Hotel Chocolat: Sweet buy, for now

The share price for chocolatier Hotel Chocolat hit 300p in early November trading, after an entire month of staying below that level. The price movement came in the wake of the company delivering a strong set of results in late October, providing impetus to the price increase. Going by this and the fact that price is still below the 52-week average level of 347p, there appears to be room for further increases going forward.

Revenue for the financial year ending 1 July 2018 (FY18) came in at £ 116.3m, an 11% increase over the previous year. It also showed an increase in net profit to £10m, up from £8.8m during FY17. So far, so good.

But, the next question is, can Hotel Chocolat sustain its current growth rate? In the outlook for its annual report, company co-founder and chairman, Angus Thirlwell, alludes to the fact that the future might not be all rosy. He states: “The market and wider economy may not be without challenges, however I remain confident that our plan for the coming year will deliver growth.”

And indeed, the impact of the impending Brexit on the consumer discretionary sector is likely to be negative, at least in the short run. But Hotel Chocolat seems to have a plan for the softening in economic conditions. Its international presence is growing, for instance.

While it still remains largely UK based in its operations, with 104 stores, all of which are profitable; it has also started taking steps towards building up an international presence. It now has 9 international stores, with franchises in Scandinavia, Spain and Hong Kong.

It also has a joint venture in Japan and is opening a store in New York in December. The company is also in the process of growing its sales through the digital format.

It remains to be seen how far these measures can counter potentially slower growth in demand in the UK in a potential post-Brexit scenario. It is also worth noting that the AIM-listed chocolatier will also face cost pressures if the sterling depreciates significantly, since its raw materials, like cocoa, are imports.

As a result, there is likely to be a squeeze on profits going forward.

Another catch to the Hotel Chocolat story is that it somewhat expensive compared to its peer set, with a trailing twelve month price-to-earnings ratio at 34.4x. However, this fact is diluted by the fact that this is not the priciest valuation – at a 67.5x multiple, the Finsbury Food Group is far more expensive. This, combined with Hotel Chocolat’s price rise in the recent weeks, suggests that this stock is a good buy, for now.