Shares in Thorntons (LSE: THT) have fallen by 25% to 89p this morning, after the high-street chocolatier issued a surprise profit warning, just two days before Christmas.
It was a big one, too: recent consensus forecasts for Thorntons were suggesting earnings per share growth of around 11% for this year, but the firm now says profits will be lower than last year. This suggests to me that earnings per share could be as much as 15%-20% below current estimates.
What’s gone wrong?
Thorntons says that major supermarkets have cut planned orders for some of the chocolate firm’s most popular products. Supermarkets have also been placing orders later than usual.
The problems have been made much worse by teething problems at Thorntons’ new centralised warehouse, which the company says has caused disruption for all of its customers, especially its UK Commercial channel customers — supermarkets and other retailers.
Thorntons says that problems with the new warehouse caused “lost and late sales with consequent missed promotional slots and reorders”.
In other words, the company couldn’t ship orders promptly, meaning that some were cancelled altogether, and others missed promotional slots with big retailers that would have generated a surge in sales.
It’s clear that despite Thorntons’ claim to have carried out extensive testing of its new warehouse facility, the rollout was a fiasco.
Is the worst over?
Back in October, Thorntons warned that UK Commercial channel sales had fallen by 16.4% during the first quarter of the firms’ financial year, which starts on 28 June.
At the time, the firm said it expected the reduction of orders to reverse in the second quarter, but we can now see that this hasn’t happened, even though this quarter includes the run-up to Christmas.
As a result, I’m sceptical: perhaps the current, lower levels of orders from the big supermarkets will now be normal?
Thorntons looks cheap
Before today’s profit warning, Thorntons was trading on a forecast P/E of around 11.0.
Assuming that earnings per share are 15% lower than expected, the firm’s shares now trade on a forecast P/E of 10, which looks cheap — but personally, I would wait until the firm’s next set of results before deciding whether to buy, in order to judge how serious and long-lasting the current weakness is likely to be.
After all, Thornton’s may look cheap, but it has a lot of debt and falling earnings — this is a risky situation.