Charms with Disney images by Pandora

PARIS — Pandora, it seems, has charm issues.

The Danish jeweler, which generates the bulk of its sales from charms, has noticed consumers scaling back on the number of decorations they want for their bracelets, highlighting the perils for companies unprepared to adapt quickly to shifting consumption habits.

“For both new and older collections, the charms category is not increasing to the level we had expected…consumers prefer a simpler look with fewer charms on the bracelets,” noted chief executive officer Anders Colding Friis.

Revenue growth from charms declined 7 percent in the second quarter, throwing off the company’s annual projections and prompting staff cuts — including Colding Friis himself.

His resignation, revealed Thursday, served as a stark illustration of the weight of the struggle facing Pandora as it searches for his successor.

The jeweler earlier this week lowered full-year guidance as it pre-released second-quarter figures. Sales rose 4 percent in local currencies during the period, below expectations, the company said.

Thanking Colding Friis for “his hard work and commitment” for the past three and a half years, the board said it would stick to the four-year strategy laid out earlier this year.

Pandora has recruited Jeremy Schwartz, formerly ceo of The Body Shop, to become chief operating officer, effective in September. Schwartz, along with chief financial officer Anders Boyer, will be jointly responsible for running the company until it finds a new ceo.

Colding Friis will step down at the end of August.

The company said sales in the second quarter, the first full quarter with collections from Pandora’s new design team, indicated the plan presented at its Capital Markets Day in January would take longer to implement than initially expected.

While Colding Friis stressed that the company’s new charms have failed to ignite demand, he added that revenues were also impacted by a reduction of inventory in the wholesale channel.

“We still believe in our strategy toward 2022, but we have realized that we have been too optimistic on the speed of the impact from new products,” he said. “We are taking the right strategic initiatives, but the transition will take longer than expected.”

But analysts noted the second-quarter results show the company faces an uphill struggle.

While product collections from the new design team seemed to work for other product categories, “charms appears to remain challenged despite newness,” noted Piral Dadhania, an analyst at RBC Europe. “We are increasingly of the opinion that the charms business is in structural decline and its relative weight should be addressed accordingly.”

Over the quarter, charms accounted for 53 percent of group revenues while bracelet sales, which rose 11 percent, accounted for a 19 percent share. Pandora is working on growing the proportion of earrings, rings and necklaces, which generated 27 percent of the quarterly revenue figure, an increase from a 23 percent share in the same period last year. But progress could prove challenging, particularly as the company undergoes top management changes and the search for a new ceo.

“The success of the product diversification also depends on Pandora’s ability to raise its brand awareness outside of charms and bracelets which hinges on management execution,” noted HSBC in a research note last month. HSBC analysts estimate the contribution of charms and bracelets should decrease over time from 74 percent at the end of last year to around 50 percent in 2020.

“We are growing earrings, rings and necklaces and continue to strengthen the development of these categories with more products and marketing support,” said Colding Friis, noting plans to launch around 100 of these types of products, up from around 75 last year.

Meanwhile, the company is laying off around 400 workers, including more than 200 in Thailand, where it recently opened a new factory.

On Monday, the company said it would ramp up the pace of store openings, plans that prompted skepticism from analysts.

“At a time when the underlying selling trends are rapidly deteriorating, we remain skeptical of the store expansion plan, as we see revenues per store falling by 20 percent in 2022,” noted analysts at Morgan Stanley, in a note Thursday.

According to the revised guidance, Pandora expects sales to rise by 4 percent to 7 percent in local currencies in 2018, compared to a previous forecast of 7 percent to 10 percent growth. It predicts a full-year EBITDA margin of about 32 percent, versus 35 percent previously.

The downgrade came on the heels of a dip in first-quarter sales. Pandora, which saw a decline in profit last year, is working on improving its assortment of products while reining back price-slashing measures.

On the brighter side, in China, where the company sells products on Tmall as well as its own Internet site, business was brisk, with a 29 percent increase in revenues in local currency. The company is fighting grey market trading in the country by lowering prices by around 15 percent.

Asked if the group’s overall strategy could be up for revision given the impending management changes, Peder Tuborgh, chairman of Pandora’s board of directors, said he expected the current plan would remain in place but that adjustments might be necessary.

“We as the board believe strongly in the strategy and the direction we have set out as explained at the Capital Market Day. What we need to see is probably in some areas is a different approach or balancing of some of the strategic components and then it’s very much about execution and understanding the transition period that the strategy actually is imposing on us,” Turborgh said.

He added that he thought the second quarter showed the underlying strategy is working, but that “you just need to have more speed on it and probably have slight adjustments in how we execute some of the components.”