Pandora is known for its affordable jewelry, which has been a highly profitable business for the company. While Pandora's collections and charms are still highly popular, Pandora is transitioning into a full jewelry brand, which should propel profitability and benefit investors. The question is if now is the right time to invest in Pandora? It is what I'm going to investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Pandora. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Pandora either. Thus, I have no personal stake in Pandora. If you want to purchase shares (or fractional shares) of Pandora, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Pandora is engaged in the design, manufacture, and marketing of hand-finished and contemporary jewelry. The company operates in two segments: Core (78% of revenue) and Fuel With More (22% of revenue). Pandora offers charms, bracelets, rings, earrings, necklaces, and pendants. The company sells its products through physical stores, online stores, wholesale, and third-party distribution. Founded in Copenhagen, Denmark in 1982, Pandora is now the largest jewelry company in the world, having sold 107 million pieces of jewelry in 2023, which corresponds to three pieces every second. Pandora offers accessible luxury, hand-finished by craftspeople from high-quality materials and available in more than 100 countries. Pandora's largest market is the United States, contributing 30% of revenue, followed by the United Kingdom (14%), Italy (9%), and Germany (5%). Pandora has 2.651 concept stores and 6.700 points of sales. Pandora has a unique business model that is vertically integrated from design and crafting to direct-to-consumer channels. The company has built unrivaled scale in manufacturing, retail distribution, and brand presence, which is what gives Pandora its moat. Pandora is also focusing on sustainability and is aiming to become carbon neutral in its own operations by 2025. They use recycled gold and silver for their jewelry and have introduced lab-grown diamonds.
Management
Alexander Lacik is the CEO of Pandora. He joined the company in September 2019. Before joining Pandora, he served as CEO at Britax Ltd. and held several key management positions at Reckitt Benckiser from 2004, including President of the North American division between 2013 and 2017. North America is the largest division at Reckitt Benckiser, generating USD 3,5 billion in revenue, driven by numerous strong brands across various consumer segments. He holds a Bachelor’s degree in Business Administration from Växjö University, Sweden, and has over 25 years of leadership experience from large global consumer goods companies. Lacik has worked in the US, Europe, and Scandinavia, leading strategic international expansions and delivering strong revenue gains. He was hired to transform Pandora into a more modern company through their strategy called “Now,” which aimed to enhance eCommerce, grow online sales, and set up a data-driven approach. Today, Pandora's new strategy is named “Phoenix,” which leverages the company’s existing infrastructure to pursue numerous untapped growth opportunities and gain higher market share across geographies and jewelry categories. During his time at Pandora, he has proven his ability to increase the company’s organic growth among other achievements. He is highly regarded in Denmark and was voted CEO of the year in Denmark in 2024. Alexander Lacik has done a tremendous job at Pandora and is highly regarded in Denmark. He also has extensive experience from various leadership positions. Thus, I'm very comfortable with Alexander Lacik as CEO, and I hope that he will stay at Pandora for a long time.
The Numbers
The first metric to investigate is the return on invested capital (ROIC). Our criterion requires a 10-year history with all figures exceeding 10% annually. For some reason, Finbox didn't have the numbers from 2014. However, Pandora has delivered some very impressive numbers over the past nine years where ROIC hasn't been below 20% at any time. If you exclude 2020, which was affected by the pandemic, Pandora hasn't delivered a ROIC below 30% in the past nine years. While ROIC hasn't reached the exceptional levels seen from 2015 to 2017, where it topped 50%, this isn't a concern. The past four years have been affected by a pandemic and macroeconomic headwinds. Overall, these numbers are impressive, and not many companies manage to consistently deliver figures like these.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 as Finbox only provides data for the past ten years. The numbers are a bit mixed, and Pandora has experienced years with increases and years with decreases. The equity significantly dropped in 2023, which was a difficult year for most companies, and I expect equity will increase again in 2024. These numbers are mixed, and it is slightly concerning that Pandora delivered the second lowest equity in the past ten years in 2023. However, it isn't something that will keep me from investing in Pandora.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Pandora has managed to deliver positive free cash flow every year in the past ten years. It is encouraging that Pandora delivered its highest free cash flow ever in 2023, which bodes well for the future. The levered free cash flow margin in 2023 wasn't as high as it has been in previous years, primarily due to macroeconomic factors. However, it is encouraging that the levered free cash flow margin significantly increased from 2022 to 2023. The free cash flow yield isn't as high as it has been in previous years, but at 7.3%, it still indicates that Pandora shares are trading at a reasonable valuation. This is something we will revisit later in the analysis.
