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Puma - Stuck in the Middle of Nowhere
PUMA SE (PUM GR; market cap EUR 3.32bn)
Puma shares are -80% from their pandemic highs. The company and brand is „under-managed“ and „under-owned“ (Artemis 30%). The brand is tracking significantly behind its potential and unique heritage (think Boris Becker, Diego Maradona, Johan Cruyff, etc). The shares are significantly under-valued, but in the current set-up (management, ownership) this value won´t crystalize. The improvement potential is so massive that PE firms and strategic buyers (think VF Corp) are surely sharpening their pencils right now. So should you.
Bad investor communication: in January they give FY24 prelims and FY27 guidance – the shares tumble >20%. In March they give final FY24 and FY25 guidance – the shares lose another 20%. Why they split the guidance announcements remains anybody´s guess. All that was left in management credibility is now eroded. The “tactics” confirmed the picture that the management team is way too concerned about the stock price and the sell-side quarterly consensus game. They probably had hoped for an improvement in Jan, Feb (to be able to give better FY25 guidance) and where surprised by the opposite. When we visited them in summer FY24, they asked: what can we do for the stock to go up? They don´t understand that the stock price is a result, not a manageable object. This has now fallen on their feet.
Conference Call: The CEO, Arne Freundt, was very nervous at the beginning of the call (in light of the -50% share price ytd). His performance stabilized during the call. Between the lines he blamed the former CFO (was replaced in Sept. 2024) for „insufficient financial planning“ in light of the guidance misses.Towards the end of the call he got to where the short-term problems really are:
- massively deteriorating US business in February on very weak consumer sentiment (Hispanics very important for PUM) and
- no improvement in China (brick&mortar, wholesale).
The longer-term problems are ("peers" mostly referring to bigger NKE, ADS):
- slower overall market (Puma planned for MSD, now its LSD growth market) → outsized cost structure (now cutting 500 FTE in HQ)
- weaker than peers brand → more vulnerable in downturns, little access to most profitable sport style market
- weaker than peers marketing budget → in absolute terms and hence relative less on brand as opposed to products
- weaker than peers DTC
- weaker than peers USD position (1/3 of revenue but 50% of cost is in USD) → high fx vulnerability
- weaker than peers infrastructure (warehouse automation) → higher sensi to labor cost increases in developed markets
Freundt was again highlighting his No 1 strategic target: brand elevation: His analysis is probably correct: Puma is lacking brand power and performance credibility in order to get to
- higher price points / higher full price sales share / higher unaided attention
- more traction in sport style
- to gain resilience → at current price points, PUM is a volume play and is suffering when the weaker consumers crumble
He´s probably also right in his assessment that brand elevation “takes time”. We would want to add: „and money“. Hence, if they were real about the brand elevation strategy, they should have cautioned the market on lower profitability early in this process at their FY24 CMD. But to please the market they pretended “they can have their cake and eat it too”. This has now fallen on their feet.
Freundt is not a „Shoe Dog“. He´s „executing against KPIs“ but has “no love for the game” (not unlike Rohrsted at ADS). Freundt is a consultant at heart. His analysis is right. PUM needs brand elevation. But he´s not the right person to “just do it”. Anecdotally, signing a club like RB Leipzig or Manchester City tells you that they have no clue about „football culture“. Those deals probably look good “on metrics”, but erode your “cultural credibility”. Puma has much smaller marketing budgets vs Nike or Adidas. They need to be much better, more edgy, culturally differentiated in marketing in order to win against these giants.
They are spreading themselves too thin. Trying to win in running (from a zero position), in basketball (from nowhere), in the US and China (where they have weak position) at the same time, in wholesale and DTC, in starting trends themselves (instead of remaining a fast follower, i.e. Speedcat) is simply „too much on the plate“. More focus would help the brand elevation (i.e. use marketing money more concentrated). They could then later „scale“ into verticals, regions on an improved branding situation in selective areas.
PUM is „stuck in the middle“. Too small to really compete with full assortment, global brand peers (NKE, ADS). Too big, too diversified, not edgy enough to play the „niche game“ (like On, Lululemon, Hoka, Brooks, Asics, etc). If they play the same game as Adidas and Nike, they will always lose. They need to play a different game, specifically in marketing. Think Tesla playing a different game vs auto incumbents (EV vs IC). Tesla wouldn´t have had a chance in the „old game“ (IC). Why does Puma not start to play a different game? Probably they are afraid of losing the (marketing) scale advantage vs the smaller brands. What limits them on the upside, protects them (seemingly) on the downside. But this protection is an illusion.
Can this change ? Puma´s ownership (30% Artémis) is also a „stuck in the middle“ situation. After divesting a big part in 2020, Pinault has no credible ownership responsibility and strategic interest in Puma. We picture "a consultant (Freund) is pitching a strategy to representatives of a „mildly interested“ owner". Both are judged on the short-term share price. There´s no „soul in the game“. A change in ownership could help Puma. A PE investor or a player like VF Corporation with its variety of brands (Vans, The North Face, Timberland, Wrangler,…) could be a better owner.
As a though experiment: Could ADS and PUM team up ? There would surely be HQ synergies (both in the same town), purchasing and distribution synergies, the potential for a new “brand” i.e. “Dassler”, very much like NKE created the “Jordan” brand out of nowhere. But M&A is notoriously difficult and value destructive in this sector (ADS/Reebok or Nike/Converse or VF/Supreme). But often because of inflated purchase valuations, which is not the case at PUM.
Valuation: After the „double-whammy“, Puma shares (-50% ytd) have collapsed to levels that imply no improvement from here in the next 2 years (see left chart below). The FY27 margin target of 8.5% on 3% sales growth would catapult the FVest. to EUR 42. If they can get to just 6.5% EBIT, the upside from here is ~40%. On EV/Sales of 0.5x Puma trades at a 10-year low. Puma is an almost debt-free business (ignoring operating leases) with a ~8% FCF yield (on lowered estimates). PE and strategic investors should be getting their pencils out. We doubt that current management can change the significant undervaluation. As so often in this industry, a management change could trigger a re-rating without ownership change (remember Gulden to ADS ?)
Sidenote: In the summer, when visiting Puma, we made the following chart. It´s last 2 columns show the "Inventory Value Capture" score, a metric designed by Speedwell Research (for details click). Brands/Retailers have 2 possible strategies: Strategy 1 (convince people to pay more) or Strategy 2 (work to bring costs down so you can charge less and sell more). At its core though, this question can essentially be reframed as a tradeoff between margins and turnover: How much does inventory turnover need to increase to offset a lower margin? It shows that PUM is a relative "volume play". Higher value brands have more pricing power and hence can capture more value. PUM IR didn´t want to discuss this metric with us. (Bare in mind that this chart was made at a time with both ADS and NKE troubled in financial numbers; i.e. ADS inventory Yeezy situation).
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