While its footwear category showed signs of regaining momentum, Puma reported a larger-than-expected profit decline in the first quarter due to the stronger dollar. It also warned that currency headwinds would lead to a steep decline in profits this year.
As a result of the rapid appreciation of the dollar against most other currencies over the last few months, Puma now expects its EBIT to be between €80 million and €100 million this year. In 2014, it posted EBIT of €128 million. Net earnings will be impacted accordingly.
Puma now sees a drop in gross margin for the full year in a range of 100 to 150 basis points versus 46.6 percent in 2014.
“We do work hard to ‘counter’ these negative currency effects, but do currently not have enough leverage to fully neutralize the impact and have therefore adjusted our outlook for the full year EBIT and net earnings,” said Bjørn Gulden, Puma’s CEO.
He added, “We will continue our strategy to become the Fastest Sports Brand in the World and will continue to invest in product, marketing, retail and IT to lay the foundation for solid profitable growth in the future.”
In reporting fourth-quarter earnings in mid-February, Puma had warned that the strengthening of the dollar against nearly all currencies could cause a “significant negative impact” on the reported gross profit margin and overall earnings for the year. But Puma said it had already taken a number of countermeasures, which “should support a slight increase in reported EBIT and net earnings.”
On the positive side, Puma stuck by its prediction that sales would grow at a mid-single-digit rate in currency-neutral terms for 2015.
Indeed, the profit warning overshadowed a solid increase in Puma’s first-quarter sales, which came in at €821 million ($926.4 mm), ahead 4.4 percent on a currency-neutral basis (13 percent reported). The gain was slightly better than internal expectations and was due to momentum in footwear.
Gulden said, “We are working very hard to improve our product offer, and although we know we have some ways to go, we feel that this growth in footwear confirms that we are on the right path.”
AMERICAS DELIVERS MID-SINGLE DIGIT REVENUE GAIN
By region, sales in the Americas rose 5.6 percent on a currency-neutral basis (24.5 percent reported) to €190.8 million ($215.3 mm). Both North America and Latin America developing positively.
The EMEA region delivered a 0.2 percent gain on a currency-neutral basis, to €341.6 million ($385.4 mm). In reported terms, sales climbed 13.2 percent. Southern European countries developed positively in the first quarter, while the United Kingdom saw a decline due to a softer Lifestyle business. The Middle East and Africa regions continued to show a solid performance in most of the countries and across all categories.
The best gain was seen in the Asia/Pacific, with sales jumping 10.9 percent on a c-n basis (24.5 percent reported), to €190.8 million ($215.3 mm). The region saw a strong performance in China and India and was supported by the improved footwear business.
By category, footwear saw the top gains, improving 7.8 percent on a c-n basis (17.8 percent reported) to €378.1 million ($426.6 mm). The improvement was driven by a higher demand for Puma’s Running, Training & Fitness products, which was partly triggered by the successful launch of the Puma Ignite running shoe in mid-February.
Apparel improved 5.7 percent on a c-n basis (13.8 percent reported) to €279.8 million ($315.7 mm). The gain was driven by strong demand for Puma’s Fundamentals, Running, Training & Fitness and Golf products.
Accessories sales declined 4.6 percent on a currency-neutral basis but lifted 2.8 percent in reported terms to €163.4 million ($184.4 mm). The decline in currency-neutral terms related to lower sales of socks and bodywear in the North American market.
Retail sales increased 7.3 percent on a currency-adjusted basis to €144 million ($162.5 mm), with comparable sales in full-price stores and outlets slightly up. With an increased number of stores, retail sales represented 17.5 percent of total sales in the quarter compared to 17.1 percent last year.
GROSS MARGINS WEIGHED DOWN BY STRONG DOLLAR
Puma’s gross profit margin fell from 48.5 percent to 46.9 percent in the first quarter, solely due to negative currency impacts.
The strength of the U.S. dollar compared to major “unhedged” and not fully hedged currencies including Russian Ruble, Mexican Peso, Brazilian Real, Turkish Lira and Argentinian Peso led to the erosion. Footwear gross profit margin declined from 44.1 percent to 42.9 percent. Apparel decreased from 53.6 percent to 50.7 percent, and accessories remained at previous year’s level of 49.6 percent, about even with 49.7 percent. In absolute figures, gross profit increased 9.3 percent in reported terms to €385 million ($434.4 mm).
Operating expenses increased 17.7 percent to €351 million ($396 mm), in line with expectations, partly due to unfavorable currency fluctuations. On a currency-neutral basis, operating expenses grew 9.5 percent. The gain also reflected planned investment in “Forever Faster,” its largest marketing campaign in a decade, versus no campaign in 2014. Investments were also made in its IT infrastructure and opening stores, mainly in emerging markets. As a percent of sales, operating expenses rose to 42.7 percent from 41.1 percent a year ago.
EBIT slumped 35.6 percent to €38 million ($42.9 mm) while net profits dropped 30.3 percent to €25 million ($28.2 mm), or €1.66 a share ($1.87).
Providing a strategic update, Gulden said the launch of the Ignite running saw “a good start both in retail and wholesale,” and the platform will be expanded over coming seasons.
On the marketing side, the “Forever Faster” campaign is now more product-focused and features Usain Bolt running in the Ignite as well as elite footballers including Mario Balotelli and Cesc Fàbregas showcasing Puma’s latest football boot, evoPOWER.
Puma’s new multi-year partnership with Rihanna as a brand ambassador “has already generated a lot of positive PR and social media buzz,” said Gulden. The singer is being featured in an in-store marketing campaign promoting the training category. In August, Rihanna will be featured in the “Forever Faster” campaign alongside athletes such as Usain Bolt and Sergio Aguero.
Improving relationships with key strategic accounts continues to be a focus to improve the quality of distribution. Foot Locker was given again as an example, with the first European Puma Lab opening at a Foot Locker store in Milan in February and new Puma Lab in-store shops recently opening in the U.S. in Philadelphia and Atlanta.
In its own retail network, a new in-store concept was developed to ensure its stores “better tell our product stories, reveal the technologies behind them and strengthen Puma’s positioning as a sports brand.” The global rollout of the new prototype started last month in Herzogenaurach with Puma stores in Hong Kong and Mexico City next in line.
Organizationally, Indonesia has transitioned from a distributor to a new subsidiary to improve its coverage in the area. From an IT standpoint, the focus is on standardizing ERP systems and investing in tools to enable more efficient design and planning processes. Said Gulden, “We will continue to drive our growth strategy forward with better, and faster collections, continued investments into our brand, our organization, our distribution and our IT infrastructure.”