HOTC.L Regulatory News (HOTC)

2 March 2021

Hotel Chocolat Group plc

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

Interim Results

Hotel Chocolat Group plc, a direct-to-consumer premium chocolate brand, today announces its interim results for the 26 weeks ended 27 December 2020. All numbers are shown post-IFRS16 unless otherwise stated.

Financial highlights:

1 Underlying EBITDA in H1 FY21 excludes £0.2m of share-based charges (H1 FY20: £0.5m).

Operational highlights:

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

"The Hotel Chocolat brand stayed strong during a difficult period for all of us. We certainly kept the chocolate flowing thanks to our online capabilities and multichannel expertise. We recorded superb results in the UK, USA and Japan despite Covid-19 restrictions affecting all our physical locations. We achieved sales growth during those periods when all UK physical locations were closed, demonstrating the brand's appeal to our loyal customers, and our flexible business model.

"Databases of active customers grew substantially in all three markets, underpinning our confidence of growth in the years to come. In the UK, our multichannel model truly came of age, and excitingly, both Japan and the USA firmly stepped up from the 'test and learn' phase into 'grow and scale'. Total brand sales, through direct-to-consumer and partner-channels combined, increased 16% year-on-year.

"Huge thanks go to all the Hotel Chocolat family who worked tirelessly to safely and creatively adapt the business and deliver these results. We know that we all played a role in maintaining morale and bringing happiness through chocolate in all the countries we operate in.

"We look forward to building the Hotel Chocolat brand further as we move closer to our goal of becoming the leading global direct-to-consumer premium chocolate brand."

For further information:

Notes to Editors:

Hotel Chocolat is a direct-to-consumer premium chocolate brand, involved in every stage of chocolate from growing to making and distributing. 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 locations in the UK and USA, and in Japan via a joint venture. The Group has an organic cacao farm and hotel in Saint Lucia, offering complete cacao immersion through tree-to-bar experiences and wellness treatments. The Group also has the Rabot flagship restaurant and cacao roastery in London's Borough Market. The Group was admitted to trading on AIM in 2016.  

Chief Executive's statement (inclusive of financial review)

RESULTS

CHIEF EXECUTIVE'S STATEMENT

I am pleased to report continued progress for the Hotel Chocolat brand during the 26 weeks to 27 December 2020. Revenue for the period increased by 11% and profit before tax increased by 3%.

Our strong brand and direct-to-consumer multichannel model truly came of age in the UK, whilst the USA and Japan both delivered promising growth, firmly stepping up from the 'test and learn' phase into 'grow and scale'.

Brand

Our brand purpose is to bring happiness through chocolate. This means bringing happiness to all the communities we connect with, covering customers, team-members, growers, suppliers, and local communities. This is our North Star and by continuing to follow it we will achieve our business goal of becoming the leading global direct-to-consumer premium chocolate brand. Our commitment is to progressively improve every year on delivering this plan. In the period we made some good steps towards this.

Our compelling brand, innovative lifestyle product range and Direct-to-Consumer model mean we have many ways to bring happiness to a household, including via in-home authentic drinks, leisure experiences out of home, gift-sending to other households, and recurring purchases of treats for the household. The appeal of our products across generations, the combination of physical locations and fast growing online, plus the improvement in our customer engagement now present a significant opportunity to increase customer numbers and purchase frequency, and to create true "HC households".

Customers 

Our customers justifiably expect us to continuously conjure up new happiness-inducing creations, and we launched multiple new product including our Unbelievably Vegan chocolate selections made with our Nutmilk recipe, latte-mocha hot chocolates for our Velvetiser in home system, and new pourable chocolate cream liqueurs in Espresso Martini, Salted Caramel & Clementine, and Mint recipes.

Prior to the first lockdown, over 1.5 million customers had joined our VIP Me loyalty program. As a result, we were able to stay connected to these customers whilst their favourite local Hotel Chocolat was temporarily closed. In the six-month period we added a further 0.6 million new active customers to our database, and deepened our engagement and brand recall, even when our physical retail channel was closed. We also launched new subscriptions to keep the chocolate flowing into homes.

