Interim Results

25th February 2020

Hotel Chocolat Group plc

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

Interim Results

Hotel Chocolat Group plc, a premium British chocolatier and omni-channel retailer, today announces its interim results for the 26 weeks ended 29 December 2019. All numbers shown are after adopting IFRS 16 unless otherwise stated.

Financial highlights:

1 Underlying EBITDA in H1 FY20 excludes £0.5m of share-based charges (H1 FY19: £0.4m).

Operational highlights:

Angus Thirlwell, Co-founder and Chief Executive Officer of Hotel Chocolat, said:

"This was another strong period for Hotel Chocolat. Our new store openings contributed three percentage points of the growth in the period, with the remaining balance coming from existing locations, digital and wholesale channels. While our new markets in the US and Japan are still in the early stages of development, consumer response to the brand is encouraging, sales are growing, and we believe we have a deliverable plan to achieve attractive returns.

"The Velvetiser in-home hot chocolate system achieved strong growth, with our installed Velvetiser owner base showing great loyalty and enthusiasm for our widening library of flavours, with Tasmanian Mint, Habanero Chilli, and Maple & Pecan hot chocolates becoming instant hits. Our VIP loyalty scheme continued to grow strongly and contributed to double digit EBITDA growth from our physical UK locations.

"Our strong growth came from a wider variety of sales channels than in previous years, which led to some initial challenges in our supply chain. We are now making good progress with investments and upgrades in our supply chain which will fully address these inefficiencies and increase our international and multi-channel supply capability, ensuring we continue to deliver profitable growth."

For further information:

Notes to Editors:

Hotel Chocolat is a premium British chocolatier with a strong and distinctive brand. The business was founded in 1993 by Angus Thirlwell and Peter Harris and has traded under the Hotel Chocolat brand since 2003. The Group sells its products online and through a network of locations in the UK and abroad. The Group has a cacao plantation and eco-hotel in Saint Lucia, offering complete cacao immersion through tree-to-bar experiences and wellness treatments. The Group also has a flagship restaurant and cacao roastery in London's Borough Market: Rabot 1745. The Group was admitted to trading on AIM in 2016.  

Chief Executive's statement (inclusive of financial review)

RESULTS

*The Group has initially applied IFRS 16 at 1st July 2019 using the modified retrospective approach. Under this approach comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application. (See Note 2)

CHIEF EXECUTIVE'S STATEMENT

I am pleased to report continued progress for the Hotel Chocolat brand during the 26 weeks to 29 December 2019. Revenue for the period increased by 14% and underlying EBITDA (pre IFRS 16) increased by 7%. Our growth strategy continues to focus on four key themes:

1) UK Physical locations

We opened nine new Hotel Chocolat locations in the UK during the period and generated double-digit increase in EBITDA profitability from our UK estate. Further attractive opportunities remain, which we will continue to evaluate on a site-by-site basis. We are also investing in our existing estate; we re-located in Cardiff and Brighton to larger prime sites with our full offer, and have begun to refit locations, adding our leisure experience with drinks, ices and seating to London Moorgate and Gateshead Metro Centre. Initial results suggest that 'upgrade investment' in existing strong catchments will offer attractive returns as well as nourishing the brand and continuing to add to its appeal.

2) Cautious 'test, learn, grow' approach to new international markets

In the USA, we opened two more locations in the period, bringing the total to four. Consumer reaction is encouraging, and our first location in the USA has now passed its one-year anniversary, generating a modest EBITDA profit in the period. We have a clear and deliverable plan to further improve profitability in the coming years to the point where a rollout model would generate attractive returns.

In Japan, our joint venture partner opened three more locations bringing the total to five. Consumer reaction is similarly encouraging, and our first opening has also now passed its one-year anniversary, generating a modest EBITDA profit in the period. Unlike the UK and the USA, the larger gift-giving seasons are in the second half of our financial year, therefore we anticipate a further improvement in site-level economics in the second half of this coming financial year. Again, we have a clear and deliverable plan to improve profitability in the coming years to the point where a rollout model would generate attractive returns.

3) UK digital proposition

Despite being an early online pioneer, we believe we have under-invested in this part of our model over the last few years. The first half of the financial year saw us make investments to address this, with several new hires and a new suite of tools to make fuller use of the opportunities of our strong brand and burgeoning customer base.

Our new in-sourced CRM system is driving improved customer communication. We launched a new subscription service for Velvetiser refills, and we grew our VIP scheme by over 100 per cent, for which we will shortly be introducing an App.

4) Increase capacity and capture efficiencies from the vertically integrated supply chain

Our gross margin rate declined by 80 basis points due to the increased sales mix of the Velvetiser in-home hot chocolate maker. The initial sale has a lower than average gross margin, but this is offset by the lifetime value of the chocolate refills. We continue to innovate the library of flavours on offer and have now launched a free-delivery subscription service.

In supplying more growth channels, we encountered some inefficiency in our internal supply chain which resulted in overheads increasing by 50 basis points. Having identified the root causes, an investment programme is already underway to prepare our supply chain in advance of the 2020 winter peak.

