HOTC.L Regulatory News (HOTC)

1 December 2022

Hotel Chocolat Group plc

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

Preliminary Results

Hotel Chocolat Group plc, a premium British chocolate maker, today announces its preliminary results for the 52 weeks ended 26 June 2022 ("FY22").

FY22 FINANCIAL HIGHLIGHTS: 

1 Underlying EBITDA and Underlying Profit before tax are Alternative Performance Measures (APMs), as explained in the financial review

2 A breakdown of exceptional costs and adjusting items is included in the financial review

3 Restated 52 weeks ended 27 June 2021 - see financial review

FY22 OPERATIONAL HIGHLIGHTS:

Fast Growth and improved operational cash generation

UK sales increased 35% yoy, and +68% vs pre-pandemic (FY19)

Previously announced strategy adjustments on International

International sales grew 126% but margins remained below internal expectations, leading to adjustment to our international strategy and a prudent approach to capital allocation

Strong operational cashflows before movements in working capital of £39.5m (FY21 £28.6m)

Clear plan, focused on brand and profitability

Defined the future shape of the business model

Investing to strengthen the brand

Dividend

Current Trading and Outlook:

*Market consensus prior to this announcement, as at 30 November 2022, is for revenue of £236m and underlying profit before tax of £9.6m.

Board Succession planning

Both Andrew and Matt have indicated their willingness to stand for re-election at the AGM and will continue to be actively involved in the business in order to support an orderly succession and a smooth transition to their successors. Announcement details of the successors will made in due course.

Commenting on the results, Angus Thirlwell, Co-founder and Chief Executive Officer of Hotel Chocolat, said:

"Much of what we are publishing today in terms of the business strategy has already been announced to the market in July.

"Since then, the performance of our retail stores continues to beat 2019 pre-covid levels and subscriptions are in growth too. We have reduced online marketing spend resulting in lower volume, but higher quality full-price sales. Our wholesale partners are also showing caution too.

"The Hotel Chocolat brand has huge resonance with shoppers and despite the macro-economic environment, people are still treating themselves with affordable luxury and remaining loyal and we are winning new customers who recognise our quality. Indeed over half of our Christmas gift range is priced between £2.50 and £8.50.

"It goes without saying that the current environment is challenging on multiple fronts. Over the last few months we have taken decisive steps to reduce risk and to fully pull all our self-help Ievers in both our manufacturing and retailing businesses. One thing is for sure, we will never compromise on the brand standards and values which have built our following to this point. 

"We remain fiercely ambitious for the Hotel Chocolat brand for growth in both UK and international markets. Our new stores showcasing the format of the future opened in Norwich and Northampton and are trading very strongly. Internationally we intend to utilise more risk-contained techniques to capitalise on the proven brand appeal in major international markets. We will update on developments in due course.

"As we head into our busiest part of the year, I am confident that the strategic direction we have put in place will improve the prospects of the business for significant years to come. Our decisions to focus on full price sales and quality over quantity, coupled with a resurgence of physical store performance means that we anticipate December will be busier than ever.

"I'd like to personally thank Andrew Gerrie and Matt Pritchard for their contributions to Hotel Chocolat over many years, both having supported the Group through the IPO and throughout the outstanding growth of the business and development of the brand.

"I would like to thank all the Hotel Chocolat team and our partners 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 the later challenges. The biggest and final thanks goes to our wonderful customers for their continued loyalty. "

The information contained within this announcement is deemed by the Group to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.

The person responsible for arranging for the release of this announcement on behalf of the Company is Matt Pritchard, Chief Financial Officer.

For further information:

Notes to Editors:

Hotel Chocolat is a premium British chocolate maker with a strong and distinctive D2C brand. The business was founded by Angus Thirlwell and Peter Harris, who are still executives within the business, and has traded under the Hotel Chocolat brand since 2003. The Group is unusual in being a grower (organic cacao farm in Saint Lucia), a manufacturer (Cambridgeshire, UK) and owning its extensive direct to consumer channels (branded stores, websites). The Group was admitted to trading on AIM in 2016.

CHAIRMAN'S STATEMENT

OVERVIEW

In FY22, for the second consecutive year, we grew strongly in the UK across channels and categories, acquiring new customers and reacting to a changing external landscape. The easing of pandemic restrictions saw physical retail sales and profitability rebound, bolstered by new categories and an increase in the active customer database. This was supported by online and partnerships which continue to play a major role in delivering the brand to consumers at their convenience. The breadth of activity and the pace of growth was the fastest in the Group's history, and on behalf of the Board I would like to thank the whole HC team for working so hard to achieve this. The fast pace of growth included many successful elements and some initiatives that didn't deliver the returns we had targeted. We have therefore made the tough but compelling decision to focus our efforts on those growth drivers that can deliver highest returns relative to risks, over the short to medium term. We have excellent products, a skilled and committed team and a well invested vertically integrated platform which combine to make Hotel Chocolat a strong brand withgreat prospects.

