Interim Results

26 February 2019

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 30 December 2018.

Financial highlights:

Operational highlights:

1 Underlying EBITDA in H1 FY19 excludes £0.4m of share-based charges (H1 FY18: £0.4m).

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

"This has been another period of progress for Hotel Chocolat with strong growth in sales, profits and cash generation. The critical Christmas period was again successful, supported by the launch of our new and innovative Velvetiser Hot Chocolate maker and by a deepening relationship with our customers via the new VIP Me scheme. Both developments will also support our plans for the key spring seasons of Mother's Day and Easter.

"Growth in the UK continued to deliver improvements in profitability which have enabled us to invest in the launch of two new start-ups in New York and Tokyo, both of which are showing encouraging early signs, in terms of customer response and the initial store sales performance.

"I would like to thank everyone in the Hotel Chocolat team for their dedication in delivering another successful Christmas.

"Recent trading, including the Valentine's period, is in line with the Board's expectations and we continue to make good progress against our key strategic objectives of opening more stores, improving our digital capability and increasing our production capacity whilst testing and learning in two large new territories."

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 stores in the UK and abroad. The Group has a cocoa plantation and eco-hotel in Saint Lucia, offering complete cocoa immersion thorough tree-to-bar experiences and wellness treatments. The Group also has a flagship restaurant and cocoa 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

CHIEF EXECUTIVE'S STATEMENT

I am pleased to report continued progress for the Hotel Chocolat brand during the 26 weeks to 30 December 2018. Revenue for the period increased by 13% and underlying EBITDA increased by 10%. Hotel Chocolat delivered growth across all its channels, benefitting from strong new products, successful marketing and loyalty campaigns, and the continued growth of digital wholesale partners. The business remains focused on four key pillars of its growth strategy:

1) Open stores

We opened 14 new stores in the UK and Eire during the period. Our established stores continue to generate attractive returns, and the new stores opened over the last 3 years are achieving their payback targets suggesting that further attractive opportunities remain, which we will continue to evaluate on a site-by-site basis.

There has been much media attention regarding the future of physical retail. Whilst macro-economic trends have undoubtedly created headwinds, we obviously continually evaluate the performance of our stores. We remain confident that further new openings can deliver attractive financial returns and improve customers' ease of access to our brand. All of our stores trading for longer than 12 months are profitable, and the latest vintage of openings are delivering comparable EBITDA per site to that of the earliest stores.

The Board have modelled 3 scenarios, based on various growth rates and cost inflation for our physical estate:

1) A continuation of the FY18 growth rates for sales and for overhead costs would mean that store estate profitability would rise in future years.

2) A more pessimistic scenario, reflecting a drop to negative sales growth, and with externally driven cost inflation at rates in excess of FY18, would still mean that the retail estate would continue to generate significant EBITDA profit in 5 years' time. (Our average lease length is 5 years).

3) As a Board we are focusing all of our energies on delivering a third, and better, scenario which has the scope to generate a material increase in EBITDA, by:

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

Our manufacturing operations again delivered improved efficiency and benefitted gross margin rate. However, these gains were offset by our sales growth being partly driven by lower margin but less capital-intensive wholesale accounts and from the new Velvetiser Hot Chocolat maker which is manufactured by a third party at a dilutive margin rate. A full explanation of margin rate is included in the financial review below. The lower margins on the new sales channels are mitigated by lower overheads attaching to these sales.

3) New digital proposition to grow customer base and improve gifting proposition

Digital revenues, comprising website, subscriptions and digital wholesale partners grew by 22%, or by 29% if expressed at retail prices.

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

In late November the Group opened its first joint venture store in Tokyo, shortly followed by its first pilot store in New York, and; the Board believes that both markets offer significant potential for future growth. A modest number of store openings in each market will be used to test the consumer response, the supply chain economics, and to build a business case for potential roll-out. Initial consumer response in both markets has been encouraging; the brand appears to resonate with consumers, the breadth of range is proving popular with local tastes, and pricing has been received as fair and reasonable. Whilst it is too soon to meaningfully conclude on the store economics, the new sites are performing in line with expectations and based on the first 10 weeks of trading both stores would rank as top quartile within the UK estate.