Colleagues  

Nourishing a truly meritocratic culture, where anyone from any background can have a happy, fulfilled career is essential to us. Our guiding principle is to 'be brave and be kind'. In the period we invested in external training in inclusion for every member of the HC Family, to better unlock the benefits of diversity. Our anti-racism group, composed of motivated individuals from our USA, UK, Saint Lucian and Japanese teams met 13 times in the period and is now firmly established, dismantling all types of discrimination, whether overt or subtle, and ensuring everyone has the opportunity to progress inside Hotel Chocolat.

We created over 130 new job roles across the worldwide business, and following an unprecedented period of rapid adaptations as a team in response to Covid, we achieved our highest ever scores in the annual all-employee engagement survey conducted in September.

Growers

Our objective is to ensure that cacao farming is economically, environmentally, and socially sustainable. Chocolate is loved by people all over the world and generates good margins for many businesses. It is wrong on every level that the growers of the magic ingredient are often impoverished and disenfranchised and that this situation has perpetuated for many decades. We aim to support a decent living income for each farming household, and we encourage responsible 'gentle farming' methods that are 'climate-smart', leveraging the natural biology of cacao trees which grow best in biodiverse environments under the shade of other tree species. Jo Brett, CEO of Hotel Chocolat Saint Lucia is taking our farming practices there to the next level, and our goal is to swiftly apply the learning from this to our farmer relationships in Ghana, the source of the majority of our cacao, and we will update further on our progress later this year.

Community and Planet

Our goal is for 100% recyclable packaging. In the period we:

The most challenging material to recycle locally is flexible packaging, which we take back in our Hotel Chocolat locations, but which is not yet collected kerbside in the UK. As members of the Plastic Pact, we lobby for better recycling practices and co-operate on new packaging technologies as we strive for our goal of 100% recyclable packaging.

We are also making good progress in implementing an ISO Environmental Management System to ensure our production operations minimise their environmental footprint. Our continued investment in capital projects to increase the scale of our manufacturing presents us with a real opportunity to reduce the carbon-intensity by designing in climate smart practices.

Markets

Physical locations in the UK and the USA were closed for various extended periods of time, and in all three markets footfall to open locations reduced as consumers followed government guidance. Despite this impact, the UK, USA, and the Japan joint venture all achieved year-on-year growth, demonstrating the strength of the brand and our online capabilities.

UK

Despite a combination of lockdowns and tiering restrictions which reduced physical retail sales, the online offer drove strong sales growth, and we added 0.6 million new customers to our database. By combining a strong brand, multiple product categories and effective routes to market, we achieved overall growth whilst the physical locations were closed.

We remain fully committed to physical locations as they are a powerful way to recruit profitable new multichannel customers, and they deliver the deepest brand experience. We have three new locations opening during 2021. We have negotiated ongoing improved lease terms for 13% of our leases, with a further 56% of locations having a lease event in the next 24 months. As planned, we will use these opportunities to renegotiate or relocate to more attractive sites on better deals.

USA

Lockdown restrictions resulted in dramatically lower footfall. Two of the four physical sites are in mass transit hubs and were temporarily closed throughout H1. The team made a concerted effort to pivot the business to a digital model, immediately driving total sales growth of 47% in October and November combined. The sales acceleration resulted in some local stock shortages which constrained December growth. We are expanding our supply capabilities to capture the market opportunity. The customer database grew by 170%.

Japan

Our partner had fast growth, with +228% sales uplift, the opening of 11 new locations (taking the total to 19) and fielding 40 pop-ups for the key spring trading seasons in February and March. The locations are designed in our latest lifestyle format, which is popular with both prospective landlords and consumers, and delivers strong engagement and high VIP sign-up rates. The VIP customer database grew by 892% to 50,000. Property costs in Japan are typically flexible, with leases based on a percent of sales revenue. The Group's sales to our partner at wholesale prices contributed 1%pt to the Group's reported sales growth.

Saint Lucia

Visitor numbers reduced materially due to travel restrictions and as a result sales were 82% lower year-on-year. During the period of reduced occupancy, the team accelerated expansion works, ahead of the future easing of restrictions. Our Project Chocolat 6-acre visitor attraction opened during the half, and a doubling of the room numbers is well underway. I am particularly pleased that our 'gentle farming' approach to sustainable cacao growing made excellent progress and is ready to be expanded beyond the testbed of our own organic model farm, to the growers we work with in Ghana.

