Hotel Chocolat Group – A Sweet Deal?

We have had Valentine’s Day, next we have Mother’s Day, then Easter, then Eid, followed by Father’s Day – so the need to give chocolates to your loved ones is growing.

And that is certainly good news for the £278m capitalised Hotel Chocolat Group (LON:HOTC) which announced that in the six months to end December 2022 its group sales had fallen to £129.8m (£142.9m).

That fall back was caused mainly by a 69% easing in its International and wholesale sales, leaving its interim underlying pre-tax profits lower at £10.2m (£25.4m) and collapsing its earnings to 4.5p (12.0p) at the halfway.

In the first half the group made some sizeable investment, as well as having costs in shutting some of its overseas outlets.

We already knew that a late festive surge had given the group’s stores a massive uplift in sales for the end of the first half. In fact, it set new records for the company.

CEO Angus Thirlwell stated that:

“This strong sales performance from Hotel Chocolat stores, underpinned by our scaled database, is a result of hefty investments we continue to make into our brand.”

However, we also know that the group is facing some hassles with trying to mitigate the effects of rising prices, meaning that it is very possible that a swathe of the group’s circa 2000 employees will be made redundant in the process, despite news that the group could open 50 new stores over the next five years.

Thirlwell is calling his planned roadside cafes ‘drive-to’ Hotel Chocolats, with car parking. The company has already done a ‘trial out’ and is now getting ready to do a major rollout, featuring the brand’s Velvetiser cafes that serve drinking chocolate.

“It is a new formula for us, when people arrive they spend half an hour to an hour with us, doing a bit of shopping and enjoying a drinking chocolate.”

The Business

The group is a premium British chocolate maker with a strong and distinctive brand.

Founded in 1993 by Angus Thirlwell and Peter Harris, who are still executives within the business, it is unusual in being a grower with its own organic cacao farm in Saint Lucia, a manufacturer at Royston in Cambridgeshire, and owning its extensive direct to consumer channels through its network of 122 iconic branded stores and by way of its online websites.

It manufactures and retails chocolates and cocoa-related products under the Hotel Chocolat brand name in the UK, the rest of Europe, Saint Lucia, the US, and Japan.

It offers a range of chocolates, including gifts, and rare and vintage chocolates, as well as coffee drinks; wine, beer, and spirits; and beauty products.

Thirlwell stated that:

“Having grown sales by 66% since the start of the last pre-pandemic year, as previously announced, we are taking this year, over FY23, to sharpen-up our operating model before we embark on the next stage of growth. I am really pleased with the determination I have seen across our teams to get back to running a tight ship again.

Our adapted plan for international growth – to pursue the proven brand appeal with low risk-low capex operating models – is making sound progress.

In Japan, a new strategic partnership was signed and in the US our planning is looking encouraging.

Our Saint Lucian cacao agro-tourism business drove revenues up 46%, with our 6-acre Project Chocolat visitor attraction the star performer.

The Group continues to trade in line with market expectations for sales though as previously guided, we remain cautious about consumer sentiment over the upcoming seasonal events of Mother’s Day, Easter, Eid and Father’s Day.

Depending on the Easter performance, there is a range of PBT outcomes between £4m and £7m for the full year.

Following this transitional year in 2023, in FY24 and FY25 we expect to see a return to sales and EBITDA growth with a continued target of 20% EBITDA margin by FY25 (pre IFRS 16 basis).”

The Equity

There are some 137.5m shares in issue.

Peter Harris and Angus Thirlwell, each have 27.1% of the equity.

Other large holders include Phoenix Asset Management (15.3%), Abrdn Investment Management (4.99%), Threadneedle Asset Management (4.54%), Odey Asset Management (3.20%), Baillie Gifford (2.79%), Capital International (2.59%), Aegon Asset Management (2.57%) and Jupiter Asset Management (1.94%).

Broker’s View – Target Price of 300p

Wayne Brown, at Liberum Capital, rates the shares as a Buy, looking for 300p as his Target Price.

He considers that the group is six months into a three-year plan with the building blocks to return to profit growth and the delivery of 20% EBITDA margins by full-year 2025 are tangible.

“With the full-year 2023 interims now behind us, the focus should soon switch to full-year 2024 and the deliverability of what will be more than a 234% uplift in profitability.

Our profit-before-tax estimates are mostly reliant on internal self-help drivers and assume little by way of top-line assistance, which is an assumption that should prove too cautious.”

His estimates for the group’s full year to end June 2023 are for sales to have eased to £213m (£226m), while pre-tax profits will fall by some 75% to £5.5m (£21.7m) and with earnings falling to 3.2p (15.3p) per share.

For 2024 he goes for £224m sales and £18.5m profits, worth 10.1p per share in earnings.

Leaping further ahead, his 2025 estimates are for £235m takings and a massive £30.7m profits, generating 16.7p per share in earnings.

My View – Heading Higher

The shares of this iconic brand at 202p have quite an appealing medium-term upside as its plans come together.

(Profile 21.03.19 @ 340p set a Target Price of 402p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)

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