(IDEX Online Research) - If you think bead and charm jewelry is just a fad, think again. Based on data from the Pandora initial public offering memorandum, sales of charms and charm bracelets represent roughly 6 percent of global jewelry sales.

 

Pandora pegs the world-wide market for charms, charm bracelets and related beaded jewelry at about $9.6 billion in 2009, a hefty portion of global jewelry sales of $145 billion.

 

We estimate that Pandora’s U.S. retail sales in 2009 were about $579 million, or about 1 percent of total jewelry sales of $58.8 billion. (We calculated Pandora’s retail sales based on the company’s wholesale U.S. sales of $260.5 million and added a retail gross margin of 55 percent, a level that Pandora says its independent specialty jewelers achieve.)

 

Pandora management says that they are aiming at only 38 percent of the U.S. jewelry market – they aren’t competing for bridal spending or high-end luxury jewelry expenditures. Based on that assumption, they have about 2.6 percent of the “affordable jewelry” market. Remember, that’s just Pandora’s sales. It doesn’t include sales by any of the other bead / charm suppliers.

 

The “Real” Pandora

For years, people have been trying to understand Pandora. Who are they? What are their sales? Are they profitable? When retail specialty jewelers compared notes about the “opening deal” that Pandora’s sales people offered, they were often dismayed to find that each deal was slightly different.

 

The company recently went public – its stock was sold in many markets around the world, though not in the U.S., Canada and Japan. Because of very stringent securities laws in the U.S., there is virtually no information available on Pandora in the public domain; the U.S. Securities & Exchange Commission (SEC) does not carry any legal filings for Pandora.

 

However, because this Danish-based company filed its public offering in European markets, IDEX Online Research was able to obtain the offering memorandum – in English – as well as analysts’ reports about the company through its European offices.

 

Pandora: The Highlights

The following are highlights from the company’s public offering legal filings.

 

·        Who is Pandora? “We are a designer, manufacturer, marketer and distributor of hand-finished and modern jewelry made from genuine materials – primarily sterling silver, gold, precious and semi-precious stones, and Murano glass. At mid-year 2010, our jewelry was sold in 47 countries on six continents through approximately 10,000 points of sale. The United States is our largest market, accounting for 40.8 percent of our revenue in [the first half of] 2010.”

Pandora sells through just over 2,200 jewelry doors in the U.S., or about 8 percent of the total specialty jewelry doors in the country.

 

·        Who is Pandora targeting? Its target consumer group is women, age 25 to 50.

 

·        What is Pandora selling? The company’s current “portfolio” consists of five collections: Moments, Stories, Compose, LovePods and Liquid Silver, each of which offers the end-consumer the opportunity to combine products and create unique and personalized compositions. The company’s charm bracelets are made from sterling sliver or gold, and its charms are made from different “genuine” materials; these two categories generated nearly 90 percent of the company’s 2009 revenues.

 

·        Where is Pandora selling its merchandise? While the company sells its jewelry in 47 nations, there are four major countries where it generates most of its sales, as the graph below illustrates.

Source: Pandora

 

·        Where is Pandora jewelry fabricated? The company maintains in-house designers in Denmark, and has production facilities in Thailand that employ over 3,000 people.

 

·        What are Pandora’s global sales and profits? This company has grown rapidly. In 2000, the first year of significant charm / bead sales, revenues for this category were just over $5 million (we used a constant currency conversion rate of 5.6 Danish krone to $1USD). By 2009, revenues had grown to $618 million; the 2009 sales were 123 times as great as its sales in 2000. Its sales between 2002 and 2009 grew at a compounded annual growth rate of 97 percent.

Not only has the company grown rapidly, but it is highly profitable. It has posted a consistent 71-72 percent gross margin (most retail jewelers in the U.S. are lucky to get a 45-50 percent margin in today’s market). Because the company is “asset light and value heavy,” it does not operate a capital-intense business. Nor does it operate with high fixed costs. Its pre-tax margin is 34-35 percent (yes, you read that right, thirty-four to thirty-five percent) versus the typical U.S. jeweler who generates a pretax profit of 3.6 percent to 3.8 percent.

Pandora’s balance sheet is solid, though it has a significant level of goodwill and debt. Its annual inventory turn has been as high as 12 times annually, though it has begun to slip. In the future, analysts are looking at an inventory turn of between six and seven times annually. The typical U.S. jeweler turns inventory just once per year.

The following table summarizes actual and estimated sales for Pandora. As is clear from the table, sales could hit $1.5 billion by 2013.

 

 

 

Leveraging the Brand

 

·        What’s the outlook for Pandora? As the table above illustrates, the company is on target to post about $1 billion in sales this year. By 2013, it could generate $1.5 billion in sales. After-tax profit margins are expected to remain in the high twenty percent range (most U.S. retail jewelers generate an after-tax profit of 1-2 percent).

