Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Pandora A/S might be getting its bling back. That shine could rub off on the rest of the affordable luxury market.

The Danish seller of charms, rings and earrings reported better-than-expected third-quarter earnings on Tuesday, and raised its forecast for its full-year profit margin.

Fatter Margin
Pandora widened its forecast of FY 2016 profit margin from 38% as costs for gold and silver declined
Source: Bloomberg, company report

This is a welcome turnaround from a rare misstep in August, when Pandora came up short of analysts' sales and profit estimates -- investors had been accustomed to frequent upgrades of its outlook, and its poor second-quarter report led to fears that the malaise in the high-end luxury market was spreading to the more accessible brands.

A different story is taking shape. Pandora's overall sales rose 21 percent excluding currency movements in the latest period, though revenues from dedicated branded stores open at least a year missed analyst expectations -- that disappointment fed a drop in the share price of as much as 3.5 percent on Tuesday.

Still Ahead
Pandora's rate of expansion has slowed as affordable luxury brands battled multiple global headwinds
Source: Bloomberg Intelligence

That Pandora has seen some stabilization should reassure the likes of Michael Kors Holdings Inc. and Coach Inc., which warned Tuesday that the market remained "volatile." All of Pandora's major U.S. regions were either flat or positive while same-store sales rose 3 percent nationwide, a decent performance in a difficult market. And, same-store sales growth in China accelerated in the high double digits.

The U.S. has been a particular worry, not just for Pandora, but for much of the accessible luxury sector. Brands have been hit by uncertainty ahead of the presidential election, a decline in tourism because of the strong dollar, and broader U.S. department store woes that prompted a rash of discounting.

There's more good news for the sector elsewhere, with tentative signs that top-range luxury demand is recovering. LVMH Moet Hennessy Louis Vuitton SE and Kering both recently reported better-than-expected third quarter sales. If that improvement filters down, that should allay some fears of mid-market meltdown.

Nice While it Lasted
Pandora's premium (on a P/E basis) to the broader luxury market has disappeared amid concerns about slower growth
Source: Bloomberg Intelligence

After being the second-best performing stock in the Bloomberg Intelligence luxury peer group in 2015, rising 73 percent, Pandora shares are flat on the year. They trade on a forward price to earnings ratio of 15.5 times, a discount to the Bloomberg Intelligence luxury peer group's 18.6 times and a reversal of the premium it previously commanded.

Any recovery in the luxury market will not be straightforward, and there is also a risk that Pandora's rapid rate of expansion could prove too much. Investors are right to be cautious, but they should take heart that charmageddon's been avoided.

Meanwhile, as Gadfly has argued, the odds on consolidation in the luxury sector are shortening. So far, attention has focused on second-tier luxury brands, with recent reports that Coach was considering a merger with Burberry Group Plc, and that PVH Corp. was looking at Michael Kors. Pandora's still-strong performance, plus its large market capitalization of about $14.8 billion, means it is not the most obvious target for merger and acquisition activity. 

A bargain-basement ending seems to have been avoided for now. Pandora's cheap luxury jewels still have some sparkle.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net