Pandora through the pandemic: a turnaround in the making?

A recent report by financial publication Bloomberg notes that the stock performance of Pandora looks promising: “In a year of lockdowns and falling consumer spending, the top spot in the world’s best-performing national market has been taken, surprisingly, by a Danish jewellery maker and retailer.

“Shares of Pandora A/S have jumped 64 per cent this year, heading the OMX Copenhagen 20 and 25, which lead country indexes globally in the period.”

The 20 September article states that the positive outlook for Pandora follows a decline in short sellers’ interest in the stock. Prior to the COVID-19 pandemic and resulting financial crisis, Pandora was the most-targeted stock by share traders who were betting that the stock would drop in price (‘shorts’).

“The short sellers have been out closing their positions and combined with the positive sentiment on growth, that has given the [Pandora] stock a big boost.”

Per Fogh, Sydbank

“Hedge funds started leaving when Pandora showed signs that growth was coming back and it has had a ‘ketchup bottle’ effect on the stock,” Per Fogh, an analyst at Sydbank, told Bloomberg.

“The short sellers have been out closing their positions and combined with the positive sentiment on growth, that has given the [Pandora] stock a big boost.”

This news follows the company’s advice on 26 August to the Nasdaq Copenhagen, formerly known as the Copenhagen Stock Exchange, that Pandora CEO, Alexander Lacik, had purchased 57,560 shares at a total price of DKK23,505,544, and now holds a total of 161,628 shares. 

The stock closed at DKK454 ($US69/$AU97) on 30 August and has since traded as high as DKK502.

Pandora has been through the wars over recent years. In February it released its 2019 annual report which recorded revenue falling in six of its seven key markets over the previous 12 months – including the US and Australia. Total revenue fell from DKK22.8 billion ($AU5 billion) in 2018 to DKK21.9 billion ($AU4.8 billion).

At the time the report was published, Pandora stock traded at around DKK312 ($US48/$AU66). Just four years earlier, Pandora’s share price hovered at DKK871 ($US133/$AU185). That was during a period where revenue growth reached 40.2 per cent; it has declined every year since. 

At the time of the 2019 report, the exception to the downward trend was China, which recorded stable sales and accounted for 10 per cent of the total revenue.

However, the COVID pandemic was just beginning and it was predicted that the crisis would have a significant impact on revenue in the first quarter of 2020, especially given that Pandora had temporarily closed more than 50 Chinese stores, while locations that remained open had seen reduced foot traffic.

Anders Boyer, chief financial officer Pandora Jewelry, said at the time, “We have seen empty streets in China. It’s quite dramatic. The situation is highly unpredictable.”

Unpopular designs and product

In July 2019, Pandora's woes reached a low when, in an extraordinary step, management found it necessary to announce a ‘buy-back’ scheme from retail stockists. Pandora Denmark set a worldwide budget to clear poor performing and unsaleable jewellery ranges from the retail channel.

In an email to Pandora stockists, Phil McNutt, then managing director Pandora Australia and New Zealand, said the company “is initiating an inventory purchase program for select multi-branded [independent jewellers] partners in Australia. The purpose of the program is to assist with your inventory management by allowing you to sell to Pandora older, outdated merchandise and enabling you to purchase better, faster turning merchandise.”

The returned Pandora product was to be smelted.

A selection of pieces from Pandora's spring 2019 collection.

The email outlined how Pandora would provide a list of eligible products to be purchased from the retailer and only items on that list would be eligible for compensation. Pandora would then buy the product back at the "then-current wholesale price less handling fee for each item that it purchases”.

The handling fee was 20 per cent and retailers were paid 90 days after the product was returned. In addition, a further 10 per cent handling fee was to be charged if the items received were not packed and invoiced by the retailer as per a strict set of instructions.

This program sparked outrage from Pandora’s authorised retailers – something the company could ill-afford at the time.

In effect, Pandora was still making money on unpopular product pushed onto retail stockists which they could not sell; many stockists stood to lose 30 per cent on product they never really wanted.

Jeweller reported one Pandora stockist as saying, “This is typical of Pandora. They ‘force’ us to take stock we don’t want, or need, and have increased the number of drops [range deliveries] per year, and we have to pay them in 30 days. However, when their products fail to sell – often because they do not fit well with our customer base – they offer to buy it back at only 70-80 per cent of what it cost us and then delay our payment for 90 days."

At the same time (July 2019), Pandora released a quarterly financial report, revealing its earnings dropped 13.7 per cent to DKK1.29 billion ($AU283 million) over the previous three months. The stock was trading at around DKK255($US39/$AU54).

