5 October 2021

Hotel Chocolat Group plc

("Hotel Chocolat", the "Company" or the "Group")

Preliminary Results

Hotel Chocolat Group plc, a premium British chocolatier and multi-channel retailer, today announces its preliminary results for the 52 weeks ended 27 June 2021 ("FY21")

¹ Underlying EBITDA is post-IFRS16 and excludes share-based payment charges and related tax, and exceptional non-cash impairment charges

² Exceptional costs are non-cash impairment charges

³ Restated 52 weeks ended 28 June 2020 - see Note 9

Operational highlights:

Angus Thirlwell, Co-founder and Chief Executive Officer of Hotel Chocolat, said:

"These results show we have now evolved from a UK store-led brand to a globally ambitious digital-led brand. FY21 was a year where Hotel Chocolat improved on many fronts. Our digital and subscription-continuity models surged ahead and our global aspirations racked up more strong growth and progress.

"The continued challenges of COVID-19 pushed us to accelerate many of our existing plans and strategic initiatives, helping to strengthen our financial position, improve our multichannel capability, deepen customer engagement and loyalty, and accelerate the rate of product innovation, whilst continuing to make good progress in our two new and sizeable markets of the USA and Japan.

"A real highlight was developing the new Hotel Chocolat Gentle Farming Charter, applying all we have learned by farming ourselves in Saint Lucia, to ensure all our farming families can earn a living income in return for climate-smart farming. The living income takes into account actual family living costs and realistic farm output. In return for the higher price farmers commit to sustainable farming practices, planting of indigenous shade trees and zero illegal child labour.

"I am confident that the strategic progress we have achieved over the past year has improved the performance and prospects of the business for significant years to come.

"Finally, I would like to thank our colleagues for their hard work during the year. I am incredibly proud of how Hotel Chocolat has adapted to the disruption caused by COVID-19 and I would like to also thank our customers for their continued loyalty, and our partners for their collaboration."

Notes to Editors:

Hotel Chocolat is a premium British chocolatier with a strong and distinctive brand.  The business was founded in 1993 by Angus Thirlwell and Peter Harris and has traded under the Hotel Chocolat brand since 2003. The Group sells its products online and through a network of 150 branded locations in the UK, Japan and USA. The Group has a cacao estate and hotel in Saint Lucia and a cacao-themed restaurant in London. The Group was admitted to trading on AIM in 2016. 

CHAIRMAN'S STATEMENT

OVERVIEW

Hotel Chocolat is increasingly a digital-led brand, with 70% of FY21 revenues generated from UK digital, partners and continuity products. The Group's strong online proposition continues to be supported and complemented by a portfolio of profitable, well-located stores, as well as relationships with carefully selected wholesale partners both in the UK and internationally.

STRATEGY

The existing long-term strategy of prioritising investment in digital meant the business was well-placed to adapt to the initial closure of all stores during the final quarter of FY20. In FY21, stores were closed or disrupted for approximately six months, including the crucial peak gift-buying period from November to April which includes Christmas, Valentine's Day, Mother's Day and Easter. Despite this, the Group was still able to achieve sales growth via its multichannel platform. When stores reopened, sales growth accelerated further, with each channel continuing to play a complementary role.

The Group has a stated ambition to become the world's most sustainable chocolate brand. Significant progress has been made in the year in defining the most material risks and opportunities, gathering robust data and setting targets, and investing in support of the goals. As a result, the Group intends to publish its inaugural sustainability report during FY22, which will build upon the disclosures in this annual report. The most important new initiative, the Hotel Chocolat Gentle Farming Charter, builds upon the existing Engaged Ethics programme with the objective of ensuring every cacao farming family that supplies Hotel Chocolat has the opportunity to earn a sustainable living income in return for farming in a climate-smart, sustainable way.

FY21 FINANCIAL OVERVIEW

FY21 Group revenue of £165m (FY20: £136m) and PBT before exceptional costs of £10m (FY20: £2m) were ahead of the Board's initial expectations. This pleasing set of results primarily reflects the strong performance of the Group's multichannel proposition and the Group's fast-growing active customer database.

