Puma AG is entering Phase IV of the companys strategic growth plan a full year ahead of schedule and sees using the foundation they have built as a platform for expansion over the next five years that is expected to place Puma solidly in the number three spot for athletic brands. Phase IV, which is entitled Company Expansion, will focus on Category Expansion, Regional Expansion, and Non-PUMA Brand Expansion.
Jochen Zeitz, Puma chairman & CEO, told investors at the companys Annual General Meeting that the company will still focus on brand desirability over revenue growth, but the strategy they put in place should result in 3.5 billion in revenues within five years.
Puma was generating just 210 million in sales in 1986 at the start of Phase I when the company pulled back to focus on the basics of re-building the brand. By Phase II, management was working to increase the positioning of the brand, increasing the marketing spend from 10% of sales to 15%, and investing 5% of revenues into R&D. The result was a business that doubled from 300 million to 600 million and gross margins that expanded 500 basis points to 42% of sales from 37% at the end of Phase I.
Phase III saw the team focus on making Puma one of the most desirable sports brands in the world, an effort that will result in 1.7 billion in sales by year-end and 3.6 billion in market cap. Gross margins increased an additional 10 full points during Phase III, improving to 52% of sales. EBIT is expected to increase 600% through Phase III, with a 20% EBIT margin projected at year-end. Shareholder value has increased 3500% since the start of Phase I.
Today, Puma sees itself as the number four brand with 6.7% market share.
The next Phase will test the companys ability to capitalize on all the work they have done to date. The company will finance the expansion plan through its strong cash position and future cash flow generation, with an estimated total additional investment of up to 500 million over the next five years. Herr Zeitz likened their positioning and brand journey to brands like Apple, MTV, and Nike.
Zeitz said that growth will come from within their current positioning and discipline, committing to maintain premium pricing and avoiding the discount channels of distribution.
Category Expansion is expected to provide up to 700 million in revenues over the next five years as Puma expands within existing categories while exploring opportunities in new categories as well. New categories are forecast to deliver up to 200 million of the revenue growth.
Football (Soccer) will be an obvious focus this coming year as Puma takes their number three position in the category into a year when the World Cup is played on their home turf. Expect the brand to turn heads as Nike and adidas fight it out over the top spot and Puma goes their own way to change product perceptions in the sport forever. Herr Zeitz said he sees aesthetics playing an increasingly important role in football and hinted at the use of color as a direction for the brand. He sees more crossover product coming out of soccer as consumers respond to the lightweight, aerodynamic looks in the category. He sees, on average, double-digit annualized growth in the category over the next five years.
Running will also be a key focus in Phase IV as the brand makes a comprehensive push in all directions from performance to fashion. Zeitz sees the business here doubling in the next five years.
Motorsports will continue to see energy from F1 to NASCAR and from performance to fashion. Zeitz sees single-digit growth here, but SEW wonders what could happen if the chicken-wing-throwing-crowd on the NASCAR circuit dialed into the proposition.
Black Station is expected to expand and become a more important part of the business, with average annual growth projected at 20%+ during Phase IV.
The Womens business is forecast to double in the next five years and the company will look for additional opportunities in Baseball, Rugby, and Indoor.
In New Categories, Golf will be a primary focus for the brand as Puma again looks to the infusion of color as a means to position the brand.
The company announced last week a deal with J.Lindenberg to launch the J.Lindenberg Future Sports Golf Shoe. The shoe will be worn by Jesper Parnevik, Hank Kuehne, and James Heath and was launched in Europe during the Scandinavian Masters in Kungsangen, Sweden last week. Zeitz said the partnership roll-out is the first step toward a full Puma brand roll-out for Spring 2006, including the signing of top athletes on the tour. He said Golf can become a “sizable business,” but gave no estimates.
Herr Zeitz sees the company developing five new categories over the next five years. He also expects to develop and extend the global licensing businesses and is currently looking at a global partner for eyewear.
Regional Expansion is planned to occur in markets that are currently run by Puma as well as through several selective joint ventures and take-backs of its licensed business in its core segments. Growth in this area is expected to result in an incremental 800 million in revenues within five years.
In Phase IV, the market will see Pumas owned-retail become more important to the overall brand strategy as the company invests more than 20 million annually to establish a stronger platform. They will explore new concepts, such as the new Black Station stores, to help establish owned-retail as 15% to 20% of total company sales in Phase IV. He said all stores must meet clear criteria for success, delivering 20% CFROI.
