Hotel Chocolat is a UK chocolate company known for its upmarket retail outlets. The pandemic forced the company to review its strategy, and it made a successful pivot to selling online.
The company already had plans to expand into the US and Japan before COVID struck, but the move, which focused on being online, looked prescient following lockdowns.
In 2018, together with a QVC Japan veteran, Chris Horobin, they formed a Joint Venture (JV) to bring the stores and retail operations to Japan and invested significant amounts of money behind the venture. I couldn’t find details on the deal or what Horobin would contribute.
However, the company announced at the end of September that the full amount of the £23m ($25m) loans to their Japan JV would be ‘impaired’, which typically means they do not expect to recoup that money. Yet, an interim update cited growth in the JV’s performance in March, and the company also opened nine new stores in Japan during the period.
Japanese joint-venture’s sales to consumers grew 131%.Interim Report, 2022
While the growth as a percentage looks impressive, if the starting number is small, that’s a deceptive number. Clearly, something has gone wrong with the Japan venture if the company is communicating a likelihood of the loans being written off.
In 2021, according to the firm’s Annual Report, the Board took a key decision to extend more loans to the JV, which is a potentially questionable decision if, just a few months later, it’s determined to be uncollectable.
The global economy is moving into a recession that might be deeper and longer than others in recent history. Hotel Chocolat appeals to the upper-middle-class consumer. This demographic will feel the pinch as the increased cost of living erodes their disposable income. I’m cautiously negative about Hotel Chocolat’s prospects, as inflation and cost of inputs will eat into the company’s Gross Margin. We’ve already seen it drop from 61.0% to 59.8% over the last year, and I think that is likely to continue.
On the other hand, the company has a good management team and has made some good decisions recently, such as reducing its debt burden. As interest rates rise, the company picked the perfect time earlier this year to pay down and renegotiate draw-down facilities.
Yet, while the company remains profitable, the uncertainty over Japan, and the fact that the US is also not profitable makes me wonder what the company will do to prepare itself for the weakening retail outlook.