Should you buy into this retailer as its profit soars 229%?

Could this stock be the best buy on the high street for investors?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Plenty of high street names are struggling at the moment. The price of imported goods is rising with the weakening of sterling since the EU referendum and retailers are fearful about what will happen to consumer confidence as we move towards Brexit.

Perhaps investors in the sector should be looking to a company that has just posted a 229% rise in profit, and which — despite the challenging outlook for retail and the wider economy — is looking forward to “further progress in the year ahead.”

Taste of success

I’m talking about premium chocolatier Hotel Chocolat (LSE: HOTC), which today released its first set of results since listing on the stock market in May.

The company reported a 12% rise in revenue to £91.1m, having opened seven new stores during the year, taking its total estate to 83 stores. Digital sales growth was particularly strong at 20%.

The company has a pipeline of further store openings, a new website set to launch and management reckons it can offset higher raw material prices by finding manufacturing efficiencies rather than increasing prices for consumers.

Managing costs as the company grows is already a major theme. This year’s EBITDA margin (before exceptional costs) improved from 9.7% to 13.5%, feeding through to that 229% leap in profit I highlighted earlier.

Hotel Chocolat was floated at 148p, but the shares are now trading at nearer 248p. So, what of the current valuation?

The company reported statutory earnings per share (EPS) of 3.9p, which gives an eye-watering price-to-earnings (P/E) ratio of 63. However, I think a better guide is to take pre-tax profit before (legitimate) exceptional costs and apply a standard tax rate. On this basis I get EPS of 6.4p, which brings the P/E down to 38.

If Hotel Chocolat can deliver EPS growth of 30%, the forward P/E comes down to under 30, giving an attractive growth-at-a-reasonable-price valuation. Such growth looks entirely possible, so I tentatively rate the stock a buy.

A giant awakens

If EPS growth of 30% sounds worthy of investor attention, how about growth of 162%? That’s what City analysts are forecasting Tesco (LSE: TSCO) will deliver for its financial year ending February 2017.

After five years of earnings declines, there’s increasing evidence that the supermarket giant has finally got to grips with both its internal problems and the external challenge of co-existing with budget chains Aldi and Lidl.

Half-year results released earlier this month showed Tesco making further strong progress in every department, while recent numbers from Kantar Worldpanel showed the company nudging up its market share for the first time in five years.

Despite the challenges created by Brexit and weak sterling, Tesco’s management is confident enough of its progress and prospects to have publicly declared the profit margin target it’s looking to achieve by the end of its 2019/20 financial year.

Growing investor optimism has pushed the shares up to 212p, giving a current-year forecast P/E of close to 30. However, earnings growth and the restarting of dividends don’t always come through quite as quickly or as vigorously as the market hopes in these situations, so I rate the shares a hold at their current level.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »