Pandora (PNDZF) Q4 2018 Results - Earnings Call Transcript

Pandora (OTCPK:PNDZF) Q4 2018 Earnings Conference Call February 5, 2019 5:00 AM ET

Company Participants

Michael Bjergby - IR

Jeremy Schwartz - COO

Anders Boyer - CFO

Conference Call Participants

Chiara Battistini - JPMorgan

Elena Mariani - Morgan Stanley

Lars Topholm - Carnegie

Michael Rasmussen - ABG

Hans Gregersen - Nordea

Anne-Laure Bismuth - HSBC

Thomas Chauvet - Citi

Piral Dadhania - RBC Capital Markets

Magnus Jensen - SEB

Zuzanna Pusz - Berenberg

Fredrik Ivarsson - Kepler Cheuvreux

Omar Saad - Evercore ISI

Hans Gregersen - Nordea

Operator

Welcome to the Pandora Annual Report for 2018. For the first part of this call, all participants will be in listen-only mode and afterwards, there will be a question-and-answer session. Speakers, please begin.

Michael Bjergby

Thank you. Good morning, everyone and welcome to this conference call for Pandora’s full year results for 2018. My name is Michael Bjergby. I’m heading the Pandora Investor Relations team. And with me here today in Copenhagen at the Pandora office, I have our COO, Jeremy Schwartz; I have our CFO, Anders Boyer and my IR colleagues, Brian and Christian.

Anders, before leaving the floor for you, please everybody flip through the disclaimer on slide 2. Anders, all yours.

Anders Boyer

Thank you, Michael and good morning to everyone. This is Anders Boyer. On slide 3, you can see the short agenda for today, starting out with the full year ‘18 results and highlights, then moving on to Programme NOW and this is where we will spend the most of the call today before moving on to the full year guidance and a couple of comments to that.

So please move on to slide number 4. I think the key highlight for today is that we are announcing the next steps in the program, Programme NOW. As you know, we relaunched Programme NOW back in 2018 in November with a change of the network expansion strategy as the first big step where we radically reduced the number of store openings and franchise acquisitions. And today, we are announcing the next four important steps and they are a commercial reset, is about reigniting a passion for Pandora, it’s significant cost reductions and it's about new ways of working.

And Programme Now is all about setting up the company to drive sustainable growth. It's a 2-year comprehensive roadmap that we have ahead of us and that's where we will be spending the majority of the time today. Another key highlight of course today is that we did deliver on the full year guidance for 2018 with a 3% revenue growth in local currency and an EBITDA margin of 32.5.

On slide 5, you will find a few numbers for the full year of 2018 and our financial performance in ‘18 was clearly not satisfactory. We did deliver on our latest guidance and we did deliver substantial profits and we also did generate a lot of cash and that's obviously good, but we also made two downgrades of our guidance during 2018, which you are all acutely aware of and that's why we call it unsatisfactory or disappointing results. But the revenue growth of 3%, as you can see in the top left corner of the slide as well as the EBITDA margin of 32.5 in ‘18 was within the guidance that we made back in November.

The important like-for-like KPI ended at minus 4% for 2018 and that compared to a flat total like-for-like in 2017. We did see that the most bigger markets declined in like-for-like in 2018, but we also saw that the large important US market improving from minus 2 in ‘17 to a plus 1 in 2018. And we also saw China improving throughout the year, after having had a very difficult first quarter last year. We ended 2018 with a plus 4% like-for-like in China in Q4, after we have also just been slightly positive in the second and third quarter. I would also just like to highlight the good cash conversion that we saw in ’18, as you can see almost at the bottom to the left, 86% cash conversion in 2018 and that's the highest that we've had since 2014 and we do keep generating quite some cash and we returned DKK6 billion to the shareholders last year as you probably know, but we'll also see later on in the presentation that we will keep transferring a lot of cash back to shareholders during 2019.

A few comments on slide 6 to the Q4 numbers. Essentially just three quick key messages around like-for-like, EBITDA and cash as well. Total like-for-like was down 7% in the fourth quarter and we also saw a low level of minus 5% back in Q1 of ’18, but like-for-like in the fourth quarter was the lowest level that we had seen during 2018. We had expected that the like-for-like in Q4 would be lower and we had included that in the guidance from -- that we made back in November, but it emphasizes the need for Programme Now and it emphasizes the need to change.

The EBITDA margin ended better than what we had expected in Q4 and especially considering that we are in the low -- in low to mid-end of the revenue guidance for the year and the EBITDA margin ended above the midpoint of the full year guidance and that means that Q4 specifically was almost 36% of EBITDA margin. And it is among others the initial impact from Programme Now, cost reductions was visible in the Q4 margin. And when you dig into the cash flow numbers for Q4, specifically we also see that the effect of the change of network expansion strategy that we announced back in November is visible and the cash flow related to M&A in the fourth quarter was only DKK83 million compared to DKK1.1 billion for the full year.

Moving on to slide 7 and the revenue bridge for Q4 year-over-year. You will note on this slide and on slide 8, the next chart that we have put numbers are the waterfall charts and we hope and believe that that should be helpful for you in understanding how the business develops and what the drivers are between last year and this year. It is, I should say, rounded numbers that we put on the chart and therefore it doesn't add fully up, if you try to make the math across the chart. Forward integration still contributed quite a lot in the fourth quarter to revenue growth, even though we didn't sign any new deals during the fourth quarter, but we will obviously see a run rate impact of all the acquisitions that we've already made for some quarters still, but it will sort of go down quarter-by-quarter, as we go through 2019.

And as you proceed, later on for 19, we guide with a impact for the full year of 2% just points revenue growth from forward integration. You’ll probably also note that that bucket here in the chart that we call timing of shipments and other, it's smaller than in the last quarter, Q3 and there are indeed less one-off like elements in the fourth quarter compared to prior quarters and that bucket -- timing of shipments of other, that also includes the net impact of various other items like continued destocking in the wholesale channel and some impact from closing multi-branded point of sales.

On slide 8, we have an equivalent EBITDA margin bridge. And as I just said, the EBITDA margin did end stronger in Q4 than expected, but the margin was obviously quite heavily impacted by de-leverage that we see in the business as a consequence of the negative like-for-like and with the gross margins that we have, it hits pretty hard on the EBITDA margin and that's the minus 3 percentage points bucket that you can see on the chart here.

The forward integration impact will sort of gradually disappear, the technical forward integration impact will gradually disappear during ’19, as we gear down on forward integration, but in Q4, it still had a negative impact of around 1 percentage points -- minus one percentage points compared to the fourth quarter of ‘17 and that's the first building block that you can see in the chart here. And as you can also see, we have been able to offset some of the negative leverage impact through cost reductions, but it is only partially and cost reductions support the margin by around 150 basis points in the quarter and all-in-all, we are pleased with that and pleased to see the almost 36% EBITDA margin in the quarter.

Last, a small nice story on cash conversion and cash generation in the year and the quarter. And as I just said, that’s on slide 9, our cash conversion in ’18 was the highest since 2014 as you can see to the upper left part of the chart and that goes hand-in-hand with the reduction of working capital by around 2% of revenue, which you can see to the lower left hand part of the chart and the biggest drivers in that was the -- an increase in trade payables and that follows the decision that we made back in August last year to tighten the payment terms with suppliers.

So in ’18, we have actually had a positive cash flow from trade payables of DKK762 million due to the intensified focus on this area. I’m actually quite happy with that. And we also had a lot of focus on DSOs, both in Q4 and Q3 and we saw the days sales outstanding, DSO, decreasing down to 50 days in the fourth quarter and that's more or less flat compared to the 47 days back in Q4 of ‘17. We’re actually not fully where we want yet and by getting to a flat DSO year-over-year, I think after having had some quarters with a significant increase, it's a good step forward.

But now, it's time to dig into Programme Now and Jeremy please.

Jeremy Schwartz

Thank you, Anders. So let's have a closer look at Programme Now. Please turn to slide 11. I want to first remind you that Pandora's Q3 results, as Anders has said, we announced the launch of Programme Now, the immediate decision to stop the buyback or franchisees and the scaling back of store opening plans. We also said that we would share our situation diagnosis and next steps at this investor call and that is where I should start.

The diagnosis involved consumer studies and focus groups, surveying around 28000 people worldwide to understand consumer needs and behaviors, Pandora's brand health and the appeal of the product design and shopping experience. We've also done a rigorous deep dive into Pandora's business to find any consistent patterns across countries, channels, products and retail metrics that are significant. All of our cost lines have been scrutinized and significant opportunities to improve the cost base have been found. And finally, our company wide processes, structures, capabilities and the way we make decisions have been reviewed. As a result, we’ve implemented significant changes and created the next major steps on the Programme Now. What we believe is a management team is that Pandora has the potential to restore long-term sustainable growth and shareholder value.

