As an international company, PUMA is exposed to global macroeconomic developments. Economic developments in key sales markets can have a direct impact on consumer behavior, which may have a positive or negative impact on sales and earnings. For example, political changes, exchange rate fluctuations, changes to the legal framework, and social developments may have an effect. The current political developments may have a noticeable effect on PUMA‘s sales and operations and are therefore being closely monitored.
Overall, PUMA manages these challenges with geographic diversification and the development of alternative scenarios for the possible occurrence of serious events.
Brand image and brand heat are extremely important for PUMA, as consumer behavior can have a negative effect on the brand as well as a positive one. PUMA is aware of the significant risks involved in this and therefore strives to work with appropriate brand ambassadors. In 2016, the „DO YOU“ campaign and the cooperation with female brand ambassadors such as Rihanna, Kylie Jenner and Cara Delevingne formed a focal point. The main objective was to address female customers directly and to make the PUMA brand more attractive to women. The improved range of products for women (e.g. Fierce, FENTY PUMA by Rihanna) increased brand heat in 2016.
PUMA came up with a new mission statement in 2013 in order to ensure PUMA’s sporting roots are emphasized even further and to sharpen its perception as a sports brand. „To be the Fastest Sports Brand in the world“. Our cooperation with Usain Bolt and our commitment to Formula 1 support this mission statement
Counterfeit products can cause considerable damage to consumer confidence in the brand and can devalue PUMA‘s brand image. For this reason, PUMA has made fighting brand piracy a top priority. PUMA’s intellectual property team does more than just protect a strong global intellectual property portfolio of trademarks, designs and patents. PUMA also works closely with customs and other law-enforcement authorities around the world and provides input regarding the implementation of effective laws to protect intellectual property.
Most products are produced in the emerging markets of Asia. Production in these countries can be associated with substantial risks for PUMA. For instance, certain risks may result from factors such as fluctuations in exchange rates, changes in taxes and customs duties, trade restrictions, natural disasters and political instability, as well as the international threat of terrorism. Risks may also result from an over dependence on individual manufacturers.
The portfolio is regularly reviewed and adjusted to avoid creating a dependence on individual suppliers and sourcing markets. In order to ensure that the necessary future production capacity will be available, framework agreements are generally concluded for extended periods.
There is also the risk of a breach of ILO (International Labor Organization) core labor standards by our suppliers. The core task of the PUMA Sustainability Team is thus to verify compliance with the applicable standards in regular audits of suppliers.
Product and Market Environment
Recognizing and taking advantage of relevant consumer trends early on is key to countering the risk posed by market-specific product influences, in particular the risk of substitutability in the competitive sport and lifestyle market. Only those companies that identify these trends at an early stage will be able to gain an edge over their competitors.
PUMA‘s targeted investments in product design and development ensures that the characteristic PUMA design of the entire product range is consistent with the overall brand strategy (Forever Faster), thereby creating a unique level of brand recognition.
PUMA makes use of various distribution channels in order to minimize dependence on any single channel. The expansion of the Company‘s own retail stores is also intended to ensure that PUMA products are presented in an exclusive brand environment preferred by PUMA.
Distribution through its own retail stores
is linked to various risks for PUMA, including investments in expansion and
equipping stores, higher fixed costs
compared to distribution through wholesalers as well as lease agreements with long-term lease obligations, all of which can have a negative impact on profitability if business declines. On the other hand, extending the value chain can deliver
higher gross margins and provide better control over distribution. In addition, PUMA-owned retail stores can deliver PUMA brand experience directly to the end customer.
To avoid risks and take advantage of opportunities, PUMA performs in-depth location and profitability analyses before making investment decisions. The Company’s strong controlling and key performance indicator system enables it to detect negative trends early on and take the countermeasures required to manage individual stores accordingly.
Reporting in the Media
A negative media report about PUMA, such as a product recall, infringement of laws, or internal or external requirements, can also do significant damage to the brand and ultimately result in the loss of sales and profit, regardless of whether these events actually happened or were just assumed by the media. PUMA protects itself against this risk through careful public relations work, which is managed from the Group’s headquarters in Herzogenaurach, Germany. In addition, PUMA regularly seeks an open dialog with key external stakeholders (e.g. NGOs) and this has been institutionalized in the „Talks at Banz“, which have been held annually since 2003.
The organizational structure of PUMA with the Group‘s headquarters in Herzogenaurach, a central sourcing organization in Hong Kong and local distribution companies around the world, gives the Group a global orientation. This results in a risk for PUMA that the flow of goods and information are not sufficiently supported by modern infrastructure and information technology (IT). For this reason, existing business processes must be continually optimized and adapted. This is done systematically through targeted optimization projects, which are planned and managed centrally by a staff member.
To accomplish this objective, PUMA continued to optimize its organizational structure and setup in 2016. The optimization of the IT infrastructure remained a key topic. In addition, the central management of global eCommerce activities has been relocated from Boston to Herzogenaurach and is now being carried out at the Group‘s headquarters.