Australia was the second-worst performer of Pandora’s top seven markets. On a like-for-like basis, Pandora Australia’s earnings fell 17 per cent compared with the same period the year before (2018), and 18 per cent for the year-to-date. Sales growth was equally poor, falling 17 per cent compared to the previous year and 21 per cent for the year-to-date.

If the jewellery buy-back program wasn’t sufficient evidence that the brand was in the doldrums, Pandora also announced a brand re-launch “as part of its company-wide turnaround program, Programme NOW.”

A grand re-launch event took place in Los Angeles on 28 August 2019, and was attended by more than 400 guests from around the world, as well as international news media.

“The event in Los Angeles marks the beginning of our journey to become more relevant for consumers. We have received very positive feedback to the marketing pilots we have conducted earlier this year, so we are eager to take this to consumers around the world and show a fresher and more contemporary Pandora,” CEO Lacik declared in July 2019.

Management merry-go-round

Anders Colding Friis, former CEO, Pandora

Alexander Lacik, current CEO, Pandora

Lacik joined Pandora as president and CEO in February 2019, following the resignation of Anders Colding Friis in August 2018.

Friis announced he would leave the company on 31 August 2018 after three-and-a-half years at the helm. The resignation came hot on the heels of the company announcing “organisational adjustments”, including the reduction of almost 400 jobs in a bid to achieve its 2022 goals.

At the time of Friis’ announcement, the stock traded at around DKK359.

Lacik, who describes himself as a “turnaround architect”, joined Pandora after a short stint as CEO of Britax, a British childcare products maker. He previously spent 12 years at UK personal goods manufacturer Reckitt Benckiser, concluding his tenure as its president of North American operations. In that role, he oversaw major growth in the company’s largest market, with revenue totaling $US3.5 billion.

Pandora’s management shuffle continued and by March 2019, with the share price at around DKK320, chairman of the board of directors, Peder Tuborgh, announced plans to appoint his successor. He had been with Pandora since 2014.

At the same time, the company also announced plans for a massive share buyback over the ensuing 12 months, which was aimed to boost shareholder dividends.

Following Lacik's appointment, chief operating officer Jeremy Schwartz tendered his resignation on 3 April. Schwartz had been acting as ‘co-CEO’ alongside chief financial officer Anders Boyer since September 2018, when Colding Friis quit the company.

None of the management changes instilled confidence in the market; the share price continued to fall for the next two months and by 14 June 2019, Pandora stock hit a new low of DKK220 ($US34/$AU47).

Notably, following the management changes and leading up to the August brand re-launch, Pandora doubled its marketing spend in Italy and the UK. It also committed to increasing its marketing investment across other major markets, including Australia, over the remainder of 2019.

However, the months following the re-launch and the international ‘buy-back’ program to rid the retail channel of unpopular and unsaleable stock, the share price moved little. From 30 August to 3 January 2020 it remained in a range of DKK260 to DKK340.

It was obvious why short traders had targeted the stock.

» Background reading: No surprise, Pandora got it wrong

There was more major management change to come. On 24 March 2020 it was announced that former H&M clothing executive Martino Pessina would join the Pandora executive leadership team.

Pessina took up the newly-created role of chief commercial officer on 2 April and became responsible for overseeing the 10 regional ‘clusters’ created in the restructuring plan.

Pessina was previously president of the North American division of international clothing retailer H&M. Over a two-decade period working for the Swedish company, he held management roles in retail, sales, merchandising, operations and expansion.

According to a Pandora Jewelry statement, Pessina oversaw a “remarkable sales and profit turnaround” while leading the North American division, increasing annual revenue to more than $US4 billion.

Closer to home, over the past five years, Pandora Australia has undergone something of a management merry-go-round, having been led by four different executives: Brien Winther, who was transferred to Pandora British Isles after 13 months, Mikael Kruse Jensen, who left to manage Pandora Northern Europe, Phil McNutt, who joined the company from Sunglass Hut in January 2019 and lasted less than two years, and David Allen who has returned to Australia to lead the local arm for the second time. 

» Click to view Pandora management timeline

David Allen Current general manager, Pandora APAC, and former president Pandora Australia & NZ (2012-2015) and Pandora EMEA (2015-2020)	Phil McNutt Former managing director, Pandora Australia & NZ (2019-2020)	Mikael Kruse Jensen Former managing director, Pandora Australia & NZ (2017-2019) and Pandora Northern Europe (2019-2020)	Brien Winther Former managing director, Pandora Australia & NZ (2015-2017) and UK (2017-2018)

Worse to come

Other issues have also plagued the company. Many people – including franchise owners and independent stockists – pointed the finger at poor product design and trading policies.