Please turn to slide 12 to share the diagnosis, which identified four key interconnected causes of our like-for-like decline. I will go through each of these, starting on the left. We've found the brand has what we've called a blurred brand experience, because though Pandora has the highest industry prompted brand awareness, the brand positioning, promise and storytelling needs to be sharper and more culturally exciting with more impact across all touch points digitally, socially and in commerce and in stores in order to recruit new consumers around the world today.

Our next item, week initiatives on charm collecting, though Pandora sells more than 900,000 charms per week, Bracelet sales are increasing and good progress has been made on innovation. The whole company needs to pursue stronger initiatives to drive buyers and non-consumers to buy and then return to buy more bracelets and more charms to grow their collections.

Next is what we’ve called over push. The brand’s expansion in countries and stores in e-comm has made the brand more available to more consumers worldwide, but the recent intensity of the promotional activity as well as an immature merchandising and assortment process may be changed and must be changed to protect and enrich the brand equity. Executional inconsistency, we have strong competencies, but the global direction and executional speed and impact has been compromised by the way we go to market locally and this is changing as we speak. These four issues are being forcibly and forcibly addressed to build on the strong Pandora foundation and DNA.

Please turn to page 13. As you know, Pandora is the most well-known jewelry brand in the world, not simply because it sells charms, but because Pandora's magic product DNA, its manufacturing craftsmanship and value for money created an idea that has had universal and timeless relevance to people and of course generates shareholder value. So it's worth restating Pandora’s magic product DNA. We create precious miniaturized jewels that frankly others struggle to match. Each piece contains a meaningful human story and what every brand is seeking today, personalization, the whole Pandora concept is personalizable with stories that every woman can apply.

Now you know this about our charms, but the Pandora magic DNA applies to all our categories. For example, our 3 wishbone rings can represent three juvenile, three friends. The feather earrings are precious with 99 stones set in them. And more and more necklaces have been worn in layers and are being personalized. So we will grow all our other categories. But to arrest our decline, we have to focus on reinvigorating the charms business.

So let me talk you through our specific charms initiatives on the next slide 14. Our research shows that charms are in demand, in fact, 73% of all charm owners of Pandora say they will buy new bracelets and new charms once they finish building their current bracelet. A third of all Pandora owners have several bracelets, which they interchange for different styles and when they have different moods and yet 74% of our non-owners who actually would consider buying Pandora know very little about Pandora charms. This is where it gets interesting because our research shows that we have strong assets to leverage.

Pandora actually answers a significant underexploited global consumer jewelry market needs base. It is to help women express their individuality and that is exactly what our charms help women do. In addition, we are across generational brand. In fact, I have been pleasantly surprised on arrival here to see how we as a brand right now are recruiting Gen Z customers and even younger than that and millennials right through to baby boomers, which we all know many brands would like to say they do too. On the right, you can see that to respond to this, we are building a charm collecting system.

First of all, we need to attract new customers by innovating new bracelets, charms, having new collaborations and limited editions and using all of the best marketing resources that we can rally to hand. Leading the way women wear and star their multi charm bracelets in our advertising with influences and social media, online and in store is a key objective of ours and then driving multiple charm collecting, not least by inventing a digital first reward system to drive loyalty and capture rich data, something that Pandora is so lacking today. But none of this is business as usual. It requires disruption.

Please turn to the next slide, 15. In a world where consumers are overwhelmed by marketing messages and choice, we need to create a disruption to the Pandora brand, disruption in a positive sense and our vision is this, first, to make the brand come alive, by expressing the brand in a culturally relevant and sharp way across all our touch points to re-excite customers to actively reengage with us. We need to step change the habit of collecting by attracting new and lapsed consumers to buy, to wear, to collect charms, complimented of course by our other categories.

We work at with commercial responsibility, creating a healthier promotional activity, controlled range of products and becoming more agile in the wholesale channel. We will pursue executional excellence with the global leadership setting the plans that the countries will execute excellently on e-commerce, in-stores and with franchise partners. And finally, this will be underpinned as we push with pace to capture data and drive personalization across social, e-comm and omnichannels, all of this is captured in Programme Now.

Please turn to the next slide. And it's what we're calling reigniting a passion for Pandora. This is the Programme Now transformation of the consumer experience across all touchpoints.

Please turn to chart 17. Reigniting a passion for Pandora is the cornerstone of Programme Now. There are four major steps of Programme Now, which we will go through one by one in the next slides, excuse me. A commercial reset, reigniting a passion for Pandora, reducing costs and implementing new ways of working.

Let's turn to page, slide 18 to see how these are implemented over time. Along the top, you can see time and you can see them before work streams. The commercial reset has already started in Q1 and will continue all year, as we adjust our promotional plans and adapt our inventory levels. The work streams are reducing costs and implementing new ways of working have started and will continue for the 2-year transformational period, as we remove costs, build capabilities and improve processes. Now, 2020 is an important year for Pandora.

It is the 20th anniversary of the launch of the moments, charms and bracelets platform. Now, a celebration like this gives us the perfect springboard to re-engage new and existing consumers with our brand and therefore 2020 is the year to re-ignite a passion for Pandora. However, with Q4, Single’s Day and Christmas being such a critical moment to attract new customers and drive sales, we see this as actually the true start of the initiative, reigniting a passion for Pandora and aim therefore to make Q4 bigger and better than ever before. Until that time, the teams are working on the content that can be brought to market at that time.

Now, let's look at the concrete actions in each of the work streams in more detail. Please turn to slide 19. And I'm going to start with the commercial reset and on the left. The commercial reset is the right thing to do for the brand and the business, but it will have a negative short term impact. Firstly, we are reducing our promotional intensity outside of the key gifting retail promotional periods to both protect our brand equity and allow us to amplify the product launches between promotional periods. At the same time of course, as the next point, we will continue to amplify specific promotional periods, such as Mother's Day, Chinese New Year, Black Friday and the sale and we will continue to develop new brand building as well as price promotional mechanics.

At this stage, we estimate the net impact to be around negative 2 to 4 percentage points on like-for-like and organic growth, but of course we are seeking to amplify our non-promotional activities to neutralize this at the same time. On the right, we will optimize our wholesale inventories and we've reduced the size of our NPI sell-in packs, that’s our new product selling packs, because this will reduce the initial stock purchase, but will allow our customers to accelerate the reordering of faster selling products and reduce the stock buildup of potentially slower moving products that we've launched. We estimate this will have an organic growth impact of around minus 1 percentage point. We are also initiating an inventory program to take back some of our slow moving residual stock in selected markets and this will have a negative 2 percentage points impact on EBIT.

Now, these are tough decisions to make because of the short term negative impact, which of course we don't take lightly, but it's absolutely vital for the long term health of our brand to create a strong foundation for reigniting a passion for Pandora and to attract new and lapsed consumers. Please turn to slide 20. We've already started working on five key areas to reignite the passion for Pandora and on the left is where we are today and on the right is how we see each work stream unfolding towards customers. Let’s start with the brand where we have a new promise, we're working on a new vision identity, digital assets and communication is being developed.

We aim to launch a new brand communication and social engagement that will be both strategic, but also disruptive from the end of 2019. On new products, we are developing new products and do this while we are rationalizing the assortment, so that the new products match the new brand promise. And in 2019 through 2020, we will launch new products, including a new charms bracelet platform, new collaborations that we've never done before, limited editions and many other exciting products that I can see are in development. And we're going to do this at different price points with specific entry price ones too to recruit those new consumers who are slightly more price sensitive.

In media, we're testing econometric modeling and personalization to validate elasticities in what we call the upper and lower funnel of recruitment, i.e., new consumers versus existing consumers and in Q4 2019, we've allocated an increased media budget to our base investment, which together will amplify our new content with progressive targeting of new and lapsed consumers. Coming to e-commerce, something I think you know that I'm passionate about since joining Pandora has been to transform our e-commerce omni-channel data and loyalty reward offer.

With the current retail environment continuing this rapid change, of course, e-commerce is absolutely key for us and an area where I know Pandora has not been on the forefront of development. Right now, we’re continuing improving what we can call the basics of product landing page with more consumer relevant and inspirational content and storytelling and of course we're continuing to accelerate our omni-channel rollout in the US, while at the same time, we've kicked off and are starting our loyalty reward program scoping and development. But the more material changes investments are being conducted to step change our position in e-commerce and omni-channel and they will become progressively more evident in Q4 and of course through 2020.

At the same time, we do hope to start piloting our new loyalty scheme and accelerate data capture to underpin our personalization and client telling strategy. Finally on stores, we’re started to design a new store concept. It's focused on the merchandising and the product navigation first and foremost as well as creating a more inspiring and engaging environment. We have an ambitious goal, it is to pilot stores at the end of this year and then take some of the inspiration elements and put them across the prime areas of our state, so that we can signal change.

