Pandora💍 Valuation Update after Trading Update in March 2020

Pandora A/S released its Trading Update on Monday, 16 March 2020. As could have been expected Pandora withdrew its former financial guidance in the face of corona virus and global economic fallout.

This is not investment advice. Please read the disclaimer.

I already own a big chunk of Pandora in my portfolio (obviously at significant loss currently).

Market took the trading update positively, and probably the insider buying activity (CFO, CEO; below).

bloomberg.com

Since Pandora states in its Trading Update (16 March 2020) that

Financial performance was strong in January and February with particularly good development in the Online Store and in some key markets generating positive like-for-like. Total like-for-like excluding China was better than the full-year financial guidance but the COVID-19 escalation has led to material weakness in sales across markets.

I believe even more now that Pandora will be successful turning around Sales trends in the long-run. To assess if current prices (DKK 195) provide an attractive buying opportunity for the long-term, I am going to perform a valuation update of Pandora, incorporating the following adjustments (discussed below) vs my former valuation of Pandora from Feb 6, 2020:

  • Sales Hits (Asia, Europe, Americas)
  • Expenses
  • Financing and Liquidity
  • Cash Allocation (Share Buy Backs, Dividends)

Insiders Buying afterwards

FYI: Pandora just reported the purchase of 54,000 shares by Anders Boyer (CFO) for c. 10 mDKK ($ 1.5m, € 1.4m) which could be interpreted as a sign of trust in the company of an insider (presumably much better informed as we outside investors).
Pandora CEO Alexander Lacik just bought 44,000 Shares for c. DKK 8.73 m.

Sales Hits

As a phyical luxury retailer severy revenue declines are to be epected.

Asia

China and Asia were hit first from the corona virus and its affects (HK was impacted even before). Understandably like-for-like sales trends were abysmal in the region:

In China, like-for-like has been between -70% and -80% since late January. Revenue is currently slightly improving, but a return to normal demand will expectedly take time and be outside the control of Pandora.

According to wikipedia, Corona first appeared end of December 2019, in City of Wuhan, China, Province of Hubei. Currently economic activity in China is on its way back to normal levels with many factories going back to work and retail sales going back up. This happens after severe safety measures such as extreme social distancing in certain regions, probably with a much stricter execution than could easily be applied in Western Europe and North America.

  • I am going to model sales in Asia to be rather non existend in Q1.

Europe

Key European Markets are in lockdown (Italy, Spain, France; Germany not yet). As of now, it appears that European politicians underestimated the virus — as focus was on China only — and its global effects. The strict Chinese measures were even discussed from a political viewpoint using expressions like freedom and political system.

Right now, it is hard or impossible to guesstimate when the most severe economic effects are over in Europe. Based on the above observations, I believe it is well possible if not likely, that it will take longer in Europe than in China and other Asian countries. I.e. South Korea seems to be a positive example how to perform mass testings: via drive inns informing people with am sms afterwards.

  • I am going to model sales in Europe to be rather non existend for three months beginning March 2020.

United States

The US might have world class medical research facilities and laboratories but it appears they are not well prepared for handling the pandemic. Politics (Trump) reacted too late and probably too little. Compared with other much smaller countries the 50 bn$ potentially available from federal funds after declaring national state of emergency seem not nearly enough to get a grasp on the crisis.

  • I am going to model sales in North America to be rather non existend in Q2.

Sales recap

On one hand, I believe these assumptions of sales for the three regions to be about zero each for c. 3 months, is currently too pessimistic. On the other hand, sales could potentially transition very slowly back to normal, so I like the simple assumptions regarding the impact on sales and I prefer to err on the conservative side.

Seasonality: Q4 is most important for Pandoras sales, and it should most likely not be affected by corona.

Production, Thailand

Corona cases in Thailand are very low until yesterday, as far as I know. Of course, the reason for that might be inappropriate reporting systems and/or a lack or unwillingness of testing. Today, cases reported seam to jump!

Until now, Pandoras ‘manufacturing facilities in Thailand continue to run (…) without notable impact from the situation.

Expenses

According to the statement Pandora is

actively managing cost levels, including media, rent and other store costs, to ensure an appropriate balance between protecting profits while continuing to drive revenue from the Online store and build on the underlying momentum of the brand.

I like reading that they do not just try to cope with the sitution by slashing all sorts of costs. If it is right that underlying performance in the beginning of 2020 was good, then I believe they should indeed ‘build on the underlying momentum‘.

I believe there are only minor opportunities to slash costs short term like laying off some flex staff, let them use holiday or some type of reduced hours payed.

  • I did slightly decrease my assumed gross margin (adj) for this and next year to 72.0% and 75% respectively, down from high seventies. With lower production numbers margins should be pressured. Cases in Thailand are about to rise in the short future and could potentially create some disruptions in supply chains.
  • I did not model any changes in Expenses, any saving potentials will be upside

Financing / Liquidity

As of 31 Dec, 2019 (from Pandoras Annual Report 2019):

  • Unutilised credit facilities: 3 bn DKK
    Total committed credit facilities amounted to DKK 8,247 million (2018: DKK 7,500 million), of which DKK 747 million is committed until December 2020, DKK 1,000 million until June 2021 and DKK 6,500 million until June 2022.
  • Cash: 1 bn DKK

The profitable and cash generative business model means that Pandora can absorb several months of suppressed traffic and still be profitable and cash generative for the full year. Combined with a conservative capital structure policy, light funding covenants and healthy funding availability, Pandora has a strong financial position to manage through this downturn period. To preserve a strong balance sheet under these extraordinary circumstances, Pandora has as of today decided not to buy back any further treasury shares (…).

