Hotel Chocolat shares fell by 50% on Tuesday morning, after the upmarket chocolatier hit the market with a profit warning and said it would scale back its overseas expansion programme.
Shares in this former high flyer have now fallen by more than 75% since the start of 2022.
It’s a shocking reversal for investors. As recently as March, the company said that it had “a clear line of sight” to profitability in the US and Japan. While the core UK business appears to be performing more strongly, cost headwinds and restructuring costs are expected to lead to lower profits next year.
Hotel Chocolat’s market cap has dropped to c.£165m at the time of writing. That’s less than the £229m market cap achieved in the company’s 2016 IPO.
As shareholders or potential investors, I think we each need to decide whether this historically expensive stock now offers value.
At times like this it’s important not to anchor on past share prices. What’s happened before won’t necessarily happen again. Tuesday’s update suggests to me that Hotel Chocolat’s growth rate and cost structure are likely to be very different over the next few years. This will be reflected in its profits and valuation.
Let’s start with a look at the main points from Tuesday’s trading update.
FY22 trading: healthy
Hotel Chocolat’s underlying results for the year ended 26 June appear to be fairly healthy. Sales rose by 37% to £226m, ahead of the £215m consensus estimate shown by Stockopedia.
Full-year adjusted pre-tax profit is expected to be in line with market consensus, which is given as £22m (FY21: £10.1m).
The trouble starts with an admission that statutory profit for FY22 is “expected to be a loss”. This is due to impairment charges and costs arising from an ominous-sounding “internal business review”.
Overseas: exit costs
The majority of the extra costs that will be reported appear to relate to Hotel Chocolat’s near-total withdrawal from its international operations.
Japan: The company operates through a joint venture in Japan. This generated £5m of retail sales during the final six months of calendar 2021. Unfortunately, this loss-making business appears to have been built at a high price.
Hotel Chocolat loaned £23m to the JV between 2018 and 2022. According to Tuesday’s update, it’s now likely that these loans will…