Just for clarity, from a store CapEx point of view, we're working within the existing spend per store, though we will now grade the investments by store format and turn of a potential, so that we can flex the investments, which we don't do now. In addition, the rollout program is targeting end of lease refits and new store openings, though we have allocated some of the 200 million of CapEx that you know about for some of our prime locations, which we may need to bring forward, the refit in case from the end of lease date.

Please turn to slide 21 for a review of the next work stream of Programme Now. To better act as one global company, we're starting a journey to change the way we operate as an organization. In order to create that sharp, compelling brand, we're making our Chief Creative Officer, Stephen Fairchild, fully responsible for our global brand execution alongside his role leading product development. We’ve created and are operating now a single global to local trading calendar and this has been implemented with up to 14 trading periods by country to allow us to amplify product launches, separate to the promotional activation.

To build world-class leadership competencies, we're creating a new global merchandising function, which to date has not existed in the company and I'm very pleased to announce that we've recruited a Senior Vice President for global merchandising, effective immediately. Thirdly, we're in much closer dialog with the franchise and multi brand partners to rebuild a partnership and I'm personally involving myself by participating in annual meetings and events. Finally, we're creating a stronger performance culture, one where we are changing and aligning the incentive programs with shareholder value creation, one where we will have one set of numbers and one where we'll have and do have now a monthly performance review and common set of KPIs.

Now, I've been through 3 of the 4 work streams of Programme Now and I'll hand over now to Anders to the final piece.

Anders Boyer

Thank you, Jeremy. On slide 22, we have some details on the cost reduction opportunity and the cost reduction opportunity is quite big and also bigger than we thought when we started our diagnosis some time back and it should be recalled that the DKK1.2 billion opportunity comes on top of the DKK350 million we announced back in connection with the Q2 announcement in August last year. So in total, those two buckets together is something like 7% of our revenue and I guess when you see such a big number, you may wonder whether we are moving into the dangerous territory, whether we do aggressive and we don't think so because most of the cost reduction levers that you can see on this slide are more fair.

I guess you can call it technical nature than some fundamentally changing the structure of the company. So we have divided the cost reduction opportunity in five categories and we will follow-up on progress on these throughout the duration of Programme Now. And for each of these categories, we have shown to the right on the chart here a cost reduction range and as you can calculate, it would sum to between DKK1.0 billion and DKK1.4 billion if you take either the low end or the high end of the range respectively and on average, as we have stated here, we expect to land at around DKK1.2 billion in further cost reductions.

And as you can also see in the slide here, there's no one big silver bullet cost reduction bucket, which counts for a majority of the cost out, but it's several smaller components, which then add up to the 1.2 billion. And we are in fact in full execution mode on several of the levers here already and that includes, among others, travel expenses, point of sales material and several of the levers within cost of sales and I should also mention that earlier today, it was announced that we have had to reduce our workforce in Thailand by around 700 employees as part of that program. Of the 1.2 billion, we expect to realize DKK600 million already here in the calendar year 2019.

As you can see in slide 23, Programme Now is obviously a core part of what we will be doing and working on during ’19 and ‘20 and therefore we will obviously follow up on it quarter by quarter until the program ends and when we meet next time in May, we will update you on the progress on the cost reductions, the commercial reset, but not least take further into the initiatives within, reignite a passion for Pandora.

Then before we get to the Q&A, we will just spend a couple of minutes on the guidance, starting on slide 25. I think many of you had already guessed that we would be changing our guidance metrics in 2019. We have discussed that with several of you and we also mentioned it in connection with both the Q2 and Q3 announcements in 2018. So going forward, we will be guiding on organic growth and on EBIT margin and we believe that both metrics better reflect where shareholder value is created in a company like ours. And then obviously, the implementation of IFRS 16 makes the EBITDA margin somewhat off KPI going forward.

And we hope you agree that and that it makes sense to you as well. But when we guide -- change guidance metrics and then at the same time, we go through a significant transformation, we understand and realize that it can be difficult to track the numbers. So therefore, we have decided to provide quite some specific assumptions and building blocks for 2019 and hopefully that helps you understand the big drivers of the financial performance in 2019.

On slide 26, we have shown a waterfall for the revenue growth in ‘19 and we have separated it into two buckets, one being the normal business, I guess, you can call it and that's what we have labeled before commercial reset, if you look at the upper left hand part of the chart and thereafter -- after those two building blocks, we have the impact of the commercial reset and the reason we do that obviously is that the commercial reset is of a one-off like nature and it's a deliberate decision that we have made and it will impact the revenue in ‘19.

In ’19, we expect to add around 75 concept stores to the network, down from the 250 – 259 that we have opened net in 2018, so that's a 70% reduction in the net openings going into this year. And as you can see on the chart, the expansion of the network is expected to add around 4 percentage points to organic growth this year. Total like-for-like is expected to be negative, down to high single digit and that's what you can see in the gray text box at both the waterfall and that high single digit, up to high single digit negative like-for-like includes the impact from the commercial reset.

Excluding the impact from the commercial reset, total like-for-like is expected to be mid-single digit negative and that then would take us to an organic growth between 0 and minus 2, excluding the impact from the commercial reset and that's the second gray black bar that you can see on the chart here. The selling packages then is expected to reduce organic growth by 1 percentage point as Jeremy mentioned early on, while the reduction of promotions will impact like-for-like and organic growth equally by around minus 2 to minus 4 percentage points. And consequently, the organic growth guidance that we are putting out today is between minus 3% and minus 7% in 2019.

When we look at the total reported revenue growth, forward integration obviously has an impact as well. That's not included in organic growth, but forward integration will positively impact total revenue growth by around 2 percentage points in ‘19 and that includes all the forward integration deals that has already been completed in ’18, including the acquisition of the distributor in Taiwan. And that then means that total revenue growth in local currency is expected to be between minus 1% and minus 5% in ‘19.

On the EBIT margin guidance on slide 27, the starting point to the left obviously is the actual number for ‘18, the 20% -- 28% EBIT margin. The first building block is then the margin enhancing elements that we mentioned back in connection with the Q2 ‘18 announcement. As you may recall, then back then we mentioned the opportunity to improve the margin by 3 percentage points due to among others, less forward integration, lapping wholesale destocking, cost reductions, et cetera and that's still the case, except that the wholesale inventories are still expected to de-stock further in ’19 and thus the margin improvement in ’19 from these elements is 2 percentage points. And then, we have the -- after that, we have the net impact between the DKK600 million now cost reductions and the DKK500 million now reinvestment into the business that we are making. That's the plus 2.5% building block and minus 2% building block.

Then going a little bit further to the right, you have the -- and other bucket of minus 0.5 percentage points and that includes a couple of different things. Higher production time on new products, but also the small upside from converting to IFRS16 and that is about a plus 30 basis point impact or so. That takes us to the EBIT margin guidance of 26% to 28% before restructuring costs and the other -- this means that the upper end of the guidance for ‘19 is in line with the actual EBIT margin in 2018 of 28.2%.

The restructuring cost in Programme Now and in ‘19 are quite large and that shows both the size of the transformation that we're going through, but it also shows something about the size of the cost reductions that we are pursuing. And in ’19, the restructuring costs are expected to amount to around 6 percentage points of revenue, or up to DKK1.5 billion and that consists of the cost of the inventory buyback program, that's about, let's say, DKK0.5 billion, DKK500 million, and that's the sort of the single biggest element of the restructuring cost.

And then the remaining 4 percentage points is about the sort of program execution as such and that includes three main buckets, the first one being cost related to reducing costs, terminating contracts, severance payments, et cetera, it's about costs related to consultancy support and I should mention that part of that is partly success fee based and it includes thirdly one-off costs related to defining the new brand and the new store concept and including some potential write downs of capitalized store fixtures, and point of sale material.

Last on the guidance, on slide 28, just starting out with a more accounting technical comment and that is there will be a change in the target for the capital structure policy to reflect IFRS16. It's a pure accounting matter. And that means that our capital structure policy will be changed from currently between 0 and 1 times net interest bearing debt to EBITDA to between 0.5 and 1.5 times EBITDA. For ’19, the board of directors and management proposes a total cash return to shareholders, amounting to DKK4 billion and that's around 13%, 14% of the company's market cap as of today.

And in line with our cash distribution policy that we announced together with the annual report back in ’16, we propose a dividend of DKK18 per share and a share buyback program of DKK2.2 billion.. As we’re stating here in the first bullet on this slide, we will obviously also look at the leverage ratio, excluding restructuring costs when we consider the amount of cash returns to shareholders and consequently, it might be that the reported leverage ratio, including restructuring cost, temporarily exceeds the upper end of the new capital structure interval during 2019.

