Yesterday I was fortunate enough to attend the Pandora (OTCPK:PNDZF) CMD and before I move into the crux of my argument, I previously had Pandora with a price target of DKK375, using an 8.5% WACC and assuming an expansion of the gross margin to 72% into 2017. I furthermore, assume topline of next year at 9130DKK as well and a 5% growth in the top line until 2017 followed by a 3% terminal growth rate.
I have held the stock as a long since the 200 level and actually looked at it as a short initially considering the jewelry to be nothing more than a fad. I was convinced to go long by the 7 years of proof that the product may have longevity, on top of the fact that the company prints money utilizing a huge brand mark-up with tailwinds from the dropping gold and silver price.
As of this morning I reduced my Price target from 375 DKK to 360 DKK, yes, there is still 20% upside, but a piece of information regarding store refurbishment stuck with me.
This piece of information was pretty much overlooked by lead cheerleader JPMorgan who has a vested interest in seeing this stock do well as they have just put the company on their 2014 focus list.
The manager in charge of the store concept mentioned that as some of the stores were around seven years old they were due to be refurbished and it was estimated that 100 stores would be redesigned beginning 2Q14.
The estimates that JPMorgan gave are correct, EUR60 - 80k per shop but the broker failed to add to the research that this was only for minor jobs and it was quite conceivable that a full refit could cost double, or EUR120k to 160k per shop.
This admittance is of significance because this standard maintenance capex has so far been absent from the business model, meaning that the only capex that has ever been cashed is expansionary rather than maintenance. Granted, there will come a time when expansion slows but this won't be in the next five years as the company has only begun developing France and Italy with an estimated 125 additional concept stores to be placed. They have also suggested a complete redesign of their German franchise as well as planning to conquer the Far East, where Pandora are conspicuously absent.
How much will this cost??
It may only be 100 stores this year but the company will likely have 1030 concept stores by the end of this year and maybe 1300, 1400 by 2017. Therefore, I envisage 150 refurbs per year from 2016.
Assuming 100k costs per refurb and 100% borne by the company as opposed to the franchisee (how can you force a franchisee to refurb a profitable shop and spend 100k of his own money when he knows that Pandora considers brand and appearance of utmost importance), we see an additional capex of 75m DKK in 2014 moving to 112m DKK in 2016.
Compared to my older numbers, this moves my 2015 assumptions (first year without factory capex) to -DKK372m CFI rather than -DKK252m.
So totally all of that together, I still have a Price Target of DKK 360 (+22%) but it's worth interpreting this slight negative properly.