I was surprised by Tuesday’s announcement that Pandora’s CEO was stepping down and the company retooling in the face of sliding sales and poor execution in both marketing and operations.

The announcement raised a number of questions for me about a brand that I have perceived as being über-successful within the industry, kicking off a craze for a charm bracelets with a modern twist and helping many jewelers make it through the recession when nothing else--save bridal--was selling.

Has Pandora simply saturated the market? One of the thoughts that first came to mind when I read the Pandora announcement was that they had simply reached a point where the majority of people who wanted their product had what they wanted and didn’t need or want to buy anymore.

Industry analyst Jeff Taraschi said that’s not necessarily the case. There are consumers out there still wanting to buy Pandora-type products, they’re just buying it from other companies that are selling it for less.

“When you’re successful it brings a lot of competition and it brings a lot of competition at lower price points,” he said. “People that like the [Pandora] look are buying the look from the competition rather than buying it from Pandora.” 

He added that Pandora might be feeling some heat from recently announced partnership between competitor Chamilia and Swarovski, a strong brand.

“There probably would be concern at the executive level in the boardroom ... about this Chamilia-Swarovski relationship. It’s direct competition,” Taraschi notes.

Is Pandora a fad that’s fading? In conducting interviews with retailers over the past couple of years, I’ve come to discover that Pandora is a deeply dividing topic. Some jewelers refuse to carry Pandora, or any similar lines, because they feel it doesn’t belong in a fine jewelry store and is a fad that will disappear over time. As one retailer Tweeted to me the other day, “It’s not real jewelry!”

On the other hand, there are jewelers who have hired extra people just to man the Pandora counter and swear by the product as a way to generate traffic in their stores and sales among today’s price-conscious consumers.

So, are Pandora’s recent weak financials and ousting of the CEO are a sign that the former were correct, that Pandora is a fad that’s losing steam? Taraschi and Ken Gassman, another analyst that follows the industry closely, say no.

Gassman said he was surprised by Pandora’s problems and the resignation of the company’s CEO. “Any company with a growth curve like theirs is bound to hit a rough spot, but it is unusual this early in their life cycle. Further, the CEO’s resignation is a surprise,” he said.

Despite the problems, he said jewelers tell him that Pandora continues to sell well, and he said he’s heard nothing about price resistance from jewelers or consumers (though price is evidently a problem, as discussed below).

He also said he thinks beads--the backbone of Pandora’s business--have staying power as a category due to their low price point.

“Beads won’t ever be a major jewelry category, but it is viable (just as charm bracelets always seem to sell, and diamond engagement rings always seem to sell)” Gassman said.  

Taraschi said beads aren’t like gold hoops or diamond line bracelets--jewelry staples that will be with the industry forever--but companies such as Pandora will continue to exist. Their success will ebb and flow, according to how innovative they are with their product.

So then, what is the main problem? The issue that came up time and again in Pandora’s hour-and-a-half long conference call on Tuesday: price.

As the prices of gold and silver have soared, so have Pandora’s prices. And that hasn’t sat well with their core customers, executives acknowledged during the call.

 “Every business has a certain amount of price elasticity,” Taraschi said. “They might have crossed a boundary where consumers are no longer willing to pay at that level.”

Rather than being creative and re-engineering their product to create something more affordable, the feeling must have been that the brand was strong enough to be insulated from consumer backlash due to increasing prices. “The results would say that was a flawed strategy. That’s why you eliminate the CEO, for misjudging price elasticity, for not working to engineer product so the same basic look and feel could be presented without the price increases,” Taraschi said.

During Tuesday’s call, Pandora executives said that the average selling price in the United States has risen 40 percent over the past 18 months.

The company said it won’t raise prices for the remainder of 2011 or in 2012, a pretty bold statement considering the way the cost of metals continues to rise. Executives acknowledged that this obviously means they will be taking a hit on margins. Pandora’s second quarter margins were 74 percent.

Lastly, here are a few notes from the conference call that I found interesting.  

  • The weakness in their Q2 sales was caused by a “sharp deterioration” in the charms and charm bracelet business, and the U.S. market was singled out the largest contribution to this decline.

  •  Pandora has too much inventory, a problem many jewelers grappled with, and ultimately corrected, during the recession. Pandora said its inventory as a percentage of revenue increased from 21 percent in the second quarter 2010 to 24 percent in the second quarter 2011. The company said it is overstocked due to a combination of high gold and silver prices slowing sales and its failure to adjust production levels to demand.

  •  Pandora executives were asked during the conference call if they were willing to buy back inventory from overstocked retailers. One executive said it’s “one of the options we’ve got,” though no one made any firm commitment, acknowledging only that the company has an inventory problem that needs to be solved.

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