Before we get to the Q&A, on slide 29, we clearly have had our challenges during 2018. But it's also clear to us that Pandora has some very strong assets to build on, a cross generational brand, a magic product DNA, a large global network across touch points and not least state-of-the-art crafting facilities and based on these assets, we do see a way back to sustainable growth and that means positive like-for-like and we do see a way back to maintain continued industry leading margins and we say that because we have laid out a comprehensive 2-year roadmap as part of Programme Now based on the diagnosis that we have made and we say it because we have identified significant cost opportunities, which both allows us to invest significantly in growth initiatives, while at the same time, supporting our margins and that's why we call our equity story a turnaround opportunity and not a turnaround in a classical sense, but a turnaround in the sense, in the belief in the future of Pandora and thereby a turnaround of the multiples that our company is trading at.

That concludes our presentation, the prepared presentations, so now, we are ready to move on to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Chiara Battistini of JPMorgan.

Chiara Battistini

The first one would be, if we can go back to the product and the strategy on the product, can you talk more about the initiative, the tangible initiatives you’re planning to implement, how you are planning to prioritize the charms and the bracelets over the other categories and how do you see the balance between the core, so the charm bracelets and the other categories and also how you think about the product cycle and the product innovation, given that that was a very big focus at the beginning of last year.

And second question would be on the CEO, if you could give us an update on this -- your appointment and where you stand on that, if you're still actually actively looking for one as there was no mention in the press release this morning and also can you remind us what kind of profile you're looking for, for a new CEO and what kind of company you are trying to hire him from please?

Michael Bjergby

I think as IR, I'll start with number two, the CEO is still -- the search for new CEO is still progressing and there is no news on this so far.

And then handing over to, I think, Jeremy for the question on the product strategy.

Jeremy Schwartz

Yeah. Thank you for your question. I think the first point I want to make is and the reason for talking about the magic product DNA is for us all to realize that Pandora has an idea that applies equally to all categories. So to remove or reduce the thought of either/or or one of the other, we are able to increase all the categories. However, as I've stated, we have to focus and prioritize when you have 4 or 5 categories that you're seeking to grow, not least for if it’s – and not least for our store staff and therefore we're going to return our efforts and our thinking and our time to growing the collectability of charms and bracelets, while at the same time, bringing this idea of collecting to the other categories.

But I will express the priority, so the property is charms and bracelets and the collecting of those. Next will be necklaces, because we see that we are performing well there and we have a headroom and the collectability and the style of wearing multiple necklaces is growing. We will continue to focus on rings, because again interestingly from a stylistic point of view, the multiple wearing of rings is hot and that will be the priorities that we will take.

You've talked about product life cycle. I think there are two elements there. And I really come from a school of thought that fundamentally believes that brands and businesses have, what I would call core icons. It is those things that are growing year after year that make up the core business that have something about them that is timeless and one needs to nurture and grow those, at the same time as you think about innovation and we will do that and are focusing back on the core icons alongside innovation.

In terms of product lifecycle, we are seeking new icons with the launches and we will succeed with some where something just hits the money, an example of that on the ring for example is the wishbone ring, which I mentioned and I only mention that because again it's got a sort of timeless capability to represent the product DNA and new generations can understand that and connect. But other things, we need to create what we're calling engineering scarcity. So the reason we've mentioned here specifically collaboration's in limited edition is that marketing now is not just about advertising or promoting something new, it is leveraging scarcity to create demand and therefore the product lifecycle with some products will be extremely short, so that we can create that excitement in those cues that Pandora is so famous for outside our store and online.

Chiara Battistini

And I think that is the product and then the number of SKUs, we should be expecting fewer SKUs versus what we are in the past and maybe more focus on this shorter term collaborations or?

Jeremy Schwartz

So the answer is yes to your question and I will give the why. The why is because in order for us to cut through all of the marketing noise in the world of Express, we need to be clear to the consumer which are the key products that we personally believe are, what I would call, showstoppers, things that they -- we want millions of people to buy and to do that, we will have to reduce the numbers of products we're launching and tighten the existing assortment to improve our navigation and shopability, both in-store and online.

Operator

Our next question comes from the line of Elena Mariani of Morgan Stanley.

Elena Mariani

Hi. Good morning, everybody and thanks very much for the extremely detailed plan. Two questions from me. The first one is a bit more on the medium term plan. 2019 seems to be like the start of your journey, how should we think about 2020 and the following years, so in essence, how long do you think it will take to fully implement this extremely comprehensive plan? Do you expect in 2020 to go back already to positive like-for-like and to profitable growth and what do you expect could be your sustainable EBIT margin in the medium term, you're talking about a like-for-like growth that could be low to mid-single digits as a mid-term financial aspiration, how about your EBIT margin target?

And question number two would be on your distribution network, you don't seem to believe that your network is too big and you don't seem to be over distributed. Do you expect to perhaps consider some store closures as well, given that at the end of the day, you are growing very well in your e-commerce platform and perhaps in some of the markets you might have opened too many stores, I can see from your 2019 guidance that 4% of your organic growth is going to be driven still by store openings, how should we expect this to evolve in the future?

And I know I'm allowed to ask only two questions, but one small follow up from Chiara’s one, Jeremy, would you be open to consider the CEO role, just in the remote case you were asked by the Board?

Michael Bjergby

Thank you, Elena. I think I'll just start out to say that we are not guiding to 2020 and we do not have a guidance for the mid-term, but maybe Anders, you can provide some comments on the cost programs and the investments that you see required.

Anders Boyer

Hi, Elena. It’s Anders here. and thank you for that introduction, Michael because it is too early to be specific about 2020 yet, but it is I guess a couple of things and the points can we can give them, obviously, I think the 2019 is expected to be sort of the biggest transition year if you like and as always in transitions like this, you get the cost before you get the benefit and that's typically how it works. It works out, so looking in a couple of sort of data points, I think I can give you, you can call that, obviously 2019 will be impacted by the commercial reset, both on the top line and on the bottom line. And that the numbers have we’ve just gone through and obviously those are of one-off impact and then going into 2020, we should obviously, you will see the run rate impact and additional impact of the cost reduction opportunities. We would not get all the way to DKK1.2 billion in the calendar year 2020, but as a run rate, that's where we will get by the end of 2020, but exactly how that plays out on the bottom line depends on decisions are still to make on how much are we reinvesting in the business to drive the top line, but at least we know that there will be more cost reduction opportunities flowing into the P&L come 2020.

Jeremy Schwartz

I will take the next question. I think the first point is that, as we noted, we will have a net opening of 75 stores and as we've indicated, those will focus on Latin America and China and we can see great opportunity in places like Colombia, like Mexico that we're actively developing and of course China as we've said. The second point is within that net number, there are the natural closings that we're doing as we are finding some malls in certain areas are becoming less popular and we've come to end of lease and that makes good business sense. We are looking at other markets where we can see opportunities, the likes of UK and Italy. But unlike other -- some other retailers, we have a margin structure, which means that from a prioritization point of view and reigniting the brand, the priority areas for us to put our energy is on the things we've expressed before and ahead of a significant network redesign. That's not to say it's not being worked on, but it's not a key message to say in terms of our transformation project.

Elena Mariani

Maybe the CEO question?

Jeremy Schwartz

I don’t think it's appropriate to make a comment like that, but thank you for the question.

Operator

Our next question comes from the line of Lars Topholm of Carnegie.

Lars Topholm

Thank you and congrats for reaching your Q4 guidance. I have two questions for this round. So to begin with, your new plan includes – I understands just 14 events instead of 10 drops, it includes smaller sell-in packages, which means that franchisees have to rely more on replenishment orders, which presumably will go up and also a new concept to be launched in Q4 ‘19 and my question is, doesn't this add more complexity that could potentially put stress both on your supply chain and your production or how do you see that, maybe specifically in the light that our understanding is, there are still problems with delivering certain sizes of the reflections bracelets for example, so the question is how are you sure your organization is ready to handle increased complexity.

And then a question number two if I may, because you provided the building blocks for your guidance, but 16% of your 2018 revenue came from wholesale multi-brand dealers, how do you expect that to perform in 2019?

Jeremy Schwartz

I will answer a couple of those and we will share. So I think, the first point is one of those aha moments when this company, as we've stated, has been through a pioneering phase of opening countries and stores to create this great global network. But in so being focused in the pioneering phase, it was not necessarily working as a global company and that's why we've made that point. What we actually discovered in the first weeks was that most retailers operate a trading event plan with between 10 and 14 separate activity events, that's the nature of, in a country, having holidays, having launches, having promotions, having weekends and paydays.

