Hotel Chocolat : Full year Results FY24 Q1 Trading Update 12th October 2023

Private and confidential

12 October 2023

Hotel Chocolat Group plc

("Hotel Chocolat", the "Company" or the "Group")

Full year Results

FY24 Q1 Trading Update

Strategic progress

Hotel Chocolat Group plc, a direct-to-consumer premium chocolate company, today announces its audited full year results for the 53 weeks ended 2 July 2023 ("FY23") which are broadly in line with market consensus and in addition provides a trading update for the 13 weeks ended 2 October 2023 ("FY24 Q1") highlighting the significant progress made against its strategic priorities.

FY23 has been a critical year for the business in which we have seen a rebalancing of pandemic driven ecommerce sales, a reset of our international business and the initial benefits of the significant work to reshape our cost base previously communicated on 8 March 2023 in our Interim Results as the Group's operating efficiency initiatives or business shapers.

FY23 FINANCIAL HEADLINES

Lower sales driven by online and international sales reductions led to the anticipated small underlying loss1 in FY23, however, the business is underpinned by a strong balance sheet and healthy cash position exiting FY23 with significant liquidity provided by the Group's RCF agreement.

• Revenue decline of 10% to £204.5m (FY22: £226.1m) in line with market expectations; o UK revenue decline of 8% yoy
  o UK store sales +8% yoy
  o UK Digital and Wholesale Partners decline of 24% yoy
• Underlying EBITDA1 of £24.1m (FY22: £40.8m).
  Underlying EBITDA1 margin of 11.8% (FY22: 18.0%).
• Underlying loss before tax and exceptional costs1,2 of £0.8m (FY22: Profit before tax and exceptional costs of £21.7m), in line with market expectations.
• Statutory loss after tax of £6.2m (FY22: loss of £9.4m).
• Statutory loss in FY23 includes exceptional one-off costs of £6.1m2.
• Exceptional costs include £3.5m impairment of the estate in St Lucia related to the decline in the value of the Rabot Estate as tourism in St Lucia has not fully recovered from the impacts of COVID-19 and £1.6m of restructuring costs.
• The Group extended its RCF by a further 12 months to July 2025 on 29 September 2023 with the requirement that the Group's St Lucian entities accede to obligors within 60 days of extension. The Group has substantial headroom within the RCF facility, with £22m of unutilised facilities within its £50m RCF and £8m cash on hand as of 10 October 2023.

	53 weeks ended	52 weeks ended
	3 July 2023	26 June 2022
	£m	£m
Revenue	204.5	226.1
Underlying EBITDA1	24.1	40.8
Underlying (Loss)/Profit before tax1	(0.8)	21.7
Exceptional costs and adjusting items2	6.1	30.4
Statutory Loss after tax	(6.2)	(9.4)
Basic Earnings per share	(4.5p)	(6.9p)

• Underlying EBITDA and Underlying Profit before tax are Alternative Performance Measures (APMs), as explained in the financial review.
  2 A breakdown of exceptional costs and adjusting items is included in the financial review.

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FY23 OPERATIONAL HIGHLIGHTS

Overall Group sales decline but with UK stores continuing to grow, significant progress made against business shapers.

• Group sales decreased 10% YoY but are still ahead of pre pandemic (FY19) levels at +54% vs FY19
• Continued strength in store performance supported by roll out of Velvetiser cafés and consumers switching back from online to a more immersive brand experience in-store.
• Significant progress made on Business Shapers in driving lower cost base and reducing working capital. With FY23 expected to be a transition year, we are pleased with the strong progress on our objectives to implement cost and capital efficiencies leaving the Group well placed for the future.
• UK customer demand for our in-home drinking chocolate system was resilient throughout FY23. We are close to achieving 1m UK households with a Velvetiser and are confident we will surpass that number during FY24.
• Reduction of finished goods inventory levels and reduced aged inventory with aged finished good inventory as a percentage of total finished goods inventory falling from 13% at end of FY22 to 1% at end of FY23.

FY24 Q1 HIGHLIGHTS

Significant progress made against the Group's 'shape of the future' strategic priorities primarily comprising the Group's business shapers.

