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 Breaking Headlines

Puma Eyes Category & Regional Expansion, Multi-Brand Strategy

JULY 27, 2005 -- Puma has revealed Phase IV of its long-term business plan, in which Puma will reinforce its position as one of the leading multi-category sportlifestyle brands. In Phase IV, the Company Expansion phase, Puma has the long-term mission of becoming the most desirable sportlifestyle company.

Puma will drive Phase IV and focus on three areas: Category expansion, regional expansion and non-Puma brand expansion. In addition, significantly higher dividends to shareholders can be expected.

Category expansion will encompass growth in existing business as well as entry into categories that are new to Puma. In general, the company will take a multi-dimensional approach to category expansion, driving growth by making strong pushes across the full spectrum of sportlifestyle, from performance to fashion.

Phase IV will also be the first time that the company looks to selectively expand with brands other than Puma. Toward the end of Phase IV, non- Puma brands could contribute up to 10% of overall business.

Puma will also add breadth by accelerating its regional expansion. Regional expansion is planned to occur in markets that are currently run by Puma, as well as through several selective joint ventures and take-backs of its licensed business in its core segments. Management intends to start its regional expansion with majority-owned joint ventures together with its current license partners in Japan (apparel business), China/Hong Kong and Taiwan as well as fully owned subsidiaries in India and Dubai for the Middle East region, all of which are planned to be operational as of January 1.

Puma and Hit Union have agreed in principle to form a joint venture in which Puma will become the majority shareholder. Hit Union is the current licensee for apparel in Japan and has been responsible for the manufacturing and distribution of Puma apparel in Japan for more than 30 years. This joint venture will establish Japan as the second largest market for Puma, and it immediately establishes it among the top three brands in its segment in the country.

In '03, Puma bought back its footwear and accessories license in Japan and founded a fully owned subsidiary, Puma Japan. The aim of the joint venture is to have the critical Japanese business fully aligned under one umbrella while being able to continue to use the apparel expertise of Hit Union and to explore the further potential of the brand in Japan.

Puma has decided to set up a 100% subsidiary in India. Its current licensee in India, Planet Sports, will continue to operate the business until Puma is fully operative in January '06. After that, Planet Sports will become a Puma customer as well as a retail partner with the goal to develop the retail infrastructure on a non-exclusive basis.

In addition, Puma is in the process of setting up a fully owned subsidiary in the Middle East, located in Dubai, which will serve as a hub coordinating our efforts across the region. Puma Middle East should be operative and consolidating sales as of January for most countries in the region.

Puma and Starlike have agreed in principle to form a joint venture as of January, in which Puma will become the majority shareholder. Starlike has very valuable experience and infrastructure in the Taiwanese market. This planned joint venture will enable Puma to enhance its position as a highly desirable sportlifestyle brand in the fourth largest market in Asia.

Puma has signed a shareholders' agreement with its current licensee, Hong Kong-based Swire Pacific covering the Hong Kong and China markets. Based on an early termination of the existing long-term license agreement, the joint venture will become effective on January 1, with Puma as the majority shareholder.

Management now defines the long-term company potential at EUR 3.5 billion, of which the company is planning to capture a significant part in the coming five years. The company will finance the expansion plan through its strong cash position and future cash flow generation, with an estimated total additional investment of up to EUR 500 million over the next five years.

The company also intends to distribute a significant dividend to its shareholders. Puma is planning to increase gradually its dividend payout ratio from currently 6% to between 20% and 25%.

In addition, Puma intends to increase its share buy back activities. It now intends to utilize fully the total authorized repurchase program of up to 10% of share capital. Therefore, the current resolution of up to 800,000 shares will be extended to up to 1.6 million shares. The management considers an investment in shares to be in the company's best interest while also ensuring flexible management of the company's capital requirements. Hence, a total of up to an additional EUR 500 million is now scheduled to be distributed to shareholders through a gradual increase in the dividend payout ratio as well as share buy-backs.

Puma will kick-off Phase IV in the World Cup year '06, which will be marked by a significant increase of brand investments, in particular into marketing, sales (including own retail) as well as product development and design. Management is targeting double-digit annual sales growth, starting at between 20%-30% in '06, and continuing with double-digit average growth over the following four years. Puma is also expecting to sustain a gross profit margin of approximately 48% in the long run, with a 50%-51% margin in '06 and declining 50 basis points annually, with the change from today's levels primarily due to category and product mix, as well as the shift that is expected through the regional expansion. Due to the plan to reinvest parts of the strong profitability to kick start Phase IV, EBIT should initially decline to between EUR 300 and EUR 330 million in '06, and should boost '07 to a new record EBIT level, followed by double-digit average growth thereafter.

While absolute profits will be rising in the double-digits, the regional expansion should lower the EBIT margin as a large part of the royalty income will no longer be consolidated without its corresponding sales as well as due to regional sales percentages shifting. Therefore, EBIT margin is expected between 13% and 15% in '06 and around 15% thereafter.

With an anticipated tax rate in a range of 30%-33% and minority interest in a range between 0.5% and 1% of sales, net earnings should come in between EUR 210 and EUR 230 million in '06, with double-digit growth in the following years.

As investments and share buybacks should be more significant in the beginning of Phase IV, Puma expects the current net cash position to decline initially and later to gradually build up to be available for non- Puma brand acquisitions and/or additional share buy backs beyond the new resolution.

Overall, in Phase IV Puma anticipates achieving a high rate of return on investment as well as the creation of significant shareholder value.

Puma further announces a change in the management board. Ulrich Heyd, who has been a board member in charge of legal affairs and worldwide licensees for more than 20 years and who has served the company for over 30 years, has decided to retire at the end of this year. Dieter Bock, member of the Group Executive Committee, who has been with Puma since '79, will join the board and will be in charge of Finance.

Jochen Zeitz, CEO, said: "At year end '05, all set targets for Phase III should be reached or significantly surpassed. With our strong first-half performance and the successful close of Phase III, we now turn our focus to Phase IV of our strategic plan in which we are targeting to firmly establish Puma as one of the top three brands in the global sporting goods market with the long term mission of becoming the most desirable sportlifestyle company."


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Quick links: One-click access to topics in this article.

Chinese market
Sporting goods industry

Puma Japan
Hit Union Company Limited
Swire Pacific Limited

joint venture
Regional Expansion
category expansion
desirable sportlifestyle
majority shareholder

Ulrich Heyd
Dieter Bock
Jochen Zeitz

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