BlackRock Joins Funds Shorting Pandora as CEO Sees Slower Growth

(Bloomberg) -- Pandora A/S suffered its worst selloff in more than half a decade this week, handing huge profits to the hedge funds that bet against it.

Now, BlackRock Investment Management has added its name to the list of speculators predicting Pandora shares will decline, as the Danish jewelry maker tells investors to expect slower growth in the coming years.

BlackRock has a 0.51 percent short position in Pandora, according to a filing published by the Danish Supervisory Authority on Friday. Firms are required to make their short positions public once they surpass 0.5 percent of a company’s outstanding stock. This is the first short filing by BlackRock to the Danish FSA regarding Pandora.

The additional speculation against the company comes as management struggles to improve its relationship with investors. The CEO running Pandora says he’s now targeting “realistic” profit goals after a year of being out of step with analysts and investors who bought Pandora shares. The company’s chairman, Peder Tuborgh, says communication “seems to have been an issue, when you look at the stock price development.”

Read more about Pandora’s 2018-2022 goals, and its 2017 results

Anders Colding Friis, chief executive officer at the Copenhagen-based company, says investors need to understand that profit growth will be less impressive as the business grows. Pandora is also trying to protect itself from the adverse effects of sudden exchange-rate swings by guiding in local currencies only, he said.

“As Pandora grows, the percentage growth will of course be smaller,” he said in a phone interview. Asked whether the new guidance, published on Thursday, is more realistic, Friis said “absolutely. That’s the reason why we’ve given those objectives, because we believe they’re realistic for the future development of Pandora.”

Pandora shares opened about 2 percent lower in Copenhagen on Friday, after ending the previous day 11 percent down.

Investors and analysts say the company’s efforts to manage expectations better are much needed. At ATP, Denmark’s biggest pension fund with about $120 billion in assets under management, head of equities Claus Wiinblad says Pandora “had been chasing too high targets throughout” 2017. He said he hopes the company’s new guidance “gives a more conservative baseline for a long-term positive development.”

Tue Ostergaard, head of equities at ABG Sundal Collier in Copenhagen, says Pandora’s shares were “burdened” by very high expectations.

At SEB, analyst Kristian Godiksen cut his recommendation to hold from buy after Thursday’s news. “One of our main tasks is to determine whether this is the first step towards revenue normalising at a lower level with more downgrades to come, or whether these assumptions are now a prudent resetting of expectations, with Pandora now being able to grow from a lower base.”

Meanwhile, the hedge funds that ignored the company’s efforts to reassure markets throughout 2017 ended up pocketing the biggest profits this week. Funds shorting the stock include Coatue Management, AQR Capital Management, Lone Pine Capital and Third Point. Some, including Coatue, have cashed in recently, reducing their positions slightly.

In total, short bets against Pandora resulted in profits as big as $237 million thanks to Thursday’s drop, according to calculations based on data provided by IHS Markit.

The funds have been speculating that Pandora will suffer from a decline in the U.S. market, where the Danish company generates about a fifth of its revenue. Short interest peaked at 12.8 percent of Pandora’s share capital in November, according to data from IHS Markit. It’s since slipped below 12 percent. About a year ago, short interest was only around 1 percent.

Friis says “the U.S. retail environment has been tough for us, as for everybody else, during 2017 and that is of course not something that we believe is just going away.” Pandora also announced the departure of its chief of American operations, Scott Burger.

The CEO said management regularly speaks with investors, including the hedge funds betting against it. It’s due to hold a capital markets day on Jan. 16, with the full fourth-quarter report following on Feb. 6.

“We have one wish and that is to communicate as well with the market as possible,” he said. “So whatever we hear, and when we talk to investors, we always listen to the feedback on how we can become stronger.”

Tuborgh, the chairman, says next week will be an opportunity to reset Pandora’s relations with investors, as the company unveils a growth plan that’s intended to answer a lot of questions, in particular about the U.S.

“In connection with our upcoming capital markets day we’ve drafted a very detailed plan for all of Pandora, and therefore also the U.S. market, which is a good framework for the organization to work on going forward,” he said.

Analysts, who overwhelmingly advised clients to buy Pandora shares last year even as short bets grew, have sometimes been explicit in their criticism of the company’s communications approach.

In a note last year, Carnegie said “poor disclosure” makes Pandora’s shares “uninvestable to many,” referring in particular to what it characterized as the company’s failure to communicate clearly developments in its like-for-like sales and the timing of shipments.

Tuborgh says he’s “not happy with the development in the share price and therefore I’m also looking forward to the presentation of the new long-term plan next week.”

Through it all, analysts covering Pandora’s shares have remained positive. Of the 19 analysts tracked by Bloomberg, only one is advising clients to sell. The average price estimate 12 months ahead is about 40 percent above the level Pandora’s trading at now, signaling analysts expect the stock to start doing a lot better over the coming year.

On Thursday, Pandora said it’s replacing Chief Financial Officer Peter Vekslund, who’s managed the company’s relationship with analysts. It will instead bring in Anders Boyer from its own board as a replacement. Boyer has held CFO positions at GN Store Nord A/S and Hempel A/S. “He’s not just a numbers guy, but a modern CFO who focuses on telling the story about the company,” Sydbank analyst Soren Lontoft Hansen said of Boyer.

Tuborgh says the investor presentation at the CMD next week “will be the start of a new journey into the future, also in partnership with our investors.”

“And we will also examine improvements we may be able to make on the communication front,” he said.

--With assistance from Hanna Hoikkala

To contact the reporter on this story: Christian Wienberg in Copenhagen at cwienberg@bloomberg.net.

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net.

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