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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Puma: Female Athletes Do Not Translate on a Global Basis, Signs Entertainers

Puma

The development of the Puma SE (PMMAF) women’s division (now 1/3 of all company revenue) has helped lead the company’s revival; going from $6.3 million in ‘13 profits to $161.5 million over the first 9 months of 2017. CEO Bjorn Gulden attributes the turnaround to their relationship with Rihanna (began in ’14), believing she made the brand “hot again with young consumers”. Gulden signed Rihanna after coming to the realization that while male basketball and soccer stars translate on a global basis (see: GSW popularity in China), it is difficult to find a female athlete who could have the same impact; that female entertainers would have to fill the void. With the turnaround nearing completion, Puma parent company Kering SA (OTC: PPRUY) announced late last week it would be spinning off the sportswear brand; allocating 70% of Puma shares to Kering SA shareholders.

Howie Long-Short: NPD Group, Senior Industry Advisor, Matt Powell has been vocal that Adidas’ (ADDYY) rapid growth over the last 3 years has far more to do with their product line (see: Superstar, NMD, Stan Smith) than Kanye West; his signature line is produced in such limited quantities it doesn’t move the needle. I checked in with Matt to see if he thought Rihanna was making a bigger impact for Puma. He acknowledges Puma’s business turned after signing Rihanna, but isn’t prepared to give her the credit Gulden does; like Adidas, he says Puma’s growth (stock up 45% over last 12 mo.) has more to do with the quality of their products (see: Fierce, Fenty Creeper, Basket Platform) than her celebrity.

Fan Marino: Puma may not have big name female athletes on its roster, but it has a who’s who of female celebrities; Rihanna (59.4 million IG followers), Kylie Jenner (100 million) and Selena Gomez (132 million). For comparison purposes, the company’s biggest male endorsers; Arsenal F.C. and Usain Bolt, have 10.6 million and 7.9 million respectively. Females also accounted for 62% of all U.S. retail athletic apparel sales in 2017 (per NPD Group). Perhaps Gulden is on to something.

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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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