Puma’s Q2 Loss Steepens on FX Woes

Puma SE reported sales growth across all regions, driven by double-digit gains on a currency-neutral basis in the footwear category and in the Americas region. But the continuing negative impact of currency fluctuations led to a net loss in the period.

Puma sources most of its products from Asia in U.S. dollar contracts, but earns a bigger portion of profits than its rivals in markets where currencies have tumbled against the euro like Brazil, Argentina and Russia.

Sales in the quarter rose 7.6 percent on a currency-neutral basis to €772.7 million ($845.3 mm), above internal expectations. The gains were primarily driven by the growth in footwear sales across all regions. In reported terms, consolidated sales rose 18.5 percent.

By region, second-quarter sales for the EMEA region (Europe, Middle East and Africa) rose 3.9 percent on a currency-neutral basis to €270.5 million ($295.8 mm). Particularly encouraging results were seen in Germany, France and Turkey, while Italy and Switzerland suffered a decline due to tough comparisons against last year's World Cup replica sales.

In the Americas region, sales on a currency-neutral basis expanded 11.6 percent to €328.4 million ($359.3 mm), with growth in both North and Latin America. In particular, Argentina and Mexico showed above average sales gains.
 
Asia/Pacific (APAC) revenues grew 6.2 percent on a currency-neutral basis to €173.8 million ($190.1 mm). The increase was primarily attributable to strength in China and India, each reporting double-digit growth.

In euros, sales increased 5.8 percent in the EMEA region, 31.0 percent in the Americas and 19.1 percent in Asia/Pacific.

By product category, footwear sales accelerated 16.2 percent to €358.8 million ($392.5 mm) on a currency-neutral basis, mainly driven by running, training and sportstyle categories and especially the Puma Ignite product platform.

Apparel sales were broadly flat, easing 0.3 percent on a currency-neutral basis to €263.3 million ($288.1 mm). The category faced challenging comparisons against strong year-ago sales of replica jerseys driven by the FIFA World Cup.

Accessories revenues grew 3.6 percent on a currency-neutral basis to €150.7 million ($164.9 mm), in line with expectations.

Gross margins in the quarter were stable at 46.7 percent, despite significant negative currency effects. Footwear gross margin decreased slightly from 42.7 percent to 42.3 percent, the apparel margin rose from 48.2 percent to 50.7 percent and the margin for accessories fell from 52.4 percent to 50.0 percent.

Operating expenses, significantly impacted by adverse currency effects, increased 20.4 percent in reported terms, rising to €357.4 million ($391.0 mm). During the quarter, Puma continued to invest heavily in marketing activities to strengthen its new “Fastest Sports Brand in the World” positioning. The main cause for the increase was higher media spend and new partnerships with pop-singer Rihanna and the Arsenal football club, which both commenced in the second half of 2014. The opening of new retail stores at selected locations and investing into the IT-infrastructure also contributed to the increase of operating expenses in the second quarter. On a currency-neutral basis, the increase in operating expenses amounted to 10.6 percent versus last year.

Due to the higher operating expenses, operating income slid 46.0 percent to €6.8 million ($7,4 mm). The net loss came to €3.3 million ($3.6 mm) against earnings of €4.2 million a year ago.

Bjørn Gulden, CEO, highlighted the momentum continuing in the footwear category.

“We have said that growth in footwear is key for us to turn the company around and feel that the investment in new and innovative products is starting to pay off,” said Gulden.

Gulden noted that Ignite delivered “very solid sell-in and sell-through performance in both wholesale and own retail.” In the second quarter, Puma built on its success with the introduction of Ignite Pwr Cool, a cooling technology. In the team sports area, two footwear platforms, evoSPEED and evoPOWER, were prominently featured in marketing campaigns this year and delivered high sell-through across geographies.

The top-line growth continued to benefit from the launch of its largest marketing campaign a year ago featuring Olympic sprint champion Usain Bolt and its other athletes. During the second quarter Rihanna was prominently featured through an in-store marketing campaign for the first time with a focus on female training styles. Said Gulden, “While she is already generating positive PR buzz for Puma, Rihanna will be at the center of our ongoing marketing campaign over the upcoming months.”

Rihanna’s own collection will launch in 2016. She was named Puma’s women's creative director in December.

Puma’s new in-store concept for the brand’s own retail was first revealed in its full price store in Herzogenaurach earlier this year. Since then further stores in the format have been opened, including Hong Kong, Turkey and Mexico to success. Said Gulden,” In the new Puma stores we can better tell our product stories, reveal the technologies behind them and strengthen Puma's positioning as a sports brand. All new and refurbished stores are showing above average performance and an increased share of footwear sales.”

Still, Gulden noted that negative effect of currencies is continuing to hurt Puma’s gross margin and increase its operational expenses, reducing earnings.

“We are of course working to offset the impact of this by gradually increasing sales prices in markets that are hurt by the negative effects, and we are, when possible, moving some of the sourcing to the local markets,” said Gulden. “These measures are currently not enough to totally offset the loss in reported gross profit margin. Despite the pressure on margins, we have decided to continue our investments in marketing, IT, and in the modernizing of our retail network. We believe these investments are needed to regain the strength of the brand and to ensure long-term growth for the company. We have a vision of becoming the fastest sports brand in the world and know that we have to invest now to achieve our goal long term.”

Puma reiterated a reduced outlook given in May for its gross profit margin to fall by 100 to 150 basis points from 46.6 percent last year.

The group, majority owned by French luxury goods group Kering, still expects operating earnings to fall to between €80 million and €100 million from €128 million in 2014. It sees currency adjusted sales increasing by a medium single-digit percentage from last year's €751 million.