Pandora today announces the next steps of Programme NOW, following the important changes in 2018 with a new joint interim leadership team and a refocusing of the network strategy.
A thorough analysis of the challenges facing the company has found that: the brand has high awareness, but lacks a clear positioning; Pandora can improve its relevance to consumers and better deliver on their demands for an inspiring shopping experience; Pandora has an opportunity to leverage its unique product assortment for more impact. These challenges are within the control of the company and by addressing these issues with determination, Pandora can return to positive like-for-like growth in the medium term and continue to deliver industry-leading margins. Programme NOW will deliver the transformation required, including the change of the network expansion strategy as announced in November 2018, significant investments to “Reignite a Passion for Pandora”, a necessary commercial reset, DKK 1.2 billion in cost reductions, and a new global-local operating model.
A key part of Programme NOW will be to Reignite a Passion for Pandora, building on our strong fundamentals and Pandora’s unique position as the world’s biggest jewellery brand. Pandora will infuse new energy to the brand, and inspire and attract more people with a passion to collect and wear Pandora jewellery.
FINANCIAL HIGHLIGHTS
“Through Programme NOW, we are taking immediate and forceful action to address the disappointing aspects of our financial performance in 2018. We are confident that this company-wide business transformation will reignite Pandora, restore sustainable growth and support our industry-leading margins.” says Jeremy Schwartz, COO.
“We are pleased to have returned DKK 5.9 billion to shareholders in 2018, and we will continue to return significant cash to shareholders in 2019. It is also encouraging that we have identified significant cost saving opportunities of DKK 1.2 billion that will fund our growth initiatives and support our margins.”says Anders Boyer, CFO.
SELECTED FINANCIAL HIGHLIGHTS FOR 2018 (1 JANUARY - 31 DECEMBER 2018)
| DKK million | Q4 2018 | Q4 2017 | FY 2018 | FY 2017 |
| Revenue | 7,890 | 7,603 | 22,806 | 22,781 |
| Revenue growth, % local currency | 3% | 20% | 3% | 15% |
| Total like-for-like, % | -7% | 2% | -4% | 0% |
| EBITDA | 2,813 | 3,050 | 7,421 | 8,505 |
| EBITDA margin, % | 35.7% | 40.1% | 32.5% | 37.3% |
| EBIT margin, % | 32.0% | 37.1% | 28.2% | 34.2% |
| Cash conversion, % | 115.2% | 103.6% | 86.4% | 68.0% |
UPDATE ON PROGRAMME NOW
During H2 2018, Pandora carried out a thorough analysis of the challenges facing the company. The diagnosis points to four key issues which, when corrected, holds the potential to restore long-term sustainable growth:
Programme NOW is a comprehensive two-year roadmap designed to respond to the above challenges and to support sustainable long-term growth. As a first step in the programme, Pandora announced a change in its network expansion strategy in November 2018 by significantly reducing franchise acquisitions and new store openings. The change of strategic direction has been successfully executed and no new acquisition deals were signed in Q4 2018.
The next four steps for Programme NOW are described below.
1 :Commercial reset
Pandora will address the ‘push effect’ through a commercial reset to significantly reduce non-value added promotions and improve the level and ageing of inventories at wholesale partners.
Promotions. To protect long-term brand equity, increase full-price sell-out over time, and create the commercial environment that allows our innovation and new marketing initiatives to thrive, we will reduce promotional activities between the major gifting-retail-promotional periods. The big and relevant gifting promotional periods will remain. This will lead to healthier and more sustainable revenue for the long-term but will have a short-term negative revenue impact.
Wholesale inventories. Pandora will support the reduction of slow-moving stock and initiate an inventory buyback programme in selected markets.
Furthermore, to strengthen the focus on sell-out and reduce slow-moving stock and overall stock levels, Pandora changes the size of the New Product Introductions (NPI) sell-in packages. The changed NPI sell-in packages will benefit franchise partners from day one as it frees up cash and limits the risk of building excess inventory, while allowing Pandora to respond faster and replenish in line with actual consumer demand.
2: Reignite a Passion for Pandora
While Pandora has successfully built the best known brand in the jewellery industry, there is a need to clarify the brand expression to reignite the traction and heat of the brand, and inspire further desire for charm collecting. This requires a positive brand disruption, Reignite a Passion for Pandora, and a change in the balance between commercial push (promotions etc.) and consumer pull driven demand. In short, Pandora will materially change the investment and ambition level of all elements of the consumer experience.
The historical DNA of Pandora is focused on the product. While products remain a highly important component of the growth recipe, they cannot stand alone. In 2019, Pandora has planned for additional investments of DKK 0.5 billion in OPEX and around DKK 0.2 billion in CAPEX. The incremental spend will be focused on improving key elements in the consumer experience from product to store and marketing. In 2019, Pandora will launch the following initiatives:
3: Reduce costs
To fund the growth initiatives and support profitability a total of DKK 1.2 billion annual costs will be eliminated as a run rate by the end of 2020. Pandora targets cost reductions of around DKK 0.6 billion OPEX and cost of sales in the calendar year 2019. These cost reductions come on top of the DKK 0.35 billion cost reductions communicated in connection with the Q2 2018 announcement.