But actually, at the global level, the company was running a cadence around drops that was the language of the center and that was focusing really simply on new products. Well, as you know, a business in retail does not just operate on new products and as I've expressed, it's about driving the core and therefore there was a dis-alignment between the way the business was thinking such that by simply saying we will operate as a great retailer, both e-comm retailer and store retailer and have one view of the world in which the products have to complement and the promotions have to work beside and with and the holidays have to be amplified, we will have coherence and less complexity and that's what we're achieving. Second point, so hopefully that's a clear answer and absolutely, it's about less complexity and more clarity across the whole business.

On the small sell-in packages, as you know Lars because I've just been with the 900 franchisees of the US, Canada and South America last weekend, talking to them and actually we all believe in a sell-out just in time model for efficiency, so the smaller sell impact will ensure that within that MPI launch, if there happened to be some items that us where we're selling that the franchisee or the wholesaler will not then have a large number because the pack would have been large of an item that doesn't sell so well and therefore have to deal with the complexity of then clearing that through some lower price or sale or holding on the stock to another time, but rather can now as sales become evident or do the things they want more quickly and have less of the things that aren’t selling so well.

In terms of a new concept, of course, our job and that's why we're creating a new global merchandising function is to balance the need for all frankly consumer companies to stimulate demand through innovation and driving the core with managing complexity of that very fact and one of the things that we've not been great at planning is as the first question lifecycle management, which is the ability to actively remove items, which are not moving fast and ensure that the range does not expand because of that lack of active discontinuity. So our job is to work out and we'll work out how to do that.

In terms of the last point, we haven't really had a supply issue on the reflections bracelet funnily enough. We've had just an issue with the sizing and that issue has now been addressed. So we're in a good stage there and hopefully that sort of mistake won’t be repeated. Thank you.

Lars Topholm

Just to follow up Jeremy on your comments regarding the smaller sell-in packages, I clearly see the value proposition from the franchisee’s perspective that they can run smaller inventory, but my question was more if your supply chain and production can handle a situation where you have more replenishment orders or if you move toward what you call a more, just in time principle in supply, does this mean that you just move the inventory from the franchisee to Pandora itself.

Jeremy Schwartz

Lars, I fundamentally believe we have absolutely the capability of doing that and I think the best proof is that we run an e-comm business, which is about just in time of delivery of small packages. It is true that in the US, we've had some issues in the last quarter, but as we've indicated, we are on the case and sorting those out and that was more to do with, as you know, a new system put in place that had some hiccups, if we just say it as it is but that's being sorted and I'm confident we will work that through.

Lars Topholm

And then on the multi-brand revenue assumptions for ’19?

Anders Boyer

Hi, Lars. It’s Anders. I think that multi-brand was quite significantly down, all point of sale quite significantly down in ‘18 and we do expect that channel to reduce and our declining revenue still in 2019 and I guess, one way to look at it is that there's three components of the development in the multi-brand channel, it's like-for-like, it's the net opening or rather closing in this case of multi-brand stores and then it's about of changes of inventories, de-stocking and among those elements, I think you should still expect some closing of multi-brand stores, but probably less so than in 2018. I can't even remember as if was a 325 points of sale that we closed in ’19 and it will probably be a bit less than that, but overall, that channel is still expected to decline in ‘19.

Lars Topholm

And by the same pace, is it in ‘18 or more or less?

Anders Boyer

It is quite significant in 2018 in that channel, obviously also heavily impacted by the forward integration, also, not forward integration, but the destocking was quite significant in 2019, sorry, ’18.

Lars Topholm

So still down, but not as much as in ’18?

Anders Boyer

That would be a good modeling starting point.

Operator

Our next question comes from the line of Michael Rasmussen of ABG.

Michael Rasmussen

First of all, I would like to talk a little bit about 2019 and the quarter. Could you add a little bit more clarity on how we should expect the quarters, particularly the Q1. I mean, obviously you do have a bit more difficult comp on the group organic growth, while when we look at China specifically, you will obviously get some benefits from timing of Chinese New Year and Valentine’s and I understand it also the inventory reductions program is probably not going to hit at least a lot in the Q1, so have you had a couple of building blocks, just to set the scene here for Q1?

My second question is focused on the slide that you present in the appendix on slide number 34 in the slide pack and what I particularly notice is that the gift giving category is the one that declined the most when you ask consumers from 2016 to 2018. So how exactly it’s going to address this specific issue here and maybe if you can also just give us an update on what you see gift giving as a percentage of sales or what you estimate that is in the fourth quarter?

Anders Boyer

It’s Anders. I can start off the first question on the quarters. In general, I'm a little bit hesitant to say too much about how to expect the top line, bottom line to be between the quarters. I think that's how we think in general, but it's even more so going through a transformation like we are with some bigger than normal moving parts. Having said that, there's a couple of things that we can say and one is that at the first quarter and the first half is likely to be lower than the second half of the year. As not surprising in a transformation like this, you will also see to have the cost before you get the upside. I think that's one statement to put out, but you should also expect that the top line initiatives that we are implementing will mainly have a positive impact in the second half and so one of the slides that Jeremy went through, you can see that the marketing investments as an example mainly comes all the way back to the fourth quarter of the year, not all of it, but it's back end loaded and that means that you should expect that the first half of the year to be slow.

Jeremy Schwartz

I will now answer the second question. I think the first thing is, we are a brand as you can see that is bought not only as a gift, but also for oneself and one also needs to understand that these are gifts that are given not between just a man and a woman, but between women friends, an important shift. This is the reason that we've stated that the brand and the way it communicates need to have a role in today's culture as I mentioned and the reason is that within the brand tracker, we can see that our brand awareness continues to grow, but the brand heat is perhaps softening and that is down to relevance.

So first of all, we believe that the activity we're planning will recapture that connection, not just to the receiver, but to a giver, so that’s point 1. Point 2, the reason that we're saying that Q4 needs to be bigger and better and the start of the re-ignition is exactly for the reason that you've identified that gifting is critical and within that, the gifting range we have for Christmas is being reviewed and refreshed. And I think we can say probably around 60% of our sales are in some format. So noted as gifting. But as I say, that can be grandmother to daughter or granddaughter as well as husband to wife, which is normally referring to man to women, sorry.

Operator

Our next question comes from the line of Hans Gregersen of Nordea.

Hans Gregersen

Turning to the 1.2 billion cost savings program as you alluded to it previously Anders, you mentioned that there would be some reinvestment cost, but can you give across the entire cost cutting program, an indication of partly facing, but also how much of the 1.2 will be reinvested and how much will go to profitability, that’s a first question.

Secondly, on the like-for-like outlook, you have not shared too much information about this in this report, I don't know if more is going to come later, but could you, without going in to number guidance, give us sort of a layout for how you see the like-for-like recovery occurring over the next three years?

Anders Boyer

I can start on the first question on the cost reduction. We can't be specific on yet on how much we will reinvest of the DKK1.2 billion, this year, we're starting with reinvesting 0.5 billion, DKK500 million in the business, that's quite skewed towards the latter part of the year and then what that looks like go into 2020, that depends on several things obviously, so we'll have to -- can't be more specific, but what is certain obviously is that we will get a further upside -- margin upside in 2020 from the cost reductions. If you look at things in an isolated basis and then a bit more going into 2021, so we have said DKK600 million in cost reductions this year and then DKK1.2 billion as a run rate going out of next year and then we can do a little bit of math of what that means for the calendar year 2020, but you probably get to a number that is sort of in very rare round numbers, around 1 billion for the calendar year 2020.

Jeremy Schwartz

So I will take the second question. So as we indicated both –

Hans Gregersen

Anders, just to understand your question. Am I right, I mean you mentioned 600 in reinvestments this year, I assume that these investments are ongoing reinvestments, so it is not like one-off, it's more like recurring reinvestments?

Anders Boyer

It's DKK500 million in reinvestments, but you’re actually right. It’s here to stay, if you like, DKK500 million and not a number, higher number, let's say, we find out that we might put even more money behind marketing and our brand machine, given that the -- what we invest this year is mainly in the latter part of the year, it might be a different number going into 2020, but it's, yeah, the starting point is that it's recurring, it's not a one-off.

Hans Gregersen

So conclusion is that less of the 1.2 billion I should assume hitting the profit line?

Anders Boyer

That's great. Yeah. It will be a net impact, but what that net impact is, it's DKK100 million net OpEx in ’19, what exactly that number looks like going forward, that's too early to say.

Jeremy Schwartz

And in regards to your like-for-like, as we shared in November and we're doing now, we see that 2019 is going to be negative like for like and really I think in this environment, it's too early to make promises or statements on the future outlook, but we are only two months into a 24 month program, but I think as we've articulated, the modeling we're doing is showing that we can get back to a positive like-for-like and of course the purpose of our next calls will be to update you in as much transparency as we feel comfortable to do.