FINANCIAL REVIEW

Revenue

Group revenue increased by 14% to £91.7m. Nine new locations were opened in the UK during the period contributing three percentage points of the Group's year-on-year growth. Retail, digital and wholesale all delivered sales growth.

Profit Before Tax

Profit before tax (pre IFRS 16) increased by 7% to £14.9m. IFRS 16 has been applied at 1st July using the modified retrospective approach under which comparative information is not restated. Reported Profit before tax increased by 8% to £15.0m.

Gross margin

Gross margin declined by 80 basis points from 65.8% to 65.0% driven by the mix impact of Velvetiser sales. Whilst the initial sale of Velvetisers are at a lower gross margin, the recurring chocolate refills have a higher purchase frequency than our other products.

Operating expense

Operating expenses (pre IFRS 16) grew by 15%, ahead of the rate of sales growth, with additional costs of fulfilment during the winter peak. As a result, operating expenses as a percent of sales increased from 44.3% to 44.8%. The transition to IFRS16 resulted in reported Operating expenses of 38.2% of sales.

Underlying EBITDA

Underlying EBITDA (pre IFRS 16) increased 7% to £18.5m.

Share based payments

Share-based payment expense of £0.5m (H1 FY19: £0.4m) related to the share-based Long-Term Incentive Plan and an all-employee Save As You Earn plan.

Foreign currency

The business manufactures the majority of its products in the UK; however, it does purchase some premium ingredients in foreign currencies, predominantly Euros. The Group hedges its forecast Euro purchases up to 18 months ahead.

Finance income and expense

Finance expense (pre IFRS 16) of £0.2m reflects £0.1m of interest on a working capital overdraft, and £0.1m of realised interest on foreign exchange hedges. Post IFRS 16 Finance Expense is £0.9m. Finance income of £0.1m is driven primarily by unrealised interest on foreign exchange hedges.

Earnings per share

Basic earnings per share in the period (pre IFRS 16) increased 18% to 11.3p (H1 FY19: 9.6p). Post IFRS 16 Earnings per share were 11.5p. The exercise of the 2016 Long Term Incentive Plan and Save-As -You-Earn schemes in the period resulted in corporation tax deductions, giving an effective tax rate of 13.0% (pre IFRS-16) (H1 FY19 22.0%).

Dividend

At the time of the IPO, the Directors stated an intention to implement a progressive dividend policy to reflect the expectation of future cash flow. The Board proposes an interim dividend of 0.6p per share which will be paid on 15th April 2020 to shareholders on the register on 6th March 2020. Mindful of the potential growth opportunities in the USA and Japan, the Board will continue to review the rate of growth in any dividend relative to the potential opportunities for re-investment in service of profitability and growth.

Cash flow and closing cash position

Net cash inflow from operating activities was £30.2m (H1 FY19: £29.5m) an increase of 2 percent.

Net cash (being cash minus borrowings) at the end of the period was £24.3m (H1 FY19: £21.8m). The Group has access to an overdraft facility with Lloyds Bank plc to fund seasonal working capital requirements if required.

Major capital projects in the period included new Hotel Chocolat locations, refits of existing locations, upgrades to the manufacturing facility and Distribution Centre.

OUTLOOK

Since the end of the financial reporting period, trading has continued to be in line with the Board's expectations. The performance of the new locations is encouraging and there is a future pipeline of similar potential locations. The Velvetiser and the VIP Me loyalty card scheme both performed well during their second year and both offer significant future growth potential.

In delivering these results in a context of continued macro-economic uncertainty, the business has demonstrated creativity, resilience and adaptability. Delivery against the four-point strategy will result in top-line growth and improve profitability in the UK, enabling the Group to invest in the growing new markets of USA and Japan. A strongly differentiated brand which offers great products and customer service and that is priced as an affordable luxury, gives the Board confidence in the Group's continued progress.

Adoption of IFRS 16 "Leases"

The Group has initially applied IFRS 16 "Leases" as at 1st July 2019. A right of use asset and a lease liability is included on the balance sheet, and depreciation and interest have been charged to the income statement, replacing rental charges through operating expenses. The change has no impact to cash flow and therefore has no impact to the Board's decision-making.

Discount rates ranging between 2% and 3.5% have been applied using a portfolio approach. The discount rate is based on the Bank of England Base rate, modified to account for credit premium and the remaining lease term. Store leases have been stratified using a number of factors including:

The weighted average incremental borrowing rate applied at the date of transition was 2.5%.

The Group has adopted the modified retrospective approach, under which comparative information is not restated. The cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application.

A summary of the impact on the Group income statement and balance sheet is as follows:

Angus Thirlwell

Co-founder and Chief Executive Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 29 December 2019

* The Group has initially applied IFRS 16 at 1 July 2019 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application. (See note 2)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 29 December 2019

* The Group has initially applied IFRS 16 at 1 July 2019 using the modified retrospective approach. Under this approach, comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application. (See note 2)

CONSOLIDATED STATEMENT OF CASH FLOW 

For the period ended 29 December 2019

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the period ended 29 December 2019

NOTES TO THE INTERIM FINANCIAL INFORMATION

The consolidated interim financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and Interpretations (collectively IFRSs), as adopted by the European Union.

