- Exceptionals drag chocolate maker into the red
- Chocolatier continues to deliver tasty sales growth
- Sees ‘a range’ of possible profit outcomes this year
Posh chocolates maker Hotel Chocolat (HOTC:AIM) lurched into loss for the year ended 26 June 2022 after absorbing £30.4 million of one-off costs and adjustments linked to a change in strategy for its international operations, including a Japanese joint venture that has gone through insolvency.
However, shares in the British chocolatier sweetened up 2.1% to 148p as investors responded positively to early signs of progress with its new strategy and news the performance of its retail stores continues to beat 2019 pre-covid levels with subscriptions in growth too.
One third into its new financial year with Christmas, Valentine’s Day and Easter to come, Hotel Chocolat said the ongoing shift in sales towards retail stores offers ‘the opportunity to mitigate the year-to date shortfall, meaning there are a range of potential outcomes for full year expectations’.
This comment stoked optimism that the premium chocolates purveyor could yet beat the £9.6 million profit currently called for by consensus.
LOSS LEAVES SOUR TASTE
Annual results were in line with downgraded forecasts following July’s damaging profit warning.
They revealed another year of tasty sales growth, with revenue up 37% year-on-year to £226.1 million and 71% higher than pre-pandemic 2019, supported by the post-Covid recovery in store sales and a 15% increase in its active customer database to 2 million.
Underlying pre-tax profit fattened up 126% to £21.7 million, but unfortunately, Hotel Chocolat lurched from a profit of £3.7 million to a statutory loss after tax of £9.4 million struck after write downs and adjustments.
FASTER GROWTH BRINGS GROWING PAINS
The profitability of the international business fell below expectations, largely due to supply chain challenges.
And as a result, the British chocolatier has paused further investments in its overseas direct-to-consumer operations, both in its directly controlled USA operations and in the form of any further loans to the Japan joint venture.
Management’s new plan to shift the overseas focus to wholesale and licencing operations will reduce the need for heavy spending.
BUT DECEMBER COULD BE ‘BUSIER THAN EVER’
CEO and co-founder Angus Thirlwell insisted the Hotel Chocolat brand has ‘huge resonance’ with shoppers and despite the tough economic backdrop, stressed people are ‘still treating themselves with affordable luxury and remaining loyal and we are winning new customers who recognise our quality’.
Thirlwell expects December will be ‘busier than ever’, though he stressed that the current environment is ‘challenging on multiple fronts. Over the last few months we have taken decisive steps to reduce risk and to fully pull all our self-help levers in both our manufacturing and retailing businesses. One thing is for sure, we will never compromise on the brand standards and values which have built our following to this point.’
EXPERT VIEWS
AJ Bell investment director Russ Mould said Hotel Chocolat is in ‘an odd situation whereby plenty of people are buying its products, yet it has made a big strategic misstep with overseas expansion.’
Mould continued: ‘One could argue that businesses don’t always get things right and it is better to test the water for new initiatives and pull away or rethink if they don’t work, rather than do nothing and risk getting stale.
‘Like all retailers, Hotel Chocolat will be hoping for a bumper festive season. Even though many people are under financial pressure there is nothing like a nice box of chocolates if you’re lacking inspiration for a Christmas present. In that sense, Hotel Chocolat could be more resilient than people expect.’
Liberum Capital explained that full year 2023 is ‘a transitionary year’ for Hotel Chocolat as the retailer ‘rebases its focus on profits and cash flow generation from what is now a much higher revenue base’.
The broker also argued the fall in Hotel Chocolat’s valuation ‘does not reflect the qualities that a strong differentiated brand with accessible luxury prices and a relatively defensive core position offers; let alone the value and free cash flow that should be generated once the new strategy is being delivered towards the back end of the forecast period.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) owns shares in AJ Bell.