Hans Gregersen

Jeremy, would it be fair to argue that the return to parts of growth numbers would be a multi-year exercise based on your past retailing experience.

Jeremy Schwartz

Yes. I think it is still a bit too early to make a statement, but let's take that as a good assumption. I think one thing that is worth noting of course is that we are prioritizing our countries, so that we can give ourselves and yourselves a proof of concept and in a way taking the big countries of the US and China as our priorities and we believe that that will allow us to see positive momentum, which we can then copy and roll out to other countries as a proof of concept approach and I think that’s an exciting way of skinning the cat.

Operator

Our next question comes from the line of Anne-Laure Bismuth of HSBC.

Anne-Laure Bismuth

I have two questions on my side. I just wanted to come back on the product positioning and I know that you did this extensive presentation and you plan to redefine the PR brand positioning for Pandora, but you are also planning to launch a new platform in Q4 ’19, but what do you plan to do differently now to make this launch successful. That's my first question regarding the product side of the equation.

And the second one is about the fact that you flag that the organization is mainly decentralized to what are the key action that you are now taking to make it more centralized and if so, have your regional manager reporting directly to you and – or do you plan to local manager or regional manager will be incentivized regarding the performance that they have to deliver on?

Jeremy Schwartz

So I think to answer your first question, obviously just one point. We've launched the reflections bracelet and we're very happy with the initial start and remember that these sorts of platforms or these sorts of innovations are not about instant hits, this is about building a base from an idea, making people continuously aware and getting recruitment and trial and then of course the collecting. I think the thing I want you to think about most is that we are going to be having a marketing model and a business model that is coming back to the idea of collecting. So yes, things are about new product, but it's in the context of getting more people to buy that and collect it as part of a behavior.

So I'm going to leave that that's the important consideration I want you to walk away with in terms of the way we're going to approach building consumption of the new products that we launch. And as I mentioned earlier, it's about dramatizing the really key products worldwide and I'll just spend one minute on that because it relates to your second point. So what we've observed from an execution point of view country by country we've visited is there is an inconsistency in the way that we dramatize the innovation we have and make it visibly discoverable by our consumer and the reason is twofold.

First of all, we have a completely decentralized merchandising and management approach, which has been successful in the past that has led to, what I call, a pick and mix approach and the global consumer or the consumer across the globe is more similar than it's different and when we find a big idea that may have taken us two years to develop, we need to get behind it and amplify it worldwide. So that's the approach. So from a – half answer to your question.

So the second half therefore is the reason that we are empowering Stephen Fairchild, our Chief Creative Officer to not only be now with a broader remit of creative and brand and therefore control or touch points, but giving him the authority to determine worldwide what are the priorities and what will be executed, so that we get amplification worldwide. Your last point, yes, regional vice presidents do report in to me directly.

Operator

Our next question comes from the line of Thomas Chauvet of Citi.

Thomas Chauvet

Two questions please. The first one, your plan to reduce promotional activity, will it fell by 2 to 4 points in ’19, are you expecting this pressure to totally disappear in FY20, it feels we're still in an environment where consumers are expecting ongoing promotions, even from established brands. More generally, have you been thinking of reducing your price architecture with lower price points, perhaps for charms, what are your most recent consumer insights, servicing on the ideal price points for those products?

Secondly, on the inventory buyback, how confident are you that DKK500 million is enough, would you revisit the need to do more buyback say in 6 months’ time and just practically, will this merchandise be totally destroyed and are you issuing refunds to retailers or credit notes or swapping products? Thank you.

Jeremy Schwartz

If I have to achieve one thing in this communication, it is to make sure that it's absolutely clear what I'm about to say. We are going to maintain the promotions on all the large retail, global, trading, gifting events. We are focusing on those promotions in between those events, which either have demonstrated little elasticity or have meant that the amount of retail time that we've allocated to dramatizing our new products has been so squashed that they have only had sometimes two weeks. So you could call it the surround sound promotions, the noisy little things that are contributing not so much, but are impacting both the brand equity perception of the consumer, i.e., that we're promoting all the time or and stopping consumers seeing and really finding the new products that we want to launch. It is highly important that this message comes through to you and I hope that has got extremely clear.

The second point is, actually, I will hand to yourself actually for the inventory buyback.

Anders Boyer

It’s Anders here. On the inventory buyback program, we will do what is right. And we think that what is right is amounting to around DKK500 million, 2 percentage points of revenue in 2019. If we come – should we come to the conclusion that neither number is right, we'll still do what's right and then pursue that number. I think that's what we have to do when we go through a transformation like this or as always, but having said that, we've made quite some analysis already during the last 4, 5, 6 months on this issue and this -- the number has been circulating around this 2 percentage point of revenue, DKK0.5 billion for some time, but I should note that the visibility in parts of the channel is not really good. But having said that, I think DKK500 million is a good estimate of what it takes to get to a reasonable level, but there's no one size fits all, we will do this on a, because I'm afraid as a finance guy that if you try to go with one size fits all, you end up paying a too big part of the bill. We have to do it in a clever way and a selected basis and submit selected partners and not as a broad based model, but only where and when needed.

Jeremy Schwartz

So I think to answer your second question, so I’ll quickly come back to that on pricing. So first of all, we actually have a very sophisticated pricing architecture, not only do we now have strong global pricing corridors and that was reinforced by the reduction of prices in China by 15% and the increase in price in Australia by 5, but actually our products are all pre-tested on a price value curve and the position with that quality versus that price, however, even though we've been launching more new products at the lower price point, their visibility to consumers for whom price is important is not where it needs to be and therefore we are working with nothing confirmed yourselves on both visibility of entry level pricing and products and also launching additional products that have a greater entry price point. We don't believe that we have to do any wholesale price reduction that it is about discoverability and visibility of particularly those lower price points within our range to those consumers for whom that’s important.

Thomas Chauvet

Just a follow up to Anders maybe on the buyback, when you say it's 2% of your revenues, are you issuing credit notes or swapping products with retailers, in other words, in your organic revenue guidance, does this imply two points of positive impact from the utilization of credit notes by retailers.

Anders Boyer

Thank you for actually asking that question, Thomas, because that's a very important clarification. The way that we intend to structure, it will not hit revenue, but go directly into cost of sales and that in many aspects also makes it easier to identify and control, looking at it with the CFO eyes, but that -- it will not hit organic growth. That's not the intention.

Operator

Our next question comes from the line of Magnus Jensen of SEB. Correction. Our next question actually comes from the line of Piral Dadhania of RBC Capital Markets.

Piral Dadhania

I just have one follow up if I may on your store and how do you plan on, why there isn't more of a focus on evolving or potentially downsizing the store state as you try and reignite the brand in other aspects of your strategy, could you perhaps maybe just talk around what your evaluation criteria are for any leases that come up for expiry from a IRR perspective, because just because these stores are profitable or cash generative today doesn't mean they necessarily will be in the next 3 to 5 years, and then just following on from that, what's your implicit footfall assumption for the like-for-like guidance that you've given for 2019, are you expecting footfall into physical stores to remain broadly stable year-on-year or is there an implicit ongoing deterioration of footfall into stores?

Jeremy Schwartz

So perhaps I’ll answer a couple of those and Anders and I will split. So again, I guess, it's important just to be cautious with the emphasis that we’ve placed in this presentation to not imply that this is not important to us, but we wanted to prioritize our messaging to you and therefore of course we are, all the time, revisiting our network and for example therefore, when we first of all have any store that's coming up for lease renewal, we are creating a 5 year view of that profitability, depending there's a 5 year lease or a 3 year lease in Asia and so without a doubt, we're looking at that economics over time and would not make any decision that was not sensible in that regard. So that’s point 1.

Point two, in terms of traffic development, in essence, we are assuming that traffic will continue to decline, but we are developing rapidly, or as rapidly as we can to that at a store level or through our e-com can slow down that rate. Examples will be things such as click and collect, which is obviously one tool of drive to store and looking at other drive to store CRM tools, we're also developing client telling tools which will enable and empower our store staff to proactively call their best consumers. So there are tactics that are being developed, some of them because they’re IT linked, take time but we all without a doubt are working on that.

With regard to the network, so just to be specific, we are by country looking at our network and looking at tactics where we believe we've got overdisplay or over availability within a town as opposed to pure country and where we need to close a store to create the sense which we're naming engineering scarcity. So without a doubt, that's been worked on, but it's not been worked on in this way I've done in other jobs where it's been a wholesale number one priority. It is a business as usual priority as opposed to a Programme Now initiative.

