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Pandora A/S is a category killer jewelry business that has built significant competitive advantages right down the middle of secular growth trends that will continue indefinitely. Despite a 65% ROIC, 20% top line growth rate (25% adjusted for currency) and mid 30s% earnings growth,rolex daytona ladies watch replica, the company trades at slightly less than 20x trailing earnings and 16x forward earnings for reasons I find hard to understand. This is the very essence of GARP.
"I don't try to jump over 7 foot hurdles: I look for 1 foot hurdles that I can step over." Warren Buffett
It is difficult to find one foot hurdles in general, especially these days, with markets at all time highs, but if one takes a look over to DenmarkWhile it appears that Pandora A/S has burst onto the scene in just the past 5 10 years, the company is 34 years old, having started by Per Enevoldsen and his wife Winnie in Copenhagen, Denmark at a single jewelry shop, in 1982. They often took trips to Thailand, and, inspired by the rich history of jewelry and craftsmanship in the country, began to import jewelry from Thailand. In the late 80's, they hired a new designer, and built a production factory in Thailand, and moved there. The company then switched to selling wholesale to other shops in successful expansion.
In the 90's, the company's designers came up with its signature product, the silver charm bracelet, which was first launched in 2000. This is the hit product that launched Pandora onto the global stage. Charms currently make up 62% of revenue and Bracelets make up 17% of revenue. This percentage was even higher, before the recent ramping of rings and earrings and necklaces. and Canada, before moving on to Continental Europe and then globally to where the company sells to over 100 countries over six continents, as it built out large, industrial scale production facilities in Gemopolis, Thailand. In 2015, Pandora launched the Pandora EStore. Online sales have already grown from 2.5% of revenues in 2015 to 4% of revenues in 2016.
In 2008, the private equity firm Axcel bought a 60% stake in the company, and the company IPO'd in 2010 at 250 DKK/ share. The company currently trades at 830 DKK/ share. The company has 1) re defined the value proposition of jewelry 2) has a product that reduces customer pain points, and inspires repeat buying and 3) has been able to scale incredibly quickly to the point where other jewelry brands would find it hard to compete with a similar quality product (Pandora has in fact even partnered with rival brands to have shops in shops in rival stores more on this later). rival Tiffany and most other jewelry companies, and benefits from large scale production in Thailand, a country with very low labor costs, which buttresses sustainably high margins (mid 30's operating margin).
A different type of value proposition: Pandora's charms, like many other high growth consumer companies of recent years, is built on "affordable luxury." Think , Ulta Salon, Chipotle, Netflix, and other great growth stocks of the past decade. Some of the common attributes among these companies is that their offerings are desirable and accessible to a wide swath of the population on a very global scale. For instance, a Netlfix subscription is just another add on to the regular bundle for well off families, but also may be used as a substitute for the cable bundle for more economically challenged consumers. Similarly, Pandora charms are very well crafted in a variety of interesting designs, with charms ranging anywhere from about $25 to higher end pieces for as much as $450. In this way, Pandora appeals to everyone, and as a new brand with great design, customizability, and 7 annual product collections (or drops), is also trendy even for the wealthy.
Indeed, the company has in many ways re defined the value proposition, or "willingness to pay" of jewelry, as shown in this graph:Pandora has substituted the usual drivers of jewelry value: rarity, type, quality, high price point (a value in itself), with other value propositions Interesting designs, customizability,daytona rolex replica, personalization, variety, and, most importantly, "meaning." Pandora's goal is to become the "most loved jewelry brand in the world." Indeed, each charm is meant to signify something meaningful in someone's life this also makes the charms especially interesting for gift giving. Delivering this value proposition is much less costly one doesn't need to source very rare stones, or invest in high priced real estate and owned retail operations. Thus, Pandora can still achieve a meaningful WTP Cost gap that leads to its outsized ROIC.
Interestingly, the charm bracelet has many added benefits. Once you buy a charm bracelet, it leads to incremental charm buying. Moreover, all your relatives and friends know you have a bracelet, and this makes them even more likely to purchase a charm when the inevitable "What do I get Lucy for her birthday/holiday/anniversary/etc." question comes up.
In many ways, the charm bracelet acts as an ecosystem, not just a piece of jewelry! Much like Apple talks about its "installed base" of devices and is now emphasizing services, so does Pandora have a large "installed base" that primes the customer for further charm purchases. With seven annual "drops" or collections, there is constantly something new at Pandora. One can see how this is not just a jewelry company, but an ecosystem, or "universe of jewelry" as the company likes to put it.
This is also powerful for the customer, who can add charms when they have available funds, on their own schedule. If you buy a $500 Tiffany necklace, even if you have a payment plan,rolex daytona oyster fake, you are locked into regular payments and interest. Pandora is a less anxiety producing purchase.
