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Covid? Freight? Inflation? Ukraine? Puma CEO Sees ‘Uncertainty’ Everywhere

Increased global uncertainty is keeping Puma from raising its 2022 outlook despite robust revenue growth.

In a Nutshell: The German footwear giant got off to “a very good start” this year, CEO Bjørn Gulden said Wednesday, with sales up 20 percent in the first quarter. Though the company would “normally” raise its full-year outlook after such “strong” results, the executive said the “increased uncertainty in the world” has led Puma to stick with its initial outlook of at least 10 percent revenue growth “with upside potential.”

“The Covid-19 outbreak in China, the crisis in Ukraine, a very tight freight situation and inflationary pressures are all uncertainties that force us to remain very flexible and to manage our business as well as possible in the short-term without hindering Puma’s mid-term momentum,” Gulden added. “We see further upside on the revenue side, but also increased pressure on our [operating expenses] and gross margin due to all the uncertainties.”

The “crisis” in Ukraine has had both a direct negative impact from lost sales and earnings, as well as an indirect impact through “the general tense geopolitical situation and increasing uncertainty worldwide,” Puma said. “As a result,” it said it continues to see inflationary pressures in all markets.

Continuing Covid-related restrictions have continued to impact the company’s value chain, from manufacturing to retail store operations, the company added. Port congestion, limited shipping capacities and continued freight rate increases have also kept the supply chain situation “challenging,” Puma noted.

As the company did with its sales outlook, Puma maintained its prior earnings before interest and taxes (EBIT) forecast of between 600 million and 700 million euros ($630 million to $735 million).

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In a note published by the investment bank and financial services company Cowen Thursday, analysts John Kernan and Krista Zuber wrote that they believed Puma’s guidance was “too conservative.” To hit the 10 percent sales growth estimate, they wrote, sales would need to decelerate “significantly” in the second quarter and the remainder of the year to roughly mid-to-high single-digit sales growth.

According to Cowen’s note, which referenced Puma’s first-quarter earnings call, the company implemented a 3 percent to 4 percent price increase this spring, with more planned for the fall and 2023.

Given the uncertainty about the impact of Covid-related restrictions on suppliers in Asia, Puma said it accelerated the delivery of its products “wherever possible.” As of March 31, inventories totaled 1.62 billion euros ($1.7 billion), a 32.2 percent increase from the same date last year. Goods in transit drove “most of the increase,” the company said.

Also this week, Puma offered an update on its progress toward cutting carbon emissions Friday, claiming that it had reduced its own and those from purchased energy by 88 percent in 2021 versus 2017. Over that same time span, it said it cut CO2 emissions from its supply chain by 12 percent. When adjusting for the 65 percent sales growth it experienced over those four years, greenhouse gas emissions from its supply chain fell 46 percent.

To achieve these reductions, Puma said it focused on purchasing renewable electricity tariffs and renewable energy attribute certificates, moving its car fleet to electric engines, using more sustainable materials and improving efficiency at the factory level.

“For the first time, we published the numbers for our entire value chain, and we have made some real progress towards achieving our climate ambitions over the last years. Our own emissions and those from purchased energy were reduced by more than what is needed to do our part to keep climate change below 1.5 degrees,” Stefan Seidel, senior head of corporate sustainability, said in a statement. “We will not stop here and continue to make improvements to live up to our Forever Better sustainability strategy.”

During the United Nations Climate Change Conference, commonly known as COP26, last fall, Gulden publicly confirmed Puma’s commitment to new targets introduced by the United Nations Fashion Industry Charter for Climate Action. The new goals commit signatories to halving emissions by 2030 and reaching net zero “no later” than 2050.

On Wednesday, Puma announced the kickoff of a new marketing campaign highlighting the legacy of the brand’s Classic sneaker. Dubbed “For All Time,” the endeavor will feature products and content created by a group of “iconic culture influencers.” Jay-Z, Puma’s creative director of basketball, and Roc Nation’s Emory Jones will executive produce the campaign.

This ensemble—Puma has named the group “The Collective”—will include Emory Jones, Puma creative director June Ambrose, Harlem fashion designer Dapper Dan, director and videographer Hype Williams, NBA Hall of Famer Walt Clyde Frazier, Rhude designer Rhuigi Villaseñor, Upscale Vandal founder Mike Camargo and photographer Lenny Santiaga.

Members of The Collective will share their stories of growth and development, as well as those of a personally selected “rising member of the next generation.” Each month will see the release of new content via advertising, web content and social media.

Net Sales: First-quarter, currency-neutral sales grew 19.7 percent versus the prior year to 1.91 billion euros ($2.01 billion). The Americas led the way as revenue increased 44.1 percent to 816 million euros ($857 million). Sales in Europe, the Middle East and Africa also soared, increasing 25.5 percent to 709 million euros ($745 million).

Revenue coming from the Asia-Pacific region, meanwhile, fell by 17 percent to 387 million euros ($407 million). Puma attributed the decline to Covid-related restrictions and geopolitical tensions in Greater China.

By category, accessories, Puma’s smallest product segment, saw the largest increase in sales, with revenue up 32.2 percent to 332 million euros ($349 million). Footwear sales climbed 18.2 percent to 941 million euros ($989 million), while apparel grew 16 percent to 639 million euros ($671 million). Gulden noted that growth occurred across all product divisions and business units, with the highest rates in performance categories like running, football, basketball and golf.

“The demand for our products was high, both from retailers and consumers, and our operations people were able to move enough product through a tight supply chain to partly fulfill this increasing demand,” Gulden said in a statement.

The company’s larger wholesale business easily outpaced direct-to-consumer, with the former up 23.3 percent to 1.53 billion euros ($1.61 billion). DTC, meanwhile, grew just 7.1 percent to 384 million euros ($403 million) amid a 21.3 percent improvement in sales at owned and operated retail stores and a 13.2 percent decline in e-commerce revenue.

Net Earnings: Puma’s first-quarter gross profit margin declined 130 basis points compared to the prior year to 47.2 percent, “mainly” due to an unfavorable geographical and channel mix and higher freight rates. Operating expenses grew 18.6 percent to 713 million euros ($749 million) due to higher marketing expenses, more open retail stores and higher sales-related distribution and warehousing costs, it said. Despite Covid-related supply chain efficiencies, Puma’s OPEX ratio decreased from 38.8 percent in the first quarter of last year to 37.3 percent.

The company recorded EBIT of 196 million euros ($206 million), a 27 percent improvement from the year-ago quarter. Strong sales growth and the improved OPEX ratio helped boost its EBIT margin 30 points to 10.3 percent.

Puma’s net earnings totaled 121 million euros ($128 million) in the first quarter, boosting its earnings per share 11.1 percent to 0.73 euros (77 cents).

CEO’s Take: “We will continue to prioritize market share gains and our mid-term growth potential over short-term profit optimization,” Gulden said in a statement. “We will also continue to prioritize the health and safety of our people and not save on anything here. Now, this is especially important for all our employees and their families in Ukraine. The Puma family means more than profitability.”