Stock Idea – Hotel Chocolat HOTC – Part 1

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This is Part 1 of what might be 2 Blogs or it might be 3 !! Hopefully this will give Readers a good insight into what HOTC does and some important information like details about Directors, Strategy and the Risks that I have identified. In the next Part I intend to cover the Valuation aspects and suchlike which should complete the picture. Please note this is only touching on the information that is available and I suggest that Readers have a good look around the Company Website and also the latest Report & Accounts is worth reading.

At the time of publishing Part 1 I do not have a Position in HOTC and there are no guarantees I will buy any Shares but it is certainly something that I think has excellent Long-term potential.

There are plenty of images within this document so please click on them if you wish to see more details and in theory they should get bigger.

Enjoy……..

I have been aware of Hotel Chocolat HOTC for pretty much 20 years now; I know this because I was first introduced to their yummy delights around this time when I was in Hospital following a Motorcycle accident and a friend used their website to send me a small box of chocolates. I thought at the time the chocs were well tasty but also I liked the idea that I could use the website to send chocs to friends etc. and it made a nice change from Flowers and the usual gifts we inflict on people when we have something that requires celebrating.
 
Back in those days it really was just a website and quite a limited range and then over the years it added more products and now they have Shops in the UK and have recently opened Shops in Copenhagen, Hong Kong, New York and Tokyo. The thing that really attracts me here is that over the last 20 years I have been able to clearly see the steady progress they have been making and I think it is highly likely they can continue this kind of growth (steady, not spectacular) for many years to come – especially as they move overseas and exploit their Brand in new territories.
 
I think there are some obvious Risks and the main one is the ‘Key Man Risk’ around the Founder Angus Thirlwell (he is not all that old at 53) and in terms of the Stock it is pretty highly valued but I think the growth justifies this and it can grow into its valuation. I will look more into these specific points further into this Blog.
 
At the time of writing this I am not really ready to pounce on HOTC but I wanted to do a ‘Stock Blog’ because I have not written one for ages and ages but also I thought that doing this Blog will give structure to my Research into the Stock and this way WD Readers can benefit from my findings as well. My thinking at the time being is to produce the Blog and get it out there and when I eventually get around to buying some HOTC (assuming I do so as that is not certain and I might find something in my Research that puts me off) I will apply an appropriate one of the ‘Stock Buy Checklists’ I wrote and I will issue that as a Blog. Well that’s my thinking at the moment.
 
Company Overview
Before we get into all the heavy wordy stuff, watch this 2 minute video and that will give you a flavour (sadly not the flavour of the Chocs !!):
 
https://www.youtube.com/watch?v=bz22VTrtSyg&feature=youtu.be
 
This text that I pinched from the Company Website gives a neat overview in 2 paragraphs:
 
“When the very first Hotel Chocolat shop opened its doors to guests in North London in 2004, it was the start of a revolution in British chocolate. Two entrepreneurs, Angus Thirlwell and Peter Harris, were on a mission to make chocolate exciting again.
 
Today, we have 103 shops as well as cafés and restaurants, we’ve opened our first three boutiques in Copenhagen and we have a hotel on our working cocoa plantation in the Caribbean. It’s been a busy period of change and growth, but everything we do is still guided by the three basic values that we started with – and it always will be.”
 
It is important to realise that HOTC puts a lot of emphasis on the Quality of its products and I see this as a key differentiator which creates their competitive position in the UK and is likely to be something that can be exported to other markets fairly well. At the moment they have Shops in Copenhagen and Hong Kong and have recently opened in New York and Tokyo. They talk about having originality in their Products such as huge slabs of Chocolate and extra-thick Easter Eggs. This is also enhanced by authenticity whereby they grow the cocoa and make and retail the Chocolate products. They talk about ethics and having been a customer and known about HOTC for many years I would endorse the sense that they are an ethical operator.
 
It is worth noting the strong customer loyalty as well.
 
Something that impresses me a lot is how they have innovated in the products they offer and the ways they ‘get to market’. For example they now have things such as:

• Wide range of Chocolate items available on the website and in shops.
• Range of Seasonal Chocolate Gifts/products.
• Monthly subscription ‘Chocolate Tasting Box’ – they have been doing this for ages now. The feedback on the Chocolates in these Boxes is used to inform future Products and Selections.
• A luxury Hotel, Restaurant and Spa in the Carribean.
• ‘Rabot 1745’ Restaurant in London.
• Cafes.
• Schools of Chocolate.
• A Chocolate Cookbook.

 
I just noticed they now have something called the ‘Chocmobile’ and this looks like a Van that goes around to Summer Festivals and suchlike flogging Hot Chocolate and Ice Cream. I would guess this isn’t a huge money spinner but it helps to get the Brand around to all those Middle-Class wannabe hippies. I must keep an eye out of the kitchen window to see if it ever comes up my Road !!
 
