Puma reported that its first-quarter earnings were dragged down by the coronavirus pandemic while warning of a bigger impact in the second quarter.
2020 First Quarter Heavily Impacted By Covid-19
- Despite strong growth in the first ten weeks of the quarter, sales decrease by 1.3 percent currency adjusted to €1,300 million (-1.5 percent reported)
- Gross profit margin declined by 140 basis points to 47.6 percent, caused by negative currency impact, lower sales in China as well as inventory devaluation and return provisions
- Operating expenses (OPEX) at €553 million (last year: €511 million); actions were taken to reduce the cost base with only a limited impact in the first quarter
- Operating result (EBIT) decreases by 50 percent to €71.2 million (last year: €142.5 million)
- Net earnings and earnings per share declined 62 percent
- Puma proposes the suspension of the dividend payment to the Annual General Meeting on May 7 and will hold the AGM as a digital meeting
- Puma secures additional €900 million revolving credit facility in May to prepare for the financial impact of the COVID-19 pandemic
- Puma will announce new sustainability targets 10FOR25 in the 2019 Annual Report
- Puma and First Mile co-create a sustainable sportswear collection made from recycled plastic, with positive social impact in local communities
Bjørn Gulden, chief executive officer Of Puma, said, “2020 started very well with a great order book, strong sell-through and record retail numbers. Then, at the end of January, the COVID-19 virus hit China. Since then we have worked to minimize the damage short-term without hindering the mid-term momentum of Puma.
“We are looking at three phases: Survive, Recover, Grow Again. The different markets are at different stages. APAC with China and Korea is recovering. Europe is hopefully also moving towards recovery while the Americas, with almost all stores closed, are in the middle of the Survive phase. The health and safety of our people come first and I am very impressed with how our people have handled this difficult period. The goal is to get through this without any Puma employee losing their job. To survive this crisis in cooperation with all our partners such as retailers, suppliers, landlords, financial institutions, authorities, investors, and customers is crucial. We can only get through this together. So far, cooperation with most of them has been great.
“The first quarter was difficult, but we feel we did a decent job. The second quarter will financially be even worse with more than 50 percent of global sports and sports lifestyle space being closed. We are mitigating the impact on our revenues wherever we can by focusing on e-Commerce and the markets that are opening up again. We are working with our factories and other partners in our supply chain to minimize the damage, assure timely deliveries, avoid excess stock as much as possible and to find fair solutions for all of us. We have asked all partners to get additional financing to ensure operations through this crisis and we have just secured a €900 million revolving credit facility (RCF) to bridge the time with reduced inflows ourselves.
“Given the uncertainty of the development of COVID-19, we are not in a position to estimate the impact for the full year. 2020 is and will be a difficult year, but we do everything we can to recover and to get back to strong growth in 2021.”
First Quarter 2020
Puma started the year with a very positive order book for 2020, with strong and balanced growth in all regions. In China, after a good start to the year with double-digit growth in wholesale, e-commerce and owned and operated stores, the Chinese market shut down in the last week of January. Over the next six weeks, the whole business in China, except for e-commerce, basically disappeared. As China started to recover in mid-March, COVID-19 had started to spread globally and by the end of the month basically 80 percent of Puma’s retail doors, both owned and operated as well as partner stores, were closed. As a result, Puma’s sales declined in the first quarter of 2020 by 1.3 percent currency adjusted to €1,299.8 million (-1.5 percent reported). China, Japan and Korea were the most severely impacted countries and led to a decline of first-quarter sales in the Asia/Pacific region of 12.0 percent currency adjusted. The EMEA and Americas regions, having been negatively impacted since March 2020, still showed a slightly positive sales development in the first quarter, increasing by 3.5 percent and 3.1 percent currency adjusted respectively.
In terms of product divisions, Footwear grew by 1.9 percent in constant currency while Apparel and Accessories were down 6.3 percent and 0.2 percent.
Both wholesale and retail channels were significantly impacted by the store closures instructed by local authorities around the globe. At the end of the first quarter, almost all of our owned and operated retail stores, as well as the stores of our retail partners, were closed. Our sales in e-commerce grew around 40 percent in the first quarter.
The gross profit margin in the first quarter decreased by 140 basis points from 49.0 percent to 47.6 percent. This development was mainly caused by negative currency impacts, lower sales in China, inventory devaluation and return provisions.
Operating expenses (OPEX) rose by 8.3 percent to €553.3 million in the first quarter (last year: €510.7 million). The increase was mainly due to sales and marketing costs to support the originally expected sales growth. In addition, higher costs in our e-commerce business and more retail expenses caused by a higher number of owned and operated stores also contributed to the increase. Actions taken to reduce the cost base only had a limited impact in the first quarter.
Due to the negative impact of COVID-19 on our business, the operating result (EBIT) decreased by 50.1 percent from €142.5 million to €71.2 million in the first quarter of 2020.
Net earnings went down by 61.6 percent from €94.4 million last year to €36.2 million in the first quarter of 2020. As a consequence, earnings per share decreased from €0.63 to €0.24.
An increased number of own retail stores and the loss of sales due to the negative impact of COVID-19 has led to an increase of inventories of 24.5 percent to €1,129.9 million. Trade receivables declined by 12.6 percent to €672.0 million. On the liabilities side, trade payables increased by 32.7 percent to €742.3 million, mainly related to the higher product purchases, but also due to the deferral of payments. In total, working capital decreased by 6.9 percent to
€788.7 million (last year: 846.9 million). In May 2020, Puma secured a new revolving credit facility of €900 million through a banking consortium of twelve banks, including direct participation of the Kreditanstalt für Wiederaufbau (KfW) of €625 million.
We see an improvement in APAC, where especially China and South Korea are recovering; and we see the first stores opening again in some of the European countries. The distribution in the Americas is still almost fully shut down. E-commerce is growing at a very high rate, but this growth cannot in any way compensate for the revenue loss in the other channels.
Given that a large proportion of the global sports and sports lifestyle distribution is currently closed, that consumers are still concerned about their health and safety and that we at Puma are currently achieving only about 50 percent of normal revenue, we expect the financial performance in the second quarter to be worse than in the first quarter. The development over the coming weeks and months is so unpredictable that we cannot provide a reliable financial outlook for the full year 2020.
Puma said its mantra is to manage the crisis short term without hindering the midterm momentum. 2020 is and will continue to be a difficult year, where the goal for Puma is to survive, recover and then emerge stronger with growth again. Different markets will go through these phases at different times and execution, therefore, must be very locally driven. Management expects all markets to recover by the end of the year and 2021 to be a year of growth again. The industry is expected to be in a strong position after the crisis. People have already now started doing more sports wherever it is possible, even under difficult circumstances. There are many indications that health and sports will be even more important than before the crisis. The casualization trends and the influence of sports brands are also expected to strengthen further. Puma said it is well-positioned to continue its growth and will continue to invest in full new product ranges for 2021.
Photo courtesy Puma