Pandora A/S: 2019-Q3 Update

On Nov 5, Pandora A/S reported results for the 3-Months Period ending Sept 30, (2019-Q3). Market Reaction today was very negative: -17%.

2019 FY Guidance

  • Guidance is unchanged for like-for-like growth at ‘down to negative high single-digit’, and this is highly dependend on improvements in the very important Q4, especially December (Christmas).
  • Organic growth is now expected to be ‘-7% to -9%’ instead of -3 to -7%, stated reasons are lower effect of net store openings and higher impact of cleaning inventories within the wholesale channel.
  • Guidacne for Adj. EBIT margin is narrowed towards the lower half of the previously guided range 26-27% (before 26-28%), resulting from lower organic growth.

Highlights

  • The Cost reduction programm is going well, Targets for FY 2019 as well as 2020-runrate are increased to 650 mDKK (+50m) and 1.3 bnDKK (+100m) respectively).
  • Like-for-like improved in most markets following the brand relaunch.
  • Expectations for improving underlying growth trends are there, even if formulated very cautious: The underlying traffic trend supports the expectations of an improving performance during Q4 and a strong Christmas trading.
  • Adj. Gross-Margin at record high of 78.6%, driven by: good productivity, higher share of retail, decreased product complexity.
  • Several encouraging developments, indicating to the realistic potential to revive the Brand (read future sales) under the headline ‘Brand Relevance – the start of a new era’. Brand Relaunch only with limited visibility in reported numbers.
  • ‘Brand Access’ also lists several encouraging initiatives. These could very well support future sales.

Lowlights

  • Disappointing Results in China, with lfl -16%, despite continued double digigt growth in Tmall. (Contradiction of strategy: opening Concept Stores in China?). An initiated workstream will tackle the china-issue. Pandora missed to monetize on the very important period around Chinese Valentine’s Day (c. 32% of Q3 Revenue)
  • Hong Kond is problematic (protests)
  • Like-for-like ended the quarter at -10%, BUT: with an improvement in underlying performance towards the end of September and in October.
  • EBIT margin excluding restructuring costs was 20.2%, partly driven by (underlying) operational deleverage.

Costs

Marketing Expenses increased significantly (as expected) and should support more positive sales trends. Sales and Distribution (S&D) descreased, showing progress at cost reduction initiatives, despite higher retail-share. Normalized S&D were flat vs Q2 at 31.3% of Sales, showing good progress at cost initiatives. Admin increased slightly, which is a bit of a contradiction of the communicated cost savings.

Revenue per Channel

Online Stores performed well with lfl +12% , but could still be better, comprising 10% of total revenue in Q3. I think Online Store Sales could be a positive surprise in Q4. Concept Stores Owned and Operated (O&O) by Pandora did perform less well. Wholesale lfl growth was -13%, reported numbers were strongly impacted by changing payment terms in Italy and reduction of inventory, leading to potential upside in wholesale revenue in FY 2020.

Market Reaction

Since Mid of August (225 DKK per Share) this year, the stock performed very well recently, seemingly on the basis of

  • communication that turnaround shows early encouraging results and
  • believs that underlying sales trends were improving
  • release of a praised Q2 report
  • success of ‘Pandora Me’ Collection

On Q3 release day, 5-Nov-2019, Shares fell from 340 to 300 right in the morning, lost further to c. 280 during day.

  • Reported Revenue of 4,415 mDKK vs Median Consensus of 4,571
  • Revenue Growth in Local Currency was -13 vs -9%
  • Adj EBIT Margin of 20.2% vs 21.6
  • Basic EpS were -1.1 DKK vs -0.3

Outlook

Pandora is right in the middle of turning around the Companys business. Recently there are a few signs that the turnaround and certain items of the communicated strategy are working, as written above. But, as Pandora states, uncertainty remains high.

Reviving of underlying or lfl sales growth is crucial! Q4 with the very important Christmas season will show if the brand relaunch and marketing investment are successfull short after introduction. Pandora can only deliver high Profitability Metrics (EBIT Margin) in the long-term with stronger Sales trends, as otherwise operating leverage acts as a headwind. On the other hand, if sales trends are to get stabilized (or even get positive) it acts as a very strong value catalyst since Pandora set up and aquired a lot of concept stores.

Valuation Update to come

My next Post will be a Valuation Update on Pandora A/S…

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