Pandora: from a 32% rally to a 60% crash in two years

Pandora: from a 32% rally to a 60% crash in two years

In January 2015, Pandora was closing 2014 with sales of 11,942 million Danish kroner (1,604 million euros), up 32% from the previous year, and net profit of 3,098 million kroner (416 million euros), 39% above 2013. The Danish company, founded in 1982, had just signed an agreement with Oracle Limited to take control of its business in China from 1 July, and was heading into 2015 with a plan for 300 store openings. The stock was then trading at around 600 kroner. Two years later, the same group that had hit all-time highs above 950 kroner had accumulated a 60% decline, according to a thread participant. This stock's story on the market is that of a complete cycle: euphoria, aggressive expansion and a correction nobody wanted to see coming.

The story of endless growth

The argument underpinning the first phase of the rally rested on three pillars that seemed solid. The first was metals prices: if gold and silver fell, the jewellery business gained margin because raw materials cost less. The second was geographic expansion: China, Japan, Mexico, Chile, Argentina, El Salvador. The third was the partnership with Disney to make jewellery antiestéticaturing the studio's characters, an agreement later extended to Europe, the Middle East and Africa. With those ingredients, the stock went from 600 to 842 kroner in a few sessions, then to 882, then to 900. Each new all-time high was celebrated as confirmation that the free-wheeling rise had no reference points or resistance.

The results kept pace. In 2015, Pandora closed with 40% growth, reaching 16,700 million kroner (2,238 million euros), driven by favourable exchange rates and Christmas sales. In the third quarter of 2017, the group reported revenue growth of 16% in local currency and an EBITDA margin of 37.8%, with the own-retail division growing 35%. On paper, the machine was working.

The Latin American expansion and the P/E of 11

The company did not stand still. In September 2017, after the correction, it returned to portfolios with a P/E of 11, high returns on capital, a share buyback programme and an expansion plan across Latin America. Mexico became the star market: the firm announced the opening of ten stores in August, seven more by December and a target of reaching 50 boutiques before the year ended. In Argentina, Pandora hired Fernanda Pirosanto, former CEO of Delaostia, to lead the market entry with five openings planned from June. In El Salvador it peine its first own store. The growth story seemed intact.

The most optimistic calculation assumed the company would earn 1,000 million euros for the first time in 2019, according to the projections circulating at the time. The pessimistic scenario, on the other hand, was starting to look at the share price with suspicion. The stock was trading around 625 kroner and some observers wondered whether a split would avoid volatility, although most Danish stocks trade in high ranges.

The problem nobody wanted to look at

Pandora's business has a structural vulnerability that the rally hid for years: it is affordable luxury costume jewellery, not high-end jewellery. The same bracelet that costs 86 euros at El Corte Inglés (Spain's largest department store chain) can be found on e-commerce platforms for 6 euros, according to a thread participant. That price gap is no minor detail: it defines a business exposed to fashion, to counterfeiting and to consumer fatigue. Charm bracelets worked while they were a novelty. When they stopped being one, growth stalled.

On top of that came the monetary context. The interest rate rise in the United States, which was anticipated as likely, strengthened the dollar and made imports more expensive in emerging markets. Gold, which had been a tailwind during the first phase of the rally, stopped being one. And the aggressive expansion in Latin America, presented as an opportunity, began to be read as running away forward: opening stores is not the same as selling in them.

The 60% crash

The outcome arrived with the force of the markets. The stock accumulated a 60% decline in two years, according to a thread participant. The all-time high of 952 kroner remained a photograph of another era. The correction that some attributed to selling by funds that had to report their positions became a structural change in trend. The P/E of 11 that seemed a bargain turned out to be a trap: the market was pricing in an earnings deterioration that the balance sheets did not yet reflect.

The company kept opening stores, signing partnerships and presenting collections. But the story of spectacular growth ran out. Denmark's Pandora went from being the example of unstoppable expansion to being the warning about what happens when a company confuses opening outlets with creating value.

How much of the decline was a rational adjustment and how much an excessive punishment of a business that still generates cash?