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Puma AG (FRA:PUM, PINK:PMMAY) is a holding company based in Herzogenaurach, Germany that manufactures athletic footwear, apparel, equipment, and accessories through brands such as Puma and Tretorn. Puma also produces a collection of fashion footwear and apparel. Puma AG makes money in several ways. First, it sells its products to traditional retailers such as Foot Locker (FL) and Dick's Sporting Goods (DKS) at wholesale price (83% or 2007 revenue). However, Puma also sells directly to consumers via its website, concept and retail stores, and factory outlets (17% of total sales in 2007). At the end of 2007, the company ran 116 concept stores worldwide.^[1]

Since margins are typically higher on retail sales as opposed to wholesale, Puma is also working to expand its retail operations, which generated €406.4 million in sales during 2007, up 18% from 2006.^[2] These expansion plans cost money, however, which has taken a bite out of Puma's net income. For example, although sales grew from €2.4 billion to €2.8 billion between 2005 and 2006, net income actually fell from €285.8 million to €263.2 million because of increases in marketing, retail, and personnel expenses.^[3] Though free cash flow may suffer in the meantime, Puma is betting that the upfront costs will pay off in the long run.

Company Overview

Puma AG earns revenue by selling its footwear to retailers and specialty shops and directly to consumers through its website or retail stores. The company manufactures athletic footwear (€1.4 billion, or 58.5% of 2007 revenue), apparel (€827.3 million, or 34.8%), and accessories (€158.3 million, or 6.7%) under four different brands: Puma, Tretorn, Mihara, and Rudolf Dassler Schuhfabrik.^[4][5] Additionally, Puma earns a small amount (€35.6 million in 2007) from licensing royalties and commissions.

Puma AG's 2007 revenue totaled €2.74 billion, which was essentially flat from 2006's revenue of €2.76 billion. However, this slight (0.6%) drop can be attributed to foreign currencies weakening against the euro (primarily the U.S. dollar and several Asian currencies). Other than that small drop in 2007, Puma's sales have increased every year since 1993, when revenues totaled €541.3 million.

As Puma's sales have grown, so have its expenses. Expenses for marketing and retail, which totaled €272 million in 2005, came to about €420 million in both 2006 and 2007.^[6] Overall operating expenses increased by nearly 50% between 2005 and 2006, causing Puma's net income for 2006 to fall 8% despite a 15% increase in revenue.

Puma 2007 Annual Report Financial^[7]

Puma 2007 Annual Report Financial^[8]

Trends and Forces

Puma 2007/2006/2005 Annual Report Financial^[9]

Emerging markets fueling growth

Since it is a German company and does the largest part of its business in EMEA (Europe, the Middle East, and Africa), Puma is not as dependent on the U.S. market as some of its competitors. Only 25.3% of its 2007 sales came from the Americas region (down from 28.3% in 2006), which also consists of the Canadian and Mexican markets.^[10] In addition, Puma AG is aggressively pursuing expansion opportunities in emerging markets as part of its growth strategy. For example, the company established fully owned subsidiaries in South Korea, Croatia, and Romania that became operational at the start of 2008.^[11] Even before that, the Asia/Pacific region alone had sales growth of 147.8% in 2006 and more than 10% in 2007.

Backlogs, which are orders set to ship within the next 6 months, paint a similar picture. At the end of FY2007, Puma AG had a backlog of €1.2 billion, up 6.1% from the end of FY2006; this was the twelfth year in a row that Puma's backlog increased year-over-year. This increase came despite a 3.2% drop in backlog in the Americas region (caused by the sluggish U.S. market), as the decrease was offset by backlog growth of 26% in the Asia/Pacific region.^[12]

PPR SA owns 62% of Puma's stock

In April of 2007, PPR SA (EPA:PP), a French holding company that specializes in retail and luxury brands, bought a 27% stake in Puma AG for €330 per share and offered to buy the entire company for €5.3 billion, leading to speculation about the possibility of a complete takeover.^[13] Puma declined the offer, however, and remains its own company. On July 17, 2007, PPR SA announced that it had acquired a total of 62.1% of Puma AG's outstanding stock.^[14] Though it doesn't own Puma AG, PPR does control the majority of stockholder voting rights, meaning that it has a substantial amount of influence over any issues put to a shareholder vote.

Competition & Market Share

For comparison purposes, Puma had 2007 revenues of roughly €2.8 billion ($3.8 billion using the average 2007 exchange rate).^[15]

• Nike (NKE): 2007 revenue - $16.3 billion. Nike competes with the Puma on all fronts: footwear, apparel, accessories, and equipment. Nike is also the largest sporting goods company in the world by sales.

• Adidas AG (ADDYY): 2007 revenues - $13.7 billion. The adidas Group competes in the overall sporting goods market. It makes sports footwear, apparel, accessories, and equipment. Like Nike, the adidas Group is also much larger than Puma in terms of sales.

• Skechers U.S.A. (SKX): 2007 revenue - $1.4 billion. Skechers sells footwear (mainly non-athletic).

• Columbia Sportswear Company (COLM) 2007 revenue - $1.35 billion. Columbia Sportswear designs and sells athletic and outdoor apparel, footwear, accessories, and equipment.

• Under Armour (UA): 2007 revenue - $600 million. Under Armor designs and sells athletic footwear, apparel, and accessories. Under Armor's sales have grown rapidly, with a 5-year sales growth rate of 65% from 2002-2007 (the industry average was 15%). ^[16]

This pie chart on the left shows that Puma held roughly 7% of the global athletic footwear market in 2007, while the one on the right shows that Puma held 2% of the global athletic apparel market in the same time period.

Commerzbank Equity Research^[17]

Commerzbank Equity Research^[18]

References

1. ↑ Puma 2007 Annual Report Financial pg. 9, "Expansion of Own Retail Operations as Expected"
2. ↑ Puma 2007 Annual Report Financial pg. 9, "Expansion of Own Retail Operations as Expected"
3. ↑ Puma 2007 Annual Report Financial pg. 2, "Puma Group Development"
4. ↑ PPR Group, "Puma"
5. ↑ Puma, "Our Brands"
6. ↑ Puma 2007 Annual Report Financial pg. 2, "Puma Group Development"
7. ↑ Puma 2007 Annual Report Financial pg. 2, "Puma Group Development"
8. ↑ Puma 2007 Annual Report Financial pg. 2, "Puma Group Development"
9. ↑ Puma 2007/2006/2005 Annual Report Finance pgs. 9/19/6, "Business Development"
10. ↑ Puma 2007/2006 Annual Report Financial pg. 9/19, "Business Development"
11. ↑ Puma AG Investor Relations, "Letter to the Shareholders"
12. ↑ Puma 2007 Annual Report Financial pg. 22, "Orders Position"
13. ↑ Pinault refuses to raise PPR's bid for Puma - International Herald Tribune
14. ↑ Wikipedia, "Puma AG"
15. ↑ Monthly Average Graph (American Dolla, Euro) 2007
16. ↑ Reuters.com, "Under Armor Ratios"
17. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008
18. ↑ Christoph Dolleschal, "adidas," Equity Research, Commerzbank, 28 February 2008