Key Risks:

• Expand too fast with new Stores and opening overseas.
• Key Man risk around Angus Thirlwell the CEO.
• Spread out across too many Products and different Store Formats etc.
• Valuation very high.
• Lease Accounting treatment.

 
Key Attractions:

• Superb track record of steady growth over 25 years or so.
• Very few Competitors and highly differentiated.
• Potential to expand the Brand.
• Highly innovative management and track record of such development.

 
Company History
I lifted this piece of text from the Customer Website and it shows the growth that the Company has achieved over nearly 3 decades:
 
“A bite-sized history of Hotel Chocolat
 
1993
We start selling chocolates online, becoming one of the UK’s earliest ever ‘e-tailers’, predating the likes of Amazon and eBay.
 
1998
The Chocolate Tasting Club is created – a vast community of chocolate tasters who receive unique selections each month.
 
2004
The first-ever Hotel Chocolat shop opens!
 
2006
To realise their dream of becoming cocoa farmers, Angus and Peter buy a beautiful 250-year-old cocoa plantation in Saint Lucia – Rabot Estate.
 
2010
Hotel Chocolat’s first cafe opens in London’s Borough Market, serving a range of innovative cocoa-centred food and drinks. It quickly becomes popular.
 
We launch the world’s first ‘Chocolate Bond’ to fund our development. We raise £4.2 million from enthusiastic supporters, who receive their interest paid in our chocolate!
 
2011
Boucan, our luxury hotel, restaurant and spa, opens on our cocoa plantation in Saint Lucia, to huge acclaim. People start flying in from New York for the food.
 
2012
Hotel Chocolat is voted the UK’s ‘most advocated’ British brand. We love you too!
 
2013
London is chosen as the home for our new restaurant, Rabot 1745, bringing the cocoa plantation experience to Britain.
 
Our resident chocolatiers start making chocolates fresh in our cocoa bar-cafés.
 
2014
The School of Chocolate at Cocoa Vaults opens in Covent Garden, offering a world of chocolate adventures and experiences.
 
Copenhagen sees the launch of two brand new stores, powered by a second Chocolate Bond launch and you, our loyal customers!
 
2015
Our cookbook, A New Way of Cooking with Chocolate, is published, giving a unique insight into the award-winning dishes from our restaurants and allowing you to make them at home.
 
The School of Chocolate opens its doors at our Copenhagen City store, offering new chocolate adventures and experiences in Denmark.
 
Our first West End store opens on Regent Street.
 
Our first ‘refuel station’ café opens in Cambridge. It sets a trend that we later roll out across all of our cafés: there’s a Chocolate Whip Bar, Fuel-Up Station with brownies and snacks, Selector Library and our flavour-matched selection of hot drinks.
 
2016
We list on the London Stock Exchange, and raise new funds so that we can innovate even more.
 
We’re awarded Mid-Market Business of the Year at the Lloyds Bank National Business Awards, open to any PLC with an annual turnover of £25 to £500 million.
 
We take home 18 Academy of Chocolate Awards, including three Golds.
 
2017
Hello Hong Kong: Hotel Chocolat launches in Sogo department store – local tastes align with our mantra, ‘more cocoa, less sugar’.
 
Our first ever no added sugar milk chocolate: Supermilk Pure. Simply 80% cocoa and organic milk. Nothing to hide: no artificial sugar substitutes.
 
2018
Whoosh! Instant Gifts by Text launches across the UK. Guests can order gifts using a mobile number, no address required. Their recipient is free to organise delivery at a time and place to suit them.
 
Hello Tokyo! First store opens in Japan, in the country’s largest eco-friendly shopping centre, Aeon Lake Town. Products land with aplomb: hot chocolate, batons and Selectors are in high demand.
 
New York, New York… We arrive in NYC on Lexington Avenue, Manhattan, our new store opening just weeks after Japan launch. Hot chocolate and batons are an instant sell-out here too.
 
2019
Chocolate Dreams – Inside Hotel Chocolat. Two-part documentary shot by BBC Studios is shown on Channel 5. It goes behind the scenes of our chocolate Inventing Room, Saint Lucia cocoa estate and day-to-day life in our stores.
 
And the story continues…”
 
Strategy
I took this short piece of text from the 2018 Report & Accounts and it summarises the Strategy nicely:
 
“The growth strategy remains unchanged and is based on proven and profitable business models; to carefully continue to open more stores, to invest in digital to make it easier for consumers to access our brand and to link with selected partners to extend our reach and accessibility
 
This growth enables on going return-enhancing investment opportunities in our infrastructure whilst we increase capacity and improve efficiency. The growth of the Group and improved profitability means that the business now has the bandwidth and resources to extend its tests of international markets, taking a cautious ‘test, learn, grow’ approach.”
 