The Group pro-actively shifted its channel mix to achieve strong sales growth, however this did result in additional costs. The costs of digital are largely variable with sales volume, whereas store costs are largely fixed despite extended periods of closure. Costs of production and distribution were also temporarily increased as a result of the impacts of the social distancing and multiple stock relocations in response to changing lockdown restrictions.

The Group has maintained robust financial discipline through the Period with a strong focus on cash, liquidity and cost control, whilst also maintaining investment in the areas that the Board believe will drive growth over the coming years. The strength of the sales performance meant the Board was able to commit to repay the support received from the UK Government's Coronavirus Job Retention Scheme (£3.1m claimed in the Period).

The Group had net cash of £10m at the Period end (FY20: £28m). In July 2021 the Group completed a new £30m working capital RCF with Lloyds Bank, which replaced an existing £25m CLBIL's RCF which was never drawn. Subsequently, the Group raised £40m of new equity via an over-subscribed placing, which will be used to fund investment in growth channels, technology and manufacturing capacity.

DIVIDEND

Given the opportunities to invest for further growth, the Board has determined that it would not be appropriate to declare a dividend for the Period. The Board will continue to review the financial position of the Group within the context of internal growth opportunities and the external environment and intends to recommence dividend payments when it is appropriate to do so.

BOARD OF DIRECTORS

The Group continues to benefit from a strong founder-led management team. On behalf of the Board I would like to thank the whole Hotel Chocolat team for demonstrating great adaptability, strong teamwork and unwavering commitment, for which everyone should be proud.

OUTLOOK

The Group has entered FY22 in a strong position, with an increased active customer base, and with multiple clear avenues for further growth, spanning product ranges, channels and territories, all of which are delivering encouraging progress. Since the period end the Group has traded in line with the Board's expectations.

The Hotel Chocolat brand is in good health, as evidenced by rising customer numbers, growing sales and significant progress on sustainability initiatives. As a result, the Board remains confident in the Group's ability to continue to adapt and react swiftly to what will remain dynamic trading conditions over the coming months and to continue to deliver the brand's exciting, long-term growth.
 

Andrew Gerrie

Non-executive Chairman

CHIEF EXECUTIVE'S STATEMENT

The business has a clear strategy built on the everlasting brand foundations of Originality, Authenticity and Ethics. The last year has seen acceleration, both in multiple drivers of current and future growth, and in terms of our commitments to people and the planet. By sticking to our plan we intend to deliver further growth, improve profitability and drive forward our sustainability goals.

I am extremely proud of how the Hotel Chocolat team has responded again this year, not only adapting the business in the face of unprecedented challenges, but also strengthening the business on many levels. Digital and subscription-continuity sales grew strongly, we innovated new products, and continued to expand in the US and in Japan with our JV partner. We invested for growth, improving our technology, strengthening our team, and undertaking significant capital investment to expand our UK factory.

However, perhaps the single achievement I am most proud of is the launch of our new Gentle Farming Charter, which aims to prove a new and better model is possible for over 2,500 cacao farmers and their families. Importantly, we believe our programme is both realistic and earth-friendly, drawing directly from our own experiences of growing cacao on our own farm and our support for farmers in Ghana over the last 15 years.

We have a clear business strategy based on our everlasting brand values of Originality, Authenticity and Ethics, in pursuit of our mission to make people happy through chocolate. This means not just our customers and colleagues, but also our farmers and other supply partners, local communities and to respect the environment we all inhabit together.

FINANCIAL OVERVIEW

Revenue grew by 21% to £165m. Profit before tax and exceptional costs increased by £7.7m to £10.1m. Gross margins were impacted by the costs of multiple stock movements as the channel sales mix shifted in response to lockdowns. Operating expenses increased by 19%, due to deliberate growth investments and temporarily due to the blend of fixed costs for stores that were closed or disrupted for almost six months combined with additional variable costs due to strong digital growth. Further detail is provided in the financial review on page 20 of the ARA.

SALES REVIEW

We are increasingly confident that the Hotel Chocolat brand can deliver strong sales growth and attractive returns internationally. Our growth strategy remains focussed on three of the largest gifting markets in the world: the UK, the USA and Japan.

