Valentine’s Day is fast approaching, and while romance is in the air, there’s only really one thing on everyone’s mind – chocolate. According to research conducted by Mars, chocolate has become the go-to gift among partners, with 94% of participants preferring chocolate-filled treats over flowers. As the world’s most popular socially-encouraged chocolate-consuming rampage day is coming up, I started looking for a stock to buy to profit from people’s indulgence. And that’s when I spotted Hotel Chocolat (LSE:HOTC).
Is Hotel Chocolat a good stock to buy?
Hotel Chocolat is a premium chocolatier. What started as an online subscription business, has evolved into a multichannel chocolate empire. Today it has over 127 physical stores, and 1.3 million active members of its VIP service.
While it operates a hotel in St Lucia, most of the revenue originates from the sale of chocolate via two channels. The first is directly selling to consumers through physical stores. The second revenue stream comes from online sales, its chocolate subscription service, and indirect sales through partners (mainly Ocado and Amazon).
2020 was a challenging year for physical retail in general, and especially for non-essential stores. Unfortunately, Hotel Chocolat fell under this category and experienced numerous disruptions that significantly impacted the bottom line. Specifically, it incurred an additional £9.3m of expenses attributable directly to Covid-19. This ultimately cut underlying profit by nearly 60%.
However, an encouraging figure emerges when looking at top-line revenue. Despite its stores being closed during national lockdowns, Hotel Chocolat’s revenue grew by 3% in 2020. Its online storefront is responsible for the increased income. And with Valentine’s Day just around the corner, it seems to me that the firm can easily provide chocolate for that special someone.
Therefore, I think it could be an excellent stock to buy for my portfolio, but there are some risks to consider.
An international supply chain
The key ingredient in all of Hotel Chocolat’s products is high-quality cocoa. Sadly, the UK weather is a bit too wet to grow cocoa trees locally. So the firm has numerous suppliers around the world, predominantly based in St Lucia.
Needless to say, the Caribbean island is quite far away. Any interruptions in the supply chain could significantly impact the business. And delays could negatively impact the firm’s brand. With so many competitors to fend off, it could result in loss of market share.
Another potential risk arises around its international expansion plans. Currently, the majority of revenue originates within the UK. However, Hotel Chocolat has begun opening stores in both the US and Japan, which exposes it to currency exchange risks as well as other potential unforeseen complications.
The bottom line
Valentine’s Day should give this business a boost. But the stock has historically performed exceptionally well throughout the year, even at the height of the pandemic.
The Hotel Chocolat brand appears to have a reputation for quality that continues to result in exceptional customer loyalty. This is quite impressive to me, given the number of competing chocolatiers out there.
Providing that it continues to maintain and expand its brand, I think Hotel Chocolat could be a great stock to buy for my portfolio.
