Stock to Watch: Thorntons
What to make of the mid-market chocolatier Thorntons (THT) now the top brass – including the incoming finance director – have just bought over £150,000 worth of shares at an average price of 19.7p?
Amid a series of profit warnings the shares slumped from over 100p below 10p late last year but are enjoying a fillip to 25p since interim results on 15 February.
The main buyers are the chairman, adding 402,301 to own nearly 1.5 million shares or 2.2%, and the new finance director with 251,438 shares – certainly he is convinced to put cash, nearly £50,000, and his career behind Thorntons.
I say “mid-market chocolatier” even though THT is capitalised at £17 million and listed in the FTSE Fledgling Index because this best captures where the company stands and I believe is the crux for its future.
The chocolate market has become more competitive and higher standard with new entrants such as Hotel Chocolat (www.hotelchocolat.co.uk) and supermarkets enhancing their own-label products such that a recent Which? test found Waitrose, M&S and Tesco beat Lindt, Lir and Thorntons.
My own fear as a modest chocoholic is that despite Thorntons re-iterating its commitment to the highest standards and producing more chocolate than ever before, the product is now relatively mediocre.
The special toffee sold in Thorntons’ shops is quite unique but when you see Thorntons’ special selection chocolates reduced from £12 to £6 in a supermarket (such promotions funded by Thorntons) it implies the product can’t sell well.
From www.thorntons.co.uk you can see tasting collections however these look expensive versus supermarkets’ own brands leading the field. While Easter eggs, Mothers Day and other themed chocolate gifts, also ice cream in Thorntons’ shops, are important aspects of the overall marketing, the product range looks to need something more enticing.
Its flagship Continental brand for example, appears tired. The main feeling I get when browsing a Thorntons shop is to go and buy a tin of Green & Blacks organic cocoa and try making something myself.
Financially however, the interims showed a 7 January balance sheet net asset value of £15.7 million, equivalent to nearly 23p a share – including £49.4 million property/plant/equipment, no goodwill and only £2.3 million intangibles.
While this might not be what properties etc could suddenly fetch in an auction, Thorntons does have asset-backing and this helps explain a doubling in its shares. Trade payables rose nearly 12% however, suggesting Thorntons may be exacting more credit from its own suppliers, and current assets only just beat current liabilities.
If it was not for January’s recovery in consumer spending then nearly £16 million short-term borrowings (hence an interim finance charge over £1 million) would remain a worry, and there is also £2.3 million non-current borrowings, pension fund obligations up 30% over £29 million and nearly £6 million other liabilities. The chief executive says “we have a well-managed balance sheet” but understandably the board is conserving cash by waiving the interim dividend.
Both interim revenue and profitability were affected by discounting and promotions, such that operating profit more than halved to £4.1 million, then there was a near £2.5 million charge for impairment and onerous lease provisions where stores under-performed.
Operational cash flow nearly halved to £11.6 million. It’s understandable how, amid recessionary fears late last year some investors cut their losses – down to 10p a share.
Management cites actions to improve margins which will flow through in 2012, store closures and launch of new products such as hampers and little gifts. What about an enticing new chocolate experience though?
My concern for a mid-market chocolatier is that unless it does do something special then it risks reinforcing its brand image as middling – just when there is little room for this, as cocoa prices continue to rise.
An 11 January news item cited cocoa prices increasing by 15% in less than a week amid growing demand in China, also worldwide for dark chocolate which is considered healthier. And the West African harvest is not expected to be good this year due to lack of rain.
If cocoa is in an inflationary long-term trend, this could make it harder for mid-market players who don’t offer much special to justify the cost; they will probably need to keep making occasional discounts, thus tempering revenue/margins.
An interesting aspect of Hotel Chocolat is how sales growth has defied ridiculously high prices, affirming the “Giffen goods” paradox where a reputation for exorbitant price becomes part of the appeal and there is a positive not inverse relation between price and demand. Like the Leica camera though, the product must be top notch.
Such matters do not deter new directors joining, although if Thorntons languishes they could say the die was already cast. I am cautious about the new finance director, despite his share purchase, as his main role in recent years was chief financial officer at Peacocks whose key stores have just gone into administration; he does have wider finance director experience though.
A non-executive director with wide experience in consumer markets is also joining the board.
A third quarter trading statement due early May will be the next hook for sentiment; whether Easter can show better progress than a 22.8% like for like fall last year, blamed on hot weather. A strong order book is cited for Easter, in co-operation with retailers.
It will be interesting to see if a street-wise sense for what flies from shelves beats analysis of the balance sheet and directors’ dealings. You probably couldn’t ask for a better endorsement of a turnaround, than a new finance director buying £50,000 worth of shares. Considering Thorntons’ chocolate though, I’d wait for the evidence in sales.
Update:
It has also just been announced (22 February) that the chairman bought a further 400,000 shares at prices of 24.75p to 24.96p, to own nearly 1.9 million shares or 2.77%.
For more Stock to Watch pieces read Edmond Jackson's archive.
