Global Economy

The global economy emerged from the worst of the economic downturn during the course of 2016. The expansion of the global economy was weak overall in 2016, but began accelerating slightly from the middle of the year. According to the winter forecast of the Kiel Institute for the World Economy (IfW), the increase in global gross domestic product (GDP) for 2016 will be 3.1%. This is again slightly below the level of the previous year, which was already weak, and corresponds to the lowest growth since the crisis year 2009.

Economic growth in the advanced economies remained moderate, with the GDP in the United States (+1.6%), the United Kingdom (+1.6%), the Euro zone (+1.7%) and in Japan (+1.0%) at a similarly subdued level.

The emerging markets economies have recently seen an overall stronger performance, but major problems remain in some countries. While China‘s GDP grew significantly (+6.6%) thanks to its expansionary economic policy, Russia (-0.6%) and Brazil (-3.5%) remained in recession.

The Sporting Goods Industry

The global sporting goods industry recorded solid growth in 2016. The main growth drivers were the increase in consumer spending due to higher incomes and the worldwide increase in participation in sports. The trend towards more and more women being active in sports contributed to this positive performance. In addition, the global sports fashion trend continued.

With regard to sales channels, the eCommerce business continued to record the highest growth rates. However, volatile currency movements, and, in particular, the strong US dollar, which made products more expensive, had a dampening effect on the profitability of some companies in the sporting goods sector.

Illustration of Sales Development in 2016 Compared to 2015 Outlook

In the 2015 Annual Report, we forecast a currency-adjusted increase in consolidated sales at a high single-digit rate for the financial year 2016. This was confirmed during the year and was even slightly exceeded for the full year 2016.

More details on sales development are provided below.

Consolidated Sales

PUMA increased consolidated sales in the financial year 2016 in euro, the reporting currency, by 7.1 % to € 3,626.7 million. Currency-adjusted sales increased by 10.2%. This result even slightly exceeds the forecast of currency-adjusted sales growth at a high single-digit rate. All regions and product segments contributed to this positive performance.

The main driver for the growth in sales was PUMA’s most important segment, footwear, which at the end of the 2016 financial year had been on a sustained growth trend over the past ten quarters: Sales in euro, the reporting currency, rose by 8.0 % to € 1,627.0 million, supported by the Running, Sportstyle and Fundamentals categories. The currency-adjusted sales increase was 12.6 %. This segment’s share in consolidated sales rose from 44.5 % in 2015 to 44.9 % in the reporting year.

In the reporting currency, the euro, sales in the apparel segment rose by 7.1 % to € 1,333.2 million. The currency-adjusted sales increase was 9.6 %. All product categories contributed to this positive performance. The largest increases were achieved in the Sportstyle category, especially with products for women. The apparel segment accounted for 36.8 % of consolidated sales (previous year: 36.7 %).

Sales in the accessories segment increased by 4.7 % to € 666.5 million in the reporting currency, the euro, despite the stable development of the golf club business. This corresponds to a currency-adjusted increase of 5.9 %. The share of consolidated sales decreased to 18.4 % (previous year: 18.8 %).

Retail Businesses

The Group‘s own retail activities include PUMA Stores, factory outlets and online sales, each with direct sales to our consumers (direct-to-consumer business). In addition to regional availability, this ensures the controlled sale of PUMA products as well as the presentation of the PUMA brand in an environment appropriate to our brand positioning.

Sales in the Group‘s own retail businesses improved on a currency-adjusted basis by 12.5% to €794.3 million during the 2016 financial year. This corresponds to a share of 21.9 % of total sales (previous year: 21.4 %). The sales growth was achieved both on a comparable area basis in our own retail stores and through the targeted expansion of the portfolio of the company‘s own retail stores. In addition to the opening of additional retail stores, the optimization of the portfolio also included the modernization of existing retail stores as well as the roll-out of the „Forever Faster“ store concept at other locations. This makes it possible to present PUMA products and related technologies in an even more attractive environment and strengthens PUMA‘s position as a sports brand.

The eCommerce business recorded above-average growth, supported by the expansion of the product offering in the online stores and the opening of further online platforms. Our sales promotion measures on special days in the online business, for example on November 11, the largest online shopping day in the world, and on „Cyber Monday“, were particularly successful. In addition, the new products introduced, for example from the „FENTY PUMA by Rihanna“ collection, were extremely well received by our online customers.

Licensing Business

For various product segments, such as fragrances, eyewear, and watches, PUMA issues licenses authorizing independent partners to design, develop and sell these products. Revenue from license agreements also includes some sales licenses for various markets.

