Translated by
Nicola Mira
Apr 13, 2017
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Why would Kering consider selling its sport-lifestyle brands?

Translated by
Nicola Mira
Apr 13, 2017

The signs are clear. On Wednesday 12th April at 4 pm CET, the Puma share price posted a growth of over 8% on the Frankfurt stock exchange, reaching €337. Its peak value since 2007, when the German sport group was acquired by the Kering group (then called PPR), newly led by François-Henri Pinault, for a valuation of €330 per share. Also at 4 pm on Wednesday, Puma presented its new board of directors, minus François-Henri Pinault.

Puma is in buoyant health - Puma

In a way, it seems the wheel has turned full circle for the luxury giant's CEO. François-Henri Pinault took over from his father, the group's founder, in 2005. He went on to transform PPR, deciding to opt out of mass-market distribution, notably selling the Le Printemps department store in 2006, and concentrating on luxury goods. Entering the sport-lifestyle segment was a bold choice for the CEO, as he went ahead with the acquisition of Puma, then valued at €5.3 billion. His leaving the sport brand is therefore anything but a trivial matter.

Some observers are hinting that Pinault may want to distance himself from day-to-day operations, but his leaving Puma may well be the first step towards the divestment of Kering's sport-lifestyle business. In the meantime, Puma is booming. Yesterday the brand raised its first quarter revenue forecast, stating that sales are expected to grow by more than 10%. The figure is consistent with Puma's latest performances. Last year the German brand's sales grew 10% to €3.6 billion, generating a net income of €62.4 million, up a staggering 68% compared to 2015. And the outlook seems highly favourable, as the brand has also built a solid reputation with US consumers, notably thanks to its ability to ride the athleisure wave with brand ambassadors of the calibre of Rihanna and Cara Delevingne. Paradoxically, Puma is in such buoyant health that Kering may well be willing to sell.

Actually, it has taken Puma some time to pick up momentum, but its current commercial success has given a new impetus to the brand's share price on the Frankfurt stock exchange. It is an opportunity that Kering's management might want to seize. Selling Puma today would somehow allow Kering to call it a tie, a possibility that four years ago seemed highly improbable.

Although a few weeks after the 2007 acquisition the Puma share price topped the €350 mark, it quickly plummeted afterwards, introducing a scenario far from that heralded by François-Henri Pinault at the time. He had stated in fact that the operation "will have a positive financial impact for PPR, in terms of accelerating revenue growth, improving profitability and increasing net earnings per share."

Puma's share price actually hit a nadir of €103 in March 2009, and wallowed for a long time between the €150 and the €250 mark. In the early 2010s, the German brand lagged far behind Adidas and Nike, whose sales and share prices skyrocketed. Evidence of Puma's lack of appeal was the fact that Stella McCartney, which belongs to Kering, created a sportswear line with Adidas rather than with Puma.

As a result, François-Henri Pinault has regularly had to face questions about the likelihood of the sport outfitter's sale, a solution which however he has always denied. "Looking at the world's economic development prospects over the next 20 to 30 years, the main markets are those featuring young consumers, highly attracted by brands and also highly aware of health issues, and therefore drawn towards sport," explained Pinault to TV news channel Bloomberg in 2014.

In June 2016 he reiterated he did not foresee selling Puma in the near future. But at the time the brand's share price was struggling to rise above €200. The situation is totally different now, thanks to the strategic overhaul engineered by Bjorn Gulden, who was appointed General Manager of Puma in 2013 and introduced the 'Forever Faster' strategy. Gulden refocused the brand on sport, concentrating the marketing budget on major assets such as Usain Bolt and football clubs like Arsenal, Borussia Dortmund and soon Olympique Marseilles, before launching a series of contemporary urban collections endorsed by rap stars and social media celebrities.

And while in 2014 Puma's revenue was still slumping, stuck below the €3 billion threshold, with Asics and New Balance looming closer, a strong recovery is now in full swing. But why sell a brand whose every indicator is in the growth quadrant?

One of the key factors is probably the level of profit margin. In the last fiscal year, Puma's operating margin was 3.5%, while Kering's luxury segments boasts an operating margin of 22.9%. Financial analysts agree that selling the sport-lifestyle segment would add a good deal of value to the share price.

Given this, also Volcom, bought in 2011, may well have a future outside of the Kering group, as Todd Hymel, Volcom's General Manager, also stepped down from Puma's board of directors. Volcom operates in the board sports market, which has been highly volatile recently, and has struggled in the last fiscal year. Its sales lost 8%, falling to €242 million, but notably the brand posted a loss for the fiscal year. Kering has not abandoned Volcom though, and is investing to endow it with a quality store network worldwide, with a flagship store set to open soon in Paris.

But thinking about a sale is one thing, and finding a buyer quite another. Kering has perhaps hinted at a possible solution for Volcom, by selling the Electric accessories brand to its management last year. Nevertheless, as far as Puma is concerned, sales of such a major brand are rare in the sport market. "The senior management has done a fine job of turning Puma around, and has indicated that a sale of the brand further down the line is a possibility. However, I do not think there are many buyers ready to pay an amount equivalent to its current valuation, said Mario Otelli, an analyst at Bernstein. Although Kering would welcome the money to clear some of its debts and potentially have greater resources available for its merger and acquisition operations." Rumours about the possible sale of Puma are therefore bound to be circulating again in the future.

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