Puma Suffers from Sluggish Demand, Priced Into Stock

| About: Puma AG (PMMAF)
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Puma (OTCPK:PMMAF) Stock price: €214.9 ($291.57 USD)
Conclusion: Bad news priced into the stock. We expect the re-rating to be driven by bottom line recovery in 2010. We reiterate our valuation range of €260-275.

2009 results: Sales down 2.5% to €2,460m, down 3.7% like for like (-9% in Q4). Net earnings, including €127m restructuring charges, down to €128m (vs €233m 2008). Guidance 2010: Improvement in net result.

As expected, Puma continues to suffer from sluggish consumer demand.
Sales decreased by 3.7% excluding forex, implying a sharp 10% decline in Q4. The decline was more pronounced in Europe, but also in Asia, while the US market resisted quite well with sales down only 1%.

We expect sales growth in 2010 to be slightly positive, helped by

  • Easier comps in H2. Sales in H1 should further decline notably in Europe and in Japan and start to rebound in the second half of the year.
  • Cleaner inventories (down 19% in 2009)
  • As the leading sponsor of African football federations, Puma should be a key beneficiary of the World Cup which will take place in South Africa.
  • A stronger dollar leading to positive translation impact.
  • Lower negative impact from streamlining own retail compared with 2009. According to management, stores closures had a 4% negative impact on sales last year. 2010 will be again affected, but to a lesser extent (low single digit).

Better visibility on the cost side.
Despite lower sales, Puma lost only 50bp gross margin in 2009 (51.3%), while EBIT margin eroded by 90bp to 13% of sales. Interestingly, Q4 reported more than 400bp and 300bp gain in Gross and EBIT margin.
We expect Gross margin to remain stable in 2010 and EBIT margin to bounce back to 13.5% driven by:

  • Lower markdowns resulting from cleaner inventories
  • Higher costs savings attached to the restructuring programme implemented last year. Puma identified additional initiatives in Q4 leading to total cost of €128m (65% cash-35% non cash) in order to optimize the retail portfolio (18% of sales), the organizational structure and the re-engineering of operational processes. According to management, total savings should achieve €180m by the end of 2011, €35m in 2009, €108m in 2010 and €70m more by the end of 2011.
  • These factors should more than offset lower hedging rates (€50m impact on our estimates) and higher marketing expenses attached to the sponsoring of the World Cup.
    As a result, we expect sales and net earnings to reach €2.5bn and €236m respectively, slightly exceeding 2008 profits.

Positive cash management to allow share buy back.

  • Free Cash Flow more than doubled in 2009 to €255m, boosted by working capital inflow of €77m combined with lower capex (€55m). Assuming stable inventories and improved receivables, we expect working capital to be neutral this year and operating free cash flow to amount to €250m.
  • Net cash position could rise to €470m by the end 2010.
  • Management confirmed that they will start buying back shares this year, enabling PPR to further increase its stake (69.4% currently).

Puma trades at 13.6xP/E and 7.2xEV/EBITDA based on 2010 estimates (vs 14.8x and 8.2x respectively for Adidas). FCF yield amounts to 8%. Our DCF suggests a valuation of €275 per share.

Disclosure: No positions