STRATEGY

Hotel Chocolat is first and foremost a strong brand in the eyes of our loyal customers. The strong customer relationship though our multiple channels is driven by our values of authenticity, originality and ethics. What is perhaps often overlooked is the degree to which the brand strength is underpinned by our manufacturing skills. We have a well-invested and high-quality production facility in the UK which designs and makes our amazing range of products. A greater focus on leveraging these strengths can unlock scale economies, reduce unit costs and further improve the customer experience and product quality.

The Group continues to retain its long-term international growth ambitions but near-term, will adopt a more focused approach by backing capex light and risk light approaches.

FY22 FINANCIAL OVERVIEW

FY22 Group revenue of £226m (FY21: £165m) was driven by a combination of stronger UK retail sales, and robust growth in customer numbers supported by investment in new categories and increased acquisition marketing. Underlying profit before tax increased 126% to £21.7m.

Our statutory reported loss in FY22 contains a number of material items arising from our strategic decision to prioritise only the best prospects for financial returns. This includes the decision to exit from a number of smaller product categories, and from direct-to-consumer operations in the USA, along with impairment of our loans to the Japan Joint Venture. The statutory loss for the period of £9.4m reflects multiple non-recurring costs relating to the cessation of these activities. The underlying profit before tax of £21.7m represents a pleasing result, evidencing the ongoing success of the core business. A full reconciliation between the statutory reported profit and the alternate or underlying performance measure is included in the Financial Review.

DIVIDEND

Given the opportunities to invest for further growth and returns, 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 in the light of internal growth opportunities and the external environment and intends to recommence progressive dividend payments when appropriate to do so.

BOARD OF DIRECTORS CHANGES

The Group continues to benefit from a strong founder-led management team. As we look towards the next phase of evolution for Hotel Chocolat, I have agreed with the Board that it is the right time to seek a new Board Chair due to my growing business commitments with new ventures.

I will be offering myself for re-election at the coming 2022 AGM in order to provide continuity during the succession process. I would like to thank everyone at HC for a rewarding seven years, and all our stakeholders for their loyalty and commitment. Hotel Chocolat is a great business and it has been a privilege to play a small role in the story so far.

Matt Pritchard, CFO will also be leaving in 2023 after almost nine years at Hotel Chocolat. On behalf of the Board and the whole HC team I would like to thank Matt for his energetic support and commitment through the Group's significant evolution and growth. Matt continues to be actively involved in all parts of the business and will be offering himself for re-election at the AGM in order to support the succession plan and a smooth transition.

OUTLOOK

The Hotel Chocolat Brand is in good health as evidenced by growing sales and progress on sustainability initiatives. Whilst there continues to be external macro-economic challenges including inflationary pressures, the Hotel Chocolat team have continually proven the ability to adapt to changing circumstances whether arising from pandemic, economic factors or from the acceleration in growth across multiple fronts. I therefore remain confident in the ability of the brand and the team to deliver attractive returns.

Our focused strategy has led to the cessation of some activities resulting in transitional costs in FY23 with the goal of higher profit margin thereafter.

The Board have made clear strategic choices to maximise the prospects for the Group, and the business entered FY23 in a strong position. At the date of publication we have two thirds of the year still to trade, including the five largest gift events, and the Board is taking a prudent approach to manage current trading.

ANDREW GERRIENon-executive Chairman

CHIEF EXECUTIVE'S STATEMENT

The business achieved another acceleration in sales growth in FY22. Sales of £226m were 37% higher than FY21, and 71% higher than FY19, the last full year before the Covid pandemic disruption. Our compound annual growth rate ("CAGR") over the last two years of 29% compares to a CAGR of 12% in the four years up to FY19 inclusive.

The higher growth rate is testament to a strong brand powering forward on many fronts, driven by the efforts of the whole team. We have also learned that faster growth brings new pressures, challenges and opportunities and have therefore moved swiftly to ensure we have the best prospects for future success with a clear and simple adapted strategy.

In 2019 we added six new growth levers to our existing strategy:

In half two of 2022, we re-rated the growth drivers:

In 2020 the business adapted effectively to the Covid pandemic threat and by 2021 we saw Group sales accelerate rapidly due to the performance of our six growth drivers alongside the re-opening of the economy following the end of lockdowns. In July 2021 we raised £40m from a new equity placing to fund capex and working capital investments to support sales growth whilst profit generation remained Covid-impaired. These funds were deployed and as a result sales growth accelerated further in FY22.