Operations

Operational performance is covered in more detail in the Financial review below. Careful Covid adaptations meant that we were able to continue to safely produce and distribute our products and to achieve similar unit costs of manufacture. However, gross margins were impacted by the additional costs of adapting the supply chain to shifting demand patterns across channels in response to Covid, and increased levels of inventory clearance and write-off due to the impacts of lockdowns altering the rates of sale of some impulse-product categories.

Overheads increased more slowly than sales. Further detail on overheads is included in the Financial Review.

FINANCIAL REVIEW

Revenue

Group revenue increased by 11% to £101.9m. Driven by multichannel growth in the UK, USA & Japan. Strong online and digital partner growth more than offset the impact of physical retail closures due to government restrictions.

Profit Before Tax

Profit before tax increased by 3% to £15.5m.

Gross margin

Gross margin declined by 400 basis points from 65.0% to 61.0%. Manufacturing productivity was safely maintained, with unit costs of production in line with prior year. Margin headwinds in H1 related to the impacts of Covid on customer buying patterns, which resulted in some temporary increases in discounting to clear inventory. The value of raw material write-offs increased due to temporary range rationalisation, which supported safer and smoother operation of the factory and supply chain. The shift in channel mix from retail to online reduced margin by 230bps due to the greater take-up of offers and multibuys when shopping online.

Operating expense

Operating expenses grew by 6%, which was slower than sales growth, as a result operating expenses as a percent of sales fell by 160 basis points from 38.2% to 36.6%.

The temporary cessation of business rates contributed +220bps of savings, and lower rents including turnover-based leases contributed +140bps. Retail customer service staff were furloughed during lockdown, reducing overheads by 80bps. The rapid channel mix shift to online resulted in higher variable costs for pick, pack, and despatch, as well for digital marketing, website licence and credit card fees. The combined impact of changing channel mix was a headwind of (150bps). The Group continues to invest in key roles to further drive brand innovation, digital customer engagement, and global supply, to deliver future growth in sales, these investments increased overheads by (130bps).

Underlying EBITDA

Underlying EBITDA is a non-GAAP measure and increased 2% year-on-year to £24.9m.

Share based payments

Share-based payment expense of £0.2m (H1 FY20: £0.5m) related to the share-based Long-Term Incentive Plan and an all-employee Save As You Earn schemes.

Foreign currency

The business manufactures the majority of its products in the UK; however, it does purchase some premium ingredients and materials in foreign currencies, predominantly Euros and Dollars. The Group hedges its forecast foreign currency purchases up to 18 months ahead. The movement in exchange rates have impacted margin by +10 basis points.

The import of ingredients and materials from Europe has not been materially disrupted by Brexit. The Group's export focus remains on USA and Japan, with a modest level of sales made to the EU via the Group's website.

Finance income and expense

Finance expense of £0.9m reflects £0.6m of interest charged in relation to Right of use Assets, £0.2m of interest for the CLBILs RCF that the Group has in place, and £0.1m of realised derivative interest. Finance income of £0.1m is driven primarily by interest from a related party.

Earnings per share

Basic earnings per share in the period decreased 16% to 9.7p (H1 FY20: 11.5p). In the prior year, the exercise of the 2016 Long Term Incentive Plan and Save As You Earn schemes in the period resulted in material corporation tax deductions, which gave rise to an effective tax rate of 12.7% in H1 FY20. This year, the effective tax rate has reverted to 21.5% which is closer to historic averages for the Group.

Dividend

In March 2020, in response to the potential risks arising from the Covid-19 pandemic, the Board raised additional equity via a placing and paused its progressive dividend policy. Whilst the medium-term outlook benefits from the rollout of vaccines, the duration and intensity of the current restrictions remains uncertain. We are mindful of the potential growth opportunities in USA and Japan, and the Board will continue to review potential reinstatement of any dividend relative to the potential opportunities for re-investment in service of profitability and growth.

