19 Jul 2022 07:00
19 July 2022
HOTEL CHOCOLAT GROUP PLC
("Hotel Chocolat", the "Company" or the "Group")
Trading Update
Hotel Chocolat Group plc, a premium chocolate brand, today announces a trading update for the 52-week period ended 26 June 2022 ("FY22").
Total Group revenue increased by 37% to £226m (FY21: £165m), ahead of market consensus expectations[1] and by 70% compared to the financial year ended 30 June 2019 (FY19: £133m) with FY19 being the last full equivalent period prior to the impact of the Covid-19 pandemic.
H2 growth remained very robust at 32%, against stronger comparatives in Q4 FY21 following the end of "lockdowns" affecting UK retail from April 2021, when Group sales growth began to accelerate:
FY22 Revenue Growth (unaudited) | H1 | H2 | Full Year |
Group Sales vs FY21 | +40% | +32% | +37% |
UK Sales vs FY21 | +38% | +29% | +35% |
Group Sales vs FY19 | +77% | +60% | +71% |
UK Sales vs FY19 | +73% | +60% | +68% |
While the Board anticipates underlying FY22 profit before tax will be in line with market consensus[2], statutory reported profit for FY22 is expected to be a loss, being affected by the outcomes of an internal business review, predominantly as a result of non-cash impairment provisions[3] and costs arising from discontinued activities including the closure of retail stores in the USA[4].
The Group is well capitalised with cash on hand of £17m as at 26 June 2022, with £50m of available undrawn headroom in the Group's £50m working capital RCF. Inventory production for FY23 is well advanced.
Outlook
Having raised £40m of new equity in July 2021 to support growth investments, the Board has now reviewed the relative performance of each strategic growth driver over the year. Given the current global macro-economic climate, the Group will now deliberately focus its efforts over the next three years on its most proven and lowest-risk strategies with the greatest potential for further increased profitability and scaled cash generation. The forward strategy for each of the six growth drivers is as follows:
● | VIP loyalty and digital will continue, now forming a core part of "business as usual" growth in the UK, without requiring material additional investment in the near-term. |
● | Velvetiser hot chocolate system and Velvetised chocolate cream alcohol continue as capex-light growth categories, with significant further UK market headroom, and the potential for risk-contained capex-light international wholesale growth. |
● | In response to the change in the global macroeconomic environment, investment levels in the USA and the Japan joint venture will be materially reduced, with ongoing investment limited to essential working capital only. |
The focus on profitable drivers will mean lower sales growth in the short term, and some transitional costs leading to lower profits in FY23, with the objective of higher profits thereafter and a strategic goal of c20% EBITDA (pre IFRS16) in FY25. Current cost headwinds including opex investments and inflation, together with mitigations, are set out in the table further below.
Continued strength of Core UK Operations
● | In the UK, the brand strength and multichannel model drove sales growth of 35% vs FY21, and 68% vs FY19. | |
● | VIP loyalty customers now account for 71% of UK direct-to-consumer sales by value (FY21 44%) | |
● | Significantly larger addressable market size than previously estimated: | |
- | New categories of in-home drinks (Velvetiser) and alcohol (Velvetised Cream) are enabling us to access new incremental markets and new channels | |
- | The Group's online business is now more than three times larger than in FY19 | |
- | UK Retail estate profitability materially improved in FY22 vs FY19 due to higher sales densities and lower occupancy costs | |
- | Unprompted brand awareness has risen from 17% in October 2020 to 23% in April 2021 | |
- | Velvetiser customer lifetime value ('CLV') continues to be materially higher than for non-Velvetiser customers. Whilst Velvetiser CLV has reduced compared to FY21 due to a lower mix of early adopters, the CLV remains more than double that for a loyal non-Velvetiser customer, with 85% of Velvetiser buyers remaining active. | |
● | Multi-year capital investment programme to deliver robust and scalable manufacturing and supply infrastructure: | |
- | UK factory capacity increased from 210m pieces in FY19 to 380m pieces for FY23, with long-term ability to grow site output to 1bn pieces with further staged capex spend | |
- | Nine-fold increase in production capacity for Unbelievably Vegan 'milk' chocolate | |
- | Signed lease on 2nd DC in Northampton, which will be operational for Christmas 2023. | |
A prudent approach to cash funding for USA and Japan joint venture to minimise risk
The Group has decided to adopt a de-risked approach to international growth opportunities and in FY23 will fund necessary working capital only, without making speculative investments in customer acquisition or capex.
● | The USA focus will become solely online and wholesale when the one remaining store closes in H1 FY23. | |
● | The Japan JV partner has experienced three consecutive peak Valentine's and White Day trade periods being severely impacted by Covid-related restrictions, which has delayed the development to a profitable business. Whilst the Group continues to support necessary working capital requirements only, the Japan JV partner retains the opportunity to seek other sources of capital funding to pursue its growth business plan and further updates will be made as appropriate. |
Angus Thirlwell, Co-Founder and Chief Executive Officer, said:
"The Hotel Chocolat brand is achieving very strong growth in the UK, and we are pleased to have beaten sales expectations and expect to meet underlying profit expectations for FY22.
"The way the market has rapidly changed for all businesses in the second half certainly emphasises the resilience value of investments that we have made over the last 20 years: in building a differentiated brand with strong customer loyalty, a unique and desirable product range, and our own, dependable UK chocolate factory.
"A year of exceptional sales growth following two years of reactionary tactics to the pandemic has left clear opportunities for us to proactively streamline overheads and improve gross margins. We have set ourselves the target of becoming a 20% EBITDA margin business within three years by applying systemisation, automation, and capacity investments to our 70% larger scale (FY22 vs FY19).
"While we expect a temporary lower sales growth rate and profit margin for FY23 as we carry through our adjustments, the result will be a business delivering greater results, with less risk and an even stronger balance sheet with a higher profit percentage growth in FY24 and FY25."
"We have discovered that our UK market can be a lot bigger for us than we thought a year ago, thanks to the new drinkable chocolate products (Velvetiser & Velvetised Cream alcohol) and the way our digital and stores businesses are performing."
Current cost headwinds and mitigations with estimated duration are summarized in the table below:
Category | Items | Assumed Duration (headwind)/opportunity |
Ongoing Op-Ex investments to support brand health and sustainability | · Gentle Farming programme: paying higher prices for cacao to support farmer living incomes · Paying living wage in UK, partly offset by productivity gains
| (300bps) headwind in FY23 and ongoing |
Opex investments now to support future profits via lower unit costs | · New 10-year lease on a 2nd UK Distribution Centre in Northampton, operational H1 FY23. | (300bps) headwind in FY23, diluting to flat vs FY22 by FY25 as volumes and operating efficiency increase |
External inflation | · Utilities and materials, partly mitigated by better buying and improved production efficiency (lower unit cost of goods and fulfilment cost per unit) · Full reinstatement of UK property rates | (>300bps) headwind in FY23, realistic objective for self-help to materially exceed inflation by FY25 |
Self-help profit margin drivers | · Marketing mix adjustment: less acquisition marketing and more retention/activation marketing which is more profitable · Increased mix of full-price sales and lower discounting · Better buying (new procurement function) · Improved production efficiency: lower unit costs as a result of capital investment · Reduced fulfilment cost per unit sold · Scale economies and removal of non-value adding activities | +300bps tailwind FY23, with increasing benefit thereafter |
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.
Enquiries:
Hotel Chocolat Group PLC | Tel: +44 (0) 1763 257 746 |
Angus Thirlwell, Co-Founder and CEO | |
Peter Harris, Co-Founder and Development Director | |
Matt Pritchard, CFO | |
Liberum (Nominated Adviser and Sole Broker) | Tel: +44 (0) 20 3100 2000 |
Clayton Bush | |
Edward Thomas | |
Miquela Bezuidenhoudt | |
Citigate Dewe Rogerson | |
Angharad Couch | Tel: +44 (0) 7507 643 004 |
Ellen Wilton | Tel: +44 (0) 7921 352 851 |
Alex Winch |
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) and owning its extensive direct to consumer channels (branded stores, websites). The Group was admitted to trading on AIM in 2016.
[1] Market consensus revenue expectation for FY22 of £212m
[2] Market consensus expectations of underlying profit before tax of £22m
[3] Board acknowledges the potential for a full impairment charge under IFRS9 relating to revised assessment of probability of recovery on £23m of loans made to Japan joint venture over the period 2018-2022.
[4] £3m of provisions relating to discontinued store operations in the USA, including future lease liabilities, landlord deposits and inventory.