EUR 850.00 For Business Accounts Only

Morningstar | Pandora's Turnaround Comes With a High Uncertainty but Good Assets to Build On

Pandora is a global branded jeweller and the leader in the charm bracelet category. We believe the firm benefits from its global brand recognition and vast distribution channels, moderately strong pricing power enabled by the charms' low perceived value and recurring purchases, customer loyalty (around 70% of business from repeat buying and over 60% of revenue from gifting, which tends to be more brand-loyal), and cost advantage from manufacturing and purchasing scale.Although Pandora has grown in a relatively benign competitive environment--the global jewellery industry is largely fragmented and unbranded--we don’t think its current advantages are impossible to replicate over the next 10 years; thus, we don’t believe it has a moat. Moreover, while the appeal of charm bracelets has been long-lived so far, it could feasibly fade through changing consumer tastes; we attribute the longevity to Pandora’s marketing of charms as a method of personal expression rather than a fashion accessory, aimed at less fashion-forward customers who are less fickle in their preferences. Charm bracelets (74% of the company’s revenue) remain a relatively small niche in the wristwear category and broader jewellery industry.We believe the company is well placed to grow in adjacent jewellery categories by enlarging its product assortment and boosting category marketing spending. We expect the adjacent jewellery categories to grow at a 7% rate over the next 10 years, although success is not guaranteed and customer loyalty may be lower. We forecast charms and bracelets to be largely flat, driven by growth in new markets and offset by declines in the more mature ones. Overall, we expect the company to return to a modest low-single-digit revenue growth from 2021 (we expect a 3% dip in sales in 2019 as the company works through wholesale overstock and invests behind the brand). Margins would decline to 24%-25% in 2019-20 through operating deleveraging and increased brand investments before recovering to high-20% over the next decade. Margin recovery should be supported by less costly growth from the same store base as the management takes a more prudent approach to new openings.