The accounts have been prepared in accordance with accounting policies that are consistent with the Group's Annual Report and Accounts for the period ended 30 June 2019 and that are expected to be applied in the Group's Annual Report and Accounts for the period ended 28 June 2020. There are new or revised standards that apply to the period beginning 1 July 2019 but they do not have a material effect on the financial information for the period ended 29 December 2019, with the exception of IFRS 16 detailed below.

The comparative financial information for the period ended 30 June 2019 in this interim report does not constitute statutory accounts for that period under 435 of the Companies Act 2006.

Statutory accounts for the period ended 30 June 2019 have been delivered to the Registrar of Companies.

The auditors' report on the accounts for 30 June 2019 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Directors have taken into account the historic positive cash flows, growth in business and the inherent risks and uncertainties facing the business, and have derived forecast assumptions that are the Directors' best estimate of the future development of the business. The forecasts and projections, which take into account the projected trading performance of companies within the Group's combined bank facilities, show that the Group will be able to operate within the level of its current facilities. On this basis, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis of accounting in preparing the consolidated financial information.

Except for the first time adoption of IFRS 16 detailed below, the interim financial results have been prepared by applying the accounting policies that were applied in the preparation of the 2019 Annual Report and Accounts which are published on the Hotel Chocolat website, www.hotelchocolat.com. The changes to accounting policies outlined below are also expected to be reflected in the Group's consolidated financial statements as at the year ending 28 June 2020.

Other than IFRS 16 there are no new or amended standards effective in the period which has had a material impact on the interim consolidated financial information.

IFRS 16 "Leases"

IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both the lessee and the lessor. It eliminates the lease classification of leases as either operating leases or financial leases and introduces a single lease accounting model requiring lessees to recognise a lease liability reflecting the future lease payments and a right-of-use asset for lease contracts.

The Group has applied the modified retrospective transition approach, with recognition of transitional adjustments on the date of initial application (1 July 2019), without restatement of comparative figures.

On transition to IFRS 16 the group elected to apply the following practical expedients on a lease by lease basis as allowed by the standard:

Lease payments for low value or short term leases where the Group has elected not to recognise a right-of-use asset and lease liability are charged as an expense on a straight line basis.

At the date of commencement of property leases the Group determines the lease term to be the full term of the lease, assuming that any option to break or extend is not likely to be exercised. Leases are regularly reviewed and will be revalued if it becomes likely that a break clause or option to extend will be exercised. The weighted average incremental borrowing rate applied at the date of transition was 2.5%.

The Group recognises a right-of-use asset at the lease commencement date. The right-of-use asset is measured as their carrying amount as if IFRS 16 has been applied since the commencement date, discounted using the lessees incremental rate at the date of initial application. Subsequent to measurement, right-of-use assets are amortised on a straight line basis over the remaining term of the lease or over the remaining economic life of the asset if assessed to be shorter.

The lease liabilities are measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as at 1 July 2019. The Group's incremental borrowing rate is the rate at which a similar borrowing could be obtained over a similar term in a similar economic environment. Judgement is required to determine an approximation with consideration given to the Groups borrowing facilities and Bank of England Base rates adjusted by an indicative credit premium and a lease specific adjustment.

Subsequently, the lease liability is increased by the interest cost on the lease liability and decreased by the lease payments made. It is re-measured if there is a modification, a change in lease term or a change in the fixed lease payment.

The impact on the balance sheet on transition is summarised below:

The table below shows a reconciliation from the total operating lease commitment as disclosed at 30 June 2019 to the total lease liabilities recognised in the accounts immediately after transition:

The Group presents right-of-use assets separately in the consolidated balance sheet. The carrying amounts of right-of-use assets are as below:

The Group presents lease liabilities separately in the consolidated balance sheet.

The Group has recognised amortisation and interest costs in respect of leases that were previously classified as operating leases in the income statement, rather than rental charges. During the period ended 29 December 2019, the Group recognised £5.2m of additional amortisation charges and £0.7m of additional interest costs in respect of these leases.

The Group has applied IFRS 16 using the modified retrospective approach, whereby the initial right-of-use asset was measured at carrying amount as if the standard had always been applied, but discounted using the incremental borrowing rate at the date of initial application. The lease liability was measured at the present value of the remaining lease payments. The mismatch between the liability and asset value at transition is taken to reserves. The Group has taken £1.3m to reserves at the start of the period.

Profit from operations is arrived at after charging:

Profit for the period used in the calculation of the basic and diluted earnings 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:

As at 29 December 2019, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 301,073 (30 December 2018: 3,657,000). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect.  

*The Group has initially applied IFRS 16 at 1st July 2019 using the modified retrospective approach. Under this approach comparative information is not restated and the cumulative effect of applying IFRS 16 is recognised in Retained earnings at the date of initial application. (See Note 2)

As at 29 December 2019, the net book value of freehold property includes land of £2,853,955 (31 December 2018: £2,941,238), which is not depreciated.