When Usain Bolt steps into the starting blocks at the London Olympics, Francois-Henri Pinault will likely be watching with greater interest than most fans of the Jamaican sprinter called the fastest man on earth. As chief executive officer of PPR SA -- the French company that owns shoemaker Puma SE (PUM) -- Pinault has a lot riding on Bolt, one of the few star athletes to wear the footwear brand.
If Bolt fails to retain his 100-meter title in London, “it would be a real blow for Puma,” said Thomas Mesmin, an analyst with brokerage CA Cheuvreux in Paris.
Even if Bolt prevails, trouble at Puma could scuttle Pinault’s two-year-old plan to unload retail assets and develop a sporting-goods division, a shift aimed at helping PPR double revenue to 24 billion euros ($29 billion) from 2011 to 2020.
Puma, whose endorsement of Bolt is worth at least 2.5 million euros a year, according to researcher Sport + Markt AG, cut its 2012 sales and profit forecasts last week, citing wilting demand in Europe. If the situation worsens, PPR (PP) may reconsider the sporting-goods strategy, Mesmin predicts.
On a conference call in April, PPR deputy CEO Jean-Francois Palus branded as “ludicrous” the notion that the company would give up on Puma or sporting goods.
When Pinault outlined his strategy in 2010, he argued that brands like Puma are more profitable and have better potential for expansion than online retailer Redcats and the Fnac media and electronics chain that he is seeking to sell.
As growth slows in Europe, the U.S. and China, Puma hasn’t provided much relief for PPR because it relies on roughly the same cohort of middle-class consumers that the company’s retailers do. Competitor LVMH Moet Hennessy Louis Vuitton SA, (MC) by contrast, has focused on businesses that cater to far wealthier customers -- a group that fares better in tough times.
LVMH, the world’s largest maker of luxury goods, gets more than half its revenue from alcohol, perfume, cosmetics and duty- free retailing. Sales of each of those business units outpaced Puma’s growth in the first quarter, with revenue at the Sephora beauty chain and DFS duty-free stores rising three times as fast as the sporting-goods maker in the period.
Sales of sporting goods are unlikely to grow faster than luxury goods any time soon as the latter have more room to expand in emerging markets, according to Michael Neft, an analyst at ING Investment Management, which holds shares of PPR and LVMH.
“In luxury, there’s a lot less competition between the brands,” Neft said. “The sportswear side is much more of a market share-competition game.”
Challenging market leaders Nike Inc. (NKE) and Adidas AG (ADS) while remaining competitive on price is difficult given their scale and spending power, Neft said. Puma has sought to carve out a niche with apparel that evokes a sporting lifestyle rather than athletic gear targeted at serious sports enthusiasts -- the domain of Adidas and Nike.
And the advertising firepower of the two leading sportswear brands is immense: Nike reports it spent $2.7 billion on marketing last year and Adidas says it laid out $1.7 billion, both roughly 10 percent of sales. Even though Puma devoted 18 percent of revenue to what it calls “marketing/retail expenses,” that added up to just $666 million.
PPR shares have fallen 19 percent since it diversified into sporting goods in 2007, when it bought its first stake in Puma. LVMH has advanced 40 percent. PPR will tomorrow report that second-quarter revenue from continuing operations rose 15 percent to 3.05 billion euros, according to the median of three analysts’ estimates compiled by Bloomberg. LVMH sales rose 24 percent in the period to 6.27 billion euros, estimates show.
While PPR blamed a slowdown in France, Italy and the U.K. for Puma’s revised forecast of mid-single digit revenue growth and a “significant” drop in profit, some of the sporting-goods producer’s problems are of its own making. The purveyor of $45 polo shirts and $185 soccer cleats has trailed Nike and Adidas in revenue growth and its strategy of mixing fashion and performance remains unproven, said Credit Suisse analyst Rogerio Fujimori.
“We see lower barriers to entry for sports and lifestyle relative to European luxury goods,” Fujimori wrote in a July 6 note. Competitive pressure “on Puma has intensified.”
The difficulties at Puma stand in even sharper relief in light of the trouble PPR has had in finding a buyer for Redcats since putting the e-tailer up for sale a year ago. Now PPR is trying sell the company, which owns more than a dozen apparel and home furnishing websites, in pieces. That process will likely slide into next year and yield a lower price than the company had anticipated, according to people familiar with the situation.
Puma’s troubles and the delayed asset sales will make it harder for PPR to reach its 24 billion-euro sales target, even if Gucci, Bottega Veneta, Yves Saint Laurent and its other luxury brands continue to grow as predicted. Pinault has said 40 percent of 2020 revenue will come from the sports and lifestyle division, which includes surf- and skate-wear brand Volcom, shoemaker Tretorn and Cobra Golf, up from 26 percent last year.
To achieve the 2020 goal, Puma’s revenue -- 3 billion euros last year -- would need to grow 8 percent annually over the next nine years, CA Cheuvreux’s Mesmin estimates. Since PPR bought Puma, they’ve expanded by about 6 percent a year on average.
“We’ve always been very cautious” about PPR’s sporting goods strategy, Mesmin said. “They need a very significant investment.”
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