EUR 850.00 For Business Accounts Only

Morningstar | Pandora's New Focus Is on Like-for-Like Improvement, Cost and Capital Efficiency; FVE Maintained

We don’t foresee significant changes to our Pandora fair value estimate as we adjust our model to reflect changes in the company’s strategic direction. Pandora reduced revenue guidance for 2018 to 2%-4% constant-currency growth versus 4%-7% guided in August, while EBITDA margin guidance remained at 32%. Our forecasts already implied 3% constant-currency sales growth and an EBITDA margin slightly below 32%.

Although the CEO search is still ongoing, the new management team of COO Jeremy Schwartz and CFO Anders Boyer started with a deep look into the business and changes to the midterm plan. First, revenue guidance of 7%-10% was slashed through curtailment of store expansion and vertical integration plans. Expansion is now focused purely on white-spot markets, such as China, Latin America, and India. We continue to see significant opportunities for the brand in these markets and hence see the direction as reasonable.

Guidance for a 35% EBITDA margin is under discussion. We believe that store rationalization in well-penetrated markets and focused store openings in newer markets should be margin-supportive (we previously forecast significant dilution from cannibalization), offsetting the slower reported revenue growth. Further, management identified a number of avenues for cost improvement, notably at the level of cost of goods sold, IT, and the store network. It is reasonable to assume there is some low-hanging fruit on the cost side, given that through its historically strong growth and operating margins over 30%, Pandora could afford to not be very budget-conscious.

The key question new management must answer is the reasons for the brand’s current weakness (total like-for-like decline of 3% over the first nine months of the year), which the newness in the product range didn't help counter. We think management showed appreciation for balancing exclusivity and availability as well as a reduction in discounting for the health of the brand.

We were more skeptical about store expansion in well-penetrated markets and regard the current more cautious approach positively (previous management’s store count was approximately in line with jewellery market growth in those markets, not accounting for the shift to online). Vertical integration plans are also considerably scaled back. We saw the benefit of having a higher share of retail sales through the ability to react faster to changes in consumer demand and stronger price controls; however, we see management’s point that acquisition integration also diverts company’s focus from addressing the core issues, namely the broader brand performance and desirability to the final consumer.

Negative developments in the third quarter and the beginning of the fourth quarter and the strategic decision to slow franchisee buyouts led to the guidance reduction.