Debt
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years, which is determined by dividing the total long-term debt by earnings. Upon analyzing Pandora's financials, it is evident that the company has 1,54 years of earnings in debt. This is below the three-year threshold, which means that debt is not an issue for me if I were to invest in Pandora.
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Risks
Based on my findings so far, I believe that Pandora is an intriguing company. However, no investment is without risk, and Pandora also faces its fair share of challenges. One risk is macroeconomic factors. During economic downturns, consumers often re-evaluate their spending priorities. Essential goods and services, such as food, housing, and healthcare, take precedence over discretionary items like luxury jewelry. This behavioral shift can lead to a significant reduction in demand for non-essential products, including those offered by Pandora. Luxury items are particularly sensitive to changes in disposable income. When individuals face job losses, reduced working hours, or uncertainty about future income, they tend to save more and spend less on high-end goods. This income sensitivity means that Pandora's sales can be directly impacted by broader economic conditions. Economic downturns can also lead to decreased foot traffic in retail stores and lower online sales. Consumers may avoid shopping malls and other retail environments to save money or due to broader economic uncertainties. This reduction in consumer activity can affect sales in Pandora's physical stores and online platforms. One example is the 2008 financial crisis, which serves as a historical example of how luxury brands can be affected by economic downturns. During this period, many luxury brands, including jewelry companies, experienced a sharp decline in sales as consumers tightened their belts. Although Pandora's affordable luxury positioning somewhat buffered it compared to ultra-luxury brands, it still faced challenges in maintaining sales volumes.
Brand perception and trends. Pandora’s brand perception is crucial for maintaining consumer trust and loyalty. A strong, positive reputation encourages repeat purchases and fosters brand loyalty, which is essential for sustained sales. Consumers are more likely to buy from brands they trust and perceive as high-quality and reliable. Pandora will also need to keep up with fashion trends, as the jewelry industry is highly influenced by fashion trends. Pandora must continuously adapt its product offerings to align with current fashion trends and consumer preferences. Failure to do so can result in outdated product lines and decreased consumer interest, meaning that Pandora needs to regularly introduce new and innovative products to keep the brand fresh and relevant. Pandora's ability to innovate and launch trendy designs plays a critical role in maintaining its appeal among consumers. Thus, if Pandora cannot maintain a high brand perception, keep up with fashion trends, and launch new products, it could result in a decrease in foot traffic to both physical stores and online platforms, ultimately impacting revenue and profitability negatively.
Commodity Prices and Foreign Exchange Rates. Pandora's jewelry products primarily use silver and gold, making the company highly sensitive to fluctuations in the prices of these commodities. When the prices of silver and gold rise, Pandora’s production costs increase, which can squeeze profit margins if the company is unable to pass these costs onto consumers through higher prices. Pandora generates significant revenue in various foreign currencies, particularly the USD and GBP. Any unfavorable exchange rate movements can reduce the value of these revenues when converted to the company’s reporting currency, the Danish Krone (DKK). Thus, Pandora faces significant risks from commodity prices and foreign exchange rates, both of which can impact the company’s financial performance. Rising prices of silver and gold can increase production costs, while fluctuations in foreign exchange rates can affect both revenue and expenses.
Reasons to invest
There are numerous reasons to consider investing in Pandora. One reason is that Pandora is transitioning into a full jewelry brand. Pandora is renowned for its Core segment, which includes charms and carriers. The Core segment continues to grow at a rate of about 2% per year. However, Pandora’s Fuel with More segment, which features modern classics such as Pandora Timeless, Pandora Signature, and Pandora Lab-Grown Diamonds, is experiencing a growth rate of 14% per year. This indicates that Pandora’s product range supports the evolution into a comprehensive jewelry brand. Management has specifically highlighted their high expectations for the Lab-Grown Diamonds collection, as it continues to gain traction. Pandora’s Lab-Grown Diamonds are optically, chemically, thermally, and physically identical to mined diamonds, but are cultivated in a lab rather than underground. This means that they are not only more sustainable but also more affordable. Management has emphasized that the Lab-Grown Diamonds present an innovative and culture-shaping opportunity, which is rare to find in any industry. This initiative breaks with industry traditions by making diamond jewelry accessible to more people and for more occasions.
