Pandora A/S - Deep dive on the Danish affordable luxury king. Part 1.

Pandora is a Danish jewellery retailer which is known for its affordable premium products. Choosing Pandora as the first company to dive in answers to the fact that very few articles have been published covering one of my portfolio favorites.

On this first part we will focus on the company and its value proposition.

Ticker: PNDORA

Country: Denmark

Industry: Consumer discretionary

DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.

DISCLOSURE: I am Pandora shareholder since December 2022.

The Pandora story

Pandora group was founded in 1982 by Danish goldsmith Per Enevoldsen and his wife Winnie in the surroundings of Copenhagen, Denmark.

In 1987, after several successful years as jewellery wholesalers, the retail activities were discontinued. Meanwhile, the first in-house designer joined the company and Pandora began to focus on creating its own unique jewellery. In 1989, the company decided to start manufacturing its jewellery in Thailand.

In 2000, Pandora’s charm bracelet concept was first launched in the Danish market. Consumers embraced the concept, and in the following years, driven by growing demand, the company began to expand internationally, entering new markets such as the United States in 2003 – today the company’s largest market – and Germany and Australia in 2004.

Growing demand made Pandora group continue expansion of its production facilities, always located in Thailand:

• In 2005, large scale crafting facility in Gemopolis.

• In 2017 new crafting facility in Lamphun near Chiang Mai in Northern Thailand.

• In 2018 new Triple A facility in Gemopolis.

Pandora was listed on the NASDAQ OMX Copenhagen Stock Exchange in 2010.

Pandora is currently the largest jewellery brand in the world and it has more than 6500 points of sale in more than 100 countries.

The business

Pandora business model might seem simple: selling their own premium jewellery to customers who are reached by different channels. Although a deep dive to fully understand how the company operates to later understand its opportunities and risks is needed.

Pandora is the world leader in the design and manufacture of affordable jewellery. The company manufactures its jewellery in Thailand which is a perfect location to get raw materials supply and labor with the right set of skills at a competitive price to for its large scale production.

Pandora is a worldwide company which revenue is coming mainly from Western countries. Its largest market is USA (30% in 2022). Revenue coming from China (4th largest market before the pandemic) has been reduced from 2000 million DKK before Covid-19 to 737 DKK in 2022. This is mainly due to the closedowns which were still in place during 2022 in the country. However, it is expected the situation will finally normalize during 2023-2024. It is also interesting to point out that Pandora was expecting to triple its revenue coming from China before the pandemic.

From the previous figure, it can be observed the plain revenue in markets like Italy, France or Australia. This is an indication of that market saturation where it is unlikely to continue growing and increasing the brand market share.

The product

Pandora reports its revenue per product splitting them into 2 different segments: Moments and Style.

Pandora moments

Divided in two sub-segments: Charms and collabs.

Bracelets and charms

They are their bestseller and most well-known product. This product consists of silver bracelets which can be customized by the addition of a variable number of charms. Charms price varies from 25$ to 600$ and they are made of different materials and topics.

Pandora Moments bracelets can accommodate a variable number of charms to embellish it. Moreover, charms are easily exchangeable so a customer can have more charms than the ones the bracelet can accommodate to customize it depending on the day.

What makes Pandora charms a different business is not the quality or exclusivity of the product but the recurring revenue stream. Jewel are worn as a sign of identity, every jewel should be unique so it reflects the character of who wears it. On the contrary, Pandora business model provides a recurrent revenue stream.

Pandora collabs

Pandora partnerships with other brands to create collaboration collections are reported under this segment. The partnerships are mainly focused on new charms for the bracelets. 10% of the revenue comes from this collaborations.

Importantly, Pandora isn’t partnering with the highest bidder. Alexander Lacik (CEO) says there is a strategy to determine whether a potential collaboration will go from a one-off meeting into something that consumers see on shelves.

“There are four boxes that all potential partnerships must tick during the research phase: The idea has got to have a broad appeal, the price point has to work, the type of characters must resonate with both customers and the brand, and the character can’t be a one-off. “

“Lacik gives the example of one “concept [that] scored really, really well” in market research, but in the brand’s “universe of characters” only one character stood out—and unfortunately, to make an entire collection one star player won’t do, so this unnamed brand didn’t make the cut. “

“The connection between [the] two brands should not be something people expected, because if they expect it’s not going to do anything to enhance the brand,”

Hence, it can be observed from the extract above of Pandora´s CEO that a great focus on how the collabs will impact the brand is placed, which is the biggest risk on these kind of partnerships.

Pandora style

Under this segment 4 different collections can be found:

1. Timeless (16.5% of revenue): Pandora´s most versatile collection. What might come to our mind when talking about traditional premium jewellery.

2. Signature (7% of revenue): Pandora´s collection for wearing on our daily routine. Also within what customers would traditionally understand as traditional jewellery.

3. ME (3% of revenue): Customizable jewels focused on kids and youngsters. This collection showed strong growth last year, 40%.

4. Diamonds by Pandora (< 1% of revenue): Pandora products are mainly manufactured using sterling silver and gold. To expand its TAM, Pandora has also developed its own lab to grow their own diamonds, which are chemically identical to natural ones and they are estimated to cost 50 - 70% less. Pandora Diamonds currently generates 213 DKK million (around 32 million USD). Diamonds jewellery market TAM is estimated 340 billion USD.

Distribution channels

Once manufactured, jewellery is sold through a combination of Pandora own stores, e-commerce and third party sellers.

On the plot below it can be observed which distribution channel is revenue coming from.

From the figure above, the most remarkable is the reduction of “Wholesale and third-party sellers”, from more than 40% share of the revenue coming from them to under 30%. This share reduction is caused by the repurchase of brand franchises. Franchising helps quick expansion (but the company is not in that phase of the business cycle anymore) Consequently, management decided to repurchase branches from the franchising part of the business which will allow a larger control over the brand and customer experience.

Regarding the “Physical stores” segment, Pandora is currently expanding its brick and mortar business (88 new concept stores opened in 2022), taking advantage of the real estate downturn by either increasing the amount of owned stores and switching to better and more flexible locations while other companies leave their top locations on the cities and focus on e-commerce.

In the words of Alexander Lacik this is done because Pandora is not a “retailer” in the traditional sense. Pandora brick-and-mortar retailing is, for Lacik, a little luxury that adds to the brand’s presence. Lacik says that people come in to try jewelry on for fit and to see what they’ve been looking at online looks like in real life. Moreover, serving the 50% of Pandora customers who are men buying jewelry for the women in their life. While online shopping is predominantly a self-aided experience, stores are a sales-aided experience.

It’s the “magic” before consumers make a purchase that matters more to Lacik —and he firmly believes this happens when customers are interacted with, shown a brand experience, and hooked to the brand in-store, as well as online.

Management

Current manager took over from previous back in 2019. Since then, they have been focused in correcting group´s performance after its excessive focus on financial performance.

Having a look a the compensation scheme its establishes a base salary completed with short-term incentives (in the form of cash) and long-term objectives evaluated every three years. Under long-term objectives sustainability performance its also scrutinized.

Short-term performance is measured by attending to 2 metrics: sell-out growth and EBIT margin. Compensation is requirements fulfilled will be in the form of cash.

Long-term performance is evaluated based on EPS growth and sustainability progression. The compensation will be in the form of shares.

Moreover, there are fixed thresholds regarding the amount shares in terms of base salary multiples directors and executives are required to have.

CEO, Alexander Lacik, and CFO, Anders Boyer, are the ones with the largest share of the company. I consider management alignment guaranteed by this requirement, although they cannot be considered owner-operators.