License sales decreased in 2016 due to the expiration of some licensing agreements, both in the reporting currency, the euro, and, on a currency-adjusted basis, by 4.3 % to € 104.3 million. Of this amount, € 15.7 million or 15.1 % was attributable to license and commission income, compared with € 16.5 million (15.1 %) in the previous year.

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.

Financial Result

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.

The dividend policy of PUMA SE is based mainly on the development of consolidated net earnings and free cash flow.

The Managing Directors will recommend to the Administrative Board at the Annual General Meeting on April 12, 2017 that a dividend of € 0.75 per share be distributed from PUMA SE’s net earnings for financial year 2016 (previous year: € 0.50). The increase in the dividend results from the improvement in consolidated net earnings and free cash flow in the past financial year. As a percentage of net earnings, the payout ratio amounts to 18.0 %, compared to 20.2 % in the previous year. The dividends will be distributed in the days following the Annual General Meeting at which the resolution on the distribution is adopted.

The currency-adjusted growth in consolidated sales of 10.2 % in 2016 is attributable to the positive development in all regions.

Growth in the EMEA region was particularly strong. Sales in the reporting currency, the euro, increased by 9.9 % to € 1,382.7 million. This corresponds to a currency-adjusted increase in sales of 13.2 %. Particularly strong contributions came from France and the DACH region (Germany, Austria and Switzerland), which recorded double digit sales growth. In addition, Russia and South Africa performed very well, also recording double-digit sales growth. The share of the EMEA region in consolidated sales increased from 37.1 % in the previous year to 38.1 % in the 2016 financial year.

All three product segments recorded a double-digit increase in sales on a currency-adjusted basis. Sales of footwear increased by 13.4 % on a currency-adjusted basis. In apparel, sales improved by 14.6 % on a currency-adjusted basis and accessories recorded currency-adjusted sales growth of 10.9 %.

Sales in the Americas region rose by 2.2 % to € 1,339.6 million in the reporting currency, the euro. On a currency-adjusted basis, sales increased by 8.3 %, with both North and Latin America contributing to the growth. The weakness of the currencies in Latin America, particularly in Argentina, continued to impact the development of sales in euro, the reporting currency, in 2016. The share of the Americas region in consolidated sales therefore fell from 38.7 % to 36.9 %.

In the segments, footwear was the main growth driver: On a currency-adjusted basis, sales improved by 11.4 %. Apparel sales increased by 7.7 % on a currency-adjusted basis and accessories recorded a currency-adjusted sales increase of 1.9 % compared to the previous year.

In the reporting currency, the euro, sales in the Asia/Pacific region rose by 10.5 % to € 904.5 million. The currency-adjusted sales increase was 8.5 %. The main drivers of growth in the region were China, with a double-digit increase in sales, followed by India, which also recorded strong sales growth. The difficult market environment in Japan and Korea, on the other hand, allowed only a stable development of sales in 2016. The share of the Asia/Pacific region in consolidated sales rose from 24.2 % to 24.9 % in 2016.

With regard to the product segments, the footwear segment continued its strong growth. Currency-adjusted footwear sales rose by 13.5 %. Apparel sales rose by 5.7 % on a currency-adjusted basis and accessories increased by 1.3 % on a currency-adjusted basis compared to the previous year.

Equity Ratio

PUMA continues to have an extremely solid capital base. As of December 31, 2016, total assets increased by 5.5 % from € 2,620.3 million to € 2,765.1 million. Equity rose by 6.4% from € 1,619.3 million to € 1,722.2 million. The equity ratio accordingly improved by 0.5 percentage points from 61.8 % to 62.3 %.

Working Capital

Despite the significant increase in sales and the rise in the number of the Group‘s own retail stores, working capital increased only slightly in the past financial year by 0.7% from € 532.9 million to € 536.6 million. This underpins the strong performance in working capital management. In order to ensure product availability even when demand is strong and to meet the increased need for products due to our new retail stores, inventories increased by 9.4 % compared to the previous year from € 657.0 million to € 718.9 million. Trade receivables increased by 3.3 % from € 483.1 million to € 499.2 million. Trade payables rose by 11.7 % and totaled € 580.6 million as of December 31, 2016, compared to € 519.7 million in the previous year.

Other Assets and Other Liabilities

Other current assets, which include the market value of derivative financial instruments, increased compared to the previous year by 55.4 % to € 79.2 million.

Other non-current assets, consisting mainly of intangible assets and property, plant and equipment, rose by 7.6 % to € 770.2 million, mainly due to investments in the Group‘s own retail stores, IT infrastructure and the expansion of the administration building at the Group headquarters in Herzogenaurach.

Other current liabilities decreased year on year from € 103.9 million to € 46.6 million. The reduction resulted from the repayment of current financial liabilities, which were taken out as part of financing activities by companies included in the Kering Group.

