Hotel Chocolat sales beat expectations in its latest full year – but is warning of a full-year loss as it retreats from international expansion to focus on its UK business.
The chocolate retail brand is to close its stores in the US and sell online-only in that market, while it will also reduce investment levels in Japan, a market where its joint venture partner has been hard hit by successive Covid-19 lockdowns.
The update comes as Hotel Chocolat, ranked Top100 in RXUK Top500 research, today says that it expects group revenue to come in at £226m in the year to June 26 2022. That’s 37% ahead of the previous year, and is ahead of market expectations. It is also 70% ahead of its sales in the pre-pandemic year to June 30 2019.
In the UK, sales grew by 35% during the year – 38% first half growth was followed by 29% in the second half. Across the group, sales came in at 40% in the first half, and 32% in the second half – taking it to 37% growth over the full year.
However, while underlying pre-tax profits – before one-off costs – will be in line with market expectations, it now expects to report a bottom-line loss following its decision to close its US stores.
Rethinking the strategy
Hotel Chocolat raised £40m of new equity last July in order to invest in growth. It developed six growth strategies and, following a review of performance, has now decided to focus on its most-proven strategies that require relatively low investment – digital, VIP loyalty in the UK, and its Velvetiser hot chocolate business, which will both expand in the UK and internationally via wholesale. Hotel Chocolat says that its UK online business is now three times larger than in its 2019 full year, while its shops are more profitable as a result of lower rents and higher sales. VIP loyalty customers now account for 71% of its direct-to-consumer UK sales. Meanwhile, the customer lifetime value of Velvetiser customers is “materially higher” than that of non-Velvetiser customers.
It will reduce investment in both the US and the Japan joint venture, closing its US stores and supplying only essential working capital to both international businesses.
In the short term that’s likely to mean lower sales growth and lower profits in its current year as it deals with “transitional costs”. After that it expects to return to higher profits and 20% growth in EBITDA (earnings before interest, taxes and one-off costs) in 2025.
Angus Thirlwell, co-founder and chief executive of Hotel Chocolat, says: “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.”
As of June 26 2022, the retailer had £17m cash on hand and £50m available in its undrawn credit facility.