Luxury chocolatier Hotel Chocolat (HOTC:AIM) could see a step change in its long-term growth rate based on a dramatic shift in its sales mix towards digital channels including subscriptions and partners.

While the shares aren’t cheap, trading on around 30 times earnings, we believe a faster growth trajectory and increased lifetime value of its fast-growing customer database is underappreciated.

After experiencing an uplift in growth, with sales growing 21% in the year to 27 June to £165 million, the firm has taken action to ensure it has the capacity to meet medium-term demand.

Management estimated that if it maintained recent growth rates, it would exceed production capacity within three or four years.

Consequently, the company raised £40 million on 23 July to enable it to double the amount of revenue it could generate to around £500 million a year.

DIGITAL PIVOT

While Hotel Chocolat suffered from store closures during lockdown, it was able to pivot the business online, spearheaded by its loyalty programme.

In the UK the firm now has more than 1.9 million subscribers compared with 0.9 million before the pandemic, while globally the customer base has increased by 61% to 3.3 million.

An increased focus on digital sales has catapulted US revenue by 84% in the last 10 weeks compared with 2019.

The shift in sales mix means that digital and partner sales now represent over half of revenues compared with a third before the pandemic. Importantly, they have remained a substantially larger proportion of total revenue after the reopening of stores.

Investment bank Berenberg reckons the increased focus on digital has the potential to cannibalise physical stores and raises a question mark over the UK roll-out.

However, the bank also concedes that by developing a flexible multi-channel sales model, Hotel Chocolat has strengthened its long-term growth opportunity.

Hotel Chocolat’s management believe that a strong digital and subscription model should work in harmony with a network of ‘brand-building’ stores designed to deepen customer engagement.

We see similarities to the business model operated by fantasy miniatures company Games Workshop (GAW), where physical stores and digital channels work together to reinforce the strength of the core brand.

Meanwhile the wholesale channel has also grown rapidly during the pandemic, partly due to partnerships with well positioned online retailers like Ocado (OCDO) and Amazon.

We are impressed by how well the company has adapted and evolved through a challenging environment and believe the growth opportunity looks highly exciting.

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