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Pandora Stock: Great Business at Reasonable Price (OTCMKTS: PANDY)

Bellissimo braccialetto con ciondoli isolati su sfondo bianco

Minttu Fin / iStock via Getty Images

Preface

Pandora A / S (OTCPK: PANDY) is a Danish jewelery company that most people can buy at an affordable price. A few years ago, the Pandora brand was in an uncertain direction. In 2018, current management launched a successful turnaround operation, The company’s image of making Pandora the first globally recognized jewelry brand for “modular” bracelets. To date, Pandora has a formidable vertically integrated business with high margins, strong cash generation, and outstanding ROIC. Market concerns have downgraded and reached an interesting level, and in my opinion they can provide a good risk / reward ratio.

work

Pandora has a fully vertically integrated business model, from product design research to manufacturing, physical and online store distribution. In the past, the brand was in a negative spiral due to bad business policies, but towards the end of 2018, a two-year turnaround program called “Program NOW” will be launched to get the company back on track. it was done. CEO Alexander Lacik and the entire board of directors have done a great job of reducing certain discounts being implemented and making product offerings easier and more productive. Today’s Pandora brand is stronger than ever, with the implementation of a “Phoenix Strategy” aimed at leveraging the company’s strengths in the brand, design, customization and core markets.

Financial information

Pandora Q122 presentation

In 2021, 71% of revenue was generated by Pandora Moments and Collabs. This is also the segment that allowed for a remarkable 20% sold-out growth. The success of the Pandora charm was also impressive thanks to a very informative collaboration between Star Wars and Disney using the Marvel brand. This has allowed many fans to line up outside the Pandora store and put them on the waiting list so they can get the gems of their favorite characters. .. The second major source of revenue is Pandora Timeless, which accounted for 17% of revenue and achieved 19% sold-out growth in 2021. In 2021, Pandora also launched Pandora Brilliance, the first collection of lab-made diamonds. Currently only in the UK, but should be available worldwide by the end of 2022. In conclusion, in September they targeted Generation Z and launched Pandora ME in the fourth quarter, which accounts for 4% of revenue.

Find the key slices online occupy when it comes to sharing revenue across different sales channels.

Revenue segment

Pandora 21st Annual Report

Some of the previous articles about Pandora speculate that the share of online sales will become more and more important in the future, and Pandora could become the main online jewelery brand. The pandemic has undoubtedly influenced this type of sale, but it seems that management’s intention is not to make Pandora an e-commerce company. In recent months, many franchise store chains have been purchased, including North America and Portugal. Phoenix’s strategy highlights how the growth of a concept store is a fundamental point. To buy jewelry, many prefer to try it on directly to see how it fits. Pandora’s online presence remains important and will not be abandoned, but in my opinion in this sector it is much more important to develop a network of stores at strategic points to drive the company’s growth. is.

In the long run, the Phoenix strategy will double revenues from the United States compared to 2019 (DKK 4.7 billion) and triple revenues from China compared to 2019 (DKK 2 billion). I am aiming to do it. Store expansion is essential to achieving these ambitious goals, and investment in China has been postponed due to current disadvantages, but Pandora’s products can be very successful in China I think there is sex. Management will invest 1 billion DKK to increase production capacity by enabling the new production base in Vietnam to produce 60 million pieces a year, further expanding the current production capacity of the Thai factory by 20 million pieces. intend to do something. Overall, we are talking about a 60% increase in production. New craft facilities are scheduled to open in Thailand in 2023 and in Vietnam in 2024. Pandora’s revenue in 2021 was DKK 23.39 billion, achieving 9% organic growth compared to 2019 (+ 23% compared to 2020), 25% EBIT margin and 59% ROIC. .. Cash flow from operating activities was SEK 6.23 billion and capital investment was DKK 641 million. The following table shows some important data from Pandora over the last five years, highlighting the difficult periods Pandora has experienced and how to get out of Pandora. What I think is very important is free cash flow, which is stable even during difficult times.

Financial data

Pandora 21st Annual Report

Financial data

Pandora 21st Annual Report

Latest results

On May 4, 2022, Pandora announced its first quarter results with excellent results.

market

Pandora Q122 presentation

Growth was also fueled by the reopening of many stores. In fact, the base quarter was characterized by the closure of many stores due to COVID-19 restrictions. As you can imagine, China was clearly the weakest market because the Chinese government did not implement a COVID policy. After a very strong 2021 in the United States, the first quarter of 2022 showed signs of a slowdown, but it’s still interesting that the Marvel collection is still growing revenue. For the rest of 2022, management expects the US market to weaken.

