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Morningstar | Pandora Is In the Early Stages of Turnaround Plan As Quarterly Numbers Remain Weak; FVE Remains

We are maintaining our DKK 560 fair value estimate and no-moat rating for Pandora as the company reported weak first-quarter results but confirmed full-year guidance. Shares remain cheap.

Revenue in the quarter declined by 8% in local currencies and 10% in like-for-like sales (we forecast a 4.7% revenue decline in local currency for the full year), with particularly rapid declines in Europe. The U.S. market saw better sales trends, while China was the only expanding major market, with organic growth of 15% because of footprint expansion (like for like was down 4%). The EBIT margin, excluding restructuring charges, was 22.5% versus the 25.6% we expect for the full year and management’s guidance of 26% to 28% .

As part of its turnaround plan, Pandora reduced promotional activity in the first quarter, with fewer promotions between the traditional promotional seasons. The firm also reduced sell-in packages to the wholesale partners to 4 from 8 weeks of cover, which hit sales. The actions aimed to clear excess inventory and improve brand perception, in our view. The company is also trying to streamline product offers with fewer, more productive SKUs. The inventory buybacks are planned in selected markets at the end of the second quarter.

Pandora highlighted the need for increased marketing investments to revive brand appeal (we model marketing expenses to grow to 11.5% of sales in 2019 versus 9.8% in 2018). A relaunch of the brand is planned at the end of 2019 and will involve a new marketing campaign, new physical and eStore design, collaborations and partnerships. A stronger marketing message, influencer product endorsements, and collaboration collections have been used in the luxury industry to engage consumers and could also be a way for Pandora to improve performance. The company said pilot projects with influencers and celebrities yielded positive results in the first quarter.

Partnership with fashion-oriented retailers, especially online pureplays, may also be a way to address and engage more fashion-conscious consumers.

We see the combination of marketing and creative powers as a positive step to create a stronger, more focused brand message, but we are still unsure if an effective change can be implemented with the same creative direction/leadership.

The company remains committed to its plan to reduce costs, with costs reduced by about DKK 100 in the first quarter (target reduction of DKK 600 million in 2019 and DKK 1.2 billion was confirmed).