Executive summary

• Sales for Q2 2024 are up 15% YoY and 16% YoY for the first semester ending 30th of June 2024.

• Q2 2024 gross margin reached another all-time high of 80.2%, +210 bps compared to Q2 2023 gross margin.

• Reported EBIT margin hit a low point of 19.8%, -40 bps vs Q2 2024. Although, EBIT margin for H1 2024 was 20.9% inline with previous year reported EBIT margin of 20.8%.

• Revenue guidance raised to FY 2024 revenue growth of 9 – 12% while profitability guidance was confirmed.

Income statement

Q2 2024 reported sales growth was 15%. It has been the fourth consecutive quarter in which Pandora reported organic growth reached double digit. Growth in the quarter is split as follows: LFL growth at 8% and network expansion at 6%. On top of that, there was a 1% contribution from phasing of sell-in to partners.

The company gross margin was 80.2% (210 bps vs Q2 2023), surpassing 80% for the first time at any quarter. EBIT margin was 20.9% for H1 2024 (vs 20.8% in H1 2023). Management maintains its guidance of FY 2024 EBIT margin “around 25%”. Hence, EBIT margins slightly over 28% should be expected for H2 2024. I am a little skeptical about that EBIT margin expansion due to economic uncertainty. However, I think it is possible and plausible. 40% of Pandora revenue is generated during Q4. Last year, with a similar macroeconomic situation as the current one, Pandora reached a 25.0% EBIT margin thanks to an outstanding 4^th quarter with 34.0% EBIT margin. I believe it can be repeated in 2024.

Geographical revenue distribution

Revenue geographical distribution continues showing the trends observed in previous quarters: great sales growth performance of the USA, Germany and Rest of the Pandora while saturated ones (Italy, Australia, France) show LFL sales decrease. Network expansion in countries with poor LFL sales growth like France and UK boosted its organic sales growth remarkably.

During CMD23, Pandora announced its focus in expanding into new markets in Asia, placing its focus in India, South Korea and Japan. Out of these three markets, only Japan was mentioned, reporting solid double digit LFL growth for the period.

It is important to note that among the varied group constituting the “Rest of Pandora” most of them showed double digit LFL growth (Spain, Poland, Netherlands, Portugal, etc.) while slowdown in Mexico (promotions) and Turkey (hyperinflation) has been observed during Q2.

Product revenue distribution

At first glance, it might seem Core and Fuel with more segments have performed significantly different. Core reported LFL for the period was 1% while Fuel with more states at 19%.

However, a more detailed analysis shows Core slowdown has been caused by Collabs product line performance. According to management, -14% YoY decline in sales comparative has been caused by the exceptional performance of “Disney 100” collection in 2023. Moments product line reported 3% LFL growth, keeping with inflation, while Pandora ME grew 20% YoY in LFL sales.

Fuel with more segment shows great performance in all product lines but Signature. Nothing new. I would like to highlight the exceptional performance of Pandora ESSENCE, a collection present in a few countries before being rolled-out globally. Despite its limited release, it already represented 3% of Q2 2024 revenue, surpassing Pandora Lab-grown Diamonds product line. In my opinion this is great news because:

1. Improves revenue diversification from traditional bracelets and charms offering. This segment still represents around 70% of generated revenue.

2. Penetration of a jewellery segment, which accounts for 17% of the global jewellery market, in which Pandora had very little presence.

Revenue broken down by distribution channel

Pandora’s own retail keeps outperforming wholesale while Third-party distribution is keeping up. Consequently, Pandora’s strategy to increase the number of stores owned seems to still be the right way to go.

Operating income metrics

On the one hand, operating expenses in connection with company expansion like sales & distribution and marketing have increased more than revenue, 24% and 25% YoY respectively during H1 2024. See Figure 5.

Management again emphasized the heavy investment in marketing, focused on the brand as a whole instead of executing product specific campaigns.

On the other hand, Pandora has been able to maintain a good cost control of the Administrative expenses, which grew only 4% (slightly higher than inflation).

Balance sheet

Pandora maintains its announced strategy to use debt to finance its investments in marketing, store network expansion and IT systems improvement.

The Net Interest Bearing Debt (NIBD in advance), defined as the debt related to borrowings, loans and leases (both short and long-term) minus the cash & cash equivalents, amounted DKK 13402 million. See below some ratios to put this in context:

• NIBD/EBITDA → 1.4 (vs 1.3 H1 2023)

• Assets/Equity ratio → 6.1 (vs 5.2 in H1 2023)

• Debt-to-Equity ratio → 3.3 (vs in H1 2023)

• Long-term debt to Net Income ratio → ≈6 as per FY2024 net income estimations.