UK

We remain totally committed to achieving ongoing like-for-like growth from stores, which offer the deepest customer experiences, build brand awareness and trade profitably. However, we can achieve faster overall growth and higher customer lifetime value by continuing with our digital-first strategy, with both channels playing a crucial and complementary role.

In FY21, our stores were closed or disrupted for almost six months. Historically stores were the largest channel by sales and profit value, however the investments made in the last three years in skilled people, improved systems and in building our customer database meant that we were able to achieve UK sales growth of 21%, despite the disruption.

Encouragingly, in the period since retail stores began re-opening on 12 April we have seen growth accelerate, validating our belief in a multi-channel model as the best route to maximise customer lifetime value and shareholder returns.

The store portfolio remains highly attractive, from a brand, customer and financial returns perspective. Our stores are a fantastic way for customers to discover our brand and can offer the deepest multi-sensory experience of everything the brand has to offer, including a wide range of gifts and self-treats, café drinks and ices, and the benefit of interacting with our passionate and knowledgeable team to talk about chocolate, a topic that everyone loves.

With stores closed or disrupted for six months our direct-digital and wholesale digital partnerships were well poised to keep the chocolate flowing to our customers. Online gifting sales together with our continuity in-home drinks, including the Velvetiser, grew strongly. When stores re-opened, the return of leisure and impulse sales that are harder to service online meant that the overall sales growth rate accelerated.

The active customer database grew by 31% year-on year to 1.8m, and we are investing in a new store VIP & EPOS platform which will launch in spring 2022, allowing us to further deepen the customer connection and offer new services and benefits.

USA

In FY21, we pivoted our US business to a digital-first strategy in response to the pandemic and opportunity from the new strength of our digital-continuity offer. We achieved overall sales growth of 36%¹, despite store sales falling 41%¹. The fulfilment partnership with The Hut Group means that we have a scaleable growth model that is capex-light with a cost base that is directly variable with sales volume, whilst we retain direct control of the brand, the customer base and the strategy.

JAPAN

In Japan, our joint venture partner opened a further 16 stores in FY21 bringing the total to 22. In Japan online sales penetration in general remains lower than the UK and USA, and malls remain vibrant as leisure destinations. The variable rent partnership model between tenant and landlord is a blueprint for other markets. Whilst Japan has not experienced mandatory lockdowns, a rolling programme of regional restrictions is ongoing, resulting in temporarily reduced footfall and sales per store. We remain confident in the longer-term prospects because our latest lifestyle store formats and product range are proving successful in carving out a differentiated brand identity in this huge and competitive market. VIP Me loyalty attachment is already approaching 50% of new store customers in Japan, delivering the benefits of a direct conversation that we have seen work so well in the UK.

BRAND REVIEW

The Hotel Chocolat brand is our most valuable asset and we continually invest to enhance it. We are led by strong and unchanging values, we strive for continuous innovation and are rooted in being the 'real deal', from tree to table. We are a brand with genuine depth, powered by a team who bring it alive and love making people happy through our chocolate. In combination these factors create a brand that looks and feels very different from the traditional competition.

Our channels to customers are not dependent on FMCG grocers as is the case with most chocolate brands. The ways we attract new customers and sustain a relationship with our households is led by their convenience and how they want to make Hotel Chocolat work for their families.

1.Sales growth at constant exchange rates.

· Chocolate is an unusual product category, with the capability to excite every generation of a household, family, or extended friendship group. VIP Me is the glue that allows us to connect with our customers across channels and seasons, providing rewards for loyalty and generating excitement as we launch new products and seasons.

GIFTING

We offer a slick and reliable delivered gift service. In the Period every one of our online metrics improved, from consideration and traffic, to conversion, average order value and frequency.

Our store teams can help customers select the perfect gifts to hand over in person, whether for a family event or calendar cultural celebration.

In the year we launched much improved ranges for Valentine's and White Day, the two largest gift events in Japan, which combined are larger gift events than Christmas in the UK. We also further extended our offer for Eid in the UK, thanks to the invaluable input of our team.

IN-HOME

The success of the Velvetiser is supplemented by our cacao-alcohol range and our new range of coffees, available as whole beans or pods that can be recycled at home with our Podcycler device. This winter we will be launching a range of coffee machines in partnership with Dualit that complement the Velvetiser on the counter-top.