Some of Pandora’s woes began many years before when it started closing the accounts of independent stockists and, more recently, the ‘buying back’ of its own concept stores (franchisees) in the UK.

In May 2018 Pandora reached an agreement with Ireland’s BJ FitzPatrick Holdings to take back its distribution rights and to acquire its store network for €23 million ($US26 million), of which around €3 million ($US3.5 million), was for BJ FitzPatrick’s inventory.

A 22 May statement read: “The acquisition is consistent with Pandora’s intentions to increase the owned and operated retail footprint in markets of importance and will grant Pandora the opportunity to enter Ireland directly.”

The agreement would add 24 company-owned concept stores to its portfolio, while taking over distribution to five franchisee concept stores and 10 shop-in-shops, mainly in Northern Ireland.

On the day of the announcement (Tuesday 22 May 2018) the stock closed at DKK505. The market and industry pundits began to question the new Pandora strategy of reducing its international retail footprint – closing independent stockists in favour of franchise and company-owned stores – including a 6 July article by Jeweller: Pandora: The beginning of the end?

Two months later (22 August) Pandora’s stock had plunged 25 per cent to DKK379 ($US58/$AU80)  – but the worst was yet to come.
 

The above chart shows that the huge brand re-launch, held in Los Angeles on 28 August 2019, had little impact on Pandora's share price over four months, to the start of 2020 (pre-the COVID-19 pandemic).

Fast-forward almost exactly 12 months to 14 August 2019 – two weeks before the massive brand re-launch in Los Angeles – and Pandora had still failed to emerge from the doldrums; it traded at DKK226 ($US35/$AU48), a 55 per cent fall from when it announced worldwide account closures.

The rationalisation of Pandora’s retail locations was a not new trend; it had been taking place since 2011 when it closed the accounts of 100 Australia and New Zealand retail stockists, followed by another 100 closures in 2012.

Jeweller’s recent 2020 State of the Industry Report highlighted that a decade ago, Pandora was sold in more than 700 retail locations (independent stockists and company-owned stores) yet by July 2020, that number had fallen to below 250 – 64 per cent fewer locations than a decade earlier.

In effect, Pandora Australia has closed the accounts of more stores than in which it is currently sold today! (See charts below.)

Australia is not the only territory to see a rationalisation of Pandora stockists. More than 1,000 have been closed internationally over recent years; 450 US and 130 Canadian accounts were closed in 2016 alone.

In February this year, Lacik admitted that this strategy may have been unwise indicating that Pandora might need to refocus on distribution to independent jewellery stores – the very businesses that it once discarded.

“There hasn’t been an awful lot of attention to multi-brand stores  [independent stockists] in the last few years. The push has been [company] owned and [franchise] operated stores. We have seen there are some opportunities that we have forgone by reducing the multi-brand presence so much. A lot of new customers might come through a multi-brand rather than a concept store,” he said.

According to the company’s website, Pandora jewellery is currently sold in more than 100 countries in 7,400 outlets, including more than 2,700 concept stores.

Possible turnaround

Putting aside the COVID-19 market lows of 16 March 2020, when it traded at DKK195 ($US30/$AU41), Pandora seems to be moving in a more positive direction, trading between DKK450–DKK500 by 20 September, when the Bloomberg report was published.

“The company has been through a turnaround process and before the global lockdowns set in, we saw clear signs that the efforts are working,” Claus Wiinblad, head of equities at Danish pension fund ATP, told Bloomberg.

He added, “The company was transparent about the various scenarios it might face and set up a plan that would ensure sufficient liquidity even if the pandemic developed in the most negative way.”

ATP holds a 3.1 per cent stake in Pandora.

From a market perspective, it appears confidence in Pandora’s new management and corporate structure is high.

While the Bloomberg article cautioned that many analysts have “had a mixed record predicting the wild stock market swings of the jewellery maker,” it noted: “The brand has been re-launched, with the company forecasting EBIT margin to be in a range of 16 per cent to 19 per cent this year compared with almost 27 per cent last year.

“Some analysts are also looking past the jewellery maker’s prediction for organic sales to fall as much as 20 per cent this year, focusing instead on the year ahead,” the article added.

While Pandora has had a topsy-turvy few years, its performance during the COVID-19 crisis under the leadership of Lacik seems to be paying off – at least for shareholders. However, whether it can also deliver results for its retail stockists in 2021 – and beyond – is still unknown.

