Puma Joining Wearables Sector, Sued by Nike for Patent Infringement

Puma

Puma SE has announced it will be joining the wearables sector, signing a 10-year global licensing partnership with Fossil Group. The 2 companies will collaborate to bring Puma branded watches and smartwatches to market by the end of 2019. Fossil Group (FOSL) will design, manufacture and distribute the sport-focused line of watches, as it does for several high-end fashion labels (see: Diesel, Michael Kors). It is expected that the Fossil x Puma line will run on Wear OS (formerly Android Wear) software.

Howie Long-Short: Puma SE is a subsidiary of Kering, trading over-the-counter under the symbol PMMAF. The German athletic footwear and apparel brand reported net profit rose +36% YoY (to $82.5 million) in Q1 ’18, with sales increasing double-digits across all product categories and markets (+15.6% in U.S.). China/Asia experienced “exceptionally high growth” (+35%), while the running, training and sportstyle categories grew the fastest. In early April, with currency adjusted sales +21% YoY, PMMAF slightly increased FY18 guidance (from +10% to +10%-12%).

Puma SE’s cautious approach to entering the wearables sector (with a licensing partnership, as opposed to building their own technology) is a wise one. Both Nike and Adidas have already tried and failed, only to later sign partnerships with Fitbit (Nike) and Apple (Adidas) respectively. There’s no reason to believe Puma would have had a different result.

On a separate note, Nike is suing Puma, accusing the competitor of patent infringement in federal court. Nike alleges the unauthorized use of “Flyknit, Air and cleat assembly technologies”, related to Puma’s Ignite, The Jamming and evoSpeed SL FG products. NKE is seeking a permanent injunction and has asked that damages be awarded. Puma plans to dispute the charges and has no intention of stopping production in the interim.

Fan Marino: In other Puma news, the company announced it will become the official kit sponsor of AC Milan for the 2018-2019 season; and the official kit sponsor of Sao Paulo Palmeiras (Brazil) for the 2019 season. Those clubs join Borussia Dortmund (BORUF), Arsenal FC and the National Football Associations of Italy, Switzerland, Austria, Cameroon, Ivory Coast, Ghana, Czech Republic and Senegal in the Puma football portfolio.

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Puma Re-Entering Basketball Business After 17-Year Hiatus

Puma

Puma (PMMAF) has announced that after a 17-year hiatus, it will be re-entering the basketball business. The brand, which generates the bulk of its sales from soccer and running related products in Europe, sees “substantial upside” to building a basketball vertical within the U.S. PMMAF will also aggressively target Greater China (known for its appreciation of the sport), expecting the region to become its most lucrative market by ’22. The marketing strategy will focus on the “culture around the game”, using “culturally relevant” athletes and entertainers (as they’ve done successfully with Rihanna) to market the new product line. It must be noted that despite Puma and ADDYY’s optimism, the U.S. basketball sneaker business remains “challenged”; Foot Locker (FL) reported Q4 ‘17 comparable store sales down “high single digits” YOY for the category.

Howie Long-Short: Puma (PMMAF) wants to increase profitability, so entering a Chinese market that generates the highest profit margins in the world on sporting goods is logical. The stated goal is to lift operating profit from 5.6% in ’17 to 10% by ’22, reasonable when you consider Adidas (ADDYY) and Nike (NKE) reported profit margins of 9.8% and 13.8% respectively in 2017 (ADDYY also just raised its target to 11.5% by ’20). The announcement was made at a capital markets day where the company also announced it expects currency-adjusted consolidated net sales to grow 10% annually until 2022, plans to increase DTC sales from 23% of sales to 30% of sales (over the medium term) and a proposed dividend of 25%-35% of consolidated net earnings to begin in ’19; resulting in share prices closing +5.73% (to $504.87) on Wednesday. It should be noted that back in January, Puma’s parent company Kering S.A. (PPRUY) announced it would be spinning off the brand to focus on its high-margin luxury businesses; shares are up 32% since.

Fan Marino: The game of basketball has changed since Puma last occupied the space, most dramatically as it relates to volume 3-point shooting (see: Steph Curry, Trey Young). USA Basketball is doing what it can to prevent the next generation of basketball stars from standing on (or 5 feet behind) the 3-point line. New rules eliminate 3-point FGs for players under the age of 11, to promote shooting from a “developmentally appropriate distance”; and provide for smaller basketballs and lower baskets for younger kids. The implementation of a shot clock for grades 9-12, was the most controversial rule change enacted.

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Kering to Spin Off Puma SE, Focus on High-Margin Luxury Brands

Puma

Kering (OTC: PPRUY) has announced plans to spin off a majority stake in Puma SE (PMMAF), enabling the company to focus on its high-margin luxury brands Gucci, Yves Saint Laurent and Balenciaga. CFO Jean-Marc Duplaix indicated the group would also look to rid itself of the boardsports label Volcom. The company will distribute 70% of Puma shares to its investors, reducing its own stake to 16%. The transaction price will be determined at April’s shareholder meeting. PPRUY shareholder Groupe Artemis (see: Francois Pinault), will become PMMAF’s largest shareholder; controlling 29% of the company.

Howie Long-Short: Kering paid $6.4 billion for Puma in 2007, slightly above the current market cap ($6.1 billion); despite the stock price climbing 45% over the last 12 months. Despite not yet having capitalized on the turnaround (profits fell from $324 million in ’07 to $6.3 million in ’13, before rising to $161.5 million over the first 9 months of ‘17), it makes sense for Kering to sell their sportswear (and lifestyle) brands; as Duplaix explained, the company has found itself in “a sort of imbalance, linked to the outperformance of the luxury sector.” In other words, their sportswear businesses were dragging down the overall performance of the company; particularly Gucci, among the hottest names in fashion.

Fan Marino: PMMAF, the German footwear and sports apparel manufacturer, will report full year earnings on February 12th; after having increasing profit guidance 3x in 2017. The company turnaround can be attributed to a refocusing on the world’s most popular sports (soccer, running, motorsports) and a boost in women’s sportswear sales. Puma publicly stated it welcomes the transaction, but shares closed -4.4% on Thursday amid concerns the company lost a powerful backer.

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PIPER JAFFRAY REPORT INDICATES TEENS WILL NO LONGER WEAR UNDER ARMOUR

Piper Jaffray Companies (PJC) 34th biannual “Taking Stock with Teens” report has been released and Under Armour (UAA) has once again been named the No. 1 company teenage males perceive as an “old brand”, one they will no longer wear; while Nike (NKE) and Adidas AG (ADDYY) placed 1st and 3rd respectively, as the most preferred brands. As for footwear preferences, Nike remains #1, but lost 5% of teens (down to 46%) to Adidas over the last 12 months. The report indicates that athleisure remains popular, but trends are shifting towards “street, denim and festival wear”.

Howie Long-Short: For the first time in a generation, the majority of teens didn’t list Nike as their favorite footwear brand. Adidas has been getting a lot of the attention, but Puma (OTC: PMMAF) and New Balance are quietly picking up market share as well. Teenagers contribute $830 billion (7%) to retail’s bottom line, so their opinions (and purchases) aren’t insignificant.

Fan Marino: Nike is offering an unprecedented 40% off through 10/13. The sale includes 200+ items, including product from its premium Jordan Brand. Up until 18 months ago, Nike rarely ran sales. Now, I don’t buy Nike unless it is on sale (25% is offered frequently).

Teens say Under Armour is an ‘old brand,’ as Adidas and Vans grow more popular