The IPO was unforgettable but is the brand riding high on a fad?
It was Denmark’s biggest IPO in 16 years but is Pandora floating on a fad? Analysts tell Amanda Grately that the Danish brand must diversify to survive as she considers the benefits of an IPO.
Danish jewellery brand Pandora charmed investors with its successful initial public offering (IPO) this month but even before the celebratory champagne glasses were drained, talk turned to the sustainability of a brand built on a jewellery craze.
Pandora’s debut on the Copenhagen Stock Exchange on October 5 was one of Europe’s largest market listings this year, valuing the jewellery company at about US$5 billion (£3.15 billion).
It was Denmark’s biggest IPO in 16 years with the brand selling off US$2.1 billion (£1.35 billion) of shares in the partial listing.
The IPO provided a partial exit to the brand’s majority owner private equity investor Axcel and the founding family. The major selling shareholder following the IPO is now Prometheus Invest ApS – a vehicle set up by private equity investor Axcel, the company’s founders and share-owning management for the purpose of the IPO – with 57.4 percent of Pandora’s share capital.
Other early investors in Pandora were rewarded with a 25 percent gain as the brand’s shares, priced at 210 Danish krone (£25) in the IPO, jumped in active dealings at the debut and closed up at 263 krone (£31).
Sydbank analyst Soren Lontoft Hansen believes the price was “fair” but says he assumes strong prospects for the firm. And this is the debate.
Jyske Bank analyst Jens Thomsen says that for investors expecting that the jewellery brand can continue its success at undiminished strength and maintain its high growth rates and unique profitability over a number of years, Pandora is an attractive investment.
But he adds that investors who believe that Pandora’s success is an intermediate phenomenon and that the company will not manage to “reinvent” itself and create continuing growth, should instead select other investment opportunities.
“The maintenance of growth and profitability is decisive for the valuation of Pandora and the perception of the company,” says Thomsen.
But the fact that the Pandora float went ahead was a huge vote of confidence in the company. Analysts commented that it was commendable that Pandora was able to get the IPO done – and for it to perform well – at a time when many other IPOs have been postponed or cancelled due to uncertainties over the fragile global economic recovery.
Undaunted by the choppy economic waters, investors flocked to the company that was established as a Copenhagen jeweller in 1982. Since those modest beginnings it has enjoyed rapid growth over the past decade as women have flocked to its hugely popular charm bracelets.
Pandora has made its presence felt strongly among jewellery retailers in developed markets, including the UK, and has established a high profile among retail buyers visiting leading international jewellery trade fairs, such as the Inhorgenta show in Munich, with extensive marketing.
As well as its dominance in the jewellery retail market, it is Pandora’s strong margins that caught the eye of many an investor. Pandora’s products are made cheaply by more than 3,300 employees in Thailand and are mostly sold to middle-income women aged between 25 and 55 in developed markets, particularly the US and Europe, at price points ranging from £100 to £1,000.
Thomsen says Pandora has succeeded at turning a craft into an industry. “They have industry-like costs and craft-like sales prices, and that gives healthy margins,” he says.
Financially, Pandora is in a strong position because it has almost no debt and benefits from a strong cash flow. While it is easy to be bewitched by Pandora’s very public successes, it is important to note that Pandora’s collectable bracelets and charms accounted for 86 percent of its sales in the first half of the year. Therefore, some analysts believe that the challenge for Pandora now is to overcome its reliance on charm bracelets and to grow in emerging markets such as China and Eastern Europe.
Thomsen says Pandora must be successful in new markets and, in the long term, the popular charms must be supplemented with other sales successes if the company’s high growth and profitability are to be maintained.
“We expect that the equity market will, over the coming months, focus on news about Pandora’s challenges with respect to its brand in the Chinese market and, of course, the third quarter accounts that will be released on November 11,” he says. “In the long term, the focus will be on whether new players and structural changes will result in a price pressure in the jewellery industry.”
Despite the successful IPO, analysts have not been shy to raise concerns that Pandora’s charm bracelets could prove to be a fad, which could send the company’s impressive growth quickly into reverse. Fashion can be unpredictable, which raises uncertainties about the outlook for demand for Pandora’s big-selling charms, with some in the industry prophesying that this Christmas will be the last great hurrah for the charm phenomenon.
Pandora, however, has rejected any notion of a fad, saying that its goal now is to outperform others as a branded goods maker, and the brand is already actively trying to widen its product range.
At the The Jewellery Show at Spring Fair International in February Pandora unveiled a range of sunglasses but these have yet to reach the market, with the brand delaying delivery because of quality issues. However, it has assured retailers that the line will reach stores.
Next on the brand’s product development calendar will be the launch of Swiss made watches with interchangeable bezels and straps that it is aiming to take to market in time for Valentine’s Day 2011. These too have faced production problems with Pandora unable to brand the watches due to a watchmaker already on the market with a similar logo. Instead, it plans to add a signature black diamond to the crown of each Pandora watch.
Thanks to the IPO, Pandora, which had 2009 sales of 3.46 billion krone (£411.8 million), has raised 600 million krone (£71.4 million) to finance such product and geographical development, but the cost of this cash boost will be intense scrutiny and a loss of control.
Pandora will now be a slave to much more stringent earnings reporting requirements and will have to take the now much wider investor base of shareholders into consideration when making decisions on how to run the business.
Pandora’s IPO has put it on a similar footing to other listed big-name retail jewellers, such as Zale, Blue Nile and Signet Jewelers.
As well as high street retail chains, many luxury jewellery brands are listed, or belong to listed groups, such as Bulgari, Cartier and Van Cleef & Arpels.
Other jewellers may look at the success of Pandora’s IPO and consider following suit. And for any jeweller considering a possible IPO, there are advantages and disadvantages.
The main benefits can include realising a large sum in return for one’s risks and efforts to establish the company, as well as raising capital for future growth and investment.
However, stringent guidelines on reporting financial results regularly, and the need for greater transparency in the running of the business, are additional challenges after an IPO.
Retailers or brands considering going down the IPO route should also be aware that it may lead to big changes in the way the company is run, and will most likely reduce their control of the business.
So while a short-term cash injection to fund expansion projects can be tempting, it’s important to consider whether you run your business for love or for money. If it’s love that drives you then avoid the stock markets, but if you’re building yourself up as the next business big shot and have a company worth investing in, then following in Pandora’s charming footsteps might be just the next step you need.