Pandora Overview Pandora was a position that was initially looked at from a short perspective.

After a successful IPO, that saw the stock up 25% on the first day, the company had an even stronger six months, its share price appreciating by 80%. The popularity of the product lead the management to reposition the product from affordable luxury to luxury, in other words, they wanted to raise the prices, become more exclusive and increase gross margin. During this shift, Pandora missed expectations and in 3Q11 announced an unexpected profit warning, sales dropping 10% YoY for the quarter. The market took this profit warning incredibly badly as only a short time prior to this announcement; the management had confirmed that they were on track with annual targets. The stock didnt find support until the end of the year at around 40DKK compared to its IPO of 200DKK. The company appointed a new CEO in Bjorn Gulden and begun the arduous task of moving back to the market position that they had left. The company initiated a stock buyback, taking less popular charms and replacing them with better sellers. The prices were returned to their original levels and the company begun to concentrate on a more vertically integrated selling structure, favouring concept stores over traditional jewellers. Finally the company took on the Inditex model and abandoned seasonality in favour of seven product launches a year. When we began looking at the stock, it was firmly en route to recovery. The stock was trading at 188DKK and the private equity shareholders had begun to sell down their stake. The like for like (YoY) sales were impressive with the US growing 21.1%, Australia growing 40% and emerging Europe growing 71.5%! This performance marked year seven for the product and these strong sales after almost losing the entire brand did a lot to dispel the consensus that the product was a fad.

Sales Growth from Concept Stores YoY

40.0% 30.0% 20.0% 10.0% 0.0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 -10.0% -20.0% -30.0%
Recent US +12.6%, UK +13.6%, Germany +8.2%, Australia +25.2% Source: Company reports

US UK Germany Australia

Sales Into All Channels Chg YoY

120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0% -80.0% 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 US UK Germany Autralia Other Europe Other APAC

4Q11 US UK Germany Autralia Other Europe Other APAC

1Q12 11.6% -17.4% -37.7% -25.9% -33.1% 30.4%

2Q12 15.1% -19.3% -9.2% 26.9% 40.9% -9.8%

3Q12 32.5% 12.2% -22.5% -13.0% 61.9% -1.7%

4Q12 6.3% 11.6% -16.3% 15.7% 70.5% -67.5%

1Q13 21.1% 5.0% 6.9% 14.7% 71.5% 40.0%

2Q13 25.5% 32.8% -12.0% -10.0% 32.3% 97.8%

3Q13 -4.5% 19.3% 1.5% 4.5% 53.6% 87.8%

Adjusted for Stock Rebalancing Campaign .Source: Company, own estimations

US Other US UK Germany Other Europe Australia APAC Other

1Q12 694 179 181 101 242 129 60

2Q12 644 189 134 108 279 170 46

3Q12 779 221 249 134 361 120 57

4Q12 738 201 384 154 428 243 26

1Q13 832 225 190 108 415 148 84

2Q13 802 243 178 95 369 153 91

3Q13 703 252 297 136 555 125 107

Adjusted Quarterly Sales Figures in DKKm, Source: Company, own estimations

Valuing Pandora Focussing on the stock, Pandora is one of the most cash-generative companies in Europe. The stock is in possession of a brand moat that allows the company to earn a 65-70% gross margin while pricing at a significant discount to the more luxury players. When we covered the company, 2014 PE was 11.76x and the EV/EBITDA was 8.75x compared to similar niche players such as Hermes and Tiffany. Furthermore, the cash flow yield was above 8%, which towered over other luxury peers. We are under no illusions that the luxury peer group contain much higher quality and more stable names, but we believe that a doubling of free cash flow yield justifies this additional risk. Furthermore, we use a higher WACC than the peer group to adjust for this potential risk. On top of this significant brand moat, the company is currently seeing tailwinds from input costs as the improving economy and lower inflation expectation has meant lower gold and silver prices; a boon which only luxury jewellers can benefit from.