Anders Boyer

Yeah. I think Jeremy has answered basically all of it, what I can add which is slightly different words is that when we look at a new store or potential renewal of a lease agreement, we use some pretty tight criteria. The standard assumption is that we will have, the case will have to make sense based on declining like-for-like. negative like-for-like, and that's not what we plan for in the longer run, but that's what we say have to be solid based on certain negative like-for-like, but then obviously if we look at the, how we address that catchment area, that geographical area already among our own stores, among other point of sales, wholesale distributors online and then we reconsider what was the best way to address that catchment area for the next number of years and then that leads to a decision on whether to close the store, relocate it or extend it for a bit longer time or a shorter time depending on how we feel about the exact business environment and business case for that area.

Operator

Our next question comes from the line of Magnus Jensen of SEB.

Magnus Jensen

Firstly, on promotions, could you tell us how much you actually plan to reduce promotion for 2019 in terms of days and further to that, how larger share of sales was generated on promotions in 2018.

Secondly, in terms of your network, so you mentioned that the capital markets there at a level of around 15% and you’re actually already now at 11%. And given that also mentioned that you can possible reduce inventories further, could you give some flavor to what kind of level we should expect, when we look ahead?

Jeremy Schwartz

We are targeting by country and it does vary by country, a reduction of 50% in the numbers of days approximately that we will have promotions. Obviously, again to reinforce, we are not talking any of the major promotional event periods, which are where the majority of actually our promotional sales are executed. So that's the approach we're taking. I think we're looking at probably around a third of our sales by country because it varies by country where in 2018 on promotion or some sort.

Anders Boyer

Yeah. Hi, Magnus. Good to hear your voice again and you mentioned that 15% of working capital that we mentioned, it might almost have been you who mentioned it, one year ago. But it's true that we are at a lower level at this point in time ending ‘18 at around 11% of revenue and there may be a bit further upside, but I think in the biggest -- big scheme of things, I think we have some of -- taking some of the biggest upsides already with what we have already done in ’18.

Operator

Our next question comes from the line of Zuzanna Pusz of Berenberg.

Zuzanna Pusz

Hi. I have two questions please. So first of all, on your marketing strategy. So, as you mentioned, you’re planning to make some changes to how the brand is marketed, but can you discuss these changes in a little bit more detail because I think historically, if I remember correctly, from there, I was quite reluctant to collaborate with any celebrities or influence or so, is this something you're planning to change and also related to that, I understand that the strategic plan from last year has been abandoned, but I think back then it was discussed that you were targeting around 8% of sales and there was a marketing spend, so but if you actually compare to other jewelry brands, or let's say branded goods players, that level tends to be higher above 10%. So, do you have any faults around the sustainable level of marketing to make sure that the ground, you invest in the brand enough.

Second question is on the inventory buyback, so I understand that if it's necessary, you may decide to do a little bit more. But how did we find ourselves and how did you find yourself as a brand there in the first place because I think there were some obviously issues with inventory levels before, there was a buyback in the past and generally that was meant to be pretty well monitored across the organization, so can you just give us a bit more color, are you planning to change the way you monitor the inventory levels in the channel, just to make sure that actually you don't end up with having too much inventory in the channel?

And just a very quick follow up, it’s not a third question actually and on the question around weight in terms of what we could expect throughout the year, we understand that it makes sense you have initially more costs upfront, so the outlook is likely to be back end loaded, but it shows that over the past 2, 3 years, that was the case, so I think it would be just quite useful to have an idea of really to what extent H1 could be weaker versus H2, just for us to know what the expectations should be?

Jeremy Schwartz

Well, I'll take the first point. So the first thing is that we have stated that we need to create an environment, a positive disruption. In making that statement, it implicitly means that sacred cows for example, need to be challenge and that we have to therefore be much more connected to today's culture and the relevance to that. So I think what we can see, what I have seen in this is that we have been, I would use the word conservative in the way that we have expressed and connected and represented consumers and in the way that we have embraced tools such as celebrities and collaborations that other brands have seen, have been a very effective tool nowadays to connect with people. So I think it's a combination of a new set of eyes, it's a combination of having a call to action and a reference point that we have to reignite this brand, we're going to be disruptive and no stone can remain unturned to get. So I think those will be the main reasons why we will do things differently against that context of being part, having a greater role in today's culture, to excite and engage consumers.

In terms of your marketing spend question, to be honest, where the teams have been very effective frankly before I arrived is to reduce the number of media agencies, for example, that we use from 7 down to 2 and through not only that, but a strong focus that we're now doing on performance management, including econometric modeling. We are extracting greater value and return from every Danish kroner or dollar or pound or euro that we're spending, so we're looking more at productivity than necessarily exclusively in the amount we're spending, though of course we have allocated and planned, allocated more investment for Q4 and as we've indicated, we can imagine through our econometric modeling that we will spend again more potentially in 2020, if that's what it shows is a good investment decision.

Anders Boyer

And Zuzanna on the buyback program, it's clearly something that we have on the agenda, even though the revenue that they have from our franchise partners is smaller percent of total revenue than in prior years, is still a very big part of Pandora. And we would like, so it will be a standard part of our agenda that we always are quite close to knowing and understanding what kind of inventory sits with the partners, but we also should see the change that we’re doing with the sell-in packages and the new product introduction sell-in packages, that's a way to structure ourselves to systematically avoid having too high inventories in the channel, so that's been one of the results of the diagnosis that we have made. And then it is true that we've made -- if that was the question, we have made a structured buyback program in the past as well, but it dates all the way back to 2012, so it is quite some time back.

And then on the seasonality, I would love to sort of be -- try to be more specific and help you out more, but it is just sort of by nature more bumpy when you go through a transformation than we do. I would be hesitant to say more than what I did on the all earlier today.

Operator

Our next question comes from the line of Chiara Battistini of JPMorgan.

Chiara Battistini

Sorry, just a couple of follow up questions, very small. First, on the cost savings, you gave a very helpful split of the cost savings between COGS and OpEx on page 22, on slide 22 by 2020. Is it fair to assume a similar split also in 2019, so roughly 30% of savings are coming from COGS in 2019 and the second question, small follow up questions, the 75 net openings, would you be able to split it between gross openings and closures please?

Anders Boyer

I can start on the cost savings. I actually expect the cost of sales being somewhat higher relative share of the cost savings in 2019 than in 2020. We are sort of – have been ahead of the curve, I guess, you can call it within cost of sales, also stemming from the fact that our organization -- operating organization in Thailand has been more used to always work with us of continuous cost improvement mindset and therefore, the relative share of cost reductions from cost of sales is higher, a bit higher in ’19.

Jeremy Schwartz

I think on the second question, actually to be honest at this moment, we just like to keep at the 75 net openings. It’s a number from an opening closing that will move, so we will update you further in the year on a more precise view as we get Chiara.

Chiara Battistini

And sorry a couple of follow-ups on those, on the cost of goods sold, then the savings, is it more like 50%, 60% of savings of 2019 coming from cost of goods sold?

Anders Boyer

I wouldn't go that high, but it's higher than what you would be able to calculate from slide 22.

Chiara Battistini

And on the number of stores, can we confirm that the -- in countries like the UK or the US in 2019, we're actually going to see net closures without being precise on the numbers.

Jeremy Schwartz

You could assume that as a good opening position, yes.

Operator

Our next question comes from the line of Fredrik Ivarsson of Kepler Cheuvreux.

Fredrik Ivarsson

First one on the re-designing of the e-comm, I guess you mentioned in some of the new features and services and I'm just curious if you could elaborate a little bit on that. I guess, you mentioned click and click as one for instance. That is my first question.

The second one, I guess another follow up on the timing we’re looking into 2019, but focusing more at the cost savings as well as the restructuring cost, how should we think around the facing throughout the year, will it be clearly visible already in Q1 or more sort of accelerate throughout the year?

Jeremy Schwartz

As you know, e-comm is a combination of two things, thousands of incremental improvements and big substantial changes. So when you look at our site now, actually, it requires combination of the two and the first ones are the simple thing or the product landing page, it is the place where every brand makes or breaks its sales on the product performance, so we're step changing the way that every single product appears under a gold/silver/bronze sort of structure so that we can dramatize and bring inspiration to the products and then we are developing more helpful services from recommendation engines and other services that you’ll progressively see to help our consumers sort and find the products they really want in a more frictionless way amongst our assortment.

Secondly on omni-channel, as we've explained, we are rolling out all elements of omni channel, which is go in-store, send the home, click and collect and endless aisle and online inventory, view of inventories, all of those elements have been progressively rolled out in the US and when we feel that they are faultless or working to the level we want, we're going to roll those out in other countries against the plan that we have.

Fredrik Ivarsson

And then two short question, sorry, answers on the cost savings and restructuring cost. On the cost savings, it will be building up over the year, but there would also already be some impact, a little impact in Q1, given that we've started already back in late ’18 and on the restructuring cost seasonality, you should expect some of the opposite impact that it starts at a bit lower, but then the cost will be higher after Q1.

