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BUY – Germany last closing Price: Activities: Founded in 1948, Puma is today the third largest brand in terms of market share in the sport industry. The German brand employs 13,000 employees engaged in the production, distribution and sale of footwear, apparel and accessories (47%, 36% and 17% of sales respectively). In terms of sales, the company operates in 120 countries in all three main continents (39% in EMEA, 35% in America, 26% in Asia/Pacific), Asia being its fastest growing market. Puma’s strong position in the market is quite recent. Indeed the company experienced a significant downturn in the 2000s. Not long after being bought by FrançoisHenri Pinault in 2007, the brand witnessed a dramatic drop in earnings, falling from €230 millions in 2011 to only €5 millions in 2013. This event was mainly due to the firm’s high need for capital due to its rapid transformation from a small-size to a transnational company. To counteract its recession, the brand appointed a new CEO, Björn Gulden, who successfully worked as a director at a major competitors. The ex-professional footballer decided to change the brand’s strategy, which has been focused on fashion, preferring a strategy midway between fashion and sport. Through sponsoring influential athletes such as Antoine Griezmann and Usain Bolt, the brand managed to put its name on the map and appear as the clear top 3 in the mature and concentrated sport industry (Nike and Adidas being respectively number one and two, and Under Armour and New Balance being the only other comparables to Puma according to Bloomberg).

Google Trends (searches) from 2014 to 2019 Environment: In 2018, the sportswear industry represented 92 billion euros. With its 3.9 billion euros of sales, Puma took 4.4% of the market share. The sports industry in 2018 continued to grow impressively and all indicators suggest that the trend will continue in the coming years. This trend is explained by the overall increase in private household income in emerging countries, which has increased consumer spending on sporting goods. Women's sport, broadcasts and viewership, is constantly growing: 850 million viewers followed the Women's World Cup in 2015 compared to more than one billion in 2019, showing a positive trend. Sport has also become a real trend in recent years, as developed countries have witnessed the emergence of a large range of new products and services related to sports. At a time when social media has a strong influence on our lifestyles, more people pay attention to their health and choose to devote a larger part of their free time to sports activities. Finally, e-commerce has helped companies reach new customers and serve existing ones more efficiently. Companies have seen their transactions costs reduced: no need for as many retail stores and sales employees, and supply-chain management and distribution is simplified. However, this trend is to be tempered because of certain risks. The global economy slowed during 2018 and this trend may continue due to certain uncertainties, we observe trade policy conflicts, particularly between China and the United States. According to the IMF, the increase in tariffs between the US and China is deteriorating business confidence and worrying financial markets, which could reduce global GDP by 0.5 points in 2020. In addition, economists believe that protectionist measures not only harm growth and employment, but also make consumer goods more expensive, and could reduce sales of the sportswear industry. In addition, the debt ratio of countries continues to increase, particularly in developing countries where it represents 51% of their GDP according to the World Bank. This debt is currently not a problem because interest rates are very low or even negative, consumers can borrow easily, which is beneficial for their purchasing power. However, if interest rates were to rise again, this could reduce their spendings and their ability to buy the sportswear industry products, or even lead to an insolvency crisis. Additionally, as the industry is global, companies' revenues and expenses come from foreign operations in foreign currencies and these revenues and expenses could be affected by fluctuations in these currencies, particularly in certain unstable regions of the world. Finally, the industry is very competitive. The products offered are relatively similar, the value of the products comes from the brand image, so the greatest risk faced by companies in the industry is the failure to maintain their reputation and brand image.Thus, companies must be irreproachable with their employees, in their marketing on social networks/media, their celebrity