Pandora A/S (NASDAQOTH: PANDY) may not be a big name in American investing circles, but the Denmark-based company is among the largest jewelry companies in the world. Riding a wave of global expansion, Pandora's stock rose a stunning 20 times from 2012 to 2016. But after reaching a high of 1,000 Danish kroner in mid-2016, the stock has fallen hard to just over 600 kroner currently, as growth slowed across many of its end-markets (though it still logged a solid 12% in 2017).
The company recently hosted its Capital Markets Day, where it gave a detailed look at a bold five-year plan that has been two years in the making. The company will undergo a mini-transformation, with several key changes to its business model. Here are the key pillars.
Image source: Pandora A/S Capital Markets Presentation.
Product innovation
Pandora determined one of the main reasons behind its slowing growth has been a lack of product innovation. And, for a design-focused company, this is no small matter. To fix the problem, Pandora now plans 10 seasonal "drops," or collections, per year, up from the seven it currently puts out.
The company will also launch two new charm "concepts," this year, with a plan for at least one new concept every year going forward. A "concept" is basically a distinct collection with a unique design and/or material separate from the company's core offerings. Pandora hadn't launched a new concept in the U.S. since the Pandora Rose and Disney-themed collections in 2014, but just announced a new concept called Pandora Shine.
Finally, the company plans to increase its mix of earrings, rings, and necklaces. By 2022, these other categories will make up roughly 50% of Pandora's product mix, up from 25% today. Management believes this will not only enable growth but also de-risk the company as it becomes more diversified.
Design and manufacturing investments
To execute these plans, the company has made substantial investments in its design and manufacturing capabilities over the past two years. What I especially liked is the company's design investments, going from one design team to three different teams; one in the company's Copenhagen office, another in Milan, and yet a third team focused on longer-term, bigger-picture ideas and experimentation.
On the manufacturing front, the company built two new facilities in 2017 that will not only help expand product diversity and volumes but also reduce lead times from eight weeks to four weeks by 2019. Reducing lead time will allow the company to quickly adjust its assortment to capture more revenue from hot designs and limit the damage from the duds.
Manufacturing has historically been Pandora's strength, with over five times the capacity of its nearest competitor. With these new facilities in Thailand, which will also experiment with new techniques like 3D printing, the company aims to further distance itself from the competition.
More owned and e-commerce, less wholesale
Part of what allowed Pandora to expand so quickly was its franchise model, but that is now changing. The company plans to move from two-thirds franchised and one-third owned and operated to the reverse by 2022. The company will accomplish this by opening roughly 200 concept stores per year, 65% of which will be owned, and by acquiring 75 to 150 stores from franchisees every year.
In conjunction, the company plans to grow its e-commerce from 6% of sales to 10% to 15% of sales worldwide. It will enhance its e-stores around the world, and focus more on personalized, digital marketing, upping digital to 60% of the company's marketing spend, thus taking more control of the brand, both in-store and on the web.
Pandora A/S projects that the change from wholesale to retail will power annual revenue growth of 7% to 10% annually, but lower EBITDA margins to 35%, down from 39.1% in 2016 and 37.3% this year.
Still strong and growing
Finally, management sought to put to rest any pessimism surrounding its brand, touting the company's strong "aided awareness" numbers versus other brands. In addition, the company noted its customers stay loyal, making consistent repeat purchases over time, though not at the rate of new customers. Therefore, by adding more innovation, the company believes it can attract more new customers to drive growth.
Source: Pandora A/S Capital Markets Day 2018 presentation.
If the company executes on its vision, it believes it can expand its market share, which is still relatively low in the U.S. (~2%) and Chinese markets (under 1%), the two largest for Pandora A/S.
Summing it up
Pandora A/S certainly had a rough 2017, but if the company can execute on its bold vision and make its projected numbers, the stock seems far too cheap at only 12 times earnings.