BRAND HEALTH

Our planned investments in the brand delivered measurable improvements for customers, colleagues and farmers.

Our Brand tracker uses market research to assess UK consumer awareness of Hotel Chocolat and the degree of consideration as a business with ethics at its heart. This research shows that we have significant customer growth opportunity, particularly with slightly younger age groups including families with children at home, and especially those who have a personal interest in ethics and sustainability.

In 2021 we launched our Gentle Farming Programme, investing approximately 100 basis points of margin to pay increased prices to farmers in exchange for undertaking a farming approach that encourages a focus on cacao tree pruning to improve plant health and increase yields, and the planting of share trees to encourage biodiversity and help mitigate the impact of climate change. I visited Ghana with the team to meet with farmers and community leaders, the initiative was well received. We will receive our first assurance data shortly which will inform our next phase.

We continued to adhere to our More Cacao Less Sugar approach, with our range meeting Public Health England's targets for sugar, launched Founder Shares in the period, giving every UK employee options for free shares in Hotel Chocolat to encourage teamwork and provide colleagues the opportunity to share in future success.

We were delighted to achieve an 'outstanding' score in our all-employee engagement survey.

FINANCIAL OVERVIEW

Sales

Sales grew by 37% to £226m (FY21: £165m). Sales in the UK increased by 35% and the growth of international grew by 126%.

The performance of our UK channels, and of both our new and existing categories, indicates that the total addressable market for the Hotel Chocolat brand in the UK is greater than we had previously estimated. This is also supported by market research that shows significant potential to appeal to more UK households.

Profit

We reported a statutory loss before tax for the period of (£8.7m), which is clearly disappointing. The loss is reflective of the significant impacts of discontinuing activities in the year that had lower prospects for future returns, relative to the ongoing, proven new successes. Whilst temporarily painful to make these decisions, making choices like this has always been part of Hotel Chocolat's entrepreneurial history.

An analysis of the components of the reported loss and the reconciliation to the alternative performance metric of underlying profit before tax of £21.7m (FY21: £9.6m restated) is provided in the Financial Review.

Faster growth brought with it significant internal growing pains. Our pre-pandemic sales CAGR of 12% shaped a business that doubled revenues every seven years, whereas the latest three-year CAGR of 29% doubles the business size in less than three years. This means decisions on future investments in people, technology, inventory levels and plant and equipment capex need to be made at a much faster pace, with many of these costs needing to be committed in advance of the future sales generation, bringing greater inherent risk. The adjustments to correct for elements of this are very much self-help, being directly controllable by us. Aligning our operating costs and structures to the new shape of the business is the key to the level of future margins and return on capital that I expect from Hotel Chocolat. We have set an internal objective of 20% EBITDA margin by FY25 (pre IFRS 16). It is clear that some of the growing pains were, in retrospect, avoidable and we are enhancing governance and adopting a more risk-contained strategy that prioritises brand health and profitability over higher rates of revenue growth.

An additional factor during H2 of FY22 was the fast deterioration in global consumer outlook, coming so soon after an ebullient H1 sales and profit performance. Although I believe we have reacted speedily, there will be an overhang of some costs into FY23 before we have fully adjusted.

OPERATIONAL REVIEW

Our UK manufacturing operations are a key competitive strength and differentiator. Our ability to manufacture a wide range of unique products is a key source of competitive value. Our skilled team, bespoke factory capabilities and in-house IP all combine to create long term brand strength. In addition, we see significant opportunities to reduce unit costs of production given the recent scaling and future range optimisation.

Throughout the business we intend to increase the focus on the role of manufacturing within our value creation plan. This, we believe, will unlock more of the benefits of our vertical integration and improve margins.

In March we signed a ten-year lease on a 430,000sq ft second DC near Northampton. For peak FY22 we operated with 200,000 sq ft in our own DC with significant inventory held off-site in third-party storage. Bringing all inventory into our own locations supports smoother operation and improved service. In the initial years of the new lease the dual-running costs on our revised sales CAGR projection will temporarily represent a cost headwind of 300bps, with the expectation that this will dilute by FY25.

UK SALES CHANNEL REVIEW

Our multichannel sales model achieved UK sales growth of 35% year-on-year. The mix of sales shifted back towards retail stores and encouragingly we are now seeing higher sales densities in our stores than before the pandemic, with lower property costs. In the period we upsized 4 locations, moving into larger nearby sites, adding more elements to our offer in these towns, which we forecast will drive improved profit per catchment. We anticipate that in future more space growth will come from upsizes than from openings in new catchments.

