Puma: A Struggling Sports Brand Of Underestimated Value

| About: Puma AG (PMMAF)

Summary

Despite successes in the sports sector, the German multinational has been struggling for quite some time.

Puma's owner Kering has recently made efforts to get the brand back on track, but explored a sale nonetheless.

Puma is a promising and cheaper counterpart of the big sports brands.

(This is a joint article co-written with Bram de Haas, Family Office Manager/Analyst.)

Since its foundation in Germany in 1948, Puma (OTCPK:PMMAF), the sports brand known for its jumping cat symbol, has been quite successful. In various big sporting events like the Olympics and some FIFA World Cup Tournaments, it managed to hold up against bigger competitors like Nike and Adidas. Recent successes include a partnership with Arsenal Football Club and a position in the spotlight during the 2014 FIFA World Cup. Over the years, it has attracted numerous sports icons, ranging from Pelé to Cruyff, from Linford Christie to Usain Bolt, and from Boris Becker to Serena Williams, and has even been able to get pop stars like Madonna to fall for its charms.

Nonetheless, in spite of its apparent successes, the 3-billion dollar company has been battling declining sales for some years now. When in 2007 Kering SA (KER), a French luxury goods holding company also owner of such brands as Gucci and Saint Laurent Paris, decided to take over most (86%) of the puma-company, the brand was given a $97 million revival injection.

Whether or not efforts to convert Puma once again into a paying concern yielded the expected results, last December, Paris-based Kering was said to have approached potential buyers, both in Asia and the Middle-East. A surprising choice, not only because of the investments made, but also because only last fall, Puma announced its new advertising campaign 'Forever Faster' and a few months earlier Kering Chairman Francois-Henri Pinault had stated Kering had to have a sports and lifestyle division, which would eventually have to consist of more than one brand: "The portfolio of our sports brands is not finished. We've started it but, until Puma is on track, we won't make any acquisitions. Let's say two, three years from now, we will look again to try and strengthen that portfolio". Despite the exploration of a sale, so far, no agreements have been reached.

According to Björn Gulden, CEO; "PUMA is lacking brand clarity and brand heat." In the letter to shareholders from the annual report he is unusually harsh:

"It is not clear to the consumer what the PUMA brand stands for and we need to be more visible and tell PUMA stories which the consumer understands and finds relevant. In terms of our products, we also need to become more commercial - this does of course not mean cheap, but rather creating products that retailers are willing to buy and that consumers want. We have to be competitive, offering a good value for a good price. And thirdly, PUMA's distribution needs to be optimized as we have not been getting our products into the right channels."

The Trefis Team, made up of MIT engineers and Wall Street analysts, put the size of the 2012 global sports apparel market at $135 billion. The Trefis team expects the market to grow at a CAGR of 4% from 2012-2019 to reach $178 billion in 2019. Market growth should come from growing fitness awareness, rising income levels throughout the world, growing interest in sporting activities for women and the trend of casual wear being substituted by sports wear continuing. They identify rising demand in Asia Pacific and Latin America and trends towards healthy living as key catalysts. The fact that the market for Puma products is expanding, is important as it relieves some of the pressure its flagging brand puts on its sales. With this significant tailwind it should be much easier to right the ship and improve margins again.

It is exactly the disheveled state of the brand that grants us the opportunity to acquire shares of Puma at a significant discount to those of an Adidas (OTCQX:ADDDF) or Nike (NYSE:NKE) while a revamping effort is ongoing with the added bonus of the possibility of a takeover at a premium to market. After all, 2014 was a record year for exits via sales for private equity firms, according to Dealogic.

It is not incomprehensible Puma will successfully revive the waning interest of sports apparel consumers. Fashion is a fickle business and all it takes is one campaign that truly resonates with consumers to revive a brand with a history going back almost to WWII. Puma compares very well to competitors on traditional valuation metrics like Price/Book and Price/Sales:

Company

Price/Earnings

Price/Book

Price/Sales

Price/Cash Flow

Enterprise Value/Ebitda

Market Cap ($ Billion)

Puma

N/A

1.5

0.9

24.7

65

2.58

Adidas

19.1

1.9

0.8

22.2

10.5

13.75

Nike

27.7

6.9

2.8

25.3

16.78

80.11

But exactly how cheap the company is becomes clear when studying its financial results of the past 10 years. In 2004 revenue equalled only $1.77 billion, a far cry from today's $3.44 billion. Only in fiscal 2011, 2012 and 2013, in which Puma realized record revenues by the way, it produced less than $100 million in free cash flow. The company averaged an annual free cash flow of $247 million on a sales volume which lies significantly below today's.

By comparison Nike's free cash flow numbers are representing its historical business much more accurately while they trade at a similar multiple. It's not a certainty free cash flow levels will return to the mean but the CEO is aware of the need to change, there is a concerted credible effort to revive the brand ongoing and the company benefits from significant tailwinds with the sports apparel market expected to expand at a CAGR of 4.2% through 2019.

All the above considered we believe Puma is an interesting prospect at $200 per ADR.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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