Puma SE reported that third quarter consolidated sales grew by 6.0 percent in euro terms and by 0.5 percent currency adjusted to €892.2 million ($1.12 bn).
Footwear sales rose by 2.5 percent to €441.9 million ($496 mm), supported by continuing demand for the lightweight running footwear range Puma Faas and also Heritage styles such as the evergreen Suede Classics and our Archive Lite Mid and Low designs. However, the positive performance in the Running category was dampened by declines in the Fitness & Training and Motorsport categories in Puma’s mature markets.
Apparel sales increased by 5.6 percent to €311.2 million ($389 mm), fueled not only by continued strength in the Cobra Puma Golf division, but also by sales of replica jerseys as part of the Teamsport category. Puma has had tremendous success with Borussia Dortmund replica and fan wear, which has played an important part in Puma's sales performance in Germany this year.
Accessories continued to climb strongly, up 20.1 percent to €139.1 million ($174 mm) with strong results in the American sock and bodywear business and also in Golf.
“Puma posted a moderate increase in sales in the third quarter despite the challenging business climate in Europe,” said Franz Koch, CEO of Puma SE. “We have taken decisive actions to overcome the issues we are currently facing in particular in Europe. Our Transformation Program 2010-2015 in combination with immediate cost cutting measures and a strengthened product pipeline in Performance and Lifestyle for next year will provide a solid basis for sustainable and desirable growth.”
Sales Performance by Region
Growth continues in the Americas
In regional terms, sales in EMEA declined by 3.4 percent to €396.7 million ($496 mm) as the economic slow-down in Europe and restrained consumer spending continued to have a severe impact on Puma’s business performance. Strong numbers from Germany and Russia could not completely offset the slowdown elsewhere. However, Puma continued its excellent performance in the Americas with sales growing by 20.5 percent in euro terms (10.6 percent currency adjusted) to €283.2 million ($354 mm) in the third quarter, with Argentina, Brazil and Mexico all providing strong double digit increases and continued growth in North America. Asia/Pacific posted a gain of 8.3 percent in euro terms to €212.3 million ($266 mm) with good numbers from Korea and India in particular. Growth in China has slowed down due to a challenging overall market environment and high inventory levels in the market.
Retail continues to grow
Puma’s owned and operated retail operations generated higher sales numbers. Third quarter retail sales were €165.0 million ($206 mm), an increase of 22.7 percent compared to €134.0 million ($190 mm) for the third quarter of 2011 and equal to 18.5 percent of total sales. For the first nine months to the end of September, retail sales were up 20.4 percent from €363.0 million to €437.0 million, delivering 17.7 percent of total sales compared to 15.8 percent at the same stage last year. Comparable sales rose at existing stores and Puma continues to open new selective stores in profitable locations. However, a considerable amount of retail stores in mature markets are not generating satisfying contributions and will be part of the retail store network optimization. Puma’s e-commerce business is growing and has contributed positively.
Margins, Expenses and Profitability
Gross margin declined to 48.2 percent of sales in the third quarter of 2012, under pressure from input costs and unfavorable trading conditions in Europe. Footwear fell from 49.8 percent to 46.1 percent, mainly impacted by inventory clearances which have led to a stock reduction in the footwear category in the third quarter, ahead of the launch of our new ranges for Spring/Summer 2013. Apparel fell marginally from 50.3 percent to 50.1 percent. Accessories, however, rose from 50.0 percent to 50.6 percent compared to 2011.
Third quarter operating expenses rose by 9.5 percent to €336.1 million ($421 mm) in the third quarter of the year compared to €307.0 million ($435 mm) last year. Retail costs have continued to rise as Puma has increased the number of retail stores it owns and operates, whilst the Olympics and associated costs meant that marketing was significantly higher than over the same period in 2011. As well as continuing to invest steadily in RD&D in order to further strengthen our product portfolio, we are continuing to enhance our supply chain and IT-systems.
As a result of the lower gross profit margin and increased operating costs related to the Transformation Program, the operating result before special items declined by 16.7 percent to €98.8 million ($124 mm) during the third quarter of 2012.
Special Items
Puma recorded a total of €80 million in special items that are related to the Transformation Program during the third quarter. These have been mainly incurred by restructuring the European region, optimizing the retail portfolio and reorganizing its global operations and functions.
EBIT after special items
EBIT including special items were equal to €19.6 million ($25 mm) for the third quarter.
Earnings before Taxes
Puma’s third-quarter EBT was down 81.7 percent to €21.3 million ($27 mm). The quarterly tax ratio decreased from 30.0 percent to 27.7 percent.
Net Earnings decline
As a consequence of continued pressure on the gross profit margin, increased expenditures and the special items in particular, consolidated net earnings fell by 85.1 percent to €12.2 million ($15 mm). Earnings per share therefore fell to €0.81 ($1.01) per share.
