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Hotel Chocolat still offers quality growth

The high street chain is looking to expand its business far beyond the UK
October 5, 2017

Annual results from Hotel Chocolat (HOTC) highlighted how well the company is progressing against the targets set out at the time of the IPO last year. The statement also gave management a chance to elaborate on its plans to continue rolling out digital improvements and its new café model in the UK, as well as reveal details about potential international expansion. The shares come highly rated, but aren’t overly expensive against the stock’s 18-month history. Plus, management has started to establish a track record for delivering against forecasts. As the shares continue to ride the wave of broker-forecast upgrades, we think they’re worth shelling out for.

IC TIP: Buy at 309p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points

Good UK growth
Stable margins
International expansion
Amazon tie-up

Bear points

Consumer confidence weak
Inflationary pressure

The group’s model of owning everything from cocoa plantations all the way through to its distinctive stores has provided a degree of protection against inflation-driven cost pressures bearing down on most other retailers. Driving productivity gains within the business has also helped offset climbing costs, particularly as chief executive Angus Thirlwell sticks by his “conscious decision” not to “roll over and increase prices”. Mr Thirlwell says the brand’s mandate is “accessible luxury” and although aimed at more affluent customers, he believes “value for money” is still a prevalent concern among shoppers. The business also “religiously” hedges against currency movement 18 months ahead, which helped cash profit margins to rise from 13.6 per cent to 15.5 per cent last year.

For now, the group is still focused on growing within the UK. Mr Thirlwell said there remains a “good pipeline of locations” for new Hotel Chocolat sites, as well as a healthy balance sheet to realise those opportunities. The new café model is driving good footfall and cross-selling activity. The group has also been busy investing in its production capabilities: last year £4m was spent installing a new truffle-making line, which increased capacity in this product category by 70 per cent and by a fifth across the factory as a whole. Factory investments are due to continue for the next three years, at a cost of £4m a year.

Other investments will be made in the group’s digital platforms, although the next stage of growth will largely come through international expansion. A partnership with online retail giant Amazon (US:AMZ) is already in the offing, as is a pilot scheme in Hong Kong with a local partner. That latter agreement was signed in the spring and is structured as a joint venture. Although financial details are thin on the ground right now, the agreement is ultimately one of supply, with the local partner taking responsibility for fit-out costs, compliance and labelling, while Hotel Chocolat is responsible for branding and training. Only two stores are open in Asia at the moment, but if Christmas trading goes well the partnership could evolve into a full franchise agreement. More broadly, from autumn 2017 Amazon will commence selling a small subset of Hotel Chocolat’s year-round products. Because of the exclusion of seasonal products, there is less risk that this could result in discounting.

Wholesale is another channel the group is actively developing. It signed six new partnerships in the past year, including with online grocer Ocado (OCDO) and Fenwicks department store. While some might fear this could dilute the tight brand management – specifically its premium and exclusive nature – analysts argue it marks a savvy commercial decision to improve access to the products.

HOTEL CHOCOLAT (HOTC)  
ORD PRICE:309pMARKET VALUE:£349m
TOUCH:307-312p12-MONTH HIGH:405pLOW: 221p
FORWARD DIVIDEND YIELD:0.6%FORWARD PE RATIO:31
NET ASSET VALUE:28pNET CASH:£1.8m
Year to 2 JulyTurnover (£m)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
201691.18.46.1nil
201710511.27.81.6
2018*11712.48.71.7
2019*12813.99.92.0
% change+10+12+14+18
Normal market size:1,000   
Matched bargain trading    
Beta:0.54   
*Liberum forecasts, adjusted PTP and EPS