Is Thorntons plc A Buy After A Promising Trading Update?

Shares in Thorntons (LSE: THT) were up by 2.5% this morning, after the chocolatier said that its retail sales rose by 5% on a like-for-like basis during the second quarter, which included Christmas.

The increase in sales was a pleasant contrast to the 3.7% like-for-like decline reported during the first quarter of the year, and means that Thorntons’ like-for-like retail sales rose by 2.2% during the first half of the firm’s current financial year.

Not all good news

However, it wasn’t all good news. Just before Christmas, Thorntons warned that two large grocery customers had not ordered as much from its wholesale division as previously expected. The firm also said that the disastrous rollout of its new warehouse had disrupted sales.

Today, the firm provided some numbers to illustrate the impact of these problems. For example, sales from Thorntons’ wholesale division fell by 11.2% during the first half of the year.

Given that the firm’s sales were evenly split last year between wholesale and retail, this decline suggests that Thorntons’ total sales fell significantly during the first half of the year. We won’t have any figures until the firm publishes its results on 2 March, but Thorntons has already said that it doesn’t expect to meet current profit forecasts for the 2014/15 year.

Thorntons still looks cheap?

Thorntons is not very well covered by City analysts — according to Reuters, only two analysts currently cover the stock. Interestingly, neither appears to have adjusted their earnings forecast for the current year, despite Thorntons’ warning before Christmas that profits for the current year would be below those achieved last year.

I suspect that the analysts involved are waiting to see Thorntons’ interim results in March, at which point the scale of the profit shortfall should be more obvious.

As a result, however, Thorntons appears to be very cheap based on published earnings forecasts, trading on around eight times 2015 forecast earnings and six times 2016 earnings.

Should you buy Thorntons based on these cheap valuations?

Personally, I think it would be a brave move to buy Thorntons ahead of the firm’s half-year results on 2 March. The firm’s net debt is too high for my liking, at £32.9m, and profit margins may have fallen during the first half, given the sharp drop in volume sales.

In my view, Thorntons is one to watch -- I believe there are better buys in today's market, including several of the firm's highlighted in "5 Shares To Retire On".

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