PARIS – Blaming strong currency headwinds for denting its profitability, Puma SE said it plans to raise prices, ramp up local sourcing and trim operating expenses in emerging markets.
The Herzogenaurach, Germany-based sporting goods firm lowered its earning guidance on Wednesday as it reported a 30.3 percent dip in first-quarter net earnings to 24.8 million euros, or $28 million. The company explained that Russia, Brazil, Argentina and Turkey – countries it relies upon for proportionately higher profitability – came up against a surge in the U.S. dollar, plus higher marketing, IT and retail investments.
Like many apparel and footwear companies, Puma sources most of its goods in Asia using the American currency, but resells them in many other non-dollar markets.
“The underlying business is the same, but the currency impact was so strong, we had to make the change [in guidance],” Bjorn Gulden, chief executive officer of Puma, told a conference call after releasing its quarterly results two days ahead of schedule.
The profit warning sent shares down 5.7 percent to close on the Frankfurt stock exchange at 168.70 euros, or $190.63 at current exchange.
Puma has already raised prices in Russia about 25 percent this year in its own retail stores, and more than 10 percent in the wholesale channel. “And there will be further increases in the second half,” Gulden noted, explaining that Puma does not manufacture in Russia, giving it less room to maneuver there.
Prices in Mexico have been bumped up 6 percent, with another 6 percent increase imminent, Gulden said.
Puma plans to increase manufacturing of apparel in Mexico and footwear in Argentina to meet volatile currency and inflation fluctuations. Still, Gulden warned it would “take time” and that Puma lacked the leverage of stronger brands.
“We are in a turnaround phase. That’s why we have to be careful raising prices too quickly,” he explained, characterizing the process as a “marathon, not a sprint.”
Boosted by footwear, first-quarter sales improved 13.2 percent to 821.4 million euros, or $926.9 million. Stripping out the impact of currency fluctuations, the increase stood at 4.4 percent.
All dollar rates are calculated at average exchange rates for the period concerned.
Puma’s gross margin, a key indicator of profitability, fell to 46.9 percent from 48.5 percent due to the negative currency impacts.
Puma said it forecast a drop in the gross profit margin for the full year of 100 basis points to 150 basis points compared with the 46.6 percent recorded in 2014.
It sees EBIT for the full year coming in at a range between 80 million euros and 100 million euros, or $86.8 million to $108.5 million at current exchange rates. “Net earnings will be impacted accordingly,” the company noted.
On the plus side, Gulden highlighted stronger than expected sales in the quarter thanks to a 7.8 percent organic rise in footwear sales, its third quarterly gain, and a 5.7 percent improvement in apparel despite tough comps related to last year’s World Cup. He cited positive reaction to Puma’s spring-soled Ignite running shoe that promises maximum energy return and is backed by track-and-field star Usain Bolt.
Puma blamed lower sales of socks and bodywear in North America for a 4.6 percent organic dip in accessories sales.
By region, Gulden highlighted “strong development in Asia, especially China,” and “decent” business in the U.S., slowed by delivery issues related to the port strike on the West Coast.
Stripping out the impact of currencies, sales rose 0.2 percent in EMEA, 5.6 percent in the Americas and 10.9 percent in Asia-Pacific.
Puma is majority controlled by French conglomerate Kering, which saw its luxury activities record a 2.6 percent dip in the first quarter, with Gucci logging a 7.9 percent decline, while sport and lifestyle rose 3.7 percent, helped by the increase at Puma.
While the brand trails its larger rivals Nike and Adidas, Puma is betting on singer Rihanna, its new brand ambassador and creative director of the women’s fitness and training line, to boost ts profile and fortunes. She is to appear in its Forever Faster campaign in August alongside athletes including Bolt and soccer player Sergio Aguero.