In July 2018 the Group transferred its two Danish stores to a local partner under a franchise development agreement covering the Nordic Region. The partner has opened two further stores in the period.

FINANCIAL REVIEW

Revenue

Group revenue increased by 13% to £80.7m. 14 new stores were opened in the UK & Eire during the period contributing 4% to the Group's year-on-year growth. Retail, digital and wholesale all delivered sales growth.

Profit Before Tax

Reported Profit before Tax increased by 7% to £13.8m. This profit includes losses of £0.5m relating to the launch in the USA and £0.1m relating to the Group's 20% interest in the new Japanese joint venture. Excluding the impact of the two international start-ups, Group profit before tax increased by 11% to £14.4m.

Gross margin

Gross margin declined by 270 basis points from 68.5% to 65.8%, primarily due to the following four impacts:

Operating expense

Operating expenses grew by 7%, which was significantly slower than the rate of sales growth, as a result operating expenses as a percent of sales reduced from 46.5% to 44.3%. Inflationary cost increases were partly mitigated by the impact of growing sales from wholesale and the Velvetiser, each of which generate lower incremental overheads than other sales.

Underlying EBITDA

Underlying EBITDA increased 10% to £17.3m. Excluding the impact of the launches in the USA and Japan, underlying EBITDA increased 13% to £17.8m.

Share based payments

Share-based payment expense of £0.4m (H1 FY18: £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. The decline in Sterling in 2016 meant that some purchases in H1 FY19 were at lower rates which adversely impacted gross margin and EBITDA by 40 basis points. This adverse impact will reduce in H2.

Finance income and expense

Finance expense of £0.2m reflects £0.1m of interest on a working capital overdraft, and £0.1m of realised interest on foreign exchange hedges.

Earnings per share

Earnings per share in the period were 9.6p, a 7% increase on H1 FY18: 9.0p.

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 17th April 2019 to shareholders on the register on 8th March 2019. 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 £29.5m (H1 FY18: £24.9m) an increase of 18 percent.

Net cash (being cash minus borrowings) at the end of the period was £21.8m (H1 FY18: £18.3m). 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 shops, upgrades to the manufacturing facility in Huntingdon, and the development of a new visitor attraction in Saint Lucia.

OUTLOOK

Since the end of the period, trading has continued to be in line with the Board's expectations. The performance of the new stores is encouraging and there is a pipeline of similar potential locations. The Velvetiser and the VIP ME loyalty card scheme both performed well during their initial launch period and will offer significant potential for the future.

In delivering these results in a context of macro-economic uncertainty, the business has demonstrated creativity, resilience and adaptability. Continued delivery against the 4-point strategy will deliver top-line growth and improve profitability in the UK, enabling the Group to invest cautiously in tests in the USA and Japan. A strong 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.

Angus Thirlwell, Co-founder and Chief Executive Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 30 December 2018

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 30 December 2018

CONSOLIDATED STATEMENT OF CASH FLOW 

For the period ended 30 December 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the period ended 30 December 2018

NOTES TO THE INTERIM FINANCIAL INFORMATION

1. Basis of preparation

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 1 July 2018 and that are expected to be applied in the Group's Annual Report and Accounts for the period ended 30 June 2019. There are new or revised standards that apply to the period beginning 2 July 2018 but they do not have a material effect on the financial information for the period ended 30 December 2018.

The comparative financial information for the period ended 1 July 2018 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 1 July 2018 have been delivered to the Registrar of Companies.

The auditors' report on the accounts for 1 July 2018 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.

2. Profit from operations

Profit from operations is arrived at after charging:

3. Finance income and expenses

4. Earnings per share

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 30 December 2018, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc Long-Term Incentive Plan was 3,657,000 (31 December 2017: 3,667,000). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect.

5. Property, plant and equipment

As at 30 December 2018, the net book value of freehold property includes land of £2,941,238 (31 December 2017: £2,767,923), which is not depreciated.

Included above are assets held under finance leases and hire purchase agreements. As at 30 December 2018, the net book value of such assets within plant & machinery is £ nil (31 December 2017: £269,690) and within computer software & hardware is £335,067 (31 December 2017: £456,106).

6. Trade and other payables