Pandora Sees Solid Quarter, Takes Precautions Against Recession
PARIS — Pandora continued to grow at pace in the third quarter, despite increasing concerns about a global recession.
The Danish jeweler saw “another solid quarter” as it reported revenues of 5.26 billion Danish kroner, or $707.1 million. This amounted to a 3 percent increase compared to the corresponding period in 2021, in line with the high bracket of consensus estimates. Revenue was 13 percent higher than in 2019, before the COVID-19 pandemic struck.
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But the company is already “taking precautionary measures to ensure our profitability should circumstances change,” stated chief executive officer Alexander Lacik.
A 4 percent price increase was rolled out in North America earlier in the year on around a third of the brand’s assortment, after several years of indirect price increases effected by halving the number of promotions.
Asked where prices had been raised, Lacik explained in an interview that it was important to keep entry-level prices to “remain in demand as an affordable proposition,” and that a number of strategic items at higher price points were also left untouched as “consumers are very well versed in where those prices sit.”
Broadly, items that could withstand the price increase were gold-plated items, those with more handcraft and collaboration items “where the consumers acknowledge the fact that there’s another brand involved.”
Similar price increases of around 4 percent were rolled out globally in early October. While it’s still early days, “markets are quite quick to give me a call if they’re unhappy. Silence is good,” remarked Lacik during the analyst event.
Overall, he remained confident, noting that the company was “well equipped to weather a potential recession and seize relevant investment opportunities” thanks to strong financials and Pandora’s position in affordable gifting.
Calling the absolute impact of inflation “manageable,” owing to a 76 percent gross margin, he explained that a 4 percent price increase amounted to covering the pressure due to rising costs, including energy and materials.
With October “trading at a similar pace as Q3,” Lacik did not see any change in the trajectory, especially as retail metrics such as basket size, traffic and conversation rates remain “very strong.”
As peak trading season starts in November and shopping patterns of Pandora’s consumers remained “so far largely unchanged,” the company is “well prepared” with “an exciting product line-up,” including the lab-grown diamond Diamonds by Pandora category, which launched in North America on Aug. 25, Lacik said.
Another recession-busting angle is managing fixed costs, which includes renegotiating media contracts globally but also rolling out projects, such as a loyalty program, incrementally instead of simultaneously.
Markets welcomed the Danish jeweler’s results enthusiastically, with share prices remaining stable throughout the day, opening at 447.40 Danish kroner, up from the previous close of 416.30 Danish kroner. Shares rose an overall 10.6 percent through the day to 460.60 Danish kroner at market close.
During the three-month period, U.S. sales were down 3 percent organically compared to the third quarter of 2021, a period boosted by last year’s government stimulus checks. Sales remained 56 percent higher than 2019’s figures.
China continued to be dragged down by COVID-19, slumping 37 percent against 2021’s figures and 71 percent against 2019’s pre-pandemic figure, with Pandora indicating an overall 8 percent impact on the group’s organic growth. Traffic in stores is down 61 percent compared to last year. As a result, the company is putting on hold its planned relaunch in that market “until the situation stabilizes.”
Europe was a “mixed bag,” with figures pointing to a moderate contraction in the third quarter. But the underlying causes were varied.
Germany remains “healthy,” despite a 9 percent slump in year-on-year organic growth attributed to ending business with an online partner, while sell-out activity, which includes sales in stores and Pandora’s e-commerce, grew 3 percent. Against 2019 figures, the market saw 35 percent growth.
In France, a 2 percent sales decline came from lower promotional activities, while Italy’s 8 percent slide stemmed from “negative consumer behavior due to the macroeconomic environment,” with both conversion rates and units per transaction softer.
The U.K. continued to grow in all terms, including overall revenue, which jumped 13 percent.
Australia, on the other hand, was up 33 percent year-on-year in organic terms, as last year’s figures were affected by COVID-19 closures, while the rest of the world contributed 15 percent revenue growth.
Pandora’s retail network expansion is “starting to be visible in the numbers,” the company said, noting that in the first nine months of the year, this had amounted to 630 million Danish kroner ($84.5 million) of incremental revenue, broken down into 240 million Danish kroner for network expansion and 390 million kroner of forward integration and takeovers.
As previously stated, the target is to open an additional 100 to 150 stores for the rest of the year and in 2023, expected to bring 1 to 2 percent in organic growth. “A potential recession represents an opportunity to accelerate the network expansion,” the company noted.
“As we said at the capital markets day last year, we see great untapped opportunities in making our brand more accessible in many of our core markets,” said Lacik.