We also offer a variety of curated options to receive a regular subscription of your family's favourite chocolates.

LEISURE

Whether an impulsive pop-in visit to one of our stores or a planned trip to a café with friends or family, our stores offer something for everyone. Our self-purchase leisure business historically generated approximately half of our revenues. This part of the business was the most affected by the lengthy closure of stores in the UK. Since re-opening in April, performance has been strong.

Giving back to our communities is important to all our team as evidenced by the commitment to our annual charity week, and the participation in volunteering days.

We are testing and developing product and experience ideas that will extend this further in the years ahead.

HOW SUSTAINABILITY UNDERPINS OUR GROWTH STRATEGY

We have embarked on a step-changed mission to build a pioneering position on sustainability within the chocolate industry.  Our vertical integration, independence and everlasting brand values give us a strong platform to achieve this.

This journey will take some years to achieve in full, but we are 100% committed and making real progress. We have identified the key areas of materiality and focus, and are in the process of ensuring all our data and KPI's are robust and accurate to support disclosure of our baseline, targets, and ongoing progress against the goals. We have committed to publishing our first ever sustainability report before the end of FY22. Each of our focus areas is based on the materiality to the Groups activity and is cross-referenced to the UN Sustainable Development Goals. The material areas of focus are outlined in the table below: 

The Hotel Chocolat GENTLE FARMING CHARTER

Building on our longstanding Engaged Ethics cacao programmes, and the learning from our own organic cacao farm in Saint Lucia, we have developed a plan to enable higher incomes for the farming families that make the chocolate industry possible. This means we will further increase the premium we voluntarily pay for our cacao beans, with the goal of ensuring each farmer can achieve a living income, based on realistic farm output and local costs of living in Ghana. In return for the higher prices we require that farmers commit to sustainable farming practices and zero illegal child labour. We will also invest directly to develop long-term gentle farming techniques to increase yields without harming the planet. A key technique is cacao tree pruning for which we are funding extra labour to help initiate the ongoing practice.

The scheme launches ahead of the next cacao harvest in December, when our target is to be paying the new gentle farming premium to all of the circa 2,500 Ghanaian farming families, who supply 97% of our cacao. In addition to paying a higher price for cacao (approximately 20% higher than Fairtrade) we will provide additional financial support for pre-harvest on-farm activities that improve productivity and climate resilience.

We estimate that the combination of higher prices and the feasible increase in farm output will make it possible for each farming family to earn a living income based on farming revenues, production costs, family size and the cost of living in rural Ghana including food, education and healthcare.

OUR SIX BUSINESS GROWTH DRIVERS

Two years ago we activated additional growth levers to change the shape of the business. These six drivers are on track:

VELVETISER

The Velvetiser makes delicious hot chocolate with no fuss and no mess, with a range of 20 recipes, and more coming this autumn. Supported by subscriptions the continuity model results in very engaged customers, with higher frequency and materially higher lifetime value.

LOYALTY

Customer connection is a key element of our physical retail model. The VIP Me scheme was invaluable during lockdown and will continue to underpin our brand building.

DIGITAL

Our online channel offers the perfect solution for delivered gifts, whether for family celebrations or seasonal
cultural events.
 

USA

Digital-led, supported by four stores. The Velvetiser provides the brand introduction with attractive lifetime value, supported by the opportunity to cross-sell the full chocolate seasonal gifting range.

GLOBAL WHOLESALE

Working with carefully selected digital partners to extend brand reach and convenience, each partner has a capsule range tailored to the needs of the customer profile. The Velvetiser and cacao-alcohols are key product categories, supported by supply partnerships they provide attractive returns and capex-light growth.

JAPAN JV

Physical retail predominates in Japan. Due to cultural factors, population density and climate, malls remain vibrant and landlords continue to open new malls. Our lifestyle format is differentiated and proving popular both with customers and landlords.
 

OPERATIONAL REVIEW

OUTLOOK

Hotel Chocolat has a clear strategy and a strong brand with everlasting values that are even more relevant today than when I originally wrote them more than 15 years ago. Excitingly, we have all six of our fast-growth drivers performing well, giving us multiple opportunities to accelerate. We are well capitalised, with a strong leadership team committed to a high quality execution of our opportunities and a committed team who bring our values alive every day.