: Pandora also has a competitive advantage in being an "unpretentious" brand. Whereas Tiffany, Cartier, and Swarovski must source rare stones and control their retail stores to preserve their "high end" image, Pandora operates mostly as a franchised model to jewelry franchisees all over the world. By selling wholesale, the company can expand very quickly with very little risk into new markets. Once a market has been proved to be receptive to the charms, the company then goes in and upgrades its points of sale to either branded "concept stores," or "shop in shops" (a branded store within a larger jewelry or department store, with dedicated Pandora staff), and can close down 3rd party or multi branded stores, which are not as effective.
The charm bracelet, combined with a "middle class" brand, allows the company to focus on cementing its competitive advantage through economies of scale. Production of bracelets combines elements of both mass production (casting of charm shapes) along with hand crafted finishing, as you can see in this video
In this way, one is reminded of other successful companies that mass produce high quality "bricks," and then lets the customer assemble to their liking, or self customize. Other companies that come to mind that use this very successfully are Chipotle (limited high quality menu, let customers customize their burritos), LEGO (limited bricks, can be arranged in infinite amount of designs), and Ulta Salon (bring prestige brands, discount brands, and hair salon care under one roof, let the customers decide). Judging from the results of all these companies, it seems to be a recipe for success and generating high ROIC. It allows the company to deliver high quality "ingredients," at affordable price points that the customer is happy to play with and assemble on their own.
Thus, a competitive advantage is established if the company scales to a significant degree, which Pandora has, while the competition has slept. The company has huge scale in Thailand, a country that is advantaged by its a) close proximity to silver resources b) a verylong history with jewelry craftsmanship and design, and bc very low wages compared with the US or Europe (1/8 1/10 as much).
With this low labor cost and economies of scale built over 20 years, it would be a formidable task for another jewelry manufacturer to source, scale, and produce charm bracelets, and be able to earn the returns that Pandora does at a similar price point.
In fact, Pandora is actually increasing the complexity of its designs as it achieves other economies of scale, putting it even further ahead of competitors and knock offs. For instance, a new charm bracelet with intricate cubic zirconia designs woven in now requires 72 casks to make, as opposed to a "simpler" bracelet model from just 2013,imitation daytona rolex watch, which required 8 casks. A very detailed new lace silver ring design (below) requires 4x the manpower to produce than the simpler mother of pearl ring from 2007.
(Source: Capital Markets Day Presentation)
Why would the company deliberately eat into their margins to do this? To put even more distance between their design capabilities and those of other large jewelers or upstart brands. And it seems to be working.
This can be seen in the recent partnership with jeweler Jared, which is owned by Signet. retail stores during 2016 (now 168 as of Q2 2016). This is another advantage of being an unpretentious brand, and selling wholesale it's you can turn rivals into allies, and get them to market your products for you for a cut of the profits.
Pandora A/S is a category killer jewelry business that has built significant competitive advantages right down the middle of secular growth trends that will continue indefinitely. Despite a 65% ROIC, 20% top line growth rate (25% adjusted for currency) and mid 30s% earnings growth,rolex daytona ladies watch replica, the company trades at slightly less than 20x trailing earnings and 16x forward earnings for reasons I find hard to understand. This is the very essence of GARP.
"I don't try to jump over 7 foot hurdles: I look for 1 foot hurdles that I can step over." Warren Buffett
It is difficult to find one foot hurdles in general, especially these days, with markets at all time highs, but if one takes a look over to DenmarkWhile it appears that Pandora A/S has burst onto the scene in just the past 5 10 years, the company is 34 years old, having started by Per Enevoldsen and his wife Winnie in Copenhagen, Denmark at a single jewelry shop, in 1982. They often took trips to Thailand, and, inspired by the rich history of jewelry and craftsmanship in the country, began to import jewelry from Thailand. In the late 80's, they hired a new designer, and built a production factory in Thailand, and moved there. The company then switched to selling wholesale to other shops in successful expansion.
In the 90's, the company's designers came up with its signature product, the silver charm bracelet, which was first launched in 2000. This is the hit product that launched Pandora onto the global stage. Charms currently make up 62% of revenue and Bracelets make up 17% of revenue. This percentage was even higher, before the recent ramping of rings and earrings and necklaces. and Canada, before moving on to Continental Europe and then globally to where the company sells to over 100 countries over six continents, as it built out large, industrial scale production facilities in Gemopolis, Thailand. In 2015, Pandora launched the Pandora EStore. Online sales have already grown from 2.5% of revenues in 2015 to 4% of revenues in 2016.
In 2008, the private equity firm Axcel bought a 60% stake in the company, and the company IPO'd in 2010 at 250 DKK/ share. The company currently trades at 830 DKK/ share. The company has 1) re defined the value proposition of jewelry 2) has a product that reduces customer pain points, and inspires repeat buying and 3) has been able to scale incredibly quickly to the point where other jewelry brands would find it hard to compete with a similar quality product (Pandora has in fact even partnered with rival brands to have shops in shops in rival stores more on this later). rival Tiffany and most other jewelry companies, and benefits from large scale production in Thailand, a country with very low labor costs, which buttresses sustainably high margins (mid 30's operating margin).
