PARIS — Danish jeweler Pandora’s stock plunged more than 17 percent on Tuesday after the company said it had registered a loss in the third quarter and cut full-year guidance.
A few months into its restructuring program, the Copenhagen-based company said it expects strong year-end trading nonetheless.
“The performance in September and October shows early signs in traffic improvement in most markets. This gives us confidence that we will see continued improvement into Q4, and that we are pulling all the right levers for long-term success,” Alexander Lacik, president and chief executive officer of Pandora, said in a conference call with financial analysts on Tuesday.
The new collection launched in October, Pandora Me, fronted by Millie Bobby Brown, has had early results that “are very encouraging,” said Lacik, adding the company’s product lineup overall for the fourth quarter is stronger than its end-of-year mix for a long time.
“So in our view, the program now is on track,” he continued. “We are confident in the direction and the long-term potential of this business. Pandora is becoming more cost-efficient, our business platform is strengthening, and we are developing our brand at a completely different speed than in the past.”
Faced with slowing traffic in malls globally, the charms-maker in late August launched a restructuring program that involves revisiting its store network, reducing discounts and buying back wholesale inventory.
In the third quarter, Pandora posted a net loss of 119 million Danish kroner, or $17.7 million, versus a profit of 951 million kroner in the same period last year.
“[Third-quarter] financials were impacted by some of our deliberate actions to improve the fundamentals of this business. That’s what we call the commercial reset,” said Lacik, naming improving inventory with partners as an example.
Pandora’s sales in the third quarter declined 11.4 percent in reported terms and 14 percent on an organic basis to 4.42 billion Danish kroner, negatively impacted in part by business in China. That was dented by weak trading during the Chinese Valentine’s Day in August and a 30 percent decrease in footfall in the country’s brick-and-mortar stores.
Lacik said market research has shown that Pandora’s brand position is not clear in China, and the company is evaluating the quality of its retail network there.
“There is no quick fix to these challenges,” he said. “It requires a more embedded commercial engine and possibly a different investment approach.”
Lacik is convinced Pandora will find the right strategy to grow in China, as it has in other markets.
Overall, the company’s third-quarter results were 4 percent lower than analysts’ consensus, while the EBIT excluding restructuring costs of 891 million Danish kroner, came in 10 percent lower than consensus, Piral Dadhania, an analyst with RBC Europe, said in a research note to clients.
Enhancing brand relevance is the turnaround’s number-one priority. “We create small successes in different markets,” Lacik said.
Pandora has fully refurbished four stores in the U.K. and Italy with a new concept, plus opened a pop-up in New York and a location in Shanghai with that format. The company plans to open another six stores over the next three months.
In tandem with the brand’s reboot, Pandora increased its media spend and reduced its promotional activity. “In the weeks where we were not cycling promotional activity, there was a clear improvement in traffic development since the brand relaunch,” Lacik said.
RBC Europe’s Dadhania said the turnaround strategy aimed to protect profitability and restore the business to top-line growth whilst slowing the pace of new openings and halting conversion of wholesale doors to retail.
“While we believe costs can be better controlled by the new management team, and Pandora’s elevated margin profile provides some headroom, we are not convinced impetus to drive top-line growth will be sustainable mid-term, particularly against a challenging retail backdrop,” she added.
Despite expecting an improved fourth-quarter performance, Pandora downgraded its guidance for the full year. It now expects organic sales growth for 2019 to be between minus 7 percent and minus 9 percent, versus the previous target of a 3 percent to 7 percent dip in revenues.
“The deliberate actions of the commercial reset hurt our financial performance, but it is unquestionably the right thing to do,” Lacik said. “We will exit 2019 in much better shape in key areas, with less dependence on promotions, more balanced inventory levels and a more efficient product assortment.”
The financial community was less bullish. Pandora stock closed down 17.6 percent Tuesday on the Copenhagen Stock Exchange at 280 Danish kroner.
Looking ahead, Lacik said the next step for Pandora is “to move from just cost projects to a cost culture, so we secure this for the long term.”
Pandora’s new product development strategy is meant to bear fruit in late 2020 and in 2021. Among other actions, the company plans to ramp up its focus on is core charms category, which generates 50 percent of the business today.