We have been busy building an intelligent and genuine step-up plan for long-term sustainability and are moving from planning to delivery. I am therefore confident we are very well placed to deliver good things for all our stakeholders, whilst continuing to navigate the changing landscape.

I would like to thank every member of the Hotel Chocolat team for how they have collaborated and supported one another to deliver strong results in the unprecedented conditions.

ANgus Thirlwell

Co-founder and Chief Executive Officer

FINANCIAL REVIEW

1 Restated FY20, see Note 9.

REVENUE

Reported revenue for the 52 weeks ended 27 June 2021 was £164.6m. Revenue increased by 21% compared to the 52 weeks ended 28 June 2020. H1 revenue of £101.9m was an increase of 11% and H2 revenue of £62.6m was an increase of 40%. 70% of revenue in the year was generated through UK digital, partners and continuity which compares to 41% in the prior year.

GROSS MARGIN

Gross profit as a percent of sales increased by 90 basis points from 60.9% to 61.8%. In H1 gross margins were 61.0%, which compares to pre-COVID H1 FY2020 of 65.0%. The decline was driven by increased stock handling due to lockdowns and higher sales of third party products. H2 margins of 63.0% were an increase of 10 percentage points compared to H2 FY20. Whilst ongoing lockdowns remained a headwind the impact was much reduced due to the experience gained in the March 2020 lockdown.

OPERATING EXPENSES

Operating expenses grew more slowly than sales, increasing by 19%. Costs as a percent of sales reduced from 45.1% to 44.4%. Whilst COVID-19 continued to drive some additional costs, further investments were made in e-commerce, product innovation and supply chain to support future growth.

On 24 September 2021, the Group repaid the Coronavirus Job Retention Scheme funding received from the UK Government this financial year. At the balance sheet date the £3.1m repayment was accrued.

UNDERLYING EBITDA

Underlying EBITDA is a non-GAAP metric but is included for comparability to prior years. Excluding impairment charges, underlying EBITDA was £28.6m, an increase of £7.7m. Sales volume growth generated an additional £17.2m EBITDA YoY, higher gross margins added £1.4m, and operating expenses increased by 19% or £11.6m.

IFRS16 LEASES

Rent charges of £11.1m (FY20: £12.1m) are removed from operating expenses, replaced by additional depreciation charges of £9.3m (FY20: £11.0m), and £1.1m (FY20: £1.4m) increase in lease finance expense. The impact of these adjustments on reported profit is an increase of £0.7m. Subsequently the right of use assets have been impaired by £1.7m (FY20: £4.0m).

The Board makes business decisions based on current and future expected cash flows, so the adoption of IFRS 16 has no impact on Group strategy or investment decisions.

FINANCE INCOME AND EXPENSE

Finance income of £0.2m comprises bank deposit interest, unrealised derivative interest, and interest from the loans made to the Japan JV. Finance expense of £1.7m comprises £0.3m of bank interest, £0.2m of realised derivative interest, and a £1.1m interest charge relating to the application of IFRS16 to leases.

DEPRECIATION AND AMORTISATION

Depreciation and amortisation totalled £15.8m, being £1.5m less than the previous year. Depreciation of the right of use asset generated £9.3m of depreciation compared to £11.0m of depreciation in the prior year. Capital investment additions of £19.3m included investments in the Saint Lucia hotel, UK digital developments as well as expansion of operating capacities at both the UK chocolate factory and UK distribution centre.

PROFIT BEFORE TAX AND EXCEPTIONAL COSTS¹

Profit before tax and exceptional costs was £10.1m, an increase of £7.7m as a result of the higher sales, an increase in gross margins and operating expenses growing more slowly than sales.

ALTERNATIVE PERFORMANCE MEASURES

The Group uses the following Alternative Performance Measures (APMs) in reporting financial information. The Group believes that these APMs enhance comparability between periods and provide a more meaningful understanding of performance:

EXCEPTIONAL COSTS OF ASSET IMPAIRMENT

The Board has considered the potential requirement to impair the carrying value of assets. Consideration is given to the estimated value in use and probable open market value. This review has given rise to a non-cash impairment charge of £2.3m, comprising two main elements:

1  Retail leases: For assets with relatively short lives, such as retail leases, which average three years until the next break event, the forecasted reduced sales performance in five locations gives rise to a non-cash net impairment of £2.1m.

