The posh chocolates seller is a cash generative growth business with global aspirations
Thursday 19 Dec 2019 Author: James Crux

Premium British chocolatier Hotel Chocolat’s (HOTC:AIM) enviable record of beating earnings forecasts has been rewarded with a rich equity rating, yet the growth story is just getting started.

This cash generative chocolate brand’s product range is going from strength to strength and it plans to take a bite out of huge US and Japanese markets.

Guided by co-founder and CEO Angus Thirlwell, the leading UK premium chocolate brand sells products online and through locations in the UK and abroad.

It has a flagship UK restaurant in London and a cacao estate and hotel in Saint Lucia. A vertically integrated business, Hotel Chocolat grows its own cocoa and owns (and enforces) its own intellectual property too.

Risk factors include the fact that the bulk of its cocoa comes from a single supplier.

Hotel Chocolat’s stores – ‘a doorway into instant escapist happiness’ according to Thirlwell – are flourishing. Consumers are drawn in by relentless product innovation and experiences including Chocolate ‘lock-in’ tastings.

Like-for-like store growth accelerated in the first six months of 2019 following the launch of an in-home hot chocolate system and a loyalty scheme. And forthcoming launch ‘Biscuit of the Gods’ – where it is aiming to offer the ‘best chocolate biscuit on the planet’ – could boost sales momentum.

Hotel Chocolat is delivering tasty growth in the digital channel, as well as in the wholesale business, where it sells through Next (NXT), John Lewis and Amazon.

While being a near-term drag on group-level earnings, overseas developments are among the key upside catalysts to watch in 2020.

The gifting markets in the US and Japan are huge, roughly five and 3.8 times bigger than the UK respectively, while the brand’s ‘More Cacao Less Sugar’ mantra is already resonating in Tokyo and New York.

Having also formed a new joint venture in Scandinavia, Hotel Chocolat is exploring the potential for wholesale tie-ups in the US.

Furthermore, the gifting seasons are different in Japan, where Valentine’s Day and White Day in February and March generate a sales peak similar to Christmas in the UK.

For the year to June 2020, Peel Hunt forecasts £15m adjusted pre-tax profit (2019: £14.1m), rising to £16.3m in 2021.

We consider Hotel Chocolat one of those rare businesses with the right ingredients to keep growing thanks to geographical expansion opportunities. The shares have done well since it joined the market in 2016 and we see that trend continuing.

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