Premium British chocolatier Hotel Chocolat (HOTC:AIM) is in bullish mood. Investors have news of a strong first half with brisk business over Christmas. There's also encouraging nods ahead of Mother’s Day and Easter, both typically sales spells for the company.
Today’s statement coaxes analysts into upgrading estimates for the full year to June, and sends shares in one of Shares Top 10 for 2017 selections more than 5% higher to 268.4p.
We flagged scope for further upgrades here in December and are encouraged by half time results from Hotel Chocolat, which offers customers accessible luxury at affordable prices through its own stores, cafes and boutiques.
Sales sweetened up by 13.9% to a better-than-expected £62.5m, driven by new store openings, like-for-like growth, a strong digital showing and a fantastic festive selling season. During the half, Hotel Chocolat opened 10 new stores, completed one relocation and delivered on capital projects on time and in budget, a 60 basis point gross margin improvement to 68% reflecting factory efficiency investments.
AFFORDABLE LUXURY
Top line momentum is strong and management confident, co-founder and CEO Angus Thirlwell (pictured above, right) commenting: ‘Since the end of the period, trading has continued in line with expectations. The plans for the key Mother's Day and Easter seasons build upon the successes of Christmas, including improved gifts and children's ranges.'
Thirlwell adds: ‘The headwinds facing all retailers in the UK are widely projected to drive input cost inflation, however the group seeks to mitigate these headwinds through a combination of vertical integration, UK-based manufacturing, and currency hedging. A strong differentiated brand that offers great products and customer service, priced as an affordable luxury also provides further mitigation, giving the board confidence in the group's continued progress.'
Shares would highlight the £17m of free cash flow of £17m generated in the half, leaving Hotel Chocolat with £16.2m net cash in the coffers and which is supportive of management’s intention to pay a maiden final dividend.
ANALYSTS’ VIEW
Liberum Capital is a buyer with a 340p price target, implying more than 28% upside at these levels. Analysts Wayne Brown and Adam Tomlinson now forecast pre-tax profit of £10.6m (2016: £8.2m) for the year to June, 5% greater than at the time of the IPO, with a 1.5p dividend factored in. They estimate taxable profits can hit £11.5m next year, a significant upgrade from £11.1m before today.
However, Liberum does explain that ‘we need to remain mindful of key trading periods’, noting that Easter is around 3 weeks later than last year, which increases weather risk in terms of sales and margins. Liberum also explains: ‘While the performance of the Tasting Club was below expectations, sales declined 6%, operating profit increased. New customer recruitment activities into the club have been scaled back whilst the model is being improved and reformed around the new website, which launched in January 2017.'
At flotation in May 2016 the company raised £55m before expenses. After 10 store openings in the period, bringing the total to 93, the company still has net cash of £16m, putting it in a strong position for continued expansion.
Although premium consumer offers may come under pressure later this year, Hotel Chocolat has a unique point of difference with should put it in a good position against less differentiated competition.'