2  Saint Lucia: As the 'spiritual home' of the Hotel Chocolat brand, the cacao estate hotel in Saint Lucia is pivotal to the Group and delivers many intangible benefits including customer marketing, employee engagement, and as a source of education on sustainable cacao growing. The Board is required to consider whether at the balance sheet date the carrying value of the assets is supported by either the value in use assuming no future capex investment, or by the open market value of the assets as assessed with the support of appropriately qualified external valuation experts. The disruption caused by COVID-19 has reduced the short-term open market value of such assets, and as a result the carrying value has been impaired by a further £0.2m, in addition to the £2.7m impairment recognised in the 52 weeks ended 28 June 2020. The Board is fully committed to continuing investment in Saint Lucia, including extending the hotel and a much enlarged educational 'tree to bar' cacao farm visitor attraction, Project Chocolat, which opened in FY21.

1. Exceptional costs are non-cash impairment charges

PROFIT BEFORE TAX

Profit before tax, after non-cash impairment charges of £2.3m, was £7.8m, an increase of £15.4m YoY.

TAX

The effective tax rate is 27.3%. This is higher than the standard rate of 19% mainly due to permanent timing differences between depreciation charges and capital allowances, and overseas losses that are not deductible against UK corporation tax.

EARNINGS PER SHARE AND DIVIDENDS

The Group reported a diluted profit per share of 4.5p, compared to FY20 restated loss of 6.3p². The weighted average number of shares in issue was 126m (FY20: 118m). The Board will not be proposing a dividend (FY20: Nil). The Board will continue to review dividend policy alongside our investment opportunities for growth.

CASH AND WORKING CAPITAL

The Group had £10m of cash at the period end. Inventories of £32m represent approximately 15 weeks' forward cover. The Group has access to a Revolving Credit Facility (RCF) with Lloyds bank of £30m until June 2023. The RCF will be used to finance working capital. As at 26 September 2021 the Group had cash balances of £15.8m giving headroom of £45.8m including its £30m RCF.

EQUITY PLACING

On 28 July 2021, the Group announced the results of an over-subscribed equity placing, conducted by way of an accelerated bookbuild and Primary Bid Offer, to provide the Group with funding for ongoing capital investments in support of the growth strategy.

A total of 11,267,605 new ordinary shares of 0.1 pence were placed at a price of 355 pence per share raising £40m gross proceeds.

GOING CONCERN

Considering the significant uncertainties faced by the retail sector, the Directors have undertaken a comprehensive assessment to consider the Group's ability to trade as a going concern over the period to December 2022.

The Directors have considered the Group's financial position and its committed borrowing facilities as well as alternative sources of financing that might reasonably be assumed to be available, as well as the Group's financial commitments, noting the relatively short retail lease commitments of less than three years on average, and the Group's ability to delay the timing of planned capital expenditure.

More broadly, the Directors have considered the strength of the Hotel Chocolat brand, as demonstrated by 1.8m active customer database, and an increase in multi-channel shopping behaviour, together with the flexibility and agility of the Group's business model, noting that, since the end of the UK lockdown, just under half of the Group's sales are generated via online, subscriptions and digital partners.

The Directors have noted the support from the Group's shareholders and bank, evidenced in the successful equity placing and the subsequent RCF extension.

In making their assessment the Directors have reviewed management's forecasts based on the following trading scenarios:

Base plan scenario

The base plan assumes ongoing growth in FY22 as the Group continues to evolve from a UK-store-led brand to a global digital-led brand. This base-case reflects the shift in sales channel mix and growth achieved in the period since stores re-opened in April, and the higher customer lifetime value that this delivers.

2. Restated - see Note 9.

The base case includes the necessary overhead and capital spend required to deliver FY22 growth. The base case then assumes flat year-on year growth for the period to December 2022.

