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China Slump Clouds Puma’s $2 Billion Q4

Fourth quarter sales at Puma increased by 14.3 percent on a currency-adjusted basis to 1.77 billion euros (approximately $2 billion) on net earnings of 7.9 million euros ($9 million). But the German athletic company is still feeling the pain of consumer boycotts in China, where total sales for the market declined 27 percent in the three-month period.

In a Nutshell: Puma is one of several Western brands including rivals Nike and Adidas that have seen business in China slump after saying they would not source cotton from Xinjiang over reports of human rights abuses and forced labor taking place in the region against Uyghur Muslims.

CEO Bjorn Gulden warned analysts that sales in China are expected to fall again in the first quarter, and did not share any insight on whether the market is expected to swing back toward growth in 2022. Puma still doesn’t involve any Chinese celebrities or influencers in its marketing campaigns.

“If you use Chinese celebrities, you get an [expletive]storm on social media,” he said. “That’s not good for the celebrity or the brand.”

As rising freight costs and raw materials costs continue in 2022, Gulden said Puma is raising prices, mostly in the second half of the year, to cover the increasing expenses.

All product divisions at Puma grew in the double-digits on a currency adjusted basis in the fourth quarter, with footwear up 15.6 percent to 755 million euros ($854.9 million), apparel up 11.7 percent to 727.3 million euros ($823.5 million) and accessories increasing 17.4 percent to 284.7 million euros ($322.4 million).

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The balanced growth across product divisions was driven by a strong demand for performance categories, predominantly running and training, team sports, golf and basketball, as well as for the sportstyle category.

Inventories increased 31.1 percent to 1.49 billion euros ($1.69 billion), from 1.14 billion euros ($1.29 billion). Due to ongoing delivery delays, goods in transit increased by more than half compared to 2020.

The gross profit margin for the 2021 fourth quarter improved by 20 basis points to 48.2 percent, and above the 48 percent to close out 2020. This improvement was driven by better sell-through and less promotional activity, while geographical and channel mix effects, currency as well as higher freight rates had a negative impact.

Puma laid out its 2022 outlook in spite of the lingering supply chain and Covid-related uncertainties, expecting currency-adjusted sales growth of at least 10 percent for the full year. The company anticipates earnings before interest and tax (EBIT) in the range of 600 million euros ($678.8 million) and 700 million euros ($793.1 million), up from 2021’s 557 million euros ($631 million). Net earnings are expected to improve correspondingly.

EBIT falls short of the 692 million euros ($783.1 million) expected by analysts polled by Refinitiv.

The achievement of this outlook is subject to continued manufacturing operations in key sourcing countries in Asia and no major pandemic-driven business interruptions.

Gross profit margin and operating expense ratios will depend on the degree and duration of the negative impact of the Covid-19 pandemic on sales. Puma expects the inflationary pressure from higher freight rates and raw material prices, in addition to the operating inefficiencies due to Covid-19, to have a dilutive effect on profitability in 2022.

Puma also expects investments in fixed assets of approximately 220 million euros ($249.1 million) for 2022. The majority of these investments will be in infrastructure, largely focused on distribution and logistics centers and further investments in the expansion and modernization of Puma’s retail stores.

Net Sales: Sales increased by 14.3 percent on a currency-adjusted basis and 16.2 percent on a reported basis to 1.77 billion euros ($2 billion).

Among the regions, Americas reported the strongest currency-adjusted sales growth at 31.3 percent to 727.3 million euros ($823.5 million), driven by continued high demand for the Puma brand in the North American and Latin American markets. EMEA recorded sales growth of 14.9 percent to 573.3 million euros ($648.8 million), driven by growth in Europe as well as emerging markets such as Russia, South Africa and Turkey.

Sales in Asia/Pacific declined 5.4 percent to 466.5 million euros ($527.9 million) due to the current market environment in Greater China resulting from Covid-19 related restrictions and geopolitical tensions. Overall, Puma’s growth in China slowed 27 percent. Almost all other markets in Asia/Pacific reported double-digit growth rates.

Compared to the fourth quarter of 2019, total sales were up a currency-adjusted 24.1 percent.

Puma’s wholesale business grew by 16.5 percent on a currency-adjusted basis to 1.21 billion euros ($1.37 billion) and the direct-to-consumer (DTC) business increased by a currency-adjusted 9.7 percent to 559 million euros ($634 million).

While sales in owned and operated retail stores increased by a currency-adjusted 21.5 percent, e-commerce declined by 6.8 percent, which was solely driven by the current market environment in China.

For the full year, sales increased by a currency-adjusted 31.7 percent to 6.8 billion euros ($7.7 billion). The strong sales development was driven by double-digit growth rates in all regions and product divisions. Regionally, Americas was leading the growth with a currency-adjusted sales increase of 53.9 percent to 2.6 billion ($3 billion) mark. In the EMEA region, almost all countries contributed with double-digit increases to a currency-adjusted sales growth of 28.2 percent. Currency-adjusted sales in the Asia/Pacific region were up 10.6 percent, thanks to growth in markets such as India, Japan and Oceania balancing out weakness in Greater China.

Net Earnings: Net earnings decreased to 7.9 million euros ($9 million), down from 24.7 million euros ($28 million) in the 2020 fourth quarter, with Puma attributing the decline to both a lower financial result and a negative impact attributable to its minority investments in other companies. Earnings per share in the 2021 holiday season decreased consequently to 0.05 euros (57 cents per share), down from 0.16 euros (18 cents) in the year-ago period.

Earnings before interest and taxes increased to 65 million euros ($73.6 million) from the 63.3 million euros ($71.6 million) generated in the 2020 fourth quarter.

Net earnings increased to 309.6 million euros ($350.6 million) for the full year, from 78.9 million euros ($89.3 million) a year ago. Correspondingly, earnings per share were up from 0.53 euros (60 cents) in 2020 to 2.07 euros ($2.34 cents) in 2021.

CEO’s Take: Gulden highlighted the brand momentum and high operational flexibility that powered the “best year in Puma’s history.”

“Our strategy of working closely together with our suppliers and retail partners to maneuver through all the short-term issues and obstacles without hindering our mid-term momentum paid off,” Gulden said. “At the start of 2022, Covid-19 is unfortunately still negatively affecting our supply chain, inflationary pressures are having a negative impact on our costs and operating margins and the geopolitical situation remains very tense. We will have to continue our hard work in this difficult environment, but I remain very optimistic for the future of both our sector in general and Puma in particular. Our continued brand momentum, strong demand for our products and very good feedback from our retail partners make me very optimistic.”