Latest information on the US market

Pandora Q12022 presentation

Latest information on the Chinese market

Pandora Q12022 presentation

Online store sales fell 17%, but many stores (about 30%) were closed in 2021. This is in favor of the fact that people prefer to buy jewelery in-store rather than online, despite a 155% increase in sales compared to 2019. Gross profit fell slightly from 76.3% to 76% as it helped keep gross profit high due to unfavorable changes in commodity markets and Forex, reduced discounts, and more favorable channel configurations. EBIT margin improved significantly from 20.1% to 23% thanks to strong operating leverage. In conclusion, EPS and ROIC increased significantly as revenue growth and operating leverage EPS reached 10.5 DKK (6.3 DKK in the first quarter of 2021) and ROIC reached 49% from 29% last year. Did.

Comments on q2

Pandora Q12022 presentation

evaluation

For valuation, we will consider three cases with different growth rates and multiples as usual to be conservative. For 2022 and 2023, we will look at analysts’ FCF estimates of DKK 4.7 billion and DKK 5.5 billion, respectively.

  • Basic case: 2% CAGR up to 2031, FCF multiple: 15;
  • Best case: CAGR 5% by 2026 and 3% by 2031, FCF multiple: 20;
  • Worst case: No growth, FCF multiple: 10.

Looking back over the past few years, I estimate that 35% of the FCF will be returned to shareholders through dividends. It has been repurchased over the years, but we don’t consider the impact on the valuation, but keep in mind that it can have a very significant impact on the stock price. I used a 10% discount rate and the results are as follows:

  • Base case: DKK 52.94 billion
  • Best case: DKK 74.58 billion
  • Worst case: DKK 35.20 billion

At the time of writing, Pandora has a market capitalization of approximately DKK 46 billion, as needed by assigning probabilities to the three cases described (60% basic case, 20% best and worst). 53.72 billion Danish krone’s intrinsic value is obtained. Buy it with a 20% safety margin. We have to wait for it to reach 43 billion. I’m very happy with the quote I made, as I think the quote is very reasonable, if not too low. If management can implement the Phoenix strategy as it did between 2018 and 2021, the results could be much better. As for the risk / reward ratio, I think the numbers speak for themselves. You can triple your capital in at most 10 years, and in the worst case you will get a small capital gain, but in the meantime you will receive a significant dividend. In the best scenario, the FCF in 2031 will be DKK 7.45 billion, doubling the market capitalization of the FCF. It will be tripled to DKK 144 billion.

risk

In my opinion, the main risks are strong exposure and geographic diversity to a single type of product. The Moments and Collabs segment accounted for 71% of revenue in 2021 and dropped to 66% in the first quarter of 2022, but still relies heavily on a single type of product. The risk of this type of risk always depends on the type of product we are talking about. For example, Apple relies heavily on iPhone sales, but the product is extraordinarily loved. Pandora’s charm is very much loved and has been very successful over the years, proving that it’s not just a fad. The introduction of other types of jewelery will certainly help Pandora reduce this risk.

In terms of geographic exposure, Pandora is well-distributed, but has strong exposure in markets such as Italy, which is the most vulnerable in this macroeconomic situation (10% of 2021 revenue). Overall, the UK, France, Italy and Germany will account for 34% of 2021 sales, and Europe can generally be hit hard in the medium term. Pandora’s earnings from China, on the other hand, are only 5%, and once the restrictions are over and investment begins, the growth of this market can make up for the weaknesses of other markets.

In my opinion, competition is a secondary risk and will not be one of Pandora’s major issues in the coming years. Jewelery has some very important and well-known brands such as Tiffany and Cartier, but most of them sell very high quality jewelery. When it comes to affordable jewelery, Pandora is the most famous brand in the world, which is a competitive advantage that allows companies to suffer less competition.

Conclusion

Pandora is a great business that has survived difficult times, but it is in a good position to seize future growth opportunities. The winning formula for a strong globally recognized brand and attractiveness as a collectible is an asset that Pandora can use to confirm its leadership position. My biggest business concern stems from the medium-term macroeconomic situation. In a long recession, spending on non-essential items is easily cut off by people, which puts pressure on Pandora’s sales. By extending the period, the current assessment is still very interesting and provides a good risk / reward ratio.

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