Picked carefully, small-cap stocks can be a source of riches. These don’t necessarily need to be companies that few people have heard of either. One that even those with no interest in the stock market will probably recognise is chocolatier and retailer Hotel Chocolat (LSE: HOTC).
Today’s trading update for the year reads pretty well to me.
Strong sales
Revenue hit £165m over the last 12 months. That’s a jump of 21% from FY20. That said, I think the 24% jump from FY19 is more important, since this was at a time when the word ‘coronavirus’ was uttered only by virologists.
On a shorter timescale, sales have “remained strong” since the company last spoke to the market in May. As one might expect, trade at the firm’s sites in commuter and tourist locations continues to be impacted by travel restrictions. However, it would appear that stores in less prominent locations have “largely offset” this lower footfall. All told, sales in the 10 weeks to 27 June were 34% higher than over the same period in 2019.
What really impresses me however, is the huge strides HOTC is making with its digital offering. The AIM-listed company now claims to have grown its UK customer database to 3m. That’s a 66% increase since December 2019. Although not every one of those will be actively purchasing chocs, HOTC did say that sales via this medium now represented a “substantially larger proportion” of total revenue.
But what about the outlook? On this front, I remain optimistic. Unsurprisingly, so does HOTC’s management.
Increased expectations
Based on the recovery in store sales following the first UK lockdown, the company expects a similar trend over the next few months. Although no actual numbers were given, HOTC now believes that underlying pre-tax profit will be higher than previously thought. This helps to explain why the share price is up today.
The company’s growing presence in overseas markets is another reason to be bullish, in my opinion. Sales in the US and Japan (via its joint-venture partnership) rose 62% and 277% respectively over the last year. Sure, these are still early days. However, it does indicate that the brand is rapidly winning admirers in two of the world’s biggest economies.
Following a £22m equity raise last year, HOTC also looks to be in decent financial shape to continue investing for growth. New products are hitting the shelves (including Unbelievably Vegan chocolate). The firm’s UK distribution centre has nearly doubled in size too.
Obviously, where the share price goes from here can’t be predicted with any certainty. The fact that scientists are already warning that the pandemic will get worse before it gets better is not something I’d ignore.
However, it does look like HOTC has already done/is doing what it can to mitigate the impact of Covid. Lower rents have already been negotiated at 30% of the UK stores, for example.
Growth… at a price
Hotel Chocolat’s stock changed hands for a frothy-looking 44 times forecast earnings as markets opened this morning. That said, it also had a price/earnings-to-growth (PEG) ratio of under 1. This suggests the small-cap stock may actually be better value than it initially appears to be.
So long as the rest of my portfolio remains diversified and I don’t mind the potential for greater volatility, I’d be content to buy now.