PUMA’s human resources strategy seeks to ensure the long-term sustainability of this successful philosophy. To achieve this goal, a control process is in place to detect and assess human-resource risks. Accordingly, special attention has been paid to managing talent, identifying key positions and high-potential individuals, and optimizing talent placement and succession planning. PUMA has instituted additional national and global regulations and guidelines to ensure compliance with legal provisions.
PUMA will continue to make targeted investments in the human-resource needs of particular functions or regions in order to meet the future requirement of its corporate strategy.
As an international company, the PUMA Group is exposed to various legal risks. These include contractual risks or risks that a third party could assert claims and litigation for infringement of its trademark rights, patent rights or other rights. The continuous monitoring of our contractual obligations and the integration of internal and external legal experts in contractual matters should ensure that any legal risks are avoided.
PUMA is exposed to the risk that employees violate laws, directives and company standards (compliance violations). These risks, such as theft, fraud, breach of trust, embezzlement and corruption, as well as deliberate misrepresentations in financial reporting, may lead to significant monetary and reputational damage. PUMA therefore makes use of various tools to manage these risks. They include an integrated compliance management system, the internal control system, Group controlling and the internal audit department. The employees of PUMA also have access to an integrity hotline for reporting unethical behavior.
As an international company, PUMA is subject to currency risks resulting from the disparity between the respective amounts of currency used on the purchasing and sales sides and from exchange-rate fluctuations.
PUMA’s biggest procurement market is Asia, where most payments are settled in USD, while sales of the PUMA Group are mostly invoiced in other currencies. PUMA manages currency risk in accordance with internal guidelines. Currency forward contracts are used to hedge existing and future financial liabilities denominated in foreign currencies.
To hedge signed or pending contracts against currency risk, PUMA only concludes currency forward contracts on customary market terms with reputable international financial institutions and Kering Finance SNC. As of the end of 2016, the net requirements for the 2017 planning period were adequately hedged against currency effects.
Foreign exchange risks may also arise from intra-group loans granted for financing purposes. Currency swaps and currency forward transactions are used to hedge currency risks when converting intra-Group loans denominated in foreign currencies into the functional currencies of the Group companies.
In order to disclose market risks, IFRS 7 requires sensitivity analyses that show the effects of hypothetical changes in relevant risk variables on earnings and equity.
The periodic effects are determined by relating the hypothetical changes caused by the risk variables to the balance of the financial instruments held as of the balance sheet date. The underlying assumption is that the balance as of the balance sheet date is representative for the entire year.
Currency risks as defined by IFRS 7 arise on account of financial instruments being denominated in a currency that is not the functional currency and is monetary in nature. Differences resulting from the conversion of the individual financial statements to the Group currency are not taken into account. All non-functional currencies in which PUMA employs financial instruments are generally considered to be relevant risk variables.
Currency sensitivity analyses are based on the following assumptions:
Material primary monetary financial instruments (cash and cash equivalents, receivables, interest-bearing debt, liabilities from finance leases, non-interest-bearing liabilities) are either denominated directly in the functional currency or transferred into the functional currency through the use of currency forward contracts.
Currency forward contracts used to hedge against payment fluctuations caused by exchange rates are part of an effective cash-flow hedging relationship pursuant to IAS 39. Changes in the exchange rate of the currencies underlying these contracts have an effect on the hedge reserve in equity and the fair value of these hedging contracts.
If, as of December 31, 2016, the USD had appreciated (devalued) against all other currencies by 10%, the hedge reserve in equity and the fair value of the hedging contracts would have been € 106.2 million higher (lower) (December 31, 2015: € 105.5 million higher (lower)).
Because of its business activities, PUMA is exposed to default risk that is managed by continuously monitoring outstanding receivables and recognizing impairment losses, where appropriate.
The default risk is limited by credit insurance and the maximum default risk is reflected by the carrying amounts of the financial assets recognized on the balance sheet.
A liquidity reserve in the form of cash or cash equivalents as well as confirmed credit lines is maintained in order to ensure the Company’s solvency at all times, its financial flexibility, and the presence of a strategic liquidity buffer. Confirmed credit lines are made available until further notice or with a maturity period of less than one year.
PUMA continually analyzes short-term capital requirements through rolling cash flow planning at the level of the individual companies in coordination with the central Treasury. Thanks to the adequate liquidity of the PUMA Group and a central financing approach, any capital requirements are covered by internal financing, where and whenever possible. The central Treasury conducts medium-term liquidity planning as part of its budget process.
At PUMA, changes in interest rates do not have a significant impact on interest rate sensitivity and therefore do not require the use of interest rate hedging instruments.
PUMA’s risk management system allows the Company to fulfill the legal requirements pertaining to corporate control and transparency. The Management believes that, in an overall evaluation of the Company’s risk situation, risk is limited and manageable. Based on a very solid balance sheet structure, in particular the high equity ratio, and the positive business outlook, management does not foresee any substantial threat to the continued viability of the PUMA Group.