• UK store revenues +14% YoY, +13% like for like.
• FY24 new store openings 4 of planned 12 now open and outperforming expectations, this compares to 1 store opening in FY23.
• Relaunch of the Group's US operations through the digitally led drinkable chocolate categories of Velvetiser and Velvetised Cream alcohol with encouraging direct to consumer sales performance to date.
• Strong Group gross margin performance with gross margin +6ppt vs Q1 FY23 with reduced discounting, headline price increases and reduced inventory writes offs driving the year on year expansion.
• Significant cost reductions flowing into FY24 from restructuring activities carried out in FY23.
• Cost of service costs reducing as a proportion of total sales driven by the sub-let of part of the Northampton DC in Q4 FY23 and the renegotiation of third party delivery contract rates driving an expected £0.8m savings per year.
• Tight management of working capital, primarily inventory, has delivered a significantly favourable cash position at end Q1 FY24 vs prior year at +£19m year on year.

Commenting on the Group's Q1 progress, Angus Thirlwell, Co-Founder and Chief Executive Officer, said:

"Hotel Chocolat is on the front foot again. The hard, foundational work we put in last year is now starting to deliver the results for us.

Our new store format is trading well above our expectations, with 12 new locations planned to open in the next year. Four of them are open already and they are located across the UK from Glasgow to Bournemouth.

Our ongoing stores continue to perform strongly, benefitting from a raft of exciting new products, the resumption of in- store tasting and our unique Love March offer which reflects human individuality to closely match it across our Hotel Chocolat range. Trading in our railway station stores has rebounded as traveller numbers have increased."

Now our Year 1 of our 3-year 'shape of the future' plan has been completed, it has shown to be effective in creating operating efficiencies, with our Cambridgeshire chocolate factory and distribution hubs generating pleasing improvements in performance in overcoming the growing pains we experienced last year.

Our customers are clearly telling us to keep focusing on the important things: never compromising on 'cacao-first' in our recipes, keeping a plentiful flow of exciting new concepts and funding meaningful investments in gentle farming to make it right for cacao growers and the nature around it.

In the US, we relaunched our digital store in July and direct to consumer orders in Q1 are well ahead of our expectations. I would like to thank our US customers who have been extremely gracious in forgiving us for our 12-month absence while we improved our US digital model.

In Japan, the 21 Hotel Chocolat stores run by the brand licensee, Eat Creator, made a small profit in their first 6 months of trading. Continuing to profitably service demand in the Japanese market with reduced operating costs and capital

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investment is a key outcome of our improved operating model. Hotel Chocolat owns 20% of the Japanese business and receives a licensing fee on sales, with Eat Creator owning the remaining 80% and providing the development capital."

Outlook

The Board continues to believe that the Hotel Chocolat brand has an exciting future both in the UK and internationally as evidenced by continuing growth of UK stores and proven consumer demand in both the US and Japan. Despite the existence of external macro-economic challenges including inflationary pressures and the cost-of-living crisis, the Hotel Chocolat team has continually proven the ability to adapt to changing circumstances as evidenced by the significant progress achieved in FY23 and Q1 FY24 on the five business shapers that support margin expansion and working capital reduction. FY24 and FY25 will see an ambitious store opening programme to capture the increasing demand for in-store experiences and further progress our business shapers strategy as first announced on 8 March 2023. The Board therefore is confident in the ability of the brand and the team to deliver future attractive sales growth and returns.

The Board has made a clear strategic choice to maximise the prospects for the Group through focus on the UK, whilst deploying lower risk operating models in the Japanese and US markets with limited capital requirements. The business entered FY24 in a strong position with a healthy cash balance. Since 3 July 2023, cash outflows have been significantly better than FY23 due to well controlled working capital management. At the date of publication, the Group is entering its key FY24 Christmas trading season in a strong position with good liquidity due to improved cash balances and lower working capital. With three quarters of the year still to trade, worth around 85% of annual sales values and including the five largest gift events, the Board believes it is too early to give clear guidance around FY24 prior to Christmas. As such the Board is taking a prudent approach to managing current trading to ensure costs and capital outlay are aligned to sales performance.

For further information:
Hotel Chocolat Group plc	c/o Citigate	+ 44 (0) 20 7638 9571
Angus Thirlwell, Chief Executive Officer
Jon Akehurst, Chief Financial Officer
Liberum Capital Limited - Nominated Advisor and Broker		+ 44 (0) 20 3100 2222
Dru Danford
Ed Thomas
Miquela Bezuidenhoudt
Citigate Dewe Rogerson - Financial PR		+ 44 (0) 20 7638 9571
Angharad Couch
Ellen Wilton
Alex Winch

Notes to Editors

Hotel Chocolat is a premium British chocolate maker with a strong and distinctive D2C brand. The business was founded by Angus Thirlwell and Peter Harris, who are still executives within the business, and has traded under the Hotel Chocolat brand since 2003. The Group is unusual in being a grower (organic cacao farm in Saint Lucia), a manufacturer (Cambridgeshire) and owning its extensive direct to consumer channels (branded stores, websites). The Group was admitted to trading on AIM in 2016.

