- Chocolatier warns of statutory loss following strategic review
- Sees lower sales growth in short term
- Cutting investment in US and Japan
Posh chocolates brand Hotel Chocolat (HOTC:AIM) saw more than £150 million wiped off its market value in a savage sell-off after the company warned that it will lurch into losses for the year to 30 June 2022.
Shares in the AIM-listed company crashed nearly 50% to an all-time low 120p as investors reacted to news of assets write-downs following an internal review, while the cost of closing its US retail stores added to the balance sheet burden.
Bracing itself for a tougher consumer backdrop, the British chocolatier said a focus on profitable drivers will mean lower sales growth in the short term and lower profits in the year to June 2023.
There was also surprise at the news investment levels in the USA and Japan, vast potential overseas markets for the Hotel Chocolat brand, are to be ‘materially reduced’ in response to ‘the change in the global macroeconomic environment’.
PALATE-PLEASING PERFORMANCE
Hotel Chocolat reported a strong year ended 26 June 2022, with total sales up 37% to a forecast-beating £226 million, an impressive 70% ahead of the revenue achieved in pre-pandemic 2019.
Management also stressed that second half growth remained ‘very robust’ at 32% despite Hotel Chocolat lapping stronger comparatives in the fourth quarter following the end of UK retail lockdowns in April 2021.
WARNING LEAVES SOUR TASTE
While the British chocolatier expects underlying pre-tax profits for 2022 will be in line with the £22 million called for by consensus, following an internal review it is now guiding to a statutory loss.
The expected deficit is ‘predominantly’ due to non-cash impairment provisions as well as costs arising from discontinued activities including the closure of retail stores in America.
As part of the review, designed to provide Hotel Chocolat with the greatest potential for further increased profitability and cash generation in future, the retailer has decided to adopt a de-risked approach to international growth.
Investment levels in the USA and Hotel Chocolat’s Japan joint venture will be materially reduced and the USA will operate as a wholly digital business once the last remaining store closes in the first half of full year 2023.
‘A year of exceptional sales growth following two years of reactionary tactics to the pandemic has left clear opportunities for us to proactively streamline overheads and improve gross margins,’ explained Hotel Chocolat’s charismatic co-founder and CEO Angus Thirlwell.
‘We have set ourselves the target of becoming a 20% EBITDA margin business within three years by applying systemisation, automation, and capacity investments to our 70% larger scale (FY22 vs FY19).
‘While we expect a temporary lower sales growth rate and profit margin for FY23 as we carry through our adjustments, the result will be a business delivering greater results, with less risk and an even stronger balance sheet with a higher profit percentage growth in FY24 and FY25.’
THE LIBERUM VIEW
Despite the short-term profits setback, Liberum Capital is sticking with its bullish stance on Hotel Chocolat, which ‘reported a strong FY22 leading to a beat on the top line and should deliver ahead of expectations on profits.
‘However, the focus will be on its strategic decision to drive greater profitability and cash generation as it focuses on its higher returning business units. This means full-year 2023 will be a transitionary period as the business will reshape accordingly and pair back investment in some of its newer ventures. Together with near-term cost inflation this will lead to some short-term forecast pain for 2023 but lays the foundation for the deliverability of circa 20% EBITDA margins within three years’.
Considering the backdrop, the broker believes management are ‘making the prudent decisions to drive profitability and cash by making less risky decisions.’