Digital and partners continue to complement our retail estate by offering convenient delivery. The combination of all three channels, underpinned by our VIP loyalty programme drives brand awareness and loyalty. Active customers increased by 15% to over 2 million, with frequency also rising by 14%.

INTERNATIONAL REVIEW

The Group intends to utilise risk-contained techniques to capitalise on the brand appeal in major international markets. These will include:

USA

Having previously pivoted our D2C model from a retail rollout strategy to an online-led approach in response to the pandemic and market learnings, we saw some encouraging sales performance in the period with sales growing by 145% in the first half of the year. However, we remained dissatisfied with the margins we were achieving due to the complexity of the supply chain and the forecasting inaccuracies for a new business, and with the ongoing heavy demands on senior team bandwidth. We therefore decided near-term, to prioritise development of wholesale routes to market, led by, but not exclusive to, the Velvetised Cream alcohol category, which benefits from long shelf-life and a long-established wholesale distribution infrastructure to connect into with contained risk. In the medium term we see opportunities to progressively build the Hotel Chocolat brand behind this spearhead, utilising the valuable customer, product category, channel and operating model insights we have acquired so far. Provisions and costs relating to the exit from direct-to-consumer channels of £3.5m (further detail can be found in the Financial Review).

The response to the brand, the new and unique products for the American market have been terrific. Our message to our American customers and brand fans is please be patient as we take a few steps back in order to be able to take more steps forward in the medium term.

Japan Joint Venture

We were first approached by a prospective joint venture partner in 2017 and the Japanese JV began trading in 2018. The first two store openings performed encouragingly in FY19. The Group manufactured the majority of products for the JV, and also provided loans for working capital purposes.

By FY20 the partner had opened eight locations and signed leases for further openings with key mall landlords. The Covid pandemic severely disrupted sales during the critical spring 2020 peak for chocolate gifting resulting in lower than forecast sales per store and considerably lower margins. In 2021 the continuation of movement-restrictions had a greater impact than in the UK where the online channel was more developed. It was assumed that for 2022, as happened in the UK, that Covid would not be a major impediment to sales, however the Japanese government reinstated movement restriction guidance again. This was the third year in succession of reduced sales and reduced profitability, the latter steeply increasing as the estate size and consequent scale of impact grew. When the JV partner presented their revised loan-funding proposal for FY23 it was clear that the continued working capital needs would exceed a level that would be appropriate for the Group over the next two to three years, given the real possibility that peak 2023 could again be impacted by movement restrictions. The Directors of the JV began civil restructuring proceedings in July 2022 in order to seek alternative sources of growth capital. At the time of publication this process is ongoing.

As a result of the JV insolvency process the Group has cumulatively fully impaired its loans and equity investment of £23m and recognised guarantees of £6.7m in relation to loans for shopfit capex borrowed by the JV from Japanese banks, subsequently paid in September 2022.

As can be imagined we have asked ourselves many questions as to how we could have done this differently. The size of the prize in Japan* certainly sustained our risk appetite through the three increasingly difficult years of Covid, alongside the loyal enthusiasm of our Japanese fans for all things Hotel Chocolat. In the period the brand achieved recognition of 24% amongst buyers of premium chocolate in Japan, a credible outcome alongside many long-established European brands.

*Japan addressable market size for chocolate gifting estimated by management to be greater than 2x UK for Hotel Chocolat.

Whilst recognising the above, it is clear that shortcomings in downside risk evaluation, and the challenges of assessing the JV's management capability to execute their plan during the two year period when visits to Japan were prohibited did contribute to the outcome. These learnings will be taken forwards into all other current and future HC growth activities.

GROUP OPERATING MODEL

Hotel Chocolat owes its unique brand and market position to a fast-paced evolutionary history. This brings many positive attributes to the model which will always be protected.

We have initiated a 'once in a decade' simplification plan to sharpen our operating model, in furtherance of enhanced returns, our target being 20%+ EBITDA (pre IFRS 16) by FY25, by:

OUTLOOK

Inflation is currently at elevated levels and we are taking a resolute approach to cost reduction to mitigate this, by simplifying our business model and leveraging the opportunities for greater efficiency within our vertically integrated business model.

In previous periods of low consumer confidence, including FY08, Hotel Chocolat grew and earned strong customer loyalty. Our management focus will be skewed towards existing customer retention over new customer acquisition for FY23. Hence our outlook is for a steadier sales profile with ongoing work at pace to reshape the operating cost base.

One thing is for sure, we will never compromise on the brand standards and values which have built our following to this point.

ANGUS THIRLWELL

Co-founder and Chief Executive Officer

FINANCIAL REVIEW

1 Alternative performance measurements (APMs). See page 16 for purpose and definition of APMs.

2 Restated 27 June 2021, see note 9.

REVENUE

Revenue for the 52 weeks ended 26 June 2022 increased by 37% to £226m, driven by the strength of the groups multi-channel approach. UK sales grew by +35% year on year, driven by physical retail, which grew strongly following the ending of pandemic-related restrictions, significantly more than offsetting a -13% decline in online sales. The overall strength and flexibility of the UK multichannel model is illustrated by UK growth of +64% compared to FY19, the last full year before the pandemic:

Whilst international sales grew by +126%, profitability was below expectations, predominantly due to challenges with supply chains. As a result, the Board decided to pause further investments in international direct-to-consumer operations, both in directly controlled operations in the USA, and in the form of any further loans to the Japan joint venture.

GROSS MARGIN

Reported gross margin of 56.1% declined by 570 basis points compared with FY21. 243 basis points or £5.5m of the decline is a result of exceptional provisions relating to inventory; both for underperforming categories in the UK that will be exited during FY23, and provisions for all remaining inventories held in the USA.

Excluding exceptional provisions, gross margin of 58.5% represents a decline of 330 basis points, with two main causes:

OPERATING EXPENSES

Before exceptional costs and adjusting items, operating expenses of £91.5m increased +25% year on year, a slower rate than sales growth of 37%, the majority of the increase was due to increased central costs including marketing and salaried staff in support of the initiatives to drive faster sales growth.

Higher utility prices from April 2022 will remain at the fixed contract rates until May 2023.

Within operating expenses, exceptional costs and adjusting items comprise:

UNDERLYING EBITDA

Underlying EBITDA of £40.8m or 18.1% of sales compares to £28.6m or 17.4% of sales in FY21. Whilst this is a solid result, in future the Group intends to focus on the most profitable elements of the existing business model, with the objective of delivering improved EBITDA margins in subsequent years.

It is anticipated that FY23 will include costs of transition to the more tightly focused strategy, resulting in temporarily lower EBITDA margins, with the objective of improving margins for FY24 and beyond. Underlying EBITDA is a not a statutory GAAP measure, but is included as an additional performance measure (APM).

EXCEPTIONAL AND ADJUSTING ITEMS

The reported result for FY22 includes £28.8m of exceptional items and £1.6m of adjusting items. The exceptional costs relate to the strategic choices to focus on more profitable channels and categories, resulting in provisions, impairments and one off costs of £5.5m within gross margin, and £23.3m within operating expenses. Impairment reversals arise from a combination of improved retail trading conditions and the release of impairments on closed stores. The £1.6m of adjusting items relate to changes in accounting treatment of software, and the expenses for the new DC which did not become operational until the following period.

Further details on exceptional costs and adjusting items are provided in the table below:

JAPAN JOINT VENTURE

Having previously provided financial support to the JV in the form of investments, loans and guarantees, the Directors of the Group concluded that it was inappropriate to continue to advance further working capital to the venture. In July 2022 the JV entered Civil Rehabilitation "Minji Saisei" under the supervision of the Tokyo court. At the date of publication the process is ongoing.

RESTATEMENT OF FY21 FINANCIAL STATEMENTS

Following a helpful and constructive review of the FY21 Annual Report and Accounts conducted by the Financial Review Council's Corporate Reporting Review team, the Directors have revisited a number of items in the FY21 Annual Report and Accounts in relation to the application of IAS 21 and IFRS 9, resulting in prior year restatements of the comparative amounts in the FY21 and FY20 income statement, balance sheet and statement of comprehensive income as set our below. Further information on the scope and limitations of the FRC's engagement can be found in Note 9.

1) Between FY19 and FY22 the Group undertook a series of investments in, and loans to, the Japan Joint Venture and also undertook financial guarantee contracts in respect of loans made by Japanese banks to the Joint Venture. In July 2022 the Group announced the possibility of full impairment of the loans, investments and guarantees, and subsequently full impairment has been reflected in the FY22 Financial Statements. The value of loans, investments and guarantees totalled £29.7m.

In accordance with IFRS 9, £4.5m of the total expected credit losses and impairments should have been charged in FY20, £1.7m in FY21, with the remaining balance of £21.8m recognised in FY22. The restatement does not give rise to any change in Group cashflows, except for a change in the timing of tax (relief/credits) as a result of losses being recognised in earlier periods.

2) In prior periods foreign exchange gains and losses on long-term intercompany loans were posted to the long-term loan reserve. This has now been restated with the retranslation loss of £0.7m shown as Other Comprehensive Income in FY21 in accordance with IAS 21. This adjustment has no impact on cashflows or operating performance and an immaterial impact on corporation tax payable.

The combined effect of the above restatements is as follows:

Further details on the restatements are provided in Note 9. No dividends were paid in the periods affected by restatement, no annual Executive performance incentives were paid, nor were any LTIPs vested.

RENT EXPENSES

In accordance with IFRS 16, rent expense of £11m (FY21: £11.1m) are not reported in operating expenses, being replaced by depreciation of £9.5m (FY21: £9.3m) and interest of £1.2m (FY21: £1.1m).

FINANCE INCOME AND EXPENSE

Finance income of £1.0m is primarily accrued interest owed by the Japan JV, which has been separately impaired within exceptional items.

Finance expense of £1.9m comprises £0.5m of bank RCF interest and £1.2m of interest on leases under IFRS 16, and £0.2m of realised interest on derivative financial instruments.

DEPRECIATION

Depreciation and amortisation of £16.1m compares to £15.8m in FY21. Key capital investments in the period included upgrades to the manufacturing facility, internal fit-out of a newly leased second distribution centre, with 1 new store and 4 relocations to larger sites in existing locations.

LOSS/(PROFIT) BEFORE TAX

Underlying profit before tax of £21.7m (FY21 £9.6m1) is before exceptional costs and adjusting items totalling (£30.4m) which result in a reported statutory loss before tax of £8.7m (FY21 £5.5m profit). A reconciliation of underlying and reported profit is provided on page 17.

TAX

Tax for the period is a charge of £0.7m (FY21: £1.9m1) which has arisen despite the statutory loss as the investment related to restated exceptional items are disallowed for corporate taxes. The tax charge is made up of £0.6m current tax credit offset by £1.3m deferred tax charge.

EPS AND DIVIDENDS

The reported loss results in a loss per share of (6.9p) which compares to a restated FY21 EPS of 2.9p. See Note 9 for details of the restatement.

CASH

In the period the Group generated operating cashflows of £39.5m before movements in working capital.

In July 2021 the Group raised £39.3m (net of costs) from a new equity placing to support investments for growth. Capital expenditures in the period totalled £25.7m, and £6.3m was loaned to the Japan JV, with the balance invested in working capital.

At 26 June 2022 the Group had cash on hand of £17.6m with all of the £50m RCF facility remaining undrawn.

As at 29 November 2022 the Group remains well capitalised with £41m of headroom comprising £9m cash on hand and £32m of unutilised facilities within its £50m RCF facility, immediately prior to the peak cash-generating trading period.

1  Restated 27 June 2021, see note 9.

INVENTORY

Closing inventory of £43.1m represents an increase of £11m year on year. The majority of the increase is due to increased stock-holding of Velvetiser hot chocolate machines. The Group intends to materially reduce inventory levels in future periods, reducing forward cover to a level reflective of prudent sales forecasts with a modest buffer to allow sales outperformance to forecast.

OTHER WORKING CAPITAL

Trade and other receivables increased from £12.4m to £17.5m due to:

Current liabilities increased from £52.2m to £57.4m primarily as a result of the recognition of £6.7m of liability in connection with Financial Guarantee contracts with the Japan joint venture. These contracts were subsequently settled in full.

GOING CONCERN

The Directors have undertaken a comprehensive assessment in order to conclude that the Group has the ability to trade as a going concern using forecasts drawn up to 31 December 2023, considering the current macro-economic environment and the potential impact of relevant uncertainties facing all businesses, together with the Group's ability to influence its activities and hence the financial position, cashflows and profitability. The Financial Review considers in more detail the groups trading performance and financial position.

In reaching their conclusion the Directors' considerations have included the following factors:

The Directors have modelled a number of scenarios, including a reverse stress test. In the scenarios sales are flexed, along with the impact on related expenses, working capital changes and other mitigations such as cost reduction and timing of capital expenditures. These scenarios are used to evaluate the implications for gross margins, operating expenses, profitability, working capital, capital expenditure and the consequent financial position, including operating within financial covenants attaching to the RCF. For each scenario the Directors have identified relevant actionable mitigating measures that the Group could undertake at its own discretion to adjust future cashflows.

In making their assessment the Directors have reviewed management forecasts based on scenarios reflecting full-year sales growth/(decline) of +5%, (-9%), (-15%), (-20%) and (-30%).

The directors have considered the impact of mitigations and the Group's ability to implement these changes at its own discretion. The Directors have also considered the probability of each sales scenario, concluding that the more extreme sales decline scenarios are of remote probability. As a result, the Directors have concluded that the use of the going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern in the period to 31 December 2023.

ALTERNATIVE PERFORMANCE MEASURES (APMS)

Management believes that Underlying EBITDA, Underlying Operating Profit and Underlying Profit before tax are useful measures for investors because these are measures closely tracked by management to evaluate the Group's operating performance and to make financial, strategic and operating decisions. These may help investors to understand and evaluate, in the same manner as management, the underlying trends in operational performance on a comparable basis, period on period.

RECONCILIATION OF ADDITIONAL PERFORMANCE AND STATUTORY MEASURES

Underlying EBITDA

Underlying operating profit

Underlying profit before tax

* Restated for the period ended 27 June 2021 - see note 9.

MATT PRITCHARD

Chief Financial Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 26 June 2022

* Restated 52 weeks ended 27 June 2021 - see note 9.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 26 June 2022

* See note 9 for explanation of restatements as at 28 June 2020 and 27 June 2021.

The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 30 November 2022. They were signed on its behalf by:

Matt Pritchard

Chief Financial Officer30 November 2022

CONSOLIDATED STATEMENT OF CASH FLOW

For the period ended 26 June 2022

* Restated 52 weeks ended 27 June 2021 - see note 9.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 26 June 2022

* Restated 52 weeks ended 27 June 2021 - see note 9.

Notes to the preliminary information

1. Basis of preparation

The financial information in this preliminary announcement has been extracted from the audited consolidated financial statements for the period ended 26 June 2022 and does not constitute the statutory accounts for the Group.

The consolidated financial information has been prepared in accordance with UK-adopted International Accounting Standards in conformity with the requirements of the Companies Act 2006 ("IFRS"). The financial statements have been prepared on the historical cost basis, except for the revaluation of derivative financial instruments, JV loan and financial guarantee contracts that are measured at fair values at the end of each reporting period, as explained in the accounting policies below.

New standards, amendments and interpretations, that were effective in FY22, impacting the Group that have been adopted in the annual financial statements for the year ended 26 June 2022, and which have given rise to changes in the Group's accounting policies are set out below. None of these changes had a material impact upon the financial statements.

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.New standards, amendments and interpretations which are not yet effective at the reporting date are set out below:

Going concern

The Board has concluded that it is appropriate to adopt the Going Concern basis.

The Directors have undertaken a comprehensive assessment in order to conclude that the Group has the ability to trade as a going concern using forecasts drawn up to 31 December 2023, considering the current macro-economic environment and the potential impact of relevant uncertainties facing all businesses, together with the Group's ability to influence its activities and hence the financial position, cashflows and profitability. The Financial Review considers in more detail the groups trading performance and financial position.

In reaching their conclusion the Directors' considerations have included the following factors:

The Directors have modelled a number of scenarios, including a reverse stress test. In the scenarios sales are flexed, along with the impact on related expenses, working capital changes and other mitigations such as cost reduction and timing of capital expenditures. These scenarios are used to evaluate the implications for gross margins, operating expenses, profitability, working capital, capital expenditure and the consequent financial position, including operating within financial covenants attaching to the RCF. For each scenario the Directors have identified relevant actionable mitigating measures that the Group could undertake at its own discretion to adjust future cashflows.

In making their assessment the Directors have reviewed management forecasts based on scenarios reflecting full-year sales growth/(decline) of +5%, (-9%), (-15%), (-20%) and (-30%).

The directors have considered the impact of mitigations and the Group's ability to implement these changes at its own discretion. The Directors have also considered the probability of each sales scenario, concluding that the more extreme sales decline scenarios are of remote probability. As a result, the Directors have concluded that the use of the going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern in the period to 31 December 2023.

2.  Exceptional items

* Restated 52 weeks ended 27 June 2021 - see note 9

Impairment related to joint venture investment

Credit loss on loans

There is an impairment charge of £11,429k during the year ended 26 June 2022 (27 June 2021: restated £1,956k) related to the revised assessment of probability of recovery of loans made to the Japan joint venture over the period 2018 to 2022.

Credit loss on guarantees

There is an impairment charge of £5,936k during the year ended 26 June 2022 (27 June 2021: restated -£192k) related to guarantees provided by the Group in respect of external finance leases of the Japan joint venture which were called when the Japan joint venture obtained Court approval for Civil Rehabilitation restructuring proceedings (Minji Saisei).