HOTC sees itself as operating across 4 large and growing markets:

• UK Gifting
• UK Chocolate
• UK Cafes
• International.

 
I have taken the 2 images below from the 2018 Report & Accounts page 10 and this has good stuff on the Strategy for each market and the progress at that time (note this may have changed a bit recently both in terms of the Strategy pursued and the progress made):

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There is a lot more on Strategy in both the latest Report & Accounts and also on the Website – I recommend you have a good nose around those.
 
HOTC Competitive Environment
To an extent I see the HOTC offering as quite unique – in fact, that is a major part of why it appeals to me. In the UK, I can think of no other sizeable competitor and Chocolate makers like Thorntons are much more mainstream and are a shadow of their former selves anyway. The premium quality of the HOTC products differentiates them from all the usual brands that you see in supermarkets and even ones that are seen as a more expensive product like Green & Blacks are really not much competition for HOTC.
 
For specific parts of the HOTC offering such as the Café there are obviously loads of decent competitors but the HOTC Cafes are very up market and there are few of them. In fact, to a large extent it is all about locations and if these are chosen well then I would expect them to have a strong competitive position if they are in the right sites.
 
Obviously there would be more but slightly different competition in countries such as Belgium where there is a strong tradition of Chocolate making but I don’t know if HOTC has any plans to move to such geographies and I assume they would be best to avoid them. I don’t see this as much of a problem because there are so many places they can open Stores etc. and it could well be that they have sufficient differentiation to even open shops in many parts of Europe.
 
My mate Martin (@InvestingMartin on the Tweets) flagged up this Company called ‘Montezuma’ to me which he had come across in Chichester I think he said. It looks more down market and a lot smaller and there are probably other similar competitors but HOTC clearly has a premium offering:
 
https://www.montezumas.co.uk/
 
I cannot stress the differentiation aspect enough. It is a big part of what makes me interested in HOTC that the products are extremely top-end and if you look on their Website at the prices of many of the Gifts etc., then it is clear that customers are likely to be wealthy and yet also it has appeal for people lower down the income-spectrum who will see the products as ‘affordable but pricey treats’.
 
Website Address
Here is the Customer Website where you can get the scrummy Chocs (remember, these sorts of food stuffs can be fattening):
 
https://www.hotelchocolat.com/uk
 
You can get to the Investor Relations bit from the bottom of the Customer Website but this Link takes you there anyway:
 
https://www.hotelchocolat.com/uk/investor-relations.html
 
Risks

• HOTC is listed on AIM - this can mean lower Corporate Governance standards and less demand from Investment Institutions who are either not allowed by their mandates to invest in AIM Stocks or prefer to steer clear. However, from my knowledge of HOTC I would see it as being at the top end of the quality spectrum of Companies on AIM.

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• IFRS 16 – from June 2020 HOTC will be adopting the IFRS 16 Lease Accounting Standards and this will impact the Balance Sheet a lot. The following text is from page 53 of the 2018 Report & Accounts:

 
“The Group is currently assessing the impact of IFRS 16 on its existing lease portfolio and it is expected to impact the majority of their operating lease commitments. This includes a significant impact on the balance sheet, as both assets and liabilities will increase, and it is also expected to have a significant impact on key components on the income statement, such as depreciation on the right-of-use asset and interest recognised on the lease liability. This will result in a change to the profile of the income statement over the life of the lease and will consequently impact profit before tax. There will be no impact on cashflows, although the presentation of the cash flow statement will change significantly.”
 
HOTC are saying that they cannot calculate the full impact yet but it looks likely it will impact the Reported Profit and this has to be a concern. Note it will not impact Cashflow which is a good thing.

• Expand too fast with new Stores and opening overseas – I might be wrong but I get the sense that in recent years the pace of opening new Stores has speeded up and of course the moves Overseas are fairly recent. Of course if everything works out then this could be extremely good news but any kind of fairly aggressive Growth Strategy does run various Risks such as Financial Risk from too much debt; Dilution of the Premium Brand; less and less Management control as the organization becomes more complex; Risks around logistics and supply to the Stores, especially Overseas; get spread out too thinly across too many Products and too many Store Formats.

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• Key Man risk around Angus Thirlwell the CEO – it is pretty clear that Angus Thirlwell is an extremely important driver of the business and his leadership looks to me to be at a very high level. Having been with HOTC since the start it is still very much his ‘baby’ and it is unlikely that he would head off elsewhere but of course all it takes is a run of bad trading results and the Public Stockmarkets might not be as forgiving as fewer Private Shareholders would have been in the past – so Angus Thirlwell could get pushed out in such circumstances and that might be a huge mistake. In his early 50s he is not particularly old but of course health issues can always arise and this is a Risk. As HOTC expands it probably is the case that Angus Thirlwell becomes less important and perhaps there is a future where he moves into more of a figurehead and product innovation sort of role and others are tasked with the CEO Role etc.