marketing deals, pick in their after-sales service, on their sustainable impact... News and results: However, this trend is to be tempered because of certain risks. The global economy slowed during 2018 and this trend may continue due to certain uncertainties, Since Gulden appointment as CEO in 2013, the company showed positive growth figures. Indeed, between 2014 and 2018, consolidated income statements report an increase in sales of 56.4%, going from €2,972 millions to €4,648.3 millions, and a substantial increase in earnings, going from €84.8 millions to €187.4 millions, translating into a growth of 121%. Growth has not stopped since as earnings kept improving between first 9 months of 2018 and first nine months of 2019 at rate of 39.0%, translating into a rise of earnings per share from €1.18 to €1.64. The company is also enjoying greater profitability ratios. Indeed, between 2016 and 2018, ROA and ROE increased considerably (respectively 6.6% and 14.0% in 2018 according to Bloomberg). However, these figures lie below industry average (12.2% for ROA and 26.54% for ROE), meaning that Puma still has a long way to go before being considered as a leader in the market. In 2018, Kering sold a very large amount of its shares, losing its controlling interest in Puma. This move has been explained by the luxury giant as a strategy to focus its capital and resources on its core activities. It still decided to keep 15.7% in the German brand, and Artemis, the first recipient of sold shares, got and kept the controlling interest, confirming that investors are still optimistic concerning Puma. During the first nine months of 2019, the working capital increased by 20.1% compared to the same period in 2018. This substantial rate is explained by a 28.4% increase in inventories, mainly due to a higher number of retail stores in operation and a will to keep increasing sales for the next periods. Trade receivables and trade payables rose as well, respectively by 13.1% and 20.3%. Over the first three quarters of 2019, Puma realised sales revenue of € 4,023.6 million, up by 16% from last period. Thus, the company has only to make €624.7 in sales revenue in Q4 of this year to match the annual figure of 2018. Hence, we can easily infer that Puma will again experience a significant rise in sales growth rate. However, as the CEO warned in the 2018 Q3 report, the company will suffer from the US tariffs on China starting from Q4. The adverse effect on profit could easily be offset by a slight increase in the selling prices of impacted goods. Such a move may not have a significant negative impact on the brand’s market share as other competitors will also face the same issue and will also have a strong incentive to match the increase in prices to keep their profitability level intact. Analysis: 1.

CF Puma’s Free Cash Flows have substantially increased between 2016 and 2018 (CAGR=60.9%). This is driven by a strong increase in EBT (CAGR=38.1%) reaching €313 M. The firm is increasing its production capabilities to sustain its growth – it has an aggregated CAPEX of €337 M over the 3 years (vs. depreciation of €212 M). Over the 3 years, its cash inflows from operations were largely covering their CAPEX (aggregated: € 648 M vs. € 337 M) which is a positive indicator regarding the ability of the company to sustain its growth in the future.

In 2016, the dividend payout ratio of the firm was 17.9%. In 2018, it increased to 27.9%. We did not take into account 2017 as Puma paid a one-off dividend to reward the shareholder’s support during the tough years, highlighting that the management is dedicated to shareholder value creation. Thus, we can expect a dividend payout policy similar or more favorable to the 2018 one – as a decrease would negatively impact the stock price. Puma is also benefiting from a cheaper cost of borrowing as its effective interest rate went from a range of [1%:14.7%] in 2017 to [0.1%:8.4%] in 2018. While Puma’s good performance in the last few years undoubtedly reduced its default spread risk and thus its access to cash, this reduction in cost of debt is mainly due to a global decrease in the interest rate. The company borrowed 145 million, 800% more than in 2017, to keep increasing its CAPEX expenditures and enhance its growth figures. Financing itself through debt is a good strategy to create value for the shareholders, especially when a firm is doing that well. According to their debt repayment forecast, they will repay (including interests) 21.3, 7.8 and 164.7 Million euros in 2019, 2020 and 2021. However, the firm should be careful not to base its entire strategy on this cheap and easy access to cash as interest rates fluctuate and may rise in the medium term. 2.