A different type of value proposition: Pandora's charms, like many other high growth consumer companies of recent years, is built on "affordable luxury." Think , Ulta Salon, Chipotle, Netflix, and other great growth stocks of the past decade. Some of the common attributes among these companies is that their offerings are desirable and accessible to a wide swath of the population on a very global scale. For instance, a Netlfix subscription is just another add on to the regular bundle for well off families, but also may be used as a substitute for the cable bundle for more economically challenged consumers. Similarly, Pandora charms are very well crafted in a variety of interesting designs, with charms ranging anywhere from about $25 to higher end pieces for as much as $450. In this way, Pandora appeals to everyone, and as a new brand with great design, customizability, and 7 annual product collections (or drops), is also trendy even for the wealthy.
Indeed, the company has in many ways re defined the value proposition, or "willingness to pay" of jewelry, as shown in this graph:Pandora has substituted the usual drivers of jewelry value: rarity, type, quality, high price point (a value in itself), with other value propositions Interesting designs, customizability,daytona rolex replica, personalization, variety, and, most importantly, "meaning." Pandora's goal is to become the "most loved jewelry brand in the world." Indeed, each charm is meant to signify something meaningful in someone's life this also makes the charms especially interesting for gift giving. Delivering this value proposition is much less costly one doesn't need to source very rare stones, or invest in high priced real estate and owned retail operations. Thus, Pandora can still achieve a meaningful WTP Cost gap that leads to its outsized ROIC.
Interestingly, the charm bracelet has many added benefits. Once you buy a charm bracelet, it leads to incremental charm buying. Moreover, all your relatives and friends know you have a bracelet, and this makes them even more likely to purchase a charm when the inevitable "What do I get Lucy for her birthday/holiday/anniversary/etc." question comes up.
In many ways, the charm bracelet acts as an ecosystem, not just a piece of jewelry! Much like Apple talks about its "installed base" of devices and is now emphasizing services, so does Pandora have a large "installed base" that primes the customer for further charm purchases. With seven annual "drops" or collections, there is constantly something new at Pandora. One can see how this is not just a jewelry company, but an ecosystem, or "universe of jewelry" as the company likes to put it.
This is also powerful for the customer, who can add charms when they have available funds, on their own schedule. If you buy a $500 Tiffany necklace, even if you have a payment plan,rolex daytona oyster fake, you are locked into regular payments and interest. Pandora is a less anxiety producing purchase.
: Pandora also has a competitive advantage in being an "unpretentious" brand. Whereas Tiffany, Cartier, and Swarovski must source rare stones and control their retail stores to preserve their "high end" image, Pandora operates mostly as a franchised model to jewelry franchisees all over the world. By selling wholesale, the company can expand very quickly with very little risk into new markets. Once a market has been proved to be receptive to the charms, the company then goes in and upgrades its points of sale to either branded "concept stores," or "shop in shops" (a branded store within a larger jewelry or department store, with dedicated Pandora staff), and can close down 3rd party or multi branded stores, which are not as effective.
The charm bracelet, combined with a "middle class" brand, allows the company to focus on cementing its competitive advantage through economies of scale. Production of bracelets combines elements of both mass production (casting of charm shapes) along with hand crafted finishing, as you can see in this video
In this way, one is reminded of other successful companies that mass produce high quality "bricks," and then lets the customer assemble to their liking, or self customize. Other companies that come to mind that use this very successfully are Chipotle (limited high quality menu, let customers customize their burritos), LEGO (limited bricks, can be arranged in infinite amount of designs), and Ulta Salon (bring prestige brands, discount brands, and hair salon care under one roof, let the customers decide). Judging from the results of all these companies, it seems to be a recipe for success and generating high ROIC. It allows the company to deliver high quality "ingredients," at affordable price points that the customer is happy to play with and assemble on their own.
Thus, a competitive advantage is established if the company scales to a significant degree, which Pandora has, while the competition has slept. The company has huge scale in Thailand, a country that is advantaged by its a) close proximity to silver resources b) a verylong history with jewelry craftsmanship and design, and bc very low wages compared with the US or Europe (1/8 1/10 as much).
With this low labor cost and economies of scale built over 20 years, it would be a formidable task for another jewelry manufacturer to source, scale, and produce charm bracelets, and be able to earn the returns that Pandora does at a similar price point.
In fact, Pandora is actually increasing the complexity of its designs as it achieves other economies of scale, putting it even further ahead of competitors and knock offs. For instance, a new charm bracelet with intricate cubic zirconia designs woven in now requires 72 casks to make, as opposed to a "simpler" bracelet model from just 2013,imitation daytona rolex watch, which required 8 casks. A very detailed new lace silver ring design (below) requires 4x the manpower to produce than the simpler mother of pearl ring from 2007.
(Source: Capital Markets Day Presentation)
Why would the company deliberately eat into their margins to do this? To put even more distance between their design capabilities and those of other large jewelers or upstart brands. And it seems to be working.
This can be seen in the recent partnership with jeweler Jared, which is owned by Signet. retail stores during 2016 (now 168 as of Q2 2016). This is another advantage of being an unpretentious brand, and selling wholesale it's you can turn rivals into allies, and get them to market your products for you for a cut of the profits.
The Wall