Cash flow and closing cash position

During the period, the Group had access to a £35m CLBILs Revolving credit facility, which then reduced to £25m from 1 Jan 2021 and is committed in place until the end of December 2021. Net cash inflow from operating activities was £34.7m (H1 FY20: £30.2m) an increase of 15%. Net cash (being cash minus borrowings) at the end of the period was £47.6m (H1 FY20: £24.3m).

The strong cash position is a result of the sales performance and cost control and was supported by the £22m equity placement completed in March 2020. As at 28th February 2021, the Group has net cash of £26.3m.

CURRENT TRADING AND OUTLOOK

Since the end of the financial reporting period, trading has continued to be in line with the Board's expectations. The multichannel performance of the UK remains encouraging and the new markets continue to show promising growth. As per recent UK government guidelines, from 12th April we expect to begin re-opening our UK physical locations, with appropriate Covid-19 secure measures in place.

In delivering these results in a context of the global pandemic, the business has demonstrated creativity, resilience and spirit. A focus on bringing happiness through chocolate in every facet of our operations will nurture the brand appeal, furthering our business goal of becoming the leading global direct-to-consumer premium chocolate brand.

Angus Thirlwell

Co-founder and Chief Executive Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 27 December 2020

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 27 December 2020

CONSOLIDATED STATEMENT OF CASH FLOW 

For the period ended 27 December 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the period ended 27 December 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the period ended 27 December 2020

NOTES TO THE INTERIM FINANCIAL INFORMATION

1. Basis of preparation

The consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs), as adopted by the European Union.

The accounts have been prepared in accordance with accounting policies that are consistent with the Group's Annual Report and Accounts for the period ended 28 June 2020. This is with the exception of the calculation of right of use assets and lease liabilities under IFRS16. The Group has elected to adopt the COVID-19 Practical Expedient for rent payment concessions; this expedient had not been approved for use for the period ended 28 June 2020. Subject to certain criteria, the Practical Expedient allows rent concessions to be recognised in the profit and loss statement rather than being treated as lease modifications.

The Group's Annual Report and Accounts for the period ended 27 June 2021 are expected to be prepared under UK IFRS.

The comparative financial information for the period ended 28 June 2020 in this interim report does not constitute statutory accounts for that period under 435 of the Companies Act 2006.

Statutory accounts for the period ended 28 June 2020 have been delivered to the Registrar of Companies.

The auditors' report on the accounts for 28 June 2020 was 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.

2. Significant accounting policies

At the year ended 28 June the Directors undertook a comprehensive assessment to consider the Group's ability to trade as a going concern having considered the significant uncertainties being faced by the retail sector because of COVID-19.

The assessment included a review of a Base case and Downside scenario. The base case considered a year-on-year reduction in Retail sales but with a strong transition to Online and continued delivery of Wholesale growth plans.

The Board also considered the levers available to mitigate the impact on profit and cashflow if performance and the pandemic were to follow the downside scenario. These included:

Since 28 June 2020, the Group has consistently performed ahead of the Base case. To assess the Group's position as at 27 December 2020 the Directors have reviewed an updated Base case reflecting the current National Lockdown for the first quarter of CY2021 and disrupted Retail ongoing to September, offset by the continuing strong performance of Digital and Wholesale.

On this basis the Board has a reasonable expectation that the Group will have adequate resources to continue in operational existence for a period of at least 12 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 financial information and have concluded that there is no material uncertainty in relation to going concern.

The interim financial results have been prepared by applying the accounting policies that were applied in the preparation of the 2020 Annual Report and Accounts which are published on the Hotel Chocolat website, www.hotelchocolat.com, except for the IFRS16 practical expedient noted above. There are no new or amended standards effective in the period which has had a material impact on the interim consolidated financial information.

3. Profit from operations

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

4. Finance income and expenses

5. Earnings per share

Profit for the period used in the calculation of the basic and diluted earnings 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 December 2020, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 501,073 (29 December 2019: 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.

6. Property, plant and equipment

As at 27 December 2020, the net book value of freehold property includes land of £3,893k (29 December 2019: £4,740k), which is not depreciated.

7. Trade and other payables