CF In 2018, the value of Puma's balance sheet is $3,307 million. Adidas, Nike and Puma share similar balance sheet ratio component levels. All three have approximately 2/3 of current assets and 1/3 of long-term assets; thus these companies have good liquidity. These similar balance sheet proportions are reassuring for PUMA. However, Puma finances itself slightly more with equity, whereas the two leaders finance their activities slightly more with debt. The Altman Z-score of the company has increased from 3,87 in 2016 to 5,07 in 2018. This score and this evolution indicate a very low probability of bankruptcy. According to Bloomberg, Puma’s Quick ratio is currently slightly below 1 (i.e. 0.9). It means that Puma may not be able to fully pay off its current liabilities in the short term. However Puma is benefiting from unutilized credit lines of about € 501M. Moreover, as the sales are steadily increasing, we can consider that inventories are liquid enough to cover the 0.1 point of assets missing. Taking into account the inventories (current ratio) brings the ratio to 1.8. During the first nine months of 2019, the working capital increased by 20.1% compared to those of 2018. This is explained by a 28.4% increase in inventories due to ‘earlier purchase of products to balance supplier capacities and secure product availability, more retail stores in operation and the general sales growth’. Trade receivables and trade payables rose respectively by 13.1% and 20.3%. Between 2016 and 2018, the Interest Coverage Ratio is always above 10 which is far from the critical threshold of 1.5. Looking at the third quarter of 2016, 2017 and 2018, Puma’s long-term debt to total assets was respectively, 5.4%, 10.1% and 19.6%. It reflects the firm’s strategy to finance its growth with debt to create more value for the shareholders and it is below the 50% threshold that is considered to be risky. According to Bloomberg, Puma has a Debt/Assets of 6.2% whereas Nike, Adidas and Under Armour all have higher ratios (respectively, 14.7%, 10.4% and 17.2%). This means that Puma’s would be less at risk in case of a downturn in the economy. Puma’s Debt/Equity ratio is 11.7% against 38.5%, 25.5% and 36.1% for Nike, Adidas and Under Armour. This explains why Puma has a lower ROE as it benefits from less financial leverage – and thus is less risky. As the firm has started to do since 2017, we can expect Puma to indebt itself more to reach comparable-like level of profitability for the shareholders. Triggers & Risks: The fashion world has witnessed a huge trend towards streetwear, especially among teenagers and generation Z. It is obvious that the whole sport industry heavily beneficiated from this trend. However, trends are not eternal and basing the analysis of companies in the industry solely on this sub-sector would be simplistic. Luckily, Puma’s recent strategy has been to re-focus on sport rather than fully on fashion, diversifying the risk associated with a decrease in sales for clothes. Puma is currently settled in more than 120 countries and in all three main continents, and is increasingly oriented towards the Asian market. Indeed, sales revenues in Asia have increased by 28.5% (currency-adjusted) from Q3 2018 to Q3 2019. Large markets such as India and China represent huge opportunities for Puma to carry on its highly positive growth rates. However, by continuously expanding to emerging markets and countries, the brand starts to face more adverse effects resulting from variations in the exchange rates. As the Q3 2018 report explains, Puma’s financial result has been heavily impacted by currency losses in Argentina and Turkey, making the result profit drop from -3.4 millions to -9.3 millions. Nevertheless, the company’s management has started to address this risk by hedging on the FX market. Another big risk for Puma is the contest for patented-technologies. Indeed, the brand is regularly involved in trail suits against other major competitors in the industry for a conflict regarding specific products or components. While Puma last year won its trial against Adidas for a conflict concerning a technology used for footwear, it may not be the case for all future hypothetical trials. A loss may involve a huge fine to be paid, as well as a heavy damage on the brand’s reputation, which may eventually result in potential large economic losses. Many different factors are currently already increasing the production costs. The exposure to commodity cost volatility should be taken into account as production costs are inherently dependant on the prices of cotton, rubber, polyester and leather. For instance, the price of cotton increased by 61% between mid-2016 and mid-2018 before dropping back to its original level earlier this year. Also, its production factories being primarily based in China, Puma will suffer from the US tariffs on China. Small efforts have recently made by both parties, but a full agreement is still far from being signed. In addition, the increase in Chinese labour costs is also a significant factor to be addressed. US sees profits hit from US tariffs on China These tariffs have impacted every sportswear manufacturers' margins. Rivals, such as Nike and Adidas, are expected to increase U.S. prices, but Puma will not hike prices first as it is not the market leader. Instead, Puma would seek to shift even more production for the U.S. market from China to countries like Vietnam and Indonesia. Production in China for the U.S. has already decreased by 20% from more than 50% five years ago. That has incurred extra costs as some styles are now produced in two places. With the threat of hiking tariffs on China, production level may keep increasing in these other asian countries; leading to extra costs. However, it has not led to reducing production in China because the local market is growing so fast it has absorbed volume previously destined for the United States....