Puma

Stock price: €251
Conclusion: Since our last comment (Feb 17th) Puma gained 17%. Q1 update, in line with our estimates, leads us to reconfirm our valuation range of €260-€275 per share. 10% upside left…

Q1 results: Sales down 2% to €683m-Adjusted EBIT up 4.4%. EPS up 2.8%. Guidance 2010: “sales should increase low to mid single digit-pretax profit to improve by at least 70%”.

As expected, Q1 results were contrasted.
-Top line was weak, posting a 2.7% decline in sales at constant rates. According to management, sales were slightly positive against last year’s numbers, adjusted for inventory clearance. Europe and Asia were down 6% and 8% respectively. The good news comes from Americas, where sales rose almost double digit.
-Puma’s order book points to a significant upturn in H2 in most regions, driven by easier comps, some benefits from the World Cup and lower inventories in China.
-Bottom line improved, again in line with our expectations. Gross margin was slightly up, thanks to Americas and Asia. Ebit margin improved 110bp in Q1, reaping the fruits of Puma’s cost reduction programme and the optimization of its retail network. Opex decreased 4.6% in Q1, lifting EBIT to €119m (17.4% of sales vs 16.3% last year).
-Puma’s guidance is in line with our estimates.

Puma trades at 16xP/E and 8.5xEV/EBITDA, implying 20% discount to Adidas.
We are still looking for 10% additional return in the coming months. PPR bought a few shares (around 5000) during the quarter.

Puma

Stock price: €214.9
Conclusion: Bad news priced in. 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.

Puma

Stock price: €231
Conclusion: Improved visibility on the bottom line coupled with a potential bid from PPR, Puma’s main shareholder should propel further upside. We estimate the fair price of Puma within a valuation range of €260-275, excluding a bid premium.

9 months: Sales up 0.4% to €1.971m, down 2% excluding forex, adjusted EPS down 10.6%, reported down 49% to €112m.

We expect the consumer environment to remain challenging in Q4 and next year
Q3 did not show any improvement with sales down almost 10% like for like, notably in footwear and apparel. Rising unemployment and low consumer confidence should prevent sales from rebounding in coming quarters. In addition, growth in reported sales will be held back by a weaker dollar. However, 2010 could be slightly better than 2009, owing to lower inventories in wholesale (around 80% of sales) and some positive impact expected from the football World Cup in South Africa. We expect sales to increase by 1-2% next year.

Bottom line ? looking for a rebound next year.
We feel reasonably confident for a number of reasons.
First, cash management was impressive this year. Lower capex and improved working capital led to a €128m increase in free cashflow to €145m in the first nine months. We expect free cashflow to amount to €180m for the whole year and net cash position to increase to €280m by the end of 2009. Free cash could achieve €210m next year.
Second, COGS could decrease as a result of less promotional activity following inventory reductions in 2009. In addition, Asian sourcing should benefit from the weakness of the dollar in 2010, but even more in 2011 due to the impact of hedging.
Third, the restructuring charge taken in Q1 (€110m) is expected to generate savings of €150m by the end of 2011. We think that savings in selling and administrative expenses should more than offset increased marketing spending related to the World Cup.
We expect ebit margin before restructuring to improve from 12.4% forecasted in 2009 (down 240bp of sales) to 13.5% of sales in 2010. Net earnings could rebound to €236m vs €134m projected this year.

PPR bidding for the free float ?
We think that the listing of a majority stake in CFAO should give PPR a greater room for manoeuvre and help to take the full control of the cash by taking Puma private . Such a move should be earnings accretive and partly offset the dilution anticipated from the listing of CFAO. We also believe that PPR should move before Puma reaps the full benefits of its restructuring programme in 2011.

Puma trades at 14.7xP/E and 7.9x EV/EBITDA based on 2010 forecast. FCF yield amounts to 6%. Our valuation range €260-275 suggests 15%+ upside, excluding a bid premium paid by PPR.