Gobble up Hotel Chocolat

Management recently revealed plans to enter the US and Japan, taking the number of markets Hotel Chocolat operates in up to five, adding to the UK, Hong Kong and Scandinavia. While the group acts as operator in the UK as well as for its fledgling US business, in other markets it is experimenting with a number of different models: franchise, joint venture and development agreement. While the UK currently generates the lion's share of sales, broker Liberum believes the overseas markets it has entered have a combined value that is 4.6 times that of its home market, with compound annual growth (CAGR) in these regions expected to average 3.5 per cent between 2017 and 2022 thanks to "demand for higher-quality, healthier and more innovative products".

But for now, its progress in the UK should be the greatest source of excitement. A second-quarter trading statement revealed a 15 per cent increase in total revenues over the 13 weeks to 30 December 2018, with 5 per cent accounted for by new stores. Growth is being supported by popular product launches – the Velvetiser in-home hot chocolate system beat sales expectations with repeat capsule sales to follow – and a new VIP card gained 400,000 members.

Loyalty discounts and a lower margin in the wholesale division could put group margins under pressure, but they should boost sales, too, and the wholesale business has low capital requirements. What's more, improved efficiency, including investment in production that has boosted capacity by a quarter, helped gross margins rise to a hearty 68.4 per cent last year, from 67.9 per cent. This was despite rising input costs, and operating margins of 11.3 per cent held steady. 

Good free cash flow and a high return on capital employed puts the company in a strong position to self-finance growth both at home and overseas. Liberum forecasts £45m in cumulative free cash over the next five years. Indeed, the group remains debt-free and ended the second quarter with £4.3 of net cash. The cash should be seen in light of debt-like lease commitments which new accounting rules require to be reported on the balance sheet from this year (valuing leases at seven times rents would create a £72m liability).