Operator

Our next question comes from the line of Lars Topholm of Carnegie.

Lars Topholm

Yes. Two additional questions from me. And as I think in your presentation, you mentioned a new incentive program aligned better with shareholder value creation. I wonder if you can comment a bit on that, what are the elements, what are the changes, who is available and then a second question both your e-star revenue growth of 25%, that's market slowdown compared to previous quarters, I wonder if you have any explanation as to that and should it bother us going forward?

Anders Boyer

Hi, Lars. I can start out with the incentive program. I mean starting out with the short term incentive program so far, we have a range of participants and that is not changing, but what we are changing is the elements that ourselves and the organization is measured on and that means, it is pretty simple, it is free elements, it's like for like, total like for like, it’s EBIT margin and it's the impact of Programme Now specifically on the cost reductions, that's the 3 elements that we have, the board have and management have chosen that should be driving the short term incentive program.

And then we've also said in the annual report that the KPIs for the long term incentive program is also being revisited along the same lines, there will be more communication about that following the AGM.

Jeremy Schwartz

In terms of your question about the new store, obviously, our objective is to continue to drive and secure strong growth on our e-comm sites around the world. And because it's a key component and obviously we wanted to outpace the growth or the decline in stores to give us a net growth and that’s our strategy. We are in EMEA in particular, going to be slowing down the immediate rate of growth, because there is a sales tab that is visible to the consumer all year round as opposed to just during sales and we're going to progressively pulse and turn that off. So I think this fits into again that bucket that we said at the beginning, we're going to do the right things for the brand and the business and the brand equity, if that means some short term pain, it's the right thing to do to give us long term sustainable value and shareholder value. Thank you.

Lars Topholm

So should we expect a further slowdown in e-commerce growth going into ’19?

Jeremy Schwartz

I think that would be a good assumption, Lars.

Operator

Our next question comes from the line of Omar Saad of Evercore ISI.

Omar Saad

We wanted to ask about the shift you've been talking about to the concept of collectability. Can you talk about how you’ve arrived at the strategic direction for the brand, what were the key factors or data that give you the confidence in this new direction? And second, will the shift also change the nature of the products, in other words, are you moving away from gifts and the emotional value of the charms, the personal meeting, they signify to a couple and also maybe talk about the timing of when these product changes are going to show up on the product line.

Anders Boyer

The concept of collectability is at the very core of why Pandora is the largest and most well-known jewelry brand in the world. It is the fact that we have for example 15% of our consumers who own 20 or more charms, it is the fact that we have an average consumption for example of a ring that maybe 2 times be our customer, but when it comes to charms, is 4 to 6. So it's fundamental to why we are where we are and that's why we're going to drive it again, but with more deliberation and greater forensic approach.

In terms of when the activities will start, they're going to progressively start and I will give myself permission to be vague, if I may, because this is also dependent on a loyalty reward program, which will take some time to pilot and then rolled out, not dependent on that, but connected to that. In terms of the emotional charms, we will absolutely not be moving away from emotional charms, because it's that element that connects to the amendment I explain to of expressing one's individuality and individuality is expressed through the emotions and experience that people are having. So rather we're going to be looking at more occasions and different moments that people want to express their emotions who are charms, rings, necklaces and all of those components. And you will see it progressively happening. Obviously, most of the first half of this year has been put to bed over a year ago, so this is a refocus and development that will progressively hit our business.

Operator

Our next question comes from the line of Hans Gregersen of Nordea.

Hans Gregersen

Jeremy, in the Now analysis phase you've been through, if we look on product development, what has -- what conclusion have you arrived at because that must also be a part of the like-for-like problems. Second question goes to the franchise operators. What will happen to -- what are you doing to help them and how do they see the benefit from the actions you're doing, both short and medium term?

Jeremy Schwartz

Okay. So obviously product is key and we are, first of all, going to ensure that we continue to create products in all of the categories that are a combination of disruption and relevance and that's why for example, we're going to look for collaboration because that creates the relevance and the disruption that we need to have, for example. The second thing is all about stand out and visibility and I've explained that our execution at a country or online level has been blurred and not as sharp as we need and therefore it's as much about the way we dramatize what we're launching, the relevance and the cultural fit with what we show as simply just changing the product in itself and that's why we've expanded what we're saying is required in re-igniting a passion for Pandora for more than just a product story because it's the way we execute in as much as the product itself.

Hans Gregersen

Sorry, you mention a couple of collaborations, if I understood it correctly, would that be more as Disney and secondly to that, you mentioned that there will be SKU launches, if I look on your slide 35, that's not really what the numbers are showing to a large degree.

Jeremy Schwartz

So, first of all, Disney is a good example of a collaboration and one which has proven to be highly effective and we will continue with that, but that is the sort of collaboration we’re talking about. In terms of the reduction in DVs, it is a progressive approach that we're going to take because the question I was asked was about the future as opposed to this year per se where as I mentioned already, the majority of the first three quarters have already been secured before I write.

Operator

Our next question comes from the line of Elena Mariani of Morgan Stanley.

Elena Mariani

I also have two small follow ups. The first one is on e-commerce and on the omni-channel capabilities that you might continue to implement. I remember that this has been a critical point in the past, because not all the franchisees were supportive of omni-channel experiences, so I was wondering how you plan to tackle this and whether you found a solution that could work for all, so that this could be implemented across your entire distribution network?

And second small question is on gross margin guidance for full year ’19. I understand you don't want to go into too much detail, but is it fair to assume that the current EBIT margin guidance coupled with the cost savings and the cuts in promotions would imply gross margin to be under substantial pressure in 2019, given that the cost savings you have identified are mostly related to OpEx, if you could give us any sort of broad indication, that would be very helpful?

Jeremy Schwartz

On omni-channel, first of all, I think it would be very fair to say that Pandora is behind the curve, but we're going as quickly as we can to catch up and therefore and the approach we're taking, as I’ve earlier mentioned is to focus on America as what I'm calling a beacon country, so that we can focus our efforts. Secondly as I mentioned, I was with the Franchise Advisory Council last weekend or the weekend before last and I’ve had very constructive conversations with them and I believe we can see a joint way forward, which we are both and all excited about.

Operator

Our next question comes from the line of Michael Rasmussen of ABG.

Michael Rasmussen

Two quick follow up questions. First of all, on slide number 22, if I calculate the high end and the low end, that could be indicating that you are actually targeting cost savings of between 1 billion and 1.4 billion, or that's simply due to rounding.

And then my second question, on the new store designs that you have obviously flagged here, is the cost sharing split between the franchisees and yourself, is that changed and when we look into 2020, should we assume CapEx as a percent of sales to go above the 5%, maybe due to this?

Jeremy Schwartz

I think first of all, we are not envisaging or at this stage planning any cost sharing, split changing per se and as we indicated in principle, the approach is to take our existing CapEx approach and to flex it to be more discerning between different formats, but fundamentally not to change the approach.

Anders, do you want to add to that?

Anders Boyer

Yeah. And the first question on the cost reduction, it is true that it has to, 1.0, if you take all the numbers to the left and 1.4 if you take all the numbers to the right on slide 22 and that is deliberate. And as expected, when you go into a program of this size and so big cost opportunities, that is a range, but what we feel comfortable is saying that it nits out to around DKK1.2 billion when it's all done and dusted by the end of next year.

Operator

Our last question comes from the line of Zuzanna Pusz of Berenberg.

Zuzanna Pusz

Thank you for taking my last question is just a follow up. Now I understand that obviously there is no kind of long term margin guidance in place, but just to understand sort of the margin trajectory in the coming years, I mean there has been a couple of questions around inventory buybacks, marketing and I think you made it clear that if it's necessary, you would be willing to maybe do some additional buybacks, invest a bit more if it's needed for the brand. So when we think of the outlook you've given for this year, I think it is 26% 28% adjusted EBIT margin, is this sort of the bottom of profitability we should expect or if let's say in coming years, it turns out that you need more investment, you'll be willing to do this or is this -- and basically do you have any thought on what should be a sustainable business and margin of a business at Pandora?

Anders Boyer

I think the upfront answer, it’s too early to say and be specific but what we can nearly confirm is that we were keeping a company that has very high profit margins. We also had that in 2019 and 2018 for that matter and that that's clearly where we see that the company will keep operating but exactly what that number or range of number will be, that remains to be seen.

Operator

Thank you. There are no further questions at this time. Please go ahead speakers.

Jeremy Schwartz

I would just like to take this opportunity on behalf of Anders and myself to thank you for your attention and your questions. We look forward to meeting many of you and continue to appreciate the support that you're giving us and look forward to working with you in the future. So have a good rest of the day and see you all shortly over the next week.