Using earnings ratios to determine relative valuation, we derive our price target using a DCF and deliberately keeping assumptions conservative. 1. We ignore the online opportunity despite the potential for their net revenue per unit to increase nearly 150% and peer Tiffany estimating 6% of their sales coming through online channels. The UK was the launch country for the online offering and despite numerous imperfections (these were outlined to the CEO during the recent CMD) that still exists one year on, the portal contributes 10% of UK revenue. We brought these problems to the attention of the CEO during the investor day, which focussed around a sales dead end whereby you can design your own bracelet but cant actually purchase it!

2. We do not model the Asian opportunity because the timing and appetite is too uncertain. Despite a failed attempt at entering the market a few years back, the potential could be huge considering peer Tiffany derive 40% of their sales here. CEO Alan Leighton expressed that he wouldnt be surprised if 20% of sales came from China and Japan. This assumption would increase my 2017 sales assumption from 11.2bn to 14.2bn.

Revenue Total Revenue Internet Revenue Cost of Sales Gross Profit Raw Material Derivs Distribution Expenses Admin Expenses New Store Depreciation EBIT EBITDA Financial Income Financial Expense

2012
6,652.0 -2,223.0 4,429.0

2013e
8,700.0 -2,740.5 5,959.5

2014e
9,528.5 0.0 -2,858.5 6,669.9

2015e
10,220.5 0.0 -2,912.8 7,307.7

2016e
10,809.2 0.0 -3,026.6 7,782.6

2017e
11,286.6 0.0 -3,160.3 8,126.4

-2,084.0 -870.0 1,475.0 1,655.0 132.0 -128.0

-2,396.6 -880.0 2,682.9 2,772.6 -43.0

-2,540.4 -890.0 3,239.5 3,451.0 -43.0

-2,692.8 -900.0 -10.7 3,704.2 4,007.2 -43.0

-2,854.4 -910.0 -22.5 3,995.8 4,361.7 -43.0

-3,025.7 -920.0 -38.8 4,142.0 4,523.9 -43.0

PBT 1,479.0 2,639.9 3,196.5 3,661.2 3,952.8 4,099.0 Income Tax Expenses -277.0 -528.0 -639.3 -732.2 -790.6 -819.8 ETR 18.7% 20% 20% 20% 20% 20% Net Profit 1,202.0 2,111.9 2,557.2 2,928.9 3,162.2 3,279.2 Shares Out Including Buyback 130 127 123 120 116 113 Basic EPS 9 17 20 23 25 26 EPS Adj for buybacks 17 21 25 27 29 DPS 6 6 12 14 15 16 Extract from our DCF, 2013 is nearly complete so we exclude this year and use explicit forecasting for four years.

Consensus Revenue Our Estimate Consensus EBITDA JPM EBITDA Our Estimate Consensus EPS JPM Our Estimate Our Estimate Including Buybacks

2014 9,578 9,528 3,273 3,478 3,451 19.6 20.5 20.2 20.8

2015 10,350 10,220 3,713 3,899 4,007 22.0 23.1 23.1 24.5

2016 11,487 10,809 3,800 4,274 4,362 24.7 24.9 27.3

2017 12,618 11,287 3,783 4,635 4,524

25.8 29.0

Comparing our numbers to consensus Source: Bloomberg, JPMorgan

Our exclusion of Asia and online sales contributes to our revenues coming below estimates. We also begin to model store refits on a seven year cycle (which begin on 2014). We also expect the companys gross margin to further increase to 72% as the lack of inflation and mild GDP growth contribute to a lesser appetite for gold and silver futures while the increasing demand for the product leads to further economies of scale. We believe the company will increase operational efficiency with a new centralised production area in Thailand, admin costs that remain relatively stagnant and operational expenses that increase along with new store openings. We assume that the company continue to buy back 3.5m shares per year, which cost 700m DKK during 2013. The company sits in an interesting product niche in that, despite its affordable luxury status, the company is using penetration to drive sales.