Fielding questions, Pandora’s executives pointed out that the company had become “really strong at operating stores” and agile at determining the performing locations.
Chief financial officer Anders Boyer insisted on the fact that Pandora was “trending in the upper end of the guidance,” and that the company expected to be “highly cash generative in the fourth quarter.”
Another highlight for the quarter was the Diamonds by Pandora category, launched in the U.S. and Canada on Aug. 25, a market that is “10 times larger than the U.K. market” where an initial trial had been run and is the world’s largest lab-grown diamond market.
Though only seven to eight weeks into the launch, it was already taking a 3 percent share of business in the U.S., with an average of 5 percent across the 269 stores offering the range. This grew up to 10 percent in the top 80 stores, against some 2 percent in worst performers, Lacik revealed, noting that the differentiating factor was “not the concept [but] more the salesmanship in those bottom-end stores.”
On the 50 percent of transactions coming from new consumers, Lacik was quick to point out that the “most pleasing part of the equation” to him was the 50 percent coming from Pandora’s existing consumer base because the new category represented a “different value proposition from buying a traditional Pandora item.”
“It’s obviously great that we have the strongest influx of new customers coming to Pandora in the last three years, so there is something that is waking up and maybe even changing the perception of what Pandora as a brand represents for people,” the executive continued, calling this shift “a big positive.”
In terms of age groups, although Lacik noted that it was generally “not how [Pandora] wants to trade,” the U.S. Diamonds by Pandora launch had highlighted that Millenials and younger consumers were attracted to the new range.
He speculated that they may be gravitating toward the category’s opening price point, but that this lined up with research indicating that “the younger the consumer is, the more interest they have, the more awareness they have and the more acceptance they have of the concept [of lab-grown diamonds],” he said. “That speaks volumes for future generations.”
Though the new category has a “different margin profile than an average Pandora product,” currently standing at 50-or-so percent of gross margin, owing to the materials and other costs like marketing, the target for the category is to “run at group EBIT margin or above,” said Lacik.
New products featuring lab-grown diamonds are already slated for launch, starting with a limited-edition 2-carat ring which will make its debut in time for the 2022 holiday season. Lacik expects this to “stimulate even more” the latest category.
“We are stretching the brand here,” said Lacik, pointing out that Diamonds by Pandora sold at a 15-times higher price than the brand’s usual range.
Its Moments category continued to take the lion’s share, at 71 percent of the business, with sell-out growth increasing 2 percent against the same period last year.
Growth was driven by collaborations, such as its successful Marvel and Disney hookups, which recently launched designs from the Spiderman and Winnie the Pooh franchises.
On the whole, EBIT margin during the three months “remained strong” at 18.6 percent, Pandora said. Consensus estimate ranged from 16.4 percent to 19.5 percent.
The company maintained its EBIT margin guidance at 25 percent to 25.5 percent. Trading in the fourth quarter so far has been in line with third-quarter performance and “thereby in line with the upper end of the implied guidance range for Q4,” while it continued to caution that the macroeconomic outlook “is associated with elevated uncertainty.”
RBC Capital Markets’ analyst Piral Dadhania said in a research note that the results demonstrate “fairly healthy revenue growth and gross margin delivery” in the third quarter, with the overall guidance for the year “a bit conservative.”
“However, revenue momentum across regions is uneven, and opex growth was ahead of expectations, with earnings delivery supported by a fairly meaningful cut to marketing expenses despite [the Diamonds by Pandora launch] in North America in the period,” Dadhania continued.
The company indicated it had plan to distribute 5.3 billion Danish kronor, or $470.5 million and representing around 13 percent of its market capitalization, to its shareholders in 2022.
Regarding inventory, the company was keen to highlight that the increase to 4 billion Danish kroner was deliberate and that “inventory composition remains very healthy,” with “a low risk of markdown” as increased focused on “high runners,” or products that are not seasonal.
Among the points highlighted was the weeks of cover, which have increased from 27 to 30 in 2022, which contributed to a larger-than-usual seasonal build “to ensure we are pumping up the availability” ahead of busy gifting periods, said Boyer.
All these elements would deliver a “healthy cash conversion in Q4,” Boyer projected.
As for the fire that affected its European distribution center located in Hamburg, Germany, the company noted that initial assessment of the damage suggested “limited net financial impact.”
In a separate statement, Pandora indicated that jewelry inventory was intact and expected distribution to return to normal “in a few weeks,” a delay during which stock for Pandora stores would be fulfilled by its Thailand distribution center “to the furthest possible extent” to ensure business continuity, while online sales, managed through external distribution partners, would be unaffected.