But beads and charms aren’t the only products that Pandora has in mind. It plans to introduce a line of Pandora-branded Swiss watches later this year as well as a line of Pandora-branded sunglasses next year. Our sense is that this merchandise will not be made available to most specialty jewelers, at least near term. The company has selected just a few stores for the initial introduction of these goods.

In addition, people close to Pandora’s top management suggest that the company may be looking at leather goods as a possible new branded category.

 

·        How does Pandora plan to grow its bead and charm business? There are several potential avenues for growth, including the following:

 

o       Increased penetration of existing markets – For example, in the U.S., Pandora’s sales per capita are the lowest of any of its four key markets (the U.S., the U.K, Germany and Australia). Thus, the U.S. market offers excellent growth potential.

 

o       New markets – Pandora has entered China, Italy and Russia this year.

 

o       Increased branded selling space – As jewelers realize the potential of Pandora, the company expects that its existing retail network will increase their inventory of Pandora merchandise and will upgrade their display of the goods.

 

Pandora & Beads: Not A Fad

What is the magic behind demand for charms and beaded jewelry? What sparks consumer desire? Why should jewelers fiddle with this low-ticket category?

 

For consumers

 

·        Pandora offers a way to own fashionable jewelry at a low retail price point. A sliver Pandora bracelet can be purchased for around $55, with charms starting at $25. Thus, for a very modest expenditure of $200 or so, a consumer can have a new, fashionable piece of jewelry.

 

·        Pandora jewelry is truly unique. Because each purchaser puts together their charm / bead bracelet in their own personal way, no one else will have the exact same piece of jewelry. Today’s young consumers are searching for unique products that differentiate them from their neighbors, and Pandora products offer this opportunity.

 

For specialty jewelers

 

·        Pandora is a highly recognizable brand name. European securities analysts say that it is the third largest branded jewelry producer in the world, but this claim in not verifiable, nor are the first two brands cited. Brands seem to be particularly appealing to today’s consumer.

 

·        Pandora offers an above-average gross margin. According to the company, jewelers who price the merchandise properly can achieve a 55 percent gross margin. According to the Jewelers of America Cost of Doing Business Survey, a gross margin of 55 percent puts Pandora in one of the highest gross margin jewelry categories, especially when compared to diamonds and other commodity products.

 

·        Pandora inventory turns three to four times annually for the retail jeweler. In contrast, the typical specialty jeweler turns inventory only one time per year. Thus, Pandora offers exceptional gross profit potential while increasing financial returns (and making jewelers’ bankers happy).

 

·        Pandora is what we call an “annuity” product. Customers keep coming back for more. While the typical American consumer visits a jewelry store fewer than three times per year, a Pandora customer may come back as frequently as monthly. This gives the jeweler an opportunity to sell other merchandise to returning, loyal customers.

Based on data disclosed by Pandora, the typical initial purchase is a bracelet and two or three beads. Based on Pandora’s unit sales figures, the average Pandora charm bracelet has seven charms or beads on it currently. Pandora’s bracelets can hold up to 25 beads, so there is ample room for more beads on the typical bracelet. Thus, we expect shoppers to return regularly to fill up their bracelet.

 

·        Pandora offers several levels of distributorships for retail jewelers, all of which are detailed in its offering memo (but are too complex to summarize in this IDEX Online Research report). Further, it sells the merchandise through less than 10 percent of all American jewelry doors. Thus, a specialty jeweler has the opportunity to put together a program of Pandora jewelry that is exclusive to that store.

 

What About The Competition?

Pandora and the European financial analysts see high barriers to competition, as follows:

 

·        Patented bracelet system – Pandora has a patent to secure the charms to the desired section of the bracelet. As a result, the beads and charms do not move around the bracelet loosely.

 

·        Pandora is “the” brand – No other bead or charm producer has significant brand recognition. Pandora is the “Amazon” of the bead jewelry segment.

 

·        Global distribution – The company has 10,000 retail sales doors globally. Because it was first in most of its markets, the competition will be able to obtain only the second-best locations. Further, with 10,000 sales doors, Pandora’s distribution network is far wider than its nearest competitor.

 

·        In-house production – In 2009, Pandora produced more than 42 million units in its facilities in Bangkok. The company says this makes it the largest jewelry manufacturer in the world, based on unit volume.

 

·        Marketing – The company says that its global market spend, including money spent by all participants in its distribution chain, will amount to at least $175 million in 2010, a far larger budget than any competitor.

In the first half of 2010, the company’s marketing budget was 9.5 percent of revenues, or about $30 million.

Here’s the bottom line: While it would be difficult to replicate Pandora’s strategy, every jewelry company with aspirations of global distribution should take a close look at how Pandora has grown. There are many profitable lessons to be learned.