As always, the final result is, ultimately, decided by the consumer. And on that note, in order to regain its dominance of the international jewellery market, history shows Pandora must focus on two things: product design, and its distribution and reach to consumers.
 

PANDORA AUSTRALIA MANAGEMENT Timeline

FROM: JEWELLER'S STATE OF THE INDUSTRY REPORT - JULY 2020 PANDORA: PAST THE PEAK? Pandora has shifted its focus to a younger generation of consumers through the use of Gen Z celebrity spokespeople like Millie Bobby Brown (below).   Pandora was defined as a ‘brand-only’ chain in the 2010 State of the Industry Report (SOIR) – rather than a fine jewellery chain. The distinction is important because Pandora was, and remains, both a supplier to the wider jewellery market and a prominent retailer of its own brand. For this reason, the 2010 SOIR listed Pandora as a ‘brand-only’ operator, which was defined as “one, or more, fine or fashion jewellery stores that sells and markets its own brand of jewellery and/or watches. "It is usually a vertical-market operation, does not utilise local suppliers, and stores are often owned and operated by the proprietor of the brand or under license via franchise agreements.” Since 2010 the Pandora ‘Concept’ (brand-only) stores – many of which are operated by franchisees – have increased from 41 to 125. However, a number of the stores have closed in recent times. Pandora Australia refused to divulge the figure, but it is rumoured to be approximately five. ABOVE Table and chart compares the number of Pandora Concept (brand-only) stores and Pandora independent stockists by state. Traditional jewellers once frowned upon Pandora jewellery as a cheap fashion product; however the line between fashion and fine jewellery is often subjective and it was blurred when Pandora’s designs began using gold and diamonds. Further, the dismissive ‘fashion’ tag flew in the face of Pandora’s successful distribution model, and which best demonstrates the evolution of the brand and the industry. That is, by around 2010 Pandora was sold by more than 700 independent jewellery stockists. Following a six-year run of meteoric growth, the company began closing accounts in Australia and New Zealand; during 2011 alone, more than 100 stockists had their accounts closed as Pandora entered a “new business phase in Australasia”. The news struck the industry hard, but more was to come. In 2012, Pandora Australia announced a further 100 stockists would be closed while at the same time pushing its own franchise model. The table below shows that from a peak of more than 700 Australian independent stockists, the brand is supported by only 124 stores today. In other words, Pandora maintains only 18 per cent of its independent consumer distribution points as it did at its peak. Adding the Pandora franchise stores, that figure reaches around 35 per cent. In fairness, much of the decline has been at the company’s choice; however, the way it has managed itself over recent years caused many jewellers to quit the brand – with some making the decision for Pandora. Reasons for no longer stocking Pandora have included what many saw as excessive and unfair trading terms and conditions, along with being treated as ‘second-class citizens’ compared to the franchise operators. ABOVE Shows how the number of Pandora stockists has reduced since 2010 compared to the increase in Pandora Concept (brand-only) stores, noting that the number of independent stockists has declined by 82% For example, the increased number of forced deliveries per year gave retailers little choice in their own stock levels. Combined with minimum quantities on each item (i.e. pack sizes of three-of-kind), independent stockists were prevented from matching stock purchases with sales, resulting in ever-increasing stock levels. The over-stocking problem increased to such an extent that, in August 2019, the company took the extraordinary step of buying back jewellery from stockists for smelting. However, even the buy-back program was saddled with strict conditions, including that retailers would be charged a handling fee. The retailers’ decision to stop stocking Pandora may have been well-founded, given that over the past three to four years, Pandora sales have been declining – to the extent that in 2019, the company announced an international ‘re-launch’ of the brand. Less than two years after announcing that it would focus on its company-owned and franchise stores, thereby closing thousands more wholesale accounts from its independent jewellery retailers, Pandora Jewelry CEO Alexander Lacik declared in February this year that that may have been a poor decision. Lacik, who joined Pandora in April 2019 from outside the jewellery industry, believes the company might have lost “a lot of new customers” and may need to refocus on distribution to independent jewellery stores – the very businesses that it once discarded.

» Background reading
Pandora: The beginning of the end? July 2018 
For Pandora, arrogance is a two-edged sword August 2018
Pandora - the charm before the storm? July 2019 
No surprise, Pandora got it wrong February 2020

» History
Birth of brand Pandora June 2008
The Pandora phenomenon October 2009

» Research
2020 State of the Industry Report July 2020
Pandora past its peak? July 2020

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