Net Assets and Financial Position
Equity
Total assets as of September 30, 2012 grew by 6.5 percent from €2,423 million to €2,580 million, mainly due to an increase in inventories. The equity ratio improved from 62.9 percent to 65.2 percent when compared to the third quarter of 2011. In absolute figures, shareholders’ equity increased by 10.3 percent from €1,524 million to €1,682 million.
Working Capital related Assets and Liabilities
Looking at assets, inventories rose by 21.3 percent in euro terms to €646.0 million ($831 mm), or 16.8 percent currency adjusted. This increase is significantly lower than in previous quarters and testament that our efforts to reduce the current over-stock levels have been successful in the quarter. Inventories have generally advanced in the wake of continued retail expansion as well as higher average prices per unit on stock. Trade receivables rose only slightly to €623.7 million ($802 mm), which is due to a sharper focus and reflects Puma’s dedication to improve outstanding days. On the liabilities side, trade payables fell slightly to €382.9 million.
Cashflow/ CAPEX
The Free Cashflow (before acquisitions) came in at €-82.7 million compared to €-89.4 million for the same period in 2011, with working capital increases offset by lower tax payments. The payments for acquisitions relate to the purchase of the outstanding Dobotex shares, effected on January 1, 2012.
CAPEX increased by 21.4 percent to €54.2 million and continued for the most part to be related to investments aligned with the “Back on the Attack” growth plan, such as supply chain initiatives, IT projects and profitable retail store extension.
Cash Position
The total cash position as of September 30, 2012 was reduced by 9.4 percent from €289.5 million ($394 mm) to €262.2 million ($337 mm), affected by the purchase of the remaining Dobotex shares. Including bank debts, the net cash position decreased 19.5 percent from €255.1 million to €205.4 million.
Implementation Status of Puma’s Transformation Program and Cost Reduction Measures
Puma has progressed with and has already begun to implement major parts of its Transformation Program which was introduced in 2010 as a new development phase with the aim to reduce complexity and increase operational efficiencies in the long run. In addition, immediate cost reduction measures were initiated to improve the overall current financial performance.
New Regional Business Model: At the core of the program is the setup of a new regional business model which will initially be rolled out in Europe and then gradually be extended to the remaining regions. The European organizational structure has now also been expanded to include several central and eastern European Union member states (Czech Republic, Poland, Hungary, Slovakia and the Baltic nations). Furthermore, Puma has reduced the number of organizational entities from 23 countries to seven areas in order to reduce complexity of the business. Each area has a full management team and P&L responsibility, while each country will focus its activities on the commercial side of the business. The seven areas are: DACH (Germany, Austria, Switzerland), IBERIA (Spain, Portugal), UKIB (Belgium, Ireland, Luxemburg, Netherlands, UK), NORDICS (Denmark, Finland, Norway, Sweden) EASTERN EUROPE (Czech Republic, Estonia, Hungary, Lithuania, Latvia, Poland, Slovakia), FRANCE and ITALY.
Consolidation of Warehouse Portfolio: Correspondingly, Puma has initiated the consolidation process of its warehouse portfolio across Europe in order to generate further efficiencies and cost savings with the long-term objective to align the warehouse network with the new area structure.
Optimization of Retail Portfolio: Puma has decided to close a total of approximately 80 unprofitable stores with the focus on mature markets, while the company will continue to open new selected stores in profitable locations primarily in emerging markets. By the end of December 2013, Puma aims to operate around 540 stores worldwide, compared to its current 590 stores.
Termination of Collaboration and Endorsement Contracts: Puma has decided to divest unprofitable collaborations and endorsement contracts in line with the overall consolidation of its product portfolio.
Reducing Product Collections: Puma is planning to downsize its overall product palette by 30 percent by the end of 2015. The number of articles has already been aligned with the company’s core categories. The major portion of the article reduction will come from streamlining regional and local ranges. The first significant results of this rationalization and simplification will be visible in Spring/Summer 2013.
Establishment of Business Units: Puma will evolve its international organization establishing seven Business Units (Teamsport; Running, Training and Fitness; Golf; Fundamentals; Motorsport; Lifestyle; Accessories and Licensing). Product management, design, development and product-specific marketing will be clustered under each Business Unit. Establishing the Business Unit structure will help Puma to press ahead with its sharpened focus on Performance as well as Lifestyle categories.
Further actions are currently under investigation, to be put in place during the fourth quarter of the year.
Outlook for the Financial Year 2012
Against the backdrop of a difficult business environment in particular in Europe, Puma’s management has complemented its 2010-2015 Transformation Program with immediate cost reduction measures. The above actions require one-time costs of €80 million which were booked in the third quarter. Puma expects that these one-time expenses will be amortized within two to three years.
Puma’s management continues to forecast annual sales rising by mid-single digits in Euro terms and net earnings significantly decreasing from last year’s level due to the aforementioned one-off expenses.