Cost reduction opportunities have been identified across the company. Among the larger cost reduction areas are cost of sales, IT, costs in own concept stores and administrative expenses.
4: Implement new ways of working
Pandora has evaluated its organisational design and operating model, how and where decisions are made, how the company operates, and in which areas to lift capabilities to match the organisational design to meet the business needs. This work will be ongoing, but the following four immediate elements will make an impactful change:
Execution: Total restructuring costs of up to DKK 2.5 billion over the period 2019 and 2020
Pandora expects up to DKK 2.5 billion in restructuring costs during 2019 and 2020 of which up to DKK 1.5 billion will be expensed in 2019. The majority of the restructuring costs will be cash based.
FINANCIAL OUTLOOK FOR 2019
2019 will be a transition year for Pandora, and the financial outlook will be significantly impacted by the actions taken in Programme NOW.
CHANGING GUIDANCE METRICS TO ORGANIC GROWTH AND EBIT MARGIN
To strengthen performance management and better reflect where shareholder value is created, Pandora changes its revenue guidance metric from total revenue growth in local currency to organic revenue growth1 (which excludes all impacts from forward integration and M&A activities). Pandora will also change its profitability metric to EBIT margin (from EBITDA margin) thereby sharpening the focus on cash allocation and minimising fluctuations related to the new accounting standard for leases (IFRS 16) which is effective from 1 January 2019. As a rule of thumb, the EBIT margin will be around 0.3 percentage points higher going forward while the EBITDA margin will be around 4.5 percentage points higher due to IFRS 16.
FINANCIAL GUIDANCE FOR THE FULL YEAR OF 2019
| 2019Guidance | 2018Guidance development | FY 2018Actual | Q3 2018Guidance | Q2 2018Guidance | 2018Guidance | |
| Organic revenue growth, % | -3% to -7% | Total revenue growth (local currency) | 3% | 2-4% | 4-7% | 7-10% |
| EBITDA margin, approximately % | 32.5% | 32% | 32% | 35% | ||
| EBIT margin excl. restructuring costs | 26%-28% | EBIT margin, % | 28.2% | NA | NA | NA |
| CAPEX, approximately % of revenue | 5% | 5% | 5% | 5% |
BUILDING BLOCKS TO FULL YEAR 2019 GUIDANCE
ORGANIC GROWTH GUIDANCE – BUILDING BLOCKS
*Please find the chart in the enclosed company announcement
In 2019, Pandora expects to add around net 75 concept stores to the network. The store openings will mainly be in Latin America and China. The expansion of the network is expected to add around 4 percentage points of organic growth.
Forward integration – which is not included in organic growth – will positively impact total revenue growth by around 2 percentage points, which mainly includes acquisitions already completed in 2018, as well as Taiwan. Consequently total revenue growth in local currency is expected to be -1% to -5%.
Total like-for-like is expected to be negative mid-single digit before the impact from the commercial reset. It is expected that the initiatives in Programme NOW will mainly impact like-for-like from late 2019 and forward. Excluding the impact from the commercial reset, organic growth is expected to be between 0% and -2%. The NPI sell-in packages impact organic growth by around -1 percentage point while the reduction of promotions will impact total like-for-like and organic growth equally by negative 2-4 percentage points. In 2019, total reported like-for-like could therefore be down to negative high-single digit.
EBIT MARGIN GUIDANCE – BUILDING BLOCKS
*Please find the chart in the enclosed company announcement
The waterfall chart above outlines the most important building blocks of the EBIT margin development in 2019, supported by the following explanations:
CAPEX for the year is expected to be in the range of DKK 1.2-1.5 billion. This includes investments in both Pandora’s own distribution network, IT and continued optimisation of the company’s crafting facilities in Thailand. CAPEX directly related to Programme NOW is expected to be around DKK 200 million and relates primarily to the investments in e-commerce and omnichannel features as well as commercial projects related to Reigniting a Passion for Pandora.
The effective tax rate in 2019 is expected to be around 22%-23%.
Assuming current exchange rates versus the Danish Krone, growth reported in DKK is expected to be 0-1 percentage point higher than in local currency.
MID-TERM FINANCIAL ASPIRATIONS
All financial targets including all of the sub-components communicated in relation to the Capital Markets Day on 16 January 2018 are cancelled as a result of Programme NOW.
Pandora’s aspiration for the mid-term horizon is to deliver sustainable positive organic growth and industry-leading profitability. Organic growth will be driven by low- to mid-single digit total like-for-like growth combined with a continued controlled expansion of the store network in less penetrated areas.