Sales Per Concept Store DKKm

1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1Q 2Q 3Q 4Q 2012 2013

Sales Per Shop in Shop DKKm

0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 1Q 2Q 3Q 4Q
Source: Company Reports

2012 2013

The above two charts showcase that despite the rapid increase in concept stores (135 in 2013) the company has been able to keep increasing their sales per shop which tells us that penetration is the key to further market growth.
New Store Potential SiS p/Cap Bear Case BullCase Estimate 450 1.3 0 330 115 100 2.9 4 8 2 80 3.3 0 0 0 140 1.8 0 66 16 28 0.20 3 138 70 106 1.66 0 5 3 33 0.52 27 86 57 7 0.12 22 78 50 612 0.83 9 861 435 Per Store Earnings 4.28 Source: Compa ny Reports , myretai l medi a .com, own a s s umptions Potential DKKm 2354 Total DKKm 3,071 % of Current Sales 35% Country Population Concept Stores CSp/Cap SiS US 350 250 0.71 Canada 35 50 1.43 Australia 24.5 84 3.43 Germany 80 67 0.84 Russia 143 99 0.69 UK 64 106 1.66 France 63 18 0.29 Italy 60 21 0.35 Europe 740 520 0.70 New Shop In Shop Potential Bear Case BullCase Estimate 70 140 105

24 48 35 70 342 683 Per SiS Earnings Potential DKKm

36 53 512 1.16 717

Taking into account Europe and the US alone, using UK concept store penetration as the bull case and US concept store penetration as the bear case, and taking a similar approach with the Shop in Shop, we can see an additional 26% of earnings potential assuming sales density remains stagnant (a

bearish assumption considering Concept stores have seen a 22% increase in sales per store 9Mo9M and SiS 39%). We do not add any further revenue from Gold shops despite growing faster than the White/Silver segment is shrinking (and to add they are a larger share of revenue than the latter segment) to be prudent.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q12 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 White Silver Gold Shop In shop Concept Stores

Silver, White Concept, SiS, Gold

1Q13

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

2Q13

White: any non jewellery shop that has Pandora for sales. Silver: non-precious jewellery shops, Gold: Precious jewellery retailers, Concept Store: Entirely branded concept stores, the majority of which are franchised.

The other part of the estimation is the growth in sales per store. The data shows this number as increasing +20% YoY for both concept and SiS but this increase could be due to their rapid store expansion as it may take some time for a new store to achieve the same sales rate as a current store. We are also limited by the companys limited data and so we assume 3% increase in sales density in 2014, fading to 1% in 2017. It is conceivable that this number could be considerably higher for next year. After a 50% rally and two guidance upgrades with a beat expected according to the social media buzz, the company still looks relatively attractive with a 6% free cash flow yield in 2014 (8% in 2015) as well as management commitment to return cash to shareholders through both dividends and buybacks. There is also potential for management to leverage the balance sheet a little further and return additional funds to shareholders

3Q13

Twitter Mentions
120 100 80 60 40 20 0 01/01 01/02 01/03 01/04 01/05 01/06 01/07 01/09 01/10 01/11 01/12 2010 2011 2012 2013

Source: Twitter, Topsy, own estimations, adjusted for active user base

Going forward, the company will continue a roll out of the online presence where they will capture a major portion of the 150% mark-up that the retailer receives (Pandoras ASP is 16 considering the charms cost 30 and the bracelets roughly 50), continue their expansion into France, Italy and other undeveloped European countries (maybe another 316 stores to add and another 15% on top of current revenue) and begin developing an Asian franchise (Tiffany get 40% of revenues from here while Pandora earn next to nothing!). Furthermore, as their precious metal hedging strategy filters through, the company will see an increase in their gross margin and I am looking for 72% (from 69% currently) by 2017. We see further upside and target 350DKK using conservative assumptions (6.72% CAGR until 2017, 2.5% terminal growth and 9% WACC) and ignoring any potential uplift from online sales as well as an Asian expansion. 1. If we double the growth in sales per store (2014 would be 6% as opposed to 2013 22%), the price target moves to 396DKK. If we assume no growth, our price target is at 313DKK. 2. Web sales. The website has only been operational for one year in the UK and one month in Germany. At the CMD, the CEO told us that nearly 10% of sales had come from the online segment. Because retailers enjoy a 150% markup on the stock (ASP of 39 vs Pandoras 16), we can make a rough estimation of units sold online. Assuming 190,000 pieces sold (4% of units) we can get a total revenue share of 10% for the online segment. Assuming 4% of (additional) global unit sales are from online (scaled from 1% next year), we generate a target price of 403DKK. 3. Regarding sales in Asia, the CEO said that a 20% share from Asia we no unreachable. If we assume 5%,10% and 15% of additional Asian sales from 2015 and 2017 we reach a target of 490DKK

