EUR 850.00 For Business Accounts Only

Morningstar | Pandora's CEO Is Out, Charms Show Weakness, Midterm Targets Maintained; Shares Cheap

We are reducing our fair value estimate for Pandora to DKK 600 per share from DKK 710. Our adjustments reflect lower growth and operating margin for 2018 as well as our expectations for lower sustainable profitability.

Despite the anticipated CEO replacement, the board stuck to midterm targets for store expansion and takeovers, and we incorporated those in our forecasts. We adjusted our revenue growth expectations for four years after 2018 a little lower (to 7.5% versus 8%-9% previously) as a result of lower charm growth and higher cannibalization between new and existing stores. We forecast low-single-digit revenue growth after 2022, largely off the same store base. We expect margin to decline to 22% in 2022 from 28% in 2018 as retail expansion weighs on operating costs and gross margin suffers from higher quality and price investments. We expect margin to improve thereafter gradually to 26% as operating leverage kicks in.

We continue to regard increasing share of retail as a positive strategic direction and see room for expansion in Asia. We are more sceptical about expanding the retail footprint in the Americas and Europe. We also see Pandora’s ambition to become a full product range jewelry brand, reducing reliance on the core category, as a reasonable way forward.

In the second quarter, wholesale came under pressure through destocking and the charm category showed weakness, as the launch of new products in the category didn't help. Management attributed weak performance in charms to changing consumer buying patterns, with people wearing fewer charms per bracelet. It remains to be seen whether more important factors, such as broader loss of customer appeal for the category or increased competitive pressures, are in play. We remain cautious on the charm category, which we expect to be largely flat or decline slightly, with market saturation in some of the older markets and some growth in new ones.

Like-for-like sales growth was negative 1% in the second quarter. This compares with around a 5% decline in constant currency in the first quarter. Sales in China, one of the key negatives in the first quarter, showed stabilization in the second quarter with 29% absolute and 1% comparable sales growth (versus a midteens comparable decline in the first quarter). We still see a lot of potential for the brand in China, with its 183 stores largely located in Tier 1 and 2 cities, versus over 230 in the United Kingdom and 350 in the United States, or around 2,500 stores of Chow Tai Fook (the Chinese jewellery store chain) in the region. Sales in the U.S. improved in own-retail channels but were pressured by wholesale weakness.

Jeremy Schwartz was appointed as new COO and will run the company jointly with the CFO until a new CEO is appointed. Schwartz was CEO of Body Shop previously.