Chocolate can be comforting, and right now investors could do with comfort. While stock markets tumble, finding shares that are not in free fall is not so easy. Hotel Chocolat (LSE:HOTC) is a rarity, as its share price actually increased in the midst of panic.
An increasing share price isn’t the only thing that makes Hotel Chocolat unique. The chocolatier and cocoa maker is the only company hailing from the UK that grows cocoa on its own plantation.
Its latest results were impressive — the latest half-year period (to 29 December), saw revenue increase 14%, to £91.7n, compared to the same period a year ago. Profit before tax was up 7%.
The strengths
I worry about the impact an economic slowdown might have, but think Hotel Chocolat has sufficient balance sheet strength to weather an economic storm. There are two things I particularly like about the company and its share price.
First of all, I like the trend. The company’s revenue has been steadily rising year on year for some time. For example, its annual revenue increased by 63% between the 12-month period ending June 2015 and the the year ending June 2019, from £81.1m to £132.5m. Profit after tax increased even more rapidly, from £4.1m to £10.9m.
Secondly, there is scope for expansion. Hotel Chocolat has opened two stores in the US and three in Japan during the last six months. It’s early stages for international expansion and the company is still in testing mode in these territories, but the potential is obvious. Not that its UK expansion hasn’t got plenty of scope — it opened nine UK stores.
Also going well is its hit chocolate maker Velvetiser, which enjoyed a 200% increase in sales over the last half year compared to the equivalent period a year ago.
Hotel Chocolat Share price
While Hotel Chocolat shares have gone against the wider trend and increased over the last few days, the performance this year as a whole has not been so good — shares have fallen by just over 10% since 1 January. Look back over a longer time period, however, and the story is more encouraging. Shares are up two and half times since the IPO in 2016.
The threat posed by coronavirus and other economic headwinds
If you could somehow take Hotel Chocolat from four years ago and move it today, I wound be concerned. In June 2015, the value of the company’s net asset was negative.
I do think that the coronavirus will take its toll — if the virus spreads further, I think retail stores of any shape will be hit and Hotel Chocolate will be no exception.
The company has a good product and great potential for expansion, but if we see a coronavirus-related economic slowdown, companies, especially those that operate in sectors that entail direct customer contact, will require deep pockets.
Hotel Chocolate’s balance sheet has been steadily improving, and as at 29 December, current assets exceeded current liabilities by £3.2m. Net assets were worth £63.2m, which is a £13.2m improvement on the year before.
I think Hotel Chocolat can cope with a sharp slowdown and come out the other end well placed for renewed growth.
We may be entering difficult times for investors, but quality stocks like Hotel Chocolat will come through it.