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CHAIRPERSON'S STATEMENT

JOINING THE BOARD

I joined the Board as Chair in May 2023, taking over from Andrew Gerrie. I did so knowing that I was joining a highly respected, founder-led, values driven business known for its innovative, high quality products and strong premium brand.

STRATEGY

Hotel Chocolat is first and foremost a strong brand in the eyes of our loyal customers. The strong customer relationship through our multiple direct to consumer channels is driven by our values of authenticity, originality and ethics. Our vertical integration allows us to invest in sustainable farming and supply chain initiatives, whilst our innovation and product range is underpinned by our manufacturing skills, all in service of delighting our customers.

In the short term, the business is focused on driving further growth through innovation and store expansion in the UK and unlocking further efficiencies from our unique vertically integrated model. Alongside this, the Group continues to retain its long-term international growth ambitions but near term, will adopt a more focused approach by backing capex-light and lower risk approaches.

BUSINESS ACTIVITY IN THE YEAR

In FY23 we achieved sales of £205m, a decline of 10% on FY22; however, the business continues to see significant growth on pre-pandemic levels with FY23 delivering an increase of 54% on FY19. FY23 was a transition year with changes in the ecommerce and international channels impacting sales performance, whilst strong progress has been made on reshaping our cost base from which the business will benefit fully in future years. We have refined our operating models for international expansion and have reentered both the Japanese and US markets with lower risk, capital light operating models to address the previous operating model challenges.

As a result of lower sales and the corresponding impact on operational gearing, the business delivered an underlying loss1 before tax and exceptional items of £0.8m (FY22: profit £21.7m). As part of the cost base reduction, restructuring activities resulted in exceptional costs of £6.1m (FY22: £30.4m) and a statutory reported loss of £6.2m (FY22: £9.4m).

DIVIDEND

Given the opportunities to invest for further growth and returns, the Board has determined that it would not be appropriate to declare a dividend for the period. The Board will continue to review the financial position of the Group in light of internal growth opportunities and the external environment and intends to recommence progressive and sustainable dividend payments when appropriate to do so.

BOARD OF DIRECTORS CHANGES

The Group continues to benefit from a strong founder-led management team and I am delighted to have joined as Chair, replacing Andrew Gerrie, to support the next phase of Hotel Chocolat's expansion.

In May the Group also welcomed our new CFO, Jon Akehurst, who replaces Matt Pritchard. Jon brings strong commercial and operational experience to support the Group's growth and margin expansion strategies.

On behalf of the Board and the wider Hotel Chocolat team, I would like to thank Andrew Gerrie and Matt Pritchard for the leadership they brought to the business and for their significant contribution.

OUTLOOK

The Board continues to believe that the Hotel Chocolat brand has an exciting future both in the UK and internationally as evidenced by continuing growth of UK stores and proven consumer demand in both the US and Japan. Despite the existence of external macro- economic challenges including inflationary pressures and the cost of living crisis, the Hotel Chocolat team has continually proven the ability to adapt to changing circumstances which is demonstrated through the good progress the business has made in FY23 and early FY24 on the five Business Shapers that support margin expansion and working capital reduction. FY24 and FY25 will see an ambitious store opening programme to capture the increasing demand for in-store experiences, and further progress on our five Business Shapers is expected to deliver pre-IFRS 16 EBITDA2 margin of 20% by FY26. The Board, therefore, is confident in the ability of the brand and the team to deliver attractive sales growth and returns.

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The Board has made a clear strategic choice to maximise the prospects for the Group through focus on the UK, whilst deploying lower risk operating models in the Japanese and US markets with limited capital requirements. The business entered FY24 in a strong position with a healthy cash balance and significant headroom. Since 3 July 23 cash outflows have been significantly better than FY23 due to well controlled working capital management. At the date of publication, the Group is entering its key FY24 Christmas trading season in a strong position with good liquidity due to improved cash balances and lower working capital. With three quarters of the year still to trade, including the five largest gift events, the Board is taking a prudent approach to managing current trading to ensure costs and capital outlay are aligned to sales performance.

STEPHEN ALEXANDER

Non-executive Chair

• Underlying EBITDA and Underlying Profit before tax are Alternative Performance Measures (APMs), as explained in the financial review.

2Pre-IFRS 16 EBITDA margin is an internal measure that management use to understand the cash health of the Group. The metric is calculated by removing all IFRS 16 impacts thereby treating all leases as operating expenses.

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