So, Pandora suspended its share buy back programm (but I bought more shares, see below). This illustrates the necessity to preserve cash.

FYI and way of comparison: The fact that Check Point is still buying back shares is showing its extraordinary position.

Valuation

Applying a discount rate (wacc) of 8% (instead of 7%), I still come to the concluson that Pandora is currently strongly undervalued, trading at c. about 200 DKK, thus I placed a limit buy order @ € 26.111 which was already executed today.

However, as other retailers with strong physical stores Pandora is not without risk!

Best, and happy investing!

17 thoughts on “Pandora💍 Valuation Update after Trading Update in March 2020

  1. Hi Searching, dont you think they used poorly the excessive cash during last years for a big dividend payment and buying back stock at high prices?. that seems to be what brought net debt from 0 to 9B.

    Liked by 1 person

  2. Hi @Jose. Sure, they did not use their excess cash in the most optimal way, at least it’s easy to say that in hindsight. But, I believe that (a) their share price was undervalued for some time now, during that time I liked the SBBs and (b) what was the alternative with all that cash (they earned a lot!!!)? Investing even more cash in stores?…

    Like

  3. Hi Jose, and thank you for your comments.
    As in seeking alpha, I am not so much interest in any numbers (regarding fair valuation or any guesses on ranges where the price could move to), but, I am much more interested in your reasoning, how do you come to that conclusion?
    Mind to elaborate ?

    Best, s4v

    Like

  4. To the conclusion of going back to DKK400-500?. Well if you dont want numbers, then we have the empirical fact that shares go up and down but if business is solid in the end market will recognise it. Problem is when it takes few years like its being the case right?… 😦
    Look how we were not too far from that 2 months ago before all the virus turmoil began. I think we were headed towards the DKK450 area in 2-3 months.
    Anyway, how I hate being underwater, and at the same time watching so many quality stocks at very attractive prices.

    Liked by 1 person

  5. If I had to create a 10 stock portfolio tomorrow, Pandora would be a member at current prices very likely. Running the business takes 1B and it generates 6B. Not many businesses like this. Maybe most profitable mid-large Danish company?. Of course everything may change at any moment…

    Liked by 1 person

  6. Hi Jose, and thanks for your comments once more.
    I absolute want numbers (regarding a Fair Value estimate). But, well, let me rephrase:
    Did you do a valuation? Or rolling the dice, thinking of a nice round number somewhere above current Prices? (becasue that is exactly what I am not intrested in)
    If you did a valuation, what were the key Inputs / assumptions?
    Best!

    Liked by 1 person

  7. Hi once more.
    To be honest, I believe there are many companies out there with much higher Quality scores, currently most likelyx some of them at attractive Prices (undervaluation).
    I also believe that Pandora is undervalued, but not high Quality, and depending on the development of the current pandemic (and other Things: path dependency), the fundamental development of Pandora can be a lot worse than my model suggests.

    Re 1bn & 6bn: do you refer to CapEx and FCFF ? (pls Elaborate if not): I model lower FCFF numbers for future year, more like 4bn DKK.
    Discounted at Risk adjusted rates, this Cashflow stream has a certain fair present value (EV)…
    Best s4v

    Liked by 1 person

  8. 1bn is CAPEX, and 6bn is Cash from Operating, so FCF of 5bn
    From years 2019 down to 2014 I see this CFFO and CAPEX:
    6.7 0.8
    6.6 1.1
    6.6 1.3
    6.5 1.1
    3.3 1.0
    4.3 0.4

    I have not made a detailed valuation.
    From Cash Flow components I see:
    if I add the 1bn of inusual expenses to the 3.8bn of 2019 profits, so 4.8bn,
    An average of 700m for depreciation(from 2019 to 2014: 2319, 990, 721, 518, 400, 222)
    And -1bn for working capital(I get this -1bn just out of the hat) (from 2019 to 2014: 627, -825, -2067, -1708, -2473, 165)
    So CFFO= 4.5bn – 1bnCAPEX= FCF 3.5bn, near the 4bn, so 12-14 times FCF at dkk450

    But virus also changes it all… how long you think it will take until situation begins to improve and price might get back up in the trend to cross the dkk380 area?. Given we continue existing hahaha

    Liked by 1 person

  9. Pandora is not Johnson and Johnson, thats for sure, but in the market space it belongs to, dont you think its high quality given things like brand power, worldwide scope, well positioned for low cost production, very profitable business so far?.

    Liked by 1 person

  10. Pandora is (was) very profitable, that’s for sure. But will it stay that way?
    Brand power is good for now I would argue, but that can change fast in this price segment I believe (other brands are much better LV, Gucci,…). Production is low cost (but only in Thailand), some related risks persist for sure.

    Do not get me wrong, I believe that Pandora is undervalued, I would just not categorize it as a high quality business / investment.

    Liked by 1 person

  11. I didnt know LV and Gucci were in the jewelry space.

    Are you holding other stocks in your portfolio?.
    I am also holding PTEC from UK, profitable company, but more in trouble than Pandora I would say.

    Liked by 1 person

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