Illustration of Earnings Development in 2016 Compared to 2015
In the outlook in the 2015 Annual Report, PUMA forecast for a gross profit margin at the previous year‘s level (45.5 %) for the 2016 financial year, as PUMA had planned countermeasures to offset the negative effects of developments in exchange rates. For other operating income and expenses, PUMA expected an increase at a mid to high single-digit rate, as plans called for continued investment in marketing, in the company‘s own retail stores and in the IT infrastructure. The forecast for operating income (EBIT) was in a range between € 115 million and € 125 million. In addition, a corresponding improvement in net earnings was expected. These forecasts were confirmed during the year and, for the full year 2016, were achieved in full, or, in the case of gross profit margin and operating income, even slightly exceeded. As a result, PUMA was able to achieve the targeted improvement in its operating income and operating margin for 2016.
More details on earnings development are provided below.
Gross Profit Margin
In the financial year 2016, gross profit increased by 7.5 % from € 1,540.2 million to €1,656.4 million.
The gross profit margin increased by 20 basis points from 45.5 % to 45.7 %, as PUMA was able to more than compensate for negative currency effects resulting from the strength of the US dollar against a number of currencies by selectively increasing prices and improving sourcing. In addition, the increased share of sales generated by the Group‘s own retail activities had a positive impact on the gross profit margin.
Accordingly, the gross profit margin in the footwear segment increased from 41.2 % in the previous year to 42.5 %. Apparel recorded a decline from 49.3 % to 48.4 %, while gross profit margin for accessories remained virtually unchanged at 47.9 %.
Other Operating Income and Expenses
The strong focus on tightly controlling other operating income and expenses remained a high priority for PUMA in the 2016 financial year.
Nevertheless, further targeted investments were made in marketing in order to increase the brand awareness of PUMA and to position PUMA as the Fastest Sports Brand in the World. Investments were also made in the modernization of the Group‘s own retail stores and in the continued roll-out of the „Forever Faster“ store concept. The opening of additional retail stores also contributed to the increase in other operating income and expenses. In addition, we continued modernizing our IT infrastructure.
In the 2016 financial year, other operating income and expenses increased by 5.7 % from €1,460.5 million to € 1,544.5 million. As a percentage of sales, the expense ratio improved from 43.1 % to 42.6 %. The decline in the expense ratio reflects the operating leverage achieved and contributes significantly to the increase in operating income.
In sales and distribution expenses, expenses for marketing/retail increased by 5.0 % from € 697.6 million to € 732.3 million. This development is primarily related to the systematic continuation of the „Forever Faster“ brand campaign and the increased number of the Group‘s own retail stores. However, due to the strong growth in sales, the expense ratio decreased from 20.6 % to 20.2 %. Other sales and distribution expenses stood at € 450.1 million, an increase of 1.7 %. The expense ratio decreased from 13.1 % to 12.4 %.
Expenditures for product management and merchandising increased by 11.2 % to € 41.7 million. The expense ratio remained stable at 1.2 % (previous year: 1.1 %). Expenditures for research and development fell by 8.4 % to € 52.0 million and the corresponding expense ratio was 1.4 % (previous year: 1.7 %).
Other operating income declined from € 23.9 million in the previous year to € 0.9 million in 2016. The decrease was due to the lower allocation for development costs and the one-time income related to the sale of the Tretorn brand rights in the previous year.
Administrative and general expenses increased by 7.8 % from € 249.8 million to € 269.3 million. The increase was due to, among other things, higher expenses for IT and value adjustments for receivables. In contrast, other administrative and general expenses remained virtually constant. The expense ratio of administrative and general expenses remained unchanged at 7.4 %.
Depreciation/amortization totaling € 59.9 million (previous year: € 57.5 million) is included under the respective expenses. This represents a 4.1 % increase in depreciation/amortization compared to the previous year.
Operating income (EBIT)
Operating income rose by 32.6 % from € 96.3 million to € 127.6 million in 2016. This result is slightly above the projected range for EBIT between € 115 million and € 125 million.
As a result, the operating margin improved from 2.8 % in 2015 to 3.5 % in the reporting year. This is mainly due to the growth in sales combined with the only moderate increase in other operating income and expenses and the simultaneous slight improvement in the gross profit margin.
The financial result improved from € -11.2 million in the previous year to € -8.7 million in 2016. With virtually stable financial income of € 10.5 million (previous year: € 11.2 million), interest expenses decreased from € 14.4 million to € 13.4 million in the financial year, and expenses from currency conversion differences declined from € 8.2 million to € 6.4 million. The result from the associated company Wilderness Holdings Ltd, which is also included in the financial result, increased to € 1.2 million in 2016 (previous year: € 1.0 million).
Earnings before Taxes (EBT)
In the financial year 2016, PUMA generated earnings before taxes of € 118.9 million, an improvement of 39.8 % over the previous year (€ 85.0 million). The tax expense was €30.5 million, compared to € 23.3 million in the previous year. The decrease in the tax rate from 27.5% to 25.7% in 2016 resulted mainly from the adjustment of tax provisions after the underlying audits were completed.
Net Earnings Attributable to Non-controlling Interests
Earnings attributable to non-controlling interests relate to our joint ventures in the North American market; they increased by 5.8 % to € 26.0 million in 2016 (previous year: € 24.6 million). These companies are Janed, which sells socks and bodywear, PUMA Accessories North America (previously: PUMA Wheat Accessories) and PUMA Kids Apparel, which focuses on the sale of children‘s clothing.
Consolidated Net Earnings
Consolidated net earnings increased in 2016 by 68.0 % from € 37.1 million to € 62.4 million. The main reason for the improvement was the growth of sales in connection with the only moderate increase in other operating income and expenses and the simultaneous slight improvement in the gross profit margin. The improvement in the financial result and the lower tax rate also contributed to the increase in consolidated net earnings.
As a result, both earnings per share and diluted earnings per share rose by 68.0 % to €4.17 in comparison to € 2.48 in the previous year.