The increase in pension provisions by 32.8 % to € 31.6 million resulted mainly from a fall in the interest rate applied for valuation and the discounting of pension obligations, since yields on top-rated fixed-income corporate bonds in the market have decreased. The resulting actuarial loss is allocated to other income in accordance with IFRS accounting principles.

Other non-current liabilities rose by 61.8 % year on year to € 53.3 million. This increase is due to non-current purchase price liabilities from the acquisition of Genesis Group International Ltd. and the taking out of a long-term bank loan for the expansion of the administration building.

Gross cash flow improved by 36.0 % from € 134.5 million to € 182.9 million in the 2016 financial year due to higher pre-tax profit. Both the financial result and non-cash expenses and income, which include in particular depreciation on property, plant and equipment, amounted to € 64.1 million in 2016.

The strong performance of working capital management contributed significantly to the improvement in cash flow from operating activities. In 2016, the total cash inflow from operating activities was € 131.1 million compared to a cash outflow of € 37.1 million in the previous year. The significant improvement is due in particular to the positive development of net working capital*. Whereas net working capital recorded a cash outflow of € 125.1 million in the previous year, the cash flow in 2016 was almost completely balanced at € -0.2 million. By contrast, the cash outflow from tax, interest and dividend payments increased by 10.9 % to € 51.6 million.

The cash outflow from investing activities increased by 31.9 % from € 61.7 million to €81.4 million in the reporting year. Payments for the acquisition of shareholdings in 2016 largely resulted from the acquisition of Genesis Group International Ltd. Investments in property, plant and equipment in 2016 related mainly to investments in the Group’s own retail stores, IT infrastructure and the expansion of the administration building in Herzogenaurach. These investments increased from € 79.0 million in the previous year to € 84.3 million. The decline in other investment activities related to lower cash inflows from asset disposals.

The free cash flow before acquisitions is the balance of the cash inflows and outflows from current operating and investing activities. In addition, an adjustment is made for payments in connection with acquisitions. As a result of the increase in pre-tax profit and the strong improvement in cash flow from net working capital, the free cash flow before acquisitions rose by € 154.8 million from € -98.3 million to € 56.5 million. As a percentage of consolidated sales, free cash flow before acquisitions was 1.4 % compared to -2.9 % in the previous year.

The cash flow from financing activities in the financial year 2016 mainly consists of € 7.5 million in dividend payments to shareholders of PUMA SE, dividend payments to non-controlling interests of € 19.3 million, and the entering into and repayment of financial liabilities. In the 2016 financial year, PUMA repaid financial liabilities which had been taken on by the majority shareholder Kering as part of financing activities in the previous year. This resulted in an overall cash outflow from financing activities of € 61.1 million versus cash inflows of € 28.9 million in the previous year.

As of December 31, 2016, PUMA had cash and cash equivalents of €326.7 million, a slight decline of 3.6 % compared to the previous year (€ 338.8 million). The PUMA Group also had credit facilities totaling €487.6 million as of December 31, 2016 (previous year: €401.7 million). Unutilized credit lines totaled € 433.1 million on the reporting date, compared to € 306.0 million the previous year.

* 
Net working capital includes normal working capital line items plus current assets and liabilities which are not normally part of the working capital calculation.

We are very satisfied with the business development in the past financial year. PUMA was able to fully meet the financial targets for 2016 and even slightly exceed them in some cases. The growth in sales (currency-adjusted +10.2%) shows that we are on the right track by increasing our brand heat and improving our product offering. The sales of our products in the Group’s own retail stores as well as through our wholesale customers also improved significantly. In terms of profitability, too, we were able to grow significantly and, once again, improve our operating income, consolidated net earnings and earnings per share after declining earnings in previous years. Operating income (EBIT) improved considerably in the past financial year, thanks to a slightly improved gross profit margin and an only moderate increase in other operating income and expenses (EBIT € 127.6 million, +32.6 %).

With regard to the consolidated balance sheet, we believe that PUMA continues to have an extremely solid capital base (equity of around € 1.7 billion, equity ratio of 62.3 %). In addition, management’s strong focus on working capital contributed to the fact that working capital increased only slightly by 0.7 % compared to the previous year, despite the significant increase in sales.

The improvement in profitability and the focus on working capital also led to a significant improvement in cash flow during the past financial year. Free cash flow before acquisitions rose from € -98.3 million in the previous year to € 56.5 million. Cash and cash equivalents amounted to € 326.7 million as of the balance sheet date.

As a result, the net assets, financial position and results of operations of the PUMA Group were solid at the time the combined management report was prepared. This enables us to increase the dividend for the 2016 financial year and propose a dividend of € 0.75 per share, an increase of € 0.25 per share, to the Annual General Meeting on April 12, 2017.