By Thomas J. Ryan

<span style="color: #a8a8a8;">Puma cautioned on Thursday that U.S. tariffs on China would hurt its American region margins in the fourth quarter but still raised its sales forecast and narrowed its profit target for the full year after a strong third quarter in all regions.

“So far everybody is eating the tariffs in their margins,” Puma’s CEO Bjorn Gulden said on a conference call with journalists. He noted that like competitors, Puma hasn’t raised prices in the fourth quarter to offset the tariff costs. He also said that because Puma isn’t a “market leader,” he suspects rivals to increase U.S. prices before Puma.

Instead, Puma would seek to shift even more production for the U.S. market from China to countries like Vietnam and Indonesia. Production in China for the U.S. market has already been cut to about 20 percent from more than 50 percent five years ago, according to Gulden. That has led to extra costs as some styles are now produced in two places; however, Puma has not reduced production in China because the domestic market there is expanding significantly and has absorbed volume previously destined for the U.S.

“The fourth quarter will be the first quarter where the U.S. tariffs on China will have an impact. Currently, without price increases, this is putting pressure on EBIT, at least in the short term,” Gulden said. “Nevertheless, the good development in the third quarter and the outlook for the fourth quarter allows us to look at sales growth around 15 percent currency adjusted and an EBIT now between €420 and €430 million for the full year.”

Management indicated that tariffs could cost €5 million in Q4 and could be as much as €35 million to €40 million in FY20 with no price increases or mitigation actions. Looking ahead, Gulden said, “What will happen next year, when it gets to prices and tariffs, no one knows and, I think, we should talk about that as we approach the end of Q4.”

In the third quarter ended September 30, sales increased 17.0 percent currency adjusted to €1.48 billion ($1.64 bn) while growing 19.0 percent on a reported basis. Operating earnings (EBIT) were up by 25 percent to €162 million ($180 mm).

“The third quarter developed very positively for us and ended as the best quarter that Puma has ever achieved, both in terms of revenue and EBIT,” said Gulden on the journalists’ call.

The Asia/Pacific and Americas regions continued to contribute with double-digit increases, while growth in the EMEA region was at a high single-digit rate.

In the Americas, sales on a currency-neutral basis grew 17.9 percent to €498.6 million ($554 mm) and advanced 20.3 percent in Euro terms. The growth rate was about even with the 18.0 percent currency-neutral gain seen in the nine months.

In the Asia/Pacific region, sales on a currency-neutral basis jumped 28.5 percent to €396.8 million ($441 mm) and climbed 32.7 percent in Euro terms. Currency-neutral sales in the Asia/Pacific region were up 26.5 percent in the nine months.

In the EMEA region, sales gained 9.7 percent on a currency-neutral basis to €582.2 million ($647 mm) and added 10.2 percent on a reported basis. That marked some improvement over the 8.0 percent rate seen in the nine months that Gulden said was due to a “good recovery” in Europe outside the U.K.

Footwear, apparel and accessories all showed strong growth in the third quarter, improving by 16.9 percent, 18.7 percent and 13.4 percent respectively. Gulden said he was most encouraged by the strength in footwear which “shows the strong performance of our new styles.”

Sportstyle, Motorsport, Golf and Running and Training were the categories with the highest growth rates.

Gulden said team sports and soccer are seeing flattish growth, but he said soccer is doing well comparatively given that year-ago results were boosted by the 2018 FIFA World Cup in Russia’s boost to replica jerseys.

Gulden also said the brand’s entry into basketball last year continues to go well.

“You know that the performance basketball category is not a huge category in the space, but there’s lifestyle around it and culture around it so that the consumer is more interested in your brand because you’re doing it,” said Gulden. “So, so far, basketball has been a very good investment, and the products related to that, both from a performance, from a lifestyle and, what we call the classic side, that are many shoes coming from the 70s and 80s, has been very positive. So, we’re very happy with that development and, remember, the NBA season started two days ago so we’re just into a new season.”

<span style="color: #999999;">Gross margins in the quarter improved to 49.7 percent in the third quarter, up 10 basis points. Small positive mix effects, as well as slightly-beneficial hedging, led to margin improvements.

Operating expenses (OPEX) rose by 18.1 percent to €578.5 million ($643 mm) in the quarter, down only slightly as a percent of sales, to 39.2 percent from 39.4 percent. The net increase was mainly caused by higher sales-related variable costs including logistics costs, as well as higher marketing and retail investments, while the remaining operating expenses only rose moderately.

EBIT increased by 24.8 percent from €129.9 million last year to €162.2 million ($180 mm) due to a strong sales growth combined with an improved gross profit margin and operating leverage. This corresponds to an improvement of the EBIT-margin from 10.5 percent last year to 11.0 percent in the third quarter of 2019.

Net earnings climbed 29.7 percent from €77.5 million to €100.5 million ($112 mm), and earnings per share were up from €0.52 in the third quarter last year to €0.67 correspondingly.

Among the non-financial highlights in the quarter:

  • Puma opened its first North American flagship store on Fifth Avenue in New York;
  • At the World Athletics Championships in Doha (Qatar), Puma athlete Karsten Warholm defended his title over 400m hurdles; overall, the 12 Puma-sponsored federations and 115 athletes competing in Doha ensured a high level of visibility for the brand;
  • Puma signed the Morocco national football federation;
  • Puma added RJ Barrett from the New York Knicks and Kyle Kuzma from the Los Angeles Lakers to its growing roster of NBA players.
  • Puma launched Care Of by Puma, an exclusive offering through Amazon (AMZN, John Blackledge), emphasizing comfort and functionality.

Inventories at the quarter’s end were up by 28.4 percent at €1,140.8 million. Earlier purchase of products to balance supplier capacities and secure product availability, more retail stores in operation and the general sales growth led to the increase.

In the third quarter, the latest currency developments, as well as an increased front-loading of products for the U.S. prior to tariff increases, further added to the development.

Based on third-quarter results and the latest expectations for the fourth quarter, Puma slightly raised its guidance for the full year 2019. Puma now expects:

  • Currency adjusted sales will increase around 15 percent, up from previous guidance calling for a currency-adjusted increase of around 13 percent;
  • The gross profit margin is still anticipated to improve slightly against 48.4 percent in 2018;
  • Operating expenses (OPEX) are projected to increase at a slightly lower rate than sales;
  • Operating result (EBIT) is now expected to come in between €420 million and €430 million, despite the negative impact from new tariffs in the fourth quarter in the U.S. Previous EBIT guidance was expected between €410 million and €430 million; and
  • In line with the previous guidance, management expects that net earnings will improve significantly in 2019.

John Kernan, who covers Puma for Cowen, wrote in a note, “We remain impressed by the product cycle and level of newness which continues to produce robust top-line trends and what appears to be somewhat conservative guidance for Q4.”

The analyst believes there is “enough conservatism baked into current guidance” even with the tariff warning to help Puma possibly exceed EBIT guidance for the year.

For 2020, Cowen expects Puma to show approximately 11 percent revenue growth on a currency-neutral basis and 44 basis points of EBIT margin expansion. Wrote Kernan, “Our estimates reflect a similar margin expansion to this year when excluding the effect of tariffs, plus roughly half of the anticipated tariff impact next year as we believe management will be able to mitigate through a portion of the impact.”

Photo Cara Delevingne for Puma, courtesy Puma. This month Delevingne and Olivier Rousteing, Creative Director, Balmain, launched a unisex collection—Puma x Balmain Created with Cara Delevingne—inspired by boxing workouts.