01/08

Advertising Efficacy
1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13
Ad Efficacy is the Change in Advertising Spend Over Change in Adjusted Revenue, Sources: Company, own estimates

With a strong underlying operation and a number of positive additional scenarios, we continue to follow advertising efficacy, social media trends and conduct channel checks to catch any changes in consumer demand, while speaking with management regularly to keep abreast of their strategy.

2012 Income Statement Gross Margin EBIT Margin EBITDA Margin EBITDAR Margin Distribution as % of Rev Admin as a % of Rev 66.6% 22.2% 24.9% 26.3% 31.3% 13.1%

2013e 68.5% 30.8% 31.9% 32.0% 27.5% 10.1%

2014e 70.0% 34.0% 36.2% 37.2% 26.7% 9.3%

2015e 71.5% 36.2% 39.2% 40.2% 26.3% 8.8%

2016e 72.0% 37.1% 40.5% 41.4% 26.3% 8.4%

2017e 72.0% 36.9% 40.2% 41.1% 26.7% 8.1%

EV Base Valuation *Adjusted for Op Leases EV/Sales EV/EBIT EV/EBITDA EV/CE P/E 31.13 Cash Flow Based Valuation FCFe/EBIT OpCF/Net Profit FCF Per Share FCFps Yield Dividend Yield Debt/Equity Nebt Debt/EBITDA Asset Based Valuation Working Capital WC as % of rev WC Turn DSO DOH DPO Cash Cycle Inventory Turnover Asset Turnover Inventory as % of Sales Capital Employed ex intangs CE including intangs RoCE (ex intangS) RoCE ROE ROIC

4.2 13.7 13.7 12.8 17.2

3.9 11.4 10.7 11.1 14.2

3.6 9.9 9.2 10.8 12.4

3.4 9.1 8.4 10.4 11.4

3.2 8.8 8.1 10.1 11.0

0.93

39% -11%

1.05 1.07 10.50 3.67% 1.96% 39% -7%

1.05 0.97 17.29 6.04% 4.22% 35% -23%

1.04 0.91 22.84 7.97% 4.84% 31% -47%

1.04 0.91 24.75 8.64% 5.27% 28% -70%

1.04 0.91 25.95 9.06% 5.46% 25% -95%

1241 19% 5.36 50.48 240.3 41.62 249.2 1.2 10.50 19.8% 2,338 5,644 55.9% 21.9% 22.2%

1461 17% 5.95 48 210 42 216.0 1.5 0.00 18.1% 2,883 6,379 92.2% 38.2% 35.0% 34.7%

1603 17% 5.94 47 220 44 223.0 1.7 0.00 18.1% 3,307 6,803 90.2% 40.8% 37.8% 37.5%

1626 16% 6.28 46 220 46 220.0 1.6 0.00 17.2% 3,413 6,909 89.9% 43.7% 37.6% 37.3%

1685 16% 6.45 45 220 47 218.0 1.6 0.00 16.9% 3,535 7,031 94.8% 46.8% 35.6% 35.4%

1725 15% 6.57 44 220 49 215.0 1.6 0.00 16.9% 3,629 7,125 94.8% 47.7% 32.3% 32.2%