How Puma Is Banking on the Trade War to Boost Sales in China

“If the tariffs are coming, we cannot understand how that will not cause an increase on retail prices in the U.S. . . . 2020 will be a tough year in terms of working to mitigate that pressure,” Puma CEO Bjørn Gulden said during a conference call with journalists on Wednesday. The ongoing trade negotiations between the U.S. and China was the main topic, as talks between the two superpowers resume this week in Shanghai.

When asked if he thinks the letter sent by the American Apparel and Footwear Association to President Trump in June, objecting to his latest wave of proposed tariffs against Chinese-made goods, has helped, he replied: “Tariffs on our product for the U.S. when we have no U.S. production doesn’t really make any sense. The end result will decide. We felt when we talked to both retailers and brands, no one could capitalize in our industry with the kind of tariffs that are on the table, so in the end it will hurt the consumer. Let’s hope it’s not coming.”

Most brands, “including ourselves,” are scrambling to move supply chains for U.S. exports out of China to countries like Vietnam, Bangladesh and Cambodia to avoid margins being eaten up by tariffs. Today 25 percent of Puma product destined for the U.S. market is produced in China, versus 50 percent five years ago, “and is being reduced as we speak,” the CEO said.

But the situation also has its advantages, Gulden said, explaining how Puma is adapting its capacities in China to feed local demand, especially for apparel. As “the fastest growing market in the brand’s sector for the mid-term future,” Puma is seeing annual sales growth of around 50 percent in China. Within five years, China “could be in competition with the U.S. to be the biggest market,” Gulden said, adding: “We’re getting closer to a perfect balance between the regions.”

“There’s no doubt that China for a long time was the most efficient market to produce in — the suppliers there have done product for a long time . . . the technologies, the workforce and everything, and as you move to other markets, you’re first getting a lower productivity. You need a balanced geographical sourcing base,” added Gulden. “There are advantages to producing locally, with no tariffs, no barriers and less freight costs.”

China led the way in a 23% uptick in second quarter sales, currency-adjusted, in the Asia-Pacific region, offsetting a sluggish performance in Japan and South Korea, followed by a 22.7% increase in sales in the Americas region.

Puma SE in turn raised its full-year forecast, also citing healthy growth in all product divisions.

The Herzogenaurach, Germany-based sporting goods giant said sales in the three months ended June 30 rose 16.9% to 1.22 billion euros, while like-for-like net profit advanced 59.7% to 49.7 million euros.

Earnings before interest, taxes, depreciation and amortization improved by 39% to 80 million euros, versus 58 million euros in the equivalent year-ago period.

Both apparel and footwear showed strong growth in the period, up 23.6% and 15.4%, respectively. In terms of footwear trends, Gulden said demand was pretty well spread, with the chunky “ugly” sneaker style showing grip. “It’s actually holding up; we’re seeing good order bulk on those silhouettes and continuing into 2020,” he said.

Initial sales of the heritage basketball style, the Ralph Sampson, were encouraging, while the impact of sales on kits launched in July linked to the signing of Puma’s largest-ever soccer partnership, with City Football Group, is expected to be reflected in the third- or fourth-quarter figures, Gulden said.

Preparing for the 2020 Olympic Games in Tokyo, Puma has added a number of new athletes to its roster, including world champion 400-meter hurdler Karsten Warholm, rising pole vault star Armand Duplantis and 2019 NCAA 100-meter hurdles champion Janeek Brown.

In the first half of 2019, Puma’s net profits gained 46.3% to 1.44 billion euros, while group sales increased 16.8% to 2.54 billion euros.

The German sporting goods maker’s gross margin — a key indicator of profitability — in the period gained 80 basis points to 49.2% from 48.4% the year prior.

In terms of full-year outlook, Puma said it now expects sales growth of around 13% in currency-adjusted terms, up from previous guidance of 10%, with net earnings expected to improve significantly. The full-year EBIT is expected to come in at between 410 million euros and 430 million euros, versus the previous guidance of between 395 million euros and 415 million euros.

Puma said it has elected Héloïse Temple-Boyer and Fiona May as new members of the supervisory board.

On the retail front, the first six months of 2019 saw a net opening of 33 owned and operated Puma stores internationally, as well the opening of 200 Puma retail locations in China with partners. A New York flagship store is set to open on Fifth Avenue in August.

Following the opening of a new distribution hub just outside of Indianapolis in 2020, a new multichannel distribution center being built in Geiselwind, Germany, is expected to be operational in early 2021. Modernizing the supply chain and distribution channels “to be able to do multichannel in an efficient way” remains one of the biggest challenges, Gulden said.

This story was reported by WWD and originally appeared on WWD.com.

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