Hotel Chocolat (LON:HOTC) made a slightly better than expected profit last year, but the chocolate maker and retailer is likely to lose money this year. Online demand has increased by 150% so far this year.

In the year to June 2020, Hotel Chocolat made an underlying pre-tax profit of £2.4m, down from £14.1m, on revenues 3% ahead at £136m. Second half revenues fell by 14% – reflecting disruption to Easter trading. There is growth in online sales, and they will remain more important than in the past. This indicates the strength of the brand.

VIP members increased by 50% to 1.3 million. Management is formalising the Rabot cosmetics and toiletries joint venture.

Trading

There is good news from Japan, where a new store has been a huge success. US sales are higher even though two of the four stores are closed. Trading in central London remains tough, but the declines in the rest of the UK stores are offset by online growth.

Gross margin has declined due to the movement of stock from shops back to the warehouse to supply online demand. There has also been discounting. It is difficult to gauge the prospects for this year, but Peel Hunt has kept its forecast loss at £2.5m on flat revenues.

There is potential for a better outcome if trading continues at current levels. It is still early days, and Christmas is an important trading period. There will be new product launches, including a vegan assortment.

Cash

The balance sheet is strong, but that is because of a dilutive placing by Hotel Chocolat that raised £22m at 225p at the beginning of March, compared with a share price of 407.5p. The share price is currently 345p.

Net cash was £28.1m at the end of June 2020 and there are spare debt facilities available. The net cash figure has fallen to £16.5m since then. There is no final dividend and no dividend is expected for the foreseeable future.

There will be investment in an enlarged distribution centre and there will be an increased focus on online capacity.

It is likely to take at least three years to get back to the 2018-19 pre-tax profit level of £14.1m and earnings will be lower than 10p a share reported at the time because of the additional shares in issue.

That means that even if that profit was achieved again the prospective multiple could be approaching 40. That seems fully valued, although the Hotel Chocolat brand has shown its strength over the past six months.