Another important piece of the Regional Expansion initiative will be the take-back of licenses and the establishment of joint ventures to better control brand growth worldwide. Puma announced last week deals that would see the company establish a firm grip on their Asia business while establishing a new infrastructure for Middle East growth.
Puma AG inked a shareholders agreement with Swire Pacific, its current licensee for Hong Kong and China, to establish a joint venture with Puma becoming the majority shareholder. The new joint venture will be effective January 1, 2006.
Puma will also enter into a JV with its Japanese apparel licensee, Hit Union K.K., which has had responsibility for the manufacturing and distribution of Puma apparel in Japan for over 30 years. Puma and Hit Union have agreed in principle to form a joint venture as of January 2006, in which Puma will become the majority shareholder. In 2003, Puma bought back its footwear and accessories license in Japan and founded a fully owned subsidiary, Puma Japan K.K.
Taiwan licensee Starlike Inc. has also agreed in principle to form a joint venture with Puma starting in January 2006, in which Puma will become the ventures majority shareholder.
Additionally, Puma will set up a 100% subsidiary in India. Pumas current licensee in India, Planet Sports, will continue to operate the business until Puma is fully operative in January of 2006. Planet Sports will become a Puma customer as well as a retail partner with the goal of jointly developing the retail infrastructure on a non-exclusive basis.
Zeitz said the cost of each deal will vary, but he did intimate that the valuations should be in-line with the Japan footwear deal.
Puma is also in the process of setting up a wholly-owned subsidiary in the Middle East, located in Dubai, which will serve as a hub coordinating its efforts across the region. Puma Middle East should be operative and consolidating sales as of January of next year for most countries in the region.
This regional expansion, along with continued strong growth in North America is expected to result in more than 50% of sales coming out of regions other than EMEA by the end of Phase IV. While Eastern European subsidiaries and JVs are expected to see above-average grwoth in the mid-term, Zeitz is projecting single-digit growth for the combined Europe, Middle East, and Africa region.
Puma is forecasting that North America can represent 25% of sales within five years, which would put sales at roughly 875 million, or $1.06 billion at todays exchange rate. The U.S. business is expected to exceed $400 million in 2005.
Zeitz now sees the opportunity to leverage the brand impact from their efforts on the coasts in Phase III, moving to penetrate middle America in a bigger way over the next five years.
Asia/Pacific is also expected to become 25% of the business in Phase IV, thanks in large part to the consolidation efforts announced last week, but also through the growth of markets like China, where they expect to quadruple sales over the next five years.
Non-Puma Brand Expansion is expected to result in up to 10% of the overall business by the end of Phase IV. While the company will look for acquisitions to fill most of that target, the ramp-up of the Tretorn appears to be the primary focus in the near-term.
Tretorn, which has been somewhat sidelined as the company focused on its namesake brand, will see an increase in investment during Phase IV. Puma expects to play off of the classic Nylite appeal in the U.S. in the 80s and the established outdoor boot business in Northern Europe. Zeitz sees the long-term potential of the brand at upwards of 100 million.
As for new brand opportunities, Zeitz said that any acquisition must compete at a price-point at or above Puma and provide returns similar to Puma as well. Any brand acquisition must be complementary.
Puma will kick-off Phase IV in 2006 with a significant increase in brand investments in marketing, sales, owned-retail, and product development and design. Management is targeting double-digit annual sales growth, starting with 20% to 30% growth in 2006, and continuing with double-digit average growth over the following four years.
Puma is also expecting to sustain a gross profit margin of approximately 48% in the long run, with a 50% to 51% margin in 2006 and declining 50 basis points annually, with the change from todays levels primarily due to category and product mix, as well as the shift that is expected through the regional expansion. Due to the plan to reinvest profitability to kick start Phase IV, EBIT should initially decline to between 300 million and 330 million in 2006, and should boost 2007 to a new record EBIT level, followed by a double-digit average growth thereafter. EBIT margin is expected to be between 13% and 15% in 2006 and around 15% thereafter. Net earnings should come in between 210 million and 230 million in 2006, with double-digit growth in the following years.
Also, Ulrich Heyd, who has been a Puma board member in charge of legal affairs and worldwide licensees for over 20 years and who has served the company for over 30 years, has decided to retire at the end of this year. Dieter Bock, member of the Group Executive Committee who has been with Puma since 1979, will immediately join the board of management.