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• Valuation very high – At the time of writing this HOTC is on a 1 Year Forward P/E of 37 which is a very rich valuation (sorry, I can’t resist it – it is almost as rich as the Chocolates !!) and this is part of the reason that I am in no rush to buy a Stake. However, I think it is the kind of Stock that can ‘grow into the valuation’ and it is certainly worth paying up for Quality when we are talking about something quite exceptional. I think HOTC is certainly something I would like to own. Of course the danger is that if you pay too much for a Stock, then if something goes wrong and they put out a Profit Warning, then there is a long, long, way to fall. I will no doubt write more about this when I look at the Valuation in another Part to these Blogs.

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• Disruption to supply – HOTC grow their own Cocoa Plants and are very dependent on the crop produced etc. It seems to me that this is a major risk and not only that, but as the Company expands it might be that they cannot grow enough Cocoa to meet the demand and would need to source elsewhere. Such reliance on other Suppliers might introduce Risks in the form of Price, Quantity, Quality of the Cocoa, logistics etc.

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• Economic environment – to an extent it is possible that HOTC is fairly resilient to Economic headwinds because its Customers are likely to be more wealthy than many in society. However, I suspect a chunk of HOTC Sales come from less well-off people buying ‘Affordable Treats’ and Gifts and it could be that these buyers drop away in tough times.

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• Competition – strikes me as fairly limited but that could of course change. See my comments in the relevant Section of this Blog.

 
The Screenshots below are from Pages 24 and 25 of the 2018 Report & Accounts. For time reasons I have just copied and pasted these and I have put the Mitigations (from Page 25) underneath part of the Risks (that are on Page 24) and they do not line up perfectly – so if it gets too much then go to the Report (there is a Link further down this Blog).

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Listing Details:

Index
AIM

Country of Incorporation
England and Wales

Company Registration Number
08612206

Registered Office
Mint House
Newark Close
Royston
Hertfordshire SG8 5H

Company Secretary
Peter M Harris.

Nominated Advisers (NOMAD) and Broker
Liberum Capital Limited
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY

Legal Advisers
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH

Auditors
BDO LLP
55 Baker Street
London W1U 7EU

Registrars
Capita Registrars Limited
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU

Bankers
Lloyds Bank.


Annual Reports
You can find the most recent Report here:

https://www.hotelchocolat.com/on/demandware.static/-/Sites-HotelChocolat-Library/default/dw4b0a9416/Annual%20Report%20FY18%2019th%20October%202018.pdf

And more Results and Reports here:

https://www.hotelchocolat.com/uk/investor-relations-results-and-reports.html
 
Directors
 
Angus Thirlwell is the current CEO - Angus co-founded Hotel Chocolat with Peter Harris in 1993 and has a particular focus on brand strategy, product and channel models, marketing and creative. Angus attended Cranfield School of Management and is a committee member for The Academy of Chocolate. You can read more about him here:
 
https://www.hotelchocolat.com/uk/engaged-ethics/our-people/angus-thirlwell.html
 
Peter Harris Development Director - co-founded Hotel Chocolat with Angus Thirlwell in 1993 and is responsible for real estate, legal and intellectual property. Peter qualified as a Chartered Accountant in 1979.
 
Andrew Gerrie is the Non-Executive Chairman - Andrew joined Hotel Chocolat as Non-executive Chairman in June 2015 and has extensive retail experience, having served as CEO of Lush Cosmetics from 1994 to 2014. During this period Lush grew to over 900 stores across 49 countries, with sales in excess of £450m. Andrew holds a B.Com degree from Auckland University.
 
Matt Pritchard is the CFO - Matt joined Hotel Chocolat as Chief Financial Officer in 2014 and is responsible for the finance function, retail operations and IT. He has over 20 years of experience of finance gained in blue chip retail organisations. Matt qualified as a Certified Accountant in 1998.
 
This Link takes you to a PDF with some detail on 6 Board Directors:
 
https://www.hotelchocolat.com/on/demandware.static/-/Sites-HotelChocolat-Library/default/dwd6d20b45/Hotel-Chocolat-Directors.pdf
 
Director’s Pay
I took these images from the 2018 Report & Accounts:

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I am not an expert on Corporate Pay but these amounts do not look excessive or greedy to me.​

Director Shareholdings and Major Shareholders

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Recent Director Dealings
I have obviously taken this image from SharePad and I note there are few recent Director Buys or Sells on here. I am assuming the ‘Incentive’ items are Share Options granted and suchlike.

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Calendar
I have taken the image below direct from SharePad – I see ‘Year End’ on 30th June is next up but I guess this is just a statement of fact and we may not see any news released around this. I notice that last year there was a Trading Update on the 18th July 2018.

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