Impairment on equity investment

There is an impairment charge of £4,471k during the year ended 26 June 2022 (27 June 2021: £nil) related to the recognition of losses in the joint venture in Japan.

Saint Lucia impairment

There is an impairment of £1,200k during the year ended 26 June 2022 (27 June 2021: £216k) relating to the assets of the Saint Lucia business. The charge in 2022 related to the decline in the value of the Project Chocolat visitor attraction due to the continuing impact of COVID-19 on tourism in Saint Lucia in FY21. The charge in 2021 was due to a decline in the value of the land and property and also due to the impact of COVID-19.

Goodwill impairment

There is an impairment charge of £425k during the year ended 26 June 2022 (27 June 2021: £nil) related to goodwill which arose from the acquisition of Rabot 1745 Limited. The goodwill related to the Rabot 1745 range of beauty products which is no longer supportable as Rabot 1745 Limited is no longer trading.

Store Impairments

US Gain on remeasurement of lease liabilities

There is an impairment release of £3,491k during the year ended 26 June 2022 (27 June 2021: £2,069k charge) relating to the release of lease liabilities of the closed US stores. The prior year charge increased the impairment to 100% of the value of remaining plant & equipment and right of use assets under IFRS 16, in recognition of poor trading conditions and the decision to close the US stores.

UK Store impairments

There is an impairment release of £1,734k during the year ended 26 June 2022 (27 June 2021: £26k charge) relating to fixed assets and right of use assets of stores. The release is primarily due to the improved 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 for 5 years and a discount rate of 9.670% (27 June 2021: 9.335%).

Material non-recurring events - Operating costs

Capital cash deposit impairment

There is a provision of £2,477k during the year ended 26 June 2022 (27 June 2021: £nil) for doubtful recovery of a cash deposit made to a manufacturer of capital equipment that went into administration.

New sale and operation planning process

Non-recurring professional fees of £809k have been incurred during the year ended 26 June 2022 (27 June 2021: £nil) in relation to the implementation of a new sales and operation planning process.

US exit costs

There are exit costs of £611k during the year ended 26 June 2022 (27 June 2021: £nil) which relate to the doubtful recovery of rent deposits and staff redundancy costs.

Restructuring costs

There is an expense of £181k during the year ended 26 June 2022 (27 June 2021: £nil) related to staff redundancy costs.

Onerous contracts

Forward contracts for items of stock had been entered into to support activities in the US and Japan markets. Following management's decision to exit these markets, £964k has been provided for (27 June 2021: £nil).

Material non-recurring events - Margin

Discontinued UK stock lines

There is a provision of £2,959k during the year ended 26 June 2022 (27 June 2021: £nil) related to the decision to exit certain UK product categories.

US stock provision

There is a provision of £2,542k during the year ended 26 June 2022 (27 June 2021: £nil) related to the reduced value of US stock following the decision to exit the US market.

3.  (Loss)/Profit from operations

(Loss)/Profit 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.

2 See note 2 - Exceptional items

* Restated 52 weeks ended 27 June 2021 - see note 9

4.  Finance income and expenses

* Restated 52 weeks ended 27 June 2021 - see note 9.

5.  Earnings per share

(Loss)/profit for the period used in the calculation of the basic and diluted earnings per share. Diluted (loss)/profit 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:

* Restated 52 weeks ended 27 June 2021 - see note 9.

As at 26 June 2022, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 3,649,911 (27 June 2021: 285,289). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect. On 23 July 2021, the Company announced the completion of an equity placing for a total of 11,112,913 new ordinary shares.

6.  Property, plant and equipment

1 The following impairments were made in the period ended 26 June 2022: Saint Lucia estate impairment charge £1,200k (27 June 2021: £216k), Store impairment release £1,734k (27 June 2021: £2,095k charge) and capital cash deposit impairment charge £2,477k (27 June 2021: £nil).

2 Reclassifications represent right of use assets previously categorised within furniture & fittings, equipment & hardware.

As at 26 June 2022, the net book value of freehold property includes land of £4,509k (27 June 2021: £3,806k), which is not depreciated. Included in freehold property is £2,438k of assets under construction (27 June 2021: £2,997k). Included in Furniture & fittings, equipment & hardware is £2,005k of assets under construction (27 June 2021: £448k). Included in Plant & machinery is £7,475k of assets under construction (27 June 2021: £14,610k).

7.  Leases

The lease liability is initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate (IBR). The determination of the discount rate is considered to be a significant judgement. The discount rate applied ranged between 2.0% and 4.8% (27 June 2021: 2.0% and 3.5%). 

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

Amounts recognised in the consolidated statement of financial position