Opening more stores. Pandora aims to open between 100 to 175 stores in 2024, and a total of 400 to 500 stores between now and 2026. Pandora has two types of stores: company-owned stores and franchised stores, with the majority being company-owned. The company-owned stores outperform the franchised stores, which is why Pandora has acquired some of the franchised stores. The company-owned stores are highly profitable, and management has stated that new company stores achieve a 30% EBIT margin in the first year of operation, eventually reaching a mid-40% EBIT margin. Pandora plans to continue opening these highly profitable stores and has identified 7.000 viable locations across its market for new stores. Furthermore, Pandora is transforming its stores into the new Evoke 2.0 concept stores, which effectively showcase all of Pandora’s collections in an intuitive and engaging experience. This means that the new stores will be better equipped for Pandora’s transition into a full jewelry brand.
Executing on the Phoenix strategy. Pandora has executed very well in the past few years. In 2021, Pandora launched its Phoenix strategy, which presented a roadmap for substantial growth. The Phoenix strategy was centered around the pillars of Brand, Design, Markets, and Personalization. It has been a highly successful strategy for Pandora. Over the past two years, they have successfully executed this vision and delivered on their financial targets set in 2021 with a 7.5% organic growth CAGR (target 5-7%) and a 25.0% EBIT margin (target 25-27%). The next chapter of Phoenix carries over the fundamental building blocks of the Phoenix strategy, with updated priorities across the four major strategic growth pillars. Pandora has set new upgraded financial targets that reflect Pandora’s improved operating model. They expect an organic growth target of 7% to 9% CAGR over 2023-2026 compared to the previous target of 5% to 7% CAGR over 2021-2023. Additionally, they have set a new EBIT margin target of 26-27% by 2026, compared to 25% in 2023.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 55,10, which is from 2023. I have selected a projected future EPS growth rate of 11%. Finbox expects EPS to grow by 10,8% a year in the next five years. Additionally, I have selected a projected future P/E ratio of 22, which is twice the growth rate. This decision is based on Pandora's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 850,80. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Pandora at a price of DKK 425,40 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 7.384, and capital expenditures were 1.129. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 790 in our calculations. The tax provision was 1.494. We have 82,242 outstanding shares. Hence, the calculation will be as follows: (7.384 – 790 + 1.494) / 82,242 x 10 = DKK 983,44 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Pandora's Free Cash Flow Per Share at DKK 76,06 and a growth rate of 11%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 761,85.
Conclusion
I believe that Pandora is an intriguing company with great management. Pandora has a moat through its unique business model that is vertically integrated from design and crafting to direct-to-consumer channels, and its unrivaled scale in manufacturing, retail distribution, and brand presence. Pandora has delivered a high ROIC in the past nine years and has just achieved its highest free cash flow ever. Macroeconomic headwinds may affect Pandora in the short term if we see a prolonged recession. While Pandora should perform better than high-end luxury brands, it will still be impacted if consumer confidence drops. Pandora needs to maintain a strong brand perception, adapt its products to fashion trends, and continue launching new products to stay relevant. Although Pandora has historically managed to do so, this is something that needs to be monitored moving forward if you are investing in Pandora. Pandora is also affected by commodity prices and foreign exchange rates, which can influence its financial results. The company is transitioning into a full jewelry brand, and its Fuel with More segment is growing faster than its core segment. Management has high hopes for lab-grown diamonds, believing they present an innovative and culture-shaping opportunity, which is rare to find in any industry. Pandora plans to continue opening these highly profitable stores and has identified 7000 viable locations across its market for new stores, which should boost profitability in the future. Finally, Pandora has over-delivered two years into the Phoenix strategy and has just increased expectations for the next couple of years, demonstrating that management is very confident about the near future. I really like Pandora and believe it will be a good long-term investment below the Ten Cap price of DKK 983.
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