Pandora's Box of Unsold Charm Bracelets

(Bloomberg) -- Chinese consumers can't get enough Louis Vuitton handbags or Hermes scarves. One thing they can live without, it seems, is charm bracelets.

Pandora A/S said on Tuesday that sales growth in China slowed unexpectedly to 16 percent in the first quarter from 62 percent in the final three months of last year.

When the country was in the grip of an anti-extravagance crackdown, Pandora's affordable trinkets, often featuring cats and Disney characters, were just the thing. Fast forward three years, and demand for highest manifestations of bling is booming while Pandora's cheap charms are wearing thin. 

But that isn't the whole story. For a start, Pandora faces more competition in China, a problem my colleague David Fickling has pointed out. Rivals such as Chow Tai Fook noticed the success of Pandora and set out to capture a slice of its sales.

Supply through unofficial channels is also on the rise. That's taking business away from Pandora's Chinese stores too.

And there's another, more fundamental, issue for Pandora: its styles — on trend just a few years ago — have become stale. The company acknowledged as much at its capital markets day in January.

Without novelty, there's little reason for luxury consumers to open their wallets, as analysts at Exane BNP have pointed out. That's hit some top end brands, such as Tod's SpA, Salvatore Ferragamo SpA and Kering SA's Bottega Veneta. 

But Pandora is particularly vulnerable: charms, its main product, account for 57 of revenue and need constant re-invention to stay fresh. The company's efforts to diversify by expanding into other lines like earrings and rings have some way to go.

Pandora is trying to address the problem by improving its designs and stepping up the pace of product launches. It also plans to increase marketing in China and crack down on sales through unofficial channels. While fresher styles should help to stimulate sales, this may not be enough to stem the loss of momentum — particularly given the competition from the high end and new cut-price jewelry rivals.

Shares in Pandora fell 27 percent in 2017, and have lost another 10 percent so far this year. The stock trades at a multiple of about 10.4 times forward earnings, less than half the average for the Bloomberg Intelligence Luxury Peer group.

Unless the hiccup in China turns out to be as long-lasting as the appeal of a novelty charm, there's little reason for that discount to reduce. 

©2018 Bloomberg L.P.

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