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Morningstar | Pandora's Price Cuts in China as Expected, Offset by Tariff Reduction; Shares Cheap

We are maintaining our fair value for Pandora after the company announced 15% price reductions for its products in China (the region contributes 7% of sales). The announcement wasn't unexpected and is reasonable in our view, given the problems the company is having in the region with grey-market sales and the fact that Chinese retail prices are around 30% higher than in Europe and 60% higher than in Australia. Given that the average discount for goods sold in online grey markets is around 25%, a 15% price cut would make grey-market purchases less attractive.

The timing of the price reduction is also favourable, given the cut in Chinese import tariffs on a range of luxury goods including jewellery. The tariff rate on silver jewellery (the majority of Pandora’s range) was reduced from 20% to 8%, effective after July 2018. Some of the major luxury houses have reduced their prices in China following the tariff cut.

There are many near-term concerns about the Pandora stock in the market, notably the concerns about the quality of communication from the management, weak performance in major markets--the U.S. and China, together accounting for one third of sales--scepticism about the company’s ability to meet guidance after a weak first quarter, and receivable accumulation on the balance sheet.

While we acknowledge those concerns as valid, we see them as relatively short-term-focused. We believe our medium-term forecasts, which imply low- to mid-single-digit brand growth at retail value with 4% decline in operating margin are achievable, and we see actions to take more control over distribution and expand the product range as reasonable. We see shares as attractive at current levels.