EUR 850.00 For Business Accounts Only

Morningstar | Charms and Collectibility, Stock Buybacks, Promotion Reductions, Cost-Cutting in Focus for Pandora

We maintain our DKK 580 fair value estimate for Pandora shares as the company reported slightly better-than-expected full-year results and provided more clarity on its restructuring program. The problems with the brand that interim management sees are blurred brand message (high awareness but declining appeal), subpar new product launch execution with lack of sufficient marketing support, differing priorities at the local level, and continuous promotions that are weakening brand equity.

The plan to tackle these issues will involve developing a new brand and visual identity by the end of 2019. This will include pooling product and marketing organization under single leadership, creating a global merchandising function, reviving desire to collect Pandora charms (primary focus) and other jewellery, reducing the total number of stock-keeping units, strengthening the iconic collections, and using collaborations and limited editions to create scarcity perception. In the meantime, current overstock will be addressed through stock buybacks and tighter wholesale deliveries (new products will be delivered in smaller batches and reordered based on demand). Promotional days will be reduced by 50%, targeting mostly promotions in between special events, such as Black Friday. Management didn’t see a need for broad-based price reductions (in line with our thinking) but highlighted an opportunity for adding visibility and adding to the range in entry-price products.

Pandora identified cost-cutting opportunities of DKK 1.2 billion, or over 5% of revenue, which will partially be reinvested in increased brand support (marketing step-up, e-commerce, and omnichannel capability development).

As we argued in our recent report "Is the Second Time the Charm for Pandora?" while the brand recovery remains far from certain, the company has not run out of ammunition for performance improvement, and its loyal customer base and global brand recognition provide valuable assets to build upon.

The company now expects revenue in local currencies in 2019 to be down 1%-5% versus our expectations of 2.5%, driven by decreasing promotions, lower sell-in in the wholesale channels, and continuing negative total like-for-like results. Operating margin is expected to be 26%-28% (versus 28.2% in 2018) excluding restructuring costs and 20%-22% if the restructuring items are included. This compares to our forecasts for 23%-24%. We didn’t explicitly model inventory buyback, which is expected to remove 2% of operating margin in 2019. However, a near-term margin hit from inventory buyback is a desired action, given that it helps rebalance oversupply in the market (which leads to excessive discounting, hurting the brand) and build goodwill with distributors.

Pandora kept its dividend stable at 2018 levels, which constitutes more than 5% yield at current share price, and will buy back another DKK 2.2 billion in shares, equal to around 6% of its market cap. Given interim management’s comprehensive plan for the brand turnaround, we believe that the chances for COO Jeremy Schwartz to fill the permanent CEO position have increased. We continue to view the shares as attractive despite very high uncertainty.