Note that management expects leverage to peak in Q3 as in 2023 to then normalize to 1.2 NIBD/EBITDA.

As I have mentioned before, despite this use of debt might boost shareholders’ returns, I don’t personally like companies which manage their balance sheet aggressively. The ratios previously presented show the use of leverage is being further exploited based on the strong earnings capacity of the company. The risk comes in case earnings disappear, e.g. in the case of an economic recession unwinding and families cutting discretionary spending.

On the other hand, current long-term debt has an expiry date from 2028 onwards. Moreover, Pandora has issued DKK 3.7 billion senior unsecured sustainability-linked notes under its EMTN programme. They were issued on May 31, 2024, at a fixed coupon of 3.875% per annum (linked to sustainability targets) with maturity in 2030. The proceeds will be used for refinancing and general corporate purposes. Considering FY 2023 reported debt coupons I expect refinancing to reduce interest expense in the coming quarters.

Cash flow statement

The reported FCFF (=NOPAT+D&A-SBC-CAPEX-WC change-Acquisitions) was DKK 3.4 billion, up 3.1% YoY. Operating profit growth has been countered by CapEx acceleration, share based compensation increase and effective tax rate 100 bps higher than in 2023 due to Pillar Two introduction.

Overall, FCFF generation continues to be outstanding, with a FCFF margin of 25%.

Capital allocation

Pandora primary goals when allocating capital haven’t changed: financing its growth and capital return to shareholders.

Financing growth

Pandora CAPEX has reached DKK 0.5 billion (7% of H1 2024 reported sales) during the first half of 2024, up 20% YoY. CAPEX has been used to finance store network expansion, IT & ERP systems improvements and Vietnam new facility construction.

Regarding working capital, Pandora has been able to maintain flat inventories while sales grew 15%, leading to an improvement of the working capital. Net working capital represented 6% of sales in H1 2024. I think an eye should be kept in the WC in the coming quarters to ensure inventory has normalized and not reduced in anticipation of lower demand.

Additionally, DKK 573 million has been used for the purchase of property, plant & equipment (up 26.7% YoY reflecting new facility construction) and DKK 165 million in 3rd party Pandora’s franchises acquisitions.

Finally, Pandora has expensed a total of DKK 1966 million in H1 2024 (up 24.5% YoY) to enhance its brand image which arguably can lead to the creation of some intangibles assets.

Return to shareholders

Pandora has returned a total of DKK billion during the first six months of the year. DKK 1471 million paid as a dividend and DKK 1867 million spent in share repurchases. Share repurchases have decreased 36.6% YoY as Pandora shares price has increased remarkably during the last 1.5 years.

Pandora has additional DKK 2.1 billion to be used until 31 January 2025 for further shares buyback. At current price, Pandora trades at an estimated FY 2024 earnings yield of 6-7%. Considering the company holds debt loans and borrowings at interests in the range of 5-6%, if the share price increases further, debt repayment could be a better way of using the excess capital.

Guidance & other developments

After an outstanding quarter in terms of sales Pandora has raised its full year revenue guidance once again while maintaining its profitability unchanged.

New stores opening guidance has also been reviewed and raised: Pandora expects net 100-150 concept stores (previously “75-125”) and 50-75 (previously “25-50”) owned and operated other points of sales openings in 2024.

During the call, management also pointed out that H2 2024 will have tougher comps than H1 2024 due to a a great performance of the company during H2 2023.

Other developments

Reported LFL sales growth of Core segment has been lower than Fuel with more for many reported quarters now (see figure 8). This makes sense as the Core segment is way more mature and growth would be expected to come from offering in which Pandora tries to expand to new jewellery submarkets.

Nothing new here. What I think is interesting is that the reported gross margin of the Core segment is smaller than Fuel for more one (see Figure 9). Hence, if Pandora succeeds in increasing business revenue diversification from Core, a slight margin expansion can be expected in the coming years.

Finally, a lot of questions during the call were focused on the expensive silver prices reached during 2024 and on Pandora’s approach of stopping the silver hedging momentarily. Management also discussed which mitigations they could put in place to counter raw materials price increase and persistent inflation impact.

The mitigation initiative which surprised me the most was the increase of prices. During the call, management discussed the possibility of raising prices over inflation (the traditional approach in previous years) and shared, at high-level, how initiatives testing price & demand elasticity are being carried out. I have never considered this price increase over inflation in my thesis/modeling so, if it is finally successfully implemented, I think it is very good news for shareholders.