Full Year Results

Hotel Chocolat Group PLC

12 October 2023

 

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 3 July 2023 £m	52 weeks ended 26 June 2022 £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 Statutory Loss after tax Basic Earnings per share		6.1 (6.2) (4.5p)	30.4 (9.4) (6.9p)

¹ 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.

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

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.

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.

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

¹Underlying 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.

CHIEF EXECUTIVE'S STATEMENT

THE YEAR IN SUMMARY

FY23 will go down in Hotel Chocolat history as the year we set ourselves up for our next era of forward development. The previous three years, FY20 to FY22, had delivered an impressive 54% revenue growth over FY19, alongside agile COVID-19 adaptations, but had left us out of shape on several fronts, compared to what we know Hotel Chocolat is capable of.

So we took a year, FY23, to put that right. We established the comprehensive 'shape of the future' strategy in H1 and deployed it during H2, with pleasing results so far. Sticking to this strategy will guide us to achieve an ever-stronger brand and 20%+ pre-IFRS 16 EBITDA returns from FY26.

UK CHANNELS

£197.4m (FY22:£214.5m)

·

Stores £117.8m (FY22: £109.4m). A strong performance from our stores, with +8% sales growth. Space growth was deliberately curtailed with a year-long pause on our store opening programme while we observed the performance of our latest store format trial sites. FY24 is now benefitting from this with 12 additional UK store openings planned, based mostly on the new format, and new store openings at 50 locations planned over the next 5 years.

The Hotel Chocolat multi-channel model is led by our compelling store format. With 124 locations open at the period end, all format types delivered excellent EBITDA returns. It was reassuring to see a return to form for our railway stations thanks to resurgent passenger numbers.

Our multi-channel approach means that each store has on average c.25,000 VIP.ME members within close proximity, nourishing the high sales densities our brand achieves.

Our multi-category approach means that each store has multiple points of attraction for brand fans spanning gifting, self-gifting and the Velvetiser in-home system.

Our product range architecture by category, genre and pricing means that we genuinely offer accessible luxury. The warm welcome from our team underscores this.

With significant investments made into products, formats and training programmes during FY23, we expect to keep delivering more great things from our physical store experiences.

·

Digital £58.3m (FY22: £79.1m). As a significant portion of our customer tilted back to shopping in stores post pandemic, our digital sales declined by 26% in the year. Marketing spend was deliberately curtailed in this channel due to significant online media inflation in this period. Our online ratio of D2C revenues is still comfortably ahead of pre-pandemic levels, 29% FY23 vs 19% FY19 - an increase of +58%.

Digital will continue to be a very important element of our distribution channels. Indeed, it is our ambition to be the online leader in chocolate across major markets. Whilst sales through digital experienced a decline as a proportion of Group sales during FY23, this was against the backdrop of FY22 being positively impacted by the pandemic.

The Hotel Chocolat multi-channel model means that any investment in a particular channel creates a halo effect. We have developed expertise in acquiring new customers across the full breadth of our channels and activities.

We expect the strong new store opening programme (12 expected in FY24) and the brand building media spend (+c.90% over FY23) to underpin performance in our digital channel.

·	Wholesale £21.3m (FY22: £26.0m). Performance in this channel declined by 18% in the period. Wholesale was adversely impacted by similar trends to that seen in our own digital channel and several non-strategic accounts were closed, with a 'quality over quantity' approach being taken.

Our strategy continues to restrict the product offer to a limited range for reselling partners, with full range present only through Hotel Chocolat owned channels.

Our Velvetised Cream alcohol category was presented at several international trade shows during the year, in furtherance of our distribution plans outside the UK market. Within the UK, the product is currently ranged within several major grocers.

INTERNATIONAL CHANNELS

£7.2m (FY22: £11.6m)

US £0.2m (FY22: £2.9m)

A 100% subsidiary business

We are confident that our brand resonates in the US and, at the time of writing, we are in the early stages of relaunching our offering - testing both customer responses and distribution arrangements for our US Velvetiser-led digital sales channel.

This is the result of applying all learnings acquired so far and adapting our way to a better approach. It includes a new operating model, an adapted customer offer and a more specialist small team. The first stage of our plan is to be focused on our Velvetiser-led digital