UBS initiates Pandora at “sell,” WOSG at “neutral” on margin, supply risks

UBS Global Research initiated coverage on Pandora with a "sell" rating and DKK 950 price target, citing expected slowing momentum and margin headwinds driven by decelerating like-for-like sales growth (projected to 2% by 2026), limited pricing power, and rising silver costs, forecasting EBIT margin contraction to 23.5% in 2026. Concurrently, UBS assigned a "neutral" rating and GBp 400 target to Watches of Switzerland Group, anticipating limited near-term earnings upside due to structural supply constraints from core brands like Rolex, which is expected to lead to an EBIT margin decline to 8.6% in FY26 and has contributed to cautious market sentiment, reflected in its P/E falling to 9x forward.

Analysis

UBS Global Research has initiated coverage on Pandora and Watches of Switzerland Group with a cautious outlook, highlighting distinct challenges for each retailer. For Pandora, a "sell" rating with a DKK 950 price target is underpinned by expectations of decelerating growth and margin compression. UBS forecasts like-for-like sales growth to slow from 7% in 2024 to just 2% by 2026, citing limited pricing power against a price-sensitive customer base where a 1% price increase is estimated to reduce volumes by 1%. This is compounded by a projected slowdown in the key U.S. market, with LFL growth forecast to fall to 7% in FY25 from 11% in Q1 2025. Profitability is also under pressure, with rising silver prices, which constitute one-third of COGS, and limited operating leverage expected to drive EBIT margins down 170 basis points from 2024 to 23.5% in 2026, below consensus. In contrast, Watches of Switzerland receives a "neutral" rating with a GBp 400 target, reflecting a different constraint: supply. With over 50% of sales from brands like Rolex and Patek Philippe, growth is capped by product allocations, limiting near-term earnings upside despite providing strong revenue visibility. While FY26 sales are forecast to grow 8%, in line with guidance, EBIT margin is expected to dip 50 bps to 8.6% due to reinvestment. Market sentiment has already priced in significant risk, with the stock's forward P/E multiple halving to approximately 9x following Rolex's acquisition of Bucherer, indicating investor uncertainty about future distribution models.

Key Decisions for Investors

• Given the UBS 'Sell' rating and forecasts of slowing sales and significant margin compression from input costs and operating leverage, investors holding Pandora should consider the potential for downside towards the DKK 950 price target.
• For Watches of Switzerland, the supply-constrained growth and near-term margin pressure suggest a hold strategy may be prudent; the stock's depressed 9x forward P/E reflects market anxiety, but upside is capped until there is more clarity on key brand allocations.
• Investors should monitor Pandora's volume performance following its planned 9% price increases, as any deviation from the expected 1-for-1 negative impact could significantly alter the margin outlook.
• The primary risk differential is crucial: Pandora faces demand and margin headwinds, whereas Watches of Switzerland faces supply-side constraints, warranting distinct approaches to position sizing and risk management for each security.