Post half year, the Directors will review the cash flows & capital investments required to deliver the Groups future growth plans for FY23 with the possibility of increasing the Groups RCF using approved accordion.

Downside scenario

The downside scenario models the effect of a material slowdown in sales growth during FY22, such that the current actual growth rate falls by half for the rest of the year. FY23 sales are then modelled as being broadly flat with FY22.

Matt Pritchard

Chief Financial Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 27 June 2021

1. Restated - see Note 9.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 4 October 2021. They were signed on its behalf by:

Matt Pritchard

Chief Financial Officer

4 October 2021

1. Restated - see Note 9.

CONSOLIDATED STATEMENT OF CASH FLOW

For the period ended 27 June 2021

1. Restated - see Note 9.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 27 June 2021

1. Restated - see Note 9

Notes to the preliminary information

1. Basis of preparation

The financial information for the period ended 27 June 2021 and the period ended 28 June 2020 does not constitute the company's statutory accounts for those years. Statutory accounts for the period ended 28 June 2020 have been delivered to the Registrar of Companies. The statutory accounts for the period ended 27 June 2021 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.  

The auditors' reports on the accounts for 27 June 2021 and 28 June 2020 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

The consolidated financial information has been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. For financial years beginning after 31 December 2020, Hotel Chocolat Group plc will prepare consolidated information in line with IFRS, as adopted by UK international accounting standards.   

The financial statements have been prepared on a going concern basis and on the historical cost basis, except where adopted IFRSs require an alternative treatment. The principal variations include the revaluation of derivative financial instruments that are measured at fair values at the end of each reporting period, accounting for share based payments and leases accounted for under IFRS16 and as explained in the accounting policies below.

At the date of authorisation of this financial information, certain new standards, amendments and interpretations to existing standards applicable to the Group have been published but are not yet effective, and have not been adopted early by the Group.

New standards impacting the Group that have been adopted in the annual financial statements for the year ended 27 June 2021, and which have given rise to changes in the Group's accounting policies are:

· Amendment to IFRS 16, 'Leases' - COVID-19 related rent concessions

· IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Amendment - Definition of Material)

· IFRS 3 Business Combinations (Amendment - Definition of Business)

· Revised Conceptual Framework for Financial Reporting

There are a number of new standards issued but not yet effective that the Group has decided not to adopt early, including Annual Improvements to IFRS Standards 2018-2020 and Amendments to IAS 37. The Group is currently assessing the impact of these new accounting standards.

In January 2020, the IASB issued amendments to IAS 1, which clarify the criteria used to determine whether liabilities are classified as current or non-current. These amendments clarify that current or non-current classification is based on whether an entity has a right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. The amendments also clarify that 'settlement' includes the transfer of cash, goods, services, or equity instruments unless the obligation to transfer equity instruments arises from a conversion feature classified as an equity instrument separately from the liability component of a compound financial instrument. The amendments are effective for annual reporting periods beginning on or after 1 January 2022. Hotel Chocolat Group Plc is currently assessing the impact of these new accounting standards and amendments.

Going concern

The Board has concluded that it is appropriate to adopt the Going Concern basis, having undertaken a rigorous review of financial forecasts and available resources. The Board consider a range of potential scenarios in determining the viability of the Group, however for Going concern purposes have assessed two scenarios:

Base case:

The base plan assumes ongoing growth in FY22 as the Group continues to evolve from a UK-store-led brand to a global digital-led brand. This base case reflects the shift in sales channel mix and growth achieved in the period since stores re-opened in April, and the higher customer lifetime value that this delivers.

The base case includes the necessary overhead & capital spend required to deliver FY22 growth. The base case then assumes flat year-on-year growth for the period to December 2022.

Post half year, the Directors will review the cash flows & capital investments required to deliver the Groups future growth plans for FY23 with the possibility of increasing the Groups RCF using approved accordion.

Downside scenario:

The downside scenario models the effect of a material slowdown in sales growth during FY22, such that the recent growth rate falls by half for the rest of the year. FY23 sales are modelled on very low growth being broadly flat with FY22.

The Directors have considered the levers available to mitigate the impact on profit and cash flow if performance were to fall to these levels. These include:

· Reductions in working capital in response to lower sales.

· Reduction in variable costs, including lower sales-related costs and costs of production.