CAPITAL STRUCTURE POLICY ADJUSTED DUE TO IFRS 16
With the implementation of IFRS 16, fixed lease obligations (e.g. rent) will be classified as debt. Consequently, Pandora’s net interest-bearing debt increases by approximately DKK 4.2 billion. Furthermore, lease expenses previously recognised as OPEX will primarily be recognised as depreciations going forward. This will increase EBITDA by around DKK 1 billion.
The combined effect will increase the NIBD to EBITDA ratio by roughly 0.5. Reflecting the accounting impact of IFRS 16, the company’s capital structure policy will be adjusted accordingly from currently 0 to 1 times NIBD to EBITDA to 0.5 to 1.5 times.
EFFECT OF PROGRAMME NOW ON CAPITAL STRUCTURE POLICY
Pandora will continue to generate significant cash during Programme NOW and distribute excess cash to shareholders. During the transition, the financials will be impacted by significant restructuring costs. As these are of temporary nature only, Pandora is also looking at the leverage ratio excluding restructuring costs when determining the level of cash to be distributed to the shareholders. Based on the reported leverage ratio, Pandora expects to temporarily exceed the upper end of the capital structure interval in 2019.
CASH DISTRIBUTION OF DKK 4 BILLION TO SHAREHOLDERS IN 2019
For 2019, the Board of Directors proposes a total cash return to shareholders amounting to DKK 4 billion, which is around 13% of the company’s market cap based on the time of writing.
In line with the cash distribution policy announced with the Annual Report 2016 – a stable to growing nominal dividend and all excess cash to be distributed via share buybacks – the Board of Directors proposes a dividend of DKK 18 per share (DKK 1.8 billion) and a share buyback programme of up to DKK 2.2 billion.
| DKK billion, annual commitment | FY 2019Proposed | FY 2018Actual | FY 2017Actual | FY 2016Actual |
| Dividend (Ordinary + interim) | 1.8 | 1.9 | 4.0 | 1.5 |
| Nominal dividend per share, DKK | 18 | 18 | 36 | 13 |
| Share buy-back programme | 2.2 | 4.0 | 1.8 | 4.0 |
| Total cash return | 4.0 | 5.9 | 5.8 | 5.5 |
DIVIDEND – 2019 MAINTAINED AT DKK 18 PER SHARE
In 2018, Pandora paid out an ordinary dividend of DKK 9 per share and an interim dividend of DKK 9 per share in relation to the H1 2018 results. In total, Pandora paid out DKK 18 per share (DKK 1.9 billion) in 2018.
Based on the financial results in 2018, the Board of Directors proposes to return DKK 1.8 billion in dividend during 2019. This includes an ordinary dividend of DKK 9 per share and one additional interim dividend of DKK 9 per share in relation to the H1 2019 results.
2018 SHARE BUYBACK PROGRAMME OF DKK 4 BILLION
In connection with the Annual Report 2017, Pandora announced its intention to buy back own shares of up to DKK 4.0 billion in a share buyback programme from 14 March 2018 to 13 March 2019. In 2018, a total of 7,437,025 shares have been bought back, corresponding to a transaction value of DKK 3.2 billion. The purpose of the programme is to reduce Pandora’s share capital and to meet obligations arising from employee incentive programmes. At the Annual General Meeting 2019, The Board of Directors will propose to reduce the company's share capital by a nominal amount of DKK 10,029,003 by cancellation of 10,029,003 own shares of DKK 1, equal to 9.1% of the company's total share capital.
2019 SHARE BUYBACK PROGRAMME OF DKK 2.2 BILLION PROPOSED
The Board of Directors proposes to launch a new share buyback programme in 2019, under which Pandora will buy back own shares to a maximum consideration of DKK 2.2 billion. The shares acquired during the programme will as in previous years primarily be used to reduce Pandora’s share capital and to meet obligations arising from employee incentive programmes. The share buyback programme will run from the Annual General Meeting (13 March 2019) to 19 March 2020 at the latest.
CONFERENCE CALL
A conference call for investors and financial analysts will be held today at 11.00 CET and can be joined online at www.Pandoragroup.com. The presentation for the call will be available on the website one hour before the call.
The following numbers can be used by investors and analysts:
DK: +45 35 44 55 83
UK (International): +44 (0) 203 194 0544
US: +1 855 269 2604
ABOUT PANDORA
Pandora designs, manufactures and markets hand-finished and contemporary jewellery made from high-quality materials at affordable prices. Pandora jewellery is sold in more than 100 countries on six continents through more than 7,700 points of sale, including more than 2,700 concept stores.
Founded in 1982 and headquartered in Copenhagen, Denmark, Pandora employs more than 29,000 people worldwide of whom more than 14,000 are located in Thailand, where the Company manufactures its jewellery. Pandora is publicly listed on the Nasdaq Copenhagen stock exchange in Denmark. In 2018, Pandora’s total revenue was DKK 22.8 billion (approximately EUR 3.1 billion).
CONTACT
For more information, please contact:
1 Organic growth is an alternative financial measure not defined by IFRS, see note 1.1 in the Annual Report 2018
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