Pandora A/S (PNDORA DC) reported full year revenues of 22.8 billion Danish Krone, slightly below its own full year estimate of 23-24 billion DKK and the market reacted by cutting their stock price by 10.7% in late European trading. The world’s largest jewelry maker also forecast tighter margins in 2018 due to higher production costs, the cost of building out new self-owned stores versus franchising, foreign exchange risk and a more competitive U.S. market which may put pressure on pricing. In related news, Pandora announced that its CFO Peter Vekslund would be replaced by board member Anders Boyer.
Pandora is the largest short in the worldwide Apparel, Accessories and Luxury Goods Sector and the eighth largest overall equity short in Europe. Short sellers have been increasing their short exposure to Pandora recently, which had the largest increase in short interest over the last month in the sector followed by Swatch (UHR SW) and Under Armour (UAA & UA US).
Today’s 71.6 DKK stock price decrease, or down 10.7%, on Pandora’s 15.8 million share short position generated $171 million in mark-to-market daily profits for short sellers bringing 2018 year-to-date mark-to-market profits to $185 million. Pandora short sellers missed out on most of Pandora’s 2017 price drop, earning only $33.2 million in mark-to-market profits on an average short position of $951 million even though Pandora’s stock price was down 27% for the year. Short sellers loaded up their exposure as Pandora’s stock price rebounded.
With short interest increasing throughout most of 2017, short sellers have been rewarded for their conviction. Having kept their position on in the latter half of 2018, when Pandora’s stock price rallied, we would not expect short sellers to quickly cover their positions and realize their mark-to-market profits. After incurring a year of stock borrow financing costs and missing most of Pandora’s early price weakness we would expect short sellers to let their profits ride. There is ample stock available to short at General Collateral rates, the cheapest borrow cost for the easiest to borrow stocks, so we may see more short sellers getting into the trade and existing shorts to increase their exposure.
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Managing Director Predictive Analytics, S3 Partners, LLC
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