· Deferring or cancelling discretionary spend.

· Reducing ongoing fixed costs of operation.

· Deferring capital expenditure and overseas investment.

The downside scenario is considered prudent given recent performance.

Based on both the scenarios modelled, the Group will be able to operate within the level of its current facilities and associated covenants which include Debt to EBITDA ratios and Interest cover.

The Directors have also considered but not included as mitigations:

· Alternate sources of funding, including asset financing of Factory equipment and mortgaging of freehold property.

· Any new additional Government support or allowances.

The Group has recently raised £40m through a successful equity placing and has a £30m Revolving Credit facility in place with Lloyds to June 2023. The Board will continue to review the business plan and associated funding requirements over this period, including the opportunity to increase banking facilities as supported by the uncapped accordion now in place.

On this basis, the Board has a reasonable expectation that the Group and the Company have adequate resources to continue in operational existence for the period to December 2022 which is a period of at least twelve months from the date of approval of the financial statements and will not breach any covenants over the remaining term of the current facilities. For these reasons they continue to adopt the going concern basis of accounting in preparing the consolidated and parent company financial information and have concluded that there is no material uncertainty in relation to going concern.

2. Exceptional items

Store impairments

There is an impairment charge of £2,095k during the year ended 27 June 2021 (28 June 2020: £6,606k) relating to fixed assets and right of use assets of stores which predominantly relates to the US. Please see Note 6 for the split. The charge is primarily due to the trading conditions during the period as well as management's assessment of future cashflows over the remaining lease period for each store. The key assumptions used in the future cashflows were sales and EBITDA (based on board approved plans), assumed nil growth rate and a discount rate of 9.335%.

Saint Lucia impairment

There is an impairment charge of £216k during the year ended 27 June 2021 (28 June 2020: £2,678k) relating to the assets of the Saint Lucia business. The charge is due to a decline in the value of the land due to the impact of COVID-19.

3. Profit/(loss) from operations

Profit/(loss) from operations is arrived at after charging/(crediting):

1. Government grants received include the Retail Hospitality Leisure Grant Fund and The Closed Business Lockdown Payment.

4. Finance income and expenses

5. Earnings per share

Profit/(loss) for the period is used in the calculation of the basic and diluted earnings per share.

Diluted loss per share is capped at the basic earnings per share as the impact of dilution cannot result in a reduction in the loss per share.

The weighted average number of shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows:

As at 27 June 2021, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 285,289 (28 June 2020: 301,073). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect. On 20 March 2020 the Company announced the completion of an equity placing for a total of 9,777,777 new ordinary shares. On 28 July 2021, the Company announced the completion of a further equity placing for a total of 11,112,913 new ordinary shares.

1. Restated - see Note 9.

6. Property, plant and equipment

As at 27 June 2021, the net book value of freehold property includes land of £3,860k (28 June 2020: £4,029k), which is not depreciated.

Included in freehold property is £2,997k of assets under construction (28 June 2020: £4,940k). Included in Furniture & fittings, equipment & hardware is £448k of assets under construction (28 June 2020: £303k). Included in Plant & machinery is £14,610k of assets under construction (28 June 2020: £4,942k).

7. Leases

All leases where the Group is a lessee are accounted for by recognising a right of use asset and a lease liability except for:

IFRS 16 "Leases" was adopted on 1 July 2019 without restatement of comparative figures.

8. Trade and other payables

The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates fair value.

9. Restatements

Two restatements have been identified and made, impacting the 52 weeks ended 28 June 2020. The effect on specific financial statement line items within the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position and Consolidated Cashflow is as follows:

i). During the period ended 27 June 2021, the Group changed its accounting policy in relation to 'cash in transit' to recognise this as cash and cash equivalents only when received, as a result the comparative amounts for other debtors and cash and cash equivalents have been restated. 

Statement of Financial Position

Consolidated Statement of Cashflow

ii). The tax credit for the 52 weeks ended 28 June 2020 has been restated from £1,073k to £84k. This is due to a tax deduction of £989k relating to share option exercises that should have been allocated to equity rather than the Statement of Comprehensive Income, in line with IFRS 2 Share-based payments.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position