Pandora Earnings: Solid Revenue Development in Challenging Conditions; Shares Cheap

We are maintaining our fair value estimate for narrow-moat Pandora PNDORA after the company reported a resilient second-quarter performance and raised full-year guidance. The company now expects like-for-like sales growth of 0%-2%, versus negative 4% to 0% previously, and organic growth, which also encompasses network expansion and phasing of sell-in to partners, of 2%-5%. Local currency growth is expected at 3%-6% versus 4.9% in our estimates. EBIT margin is expected around 25%, in line with our 24.9% estimate. So far in the third quarter, like-for-like sales growth has accelerated to the midsingle digits and organic growth to the high single digits. We still view the shares as undervalued despite a strong year-to-date rally (up 30%-plus versus a 6% increase in the Stoxx Europe 600 Index), offering over 35% upside to our DKK 930 fair value estimate. Shareholder returns over 12 months through buybacks and dividends amount to around 11% of the company’s market capitalization.

Regionally, U.S. market performance was sequentially better in the second quarter (like for like of negative 4% versus negative 7% in the first quarter) in contrast to most luxury players we cover, for whom performance deteriorated in this market. Like for like in China turned positive as the comparison basis in the prior year was affected by lockdowns. The company just started investing in the market in mid-July. Like-for-like sales in most big European markets were down by single digits, in line with the first quarter, with the exception of flat performance in the United Kingdom and 11% growth in Germany. Other markets, including Mexico and Spain, continued their outperformance with a 12% like-for-like increase, bringing total like-for-like growth for the group to 2% (versus 0% in the first quarter).

Even though gross margin was up 170 basis points in the quarter, operating profit came under pressure through higher administrative and selling costs, due to salary increases and store expansion.