal), UKIB (UK, Ireland and Benelux), SCANDINAVIA (Denmark, Finland, Norway, Sweden), EASTERN EUROPE (Estonia, Latvia, Lithuania, Poland and Slovakia, Czech Republic, Hungary), FRANCE and ITALY have all been implemented.
The Transformation and Cost Reduction Program includes the closure of approximately 90 unprofitable stores, mostly in established markets, which has also begun. However, Puma will continue to open new stores in selected profitable locations throughout 2013, primarily in emerging markets. Puma expects to be operating 540 stores at the end of 2013 compared with 590 stores at the end of 2012.
Puma has also assessed its sponsorship portfolio and terminated endorsement contracts that are either unprofitable or are no longer part of Puma’s core categories going forward. Within this context, Puma has decided to focus its activities in the Sailing category on endorsing the America’s Cup and ORACLE TEAM USA for 2013. Beyond 2013, Puma will cease the production of Sailing products, and focus instead on its Outdoor business, for which Sailing has served as the perfect springboard. Puma has also decided to exit all European Rugby activities, including the endorsement of the Irish Rugby Football Union beyond the 2013/14 season.
Full year sales increase to almost €3.3 billion
Consolidated sales for the Full Year climbed 8.7 percent in Euro terms or 4.6 percent currency adjusted to €3,270.7 million ($4.6 bn). With this record result, Puma achieved its sales target for the full year.
Sales Performance by Region
While sales in EMEA softened by 0.8 percent in Euro terms to €1.3 billion ($1.81 bn) due to a weaker performance in Western Europe, there were strong performances in Germany, Russia and Turkey in 2012. The Americas delivered a satisfying performance, including North America, Mexico and Argentina, increasing in Euro terms by 16.6 percent to €1.13 billion ($1.57 bn). Asia/Pacific was equally strong, rising by 15.3 percent to €841.7 million ($1.17 bn), supported by good numbers in Japan and India in particular.
Sales Performance by Segment
In terms of segments, Footwear grew 3.6 percent in Euro terms to €1.6 billion ($2.2 bn). Apparel rose by 11.2 percent to €1.15 billion ($1.6 bn), while Accessories posted an impressive 20.7 percent increase to €523.6 million ($729 mm) also bolstered by consolidation effects of the new joint ventures.
Retail sales climb by €109.0 million
Sales in our owned and operated retail outlets rose by 21.2 percent in 2012 to €623.9 million ($866.8 mm) , an increase of €109.0 million from 2011. This is due in part to the expansion of our retail base compared to the end of 2011. As a percentage of total turnover, retail sales rose from 17.9 percent to 19.1 percent. E-commerce also posted a gain, up 16.5 percent for the year.
Gross profit margin eases to 48.3 percent
For the full year, Puma’s gross profit margin moved down from 49.6 percent to 48.3 percent in 2012. This was due to a combination of factors, most notably inventory clearance, the regional mix and also continued input cost pressure in the form of wage inflation in the Far East. The Footwear margin declined from 49.1 percent to 46.5 percent. Apparel rose slightly, from 49.6 percent to 49.8 percent whereas Accessories fell, from 51.6 percent to 50.5 percent.
Operating expenses
Puma’s full year operating expenses rose by 11.0 percent in 2012, from €1,177.8 million ($1.82 bn) to €1,307.5 million, slightly ahead of and equal to 40.0 percent of sales. Marketing and Retail rose by 10.7 percent to €609.3 million, and also slightly as a percentage of sales to 18.6 percent after 18.3 percent last year, caused by supporting a double event year and the increasing number of stores operated by Puma. Other Selling Expenses rose 11.4 percent to €431.1 million. Similarly, Research, Design and Development costs rose 10.3 percent to €84.9 million as Puma continues to emphasize its product pipeline. General and Administrative Expenses were up 5.0 percent to €205.0 million. Despite this, the expense ratio declined from 6.5 percent to 6.3 percent in 2012 due to cost saving measures. The Company reported other operating income of €22.9 million compared to €32.2 million in 2011.
Earnings before special items
EBIT before special items declined 12.8 percent to €290.7 million ($404.1 mm) as a result of higher costs and lower than expected margins. As a percentage of sales this is equal to 8.9 percent for the year compared to last year’s 11.1 percent.
Special Items
Puma recorded €124.9 million ($173.6 mm) in special items that are related to the Transformation and Cost Reduction Program. These have been incurred mainly by restructuring the European region, optimizing the retail portfolio, adjusting the product and endorsement portfolio, and reorganizing our global functions and local subsidiaries.
As announced on 20 December 2012, the former Spanish distributor and license holder Estudio 2000 S.A., who owned several Puma trademark rights in Spain, was obliged to vest these to Puma in accordance with the award of the arbitration panel. According to this ruling, the transfer of the trademark rights is subject to a one-time payment of €42.2 million to Estudio 2000 S.A., which led to a one-off expense of €24.6 million in 2012.
For Greece, Cyprus and Bulgaria, Puma has appointed Sportswind, a local distributor, to take over Puma’s business activities in these countries, as Puma wants to focus its efforts, initiatives and investments on its key strategic markets. The distribution agreement should reduce Puma’s business risks in these markets substantially while at the same time improve its sales. Puma will close its own operations in due course in these three markets. The restructuring of the aforementioned distribution and operations resulted in additional one-time costs of €28.0 million.
Operational result after Special Items
The EBIT after special items for 2012 was €113.2 million ($158 mm), or 3.5 percent as a percentage of sales.
The financial result for 2012 improved significantly and was €-0.9 million compared to €-12.8 million in 2011 due to lower foreign exchange impacts in Puma’s financing activities.
Full year EBT was therefore €112.3 million ($156 mm), or 3.4 percent of sales, while the tax ratio remained stable at 28.9 percent.
As a result of our Transformation and Cost Reduction Program in 2012, net earnings for the financial year 2012 were €70.2 million ($98 mm), compared to €230.1 million last year and EPS was therefore equal to €4.69 ($6.53) and down from last year’s €15.36.
Net Assets and Financial Position
Equity
The equity ratio rose from 62.2 percent to 63.1 percent, which indicates continued improvement in our capital base, despite the lower net earnings in 2012.
Working Capital
Puma’s overall Working Capital increased by 16.8 percent to €623.7 million, due in particular to a decline of working capital related liabilities at the balance sheet date. On the asset side, testament to Pumas strict management, Inventories rose only slightly, by 2.9 percent to €552.5 million and Trade receivables actually decreased despite the rise in sales, down 4.9 percent to €507.0 million.
Cashflow / Capex / Cash Position
Free cashflow before acquisitions for the full year improved by 37.1 percent from €61.0 million to €83.5 million in 2012 mainly due to lower tax payments. With regards to our Capex, Puma’s outgoings increased by 14.1 percent to €81.2 million related to store openings and IT investments. Payments for acquisitions more than doubled to €91.7 million, consisting for the most part of Puma’s purchase of all outstanding Dobotex shares at the beginning of the year. As a consequence, the net cash position decreased by 12.1 percent to €363.2 million.
Dividend
The Administrative Board will propose at the Annual General Meeting on May 7, 2013, that a dividend of €0.50 per share (€2.00 in the previous year) be paid for the financial year 2012. This is a result of the reduced earnings caused by the special items undertaken under the Transformation and Cost Reduction Program, the restructuring of the distribution in southern east European countries and the Arbitration ruling in Spain.
Share buyback
The company did not buy back any of its own shares throughout the year, including the fourth quarter of 2012. As of the balance sheet date, Puma owned 143.185 of its own shares, equal to €32.2 million.
Outlook
Management expects that Puma’s sales in 2013 will remain at a level consistent with that of 2012. This is due to the fact that the implementation of the Transformation and Cost Reduction Program will continue throughout 2013, making it a transitional year before Puma will once again generate desirable, profitable sales growth. However, as Puma’s Transformation and Cost Reduction Program is geared towards improving the company’s profitability, management envisages an increase in EBIT before special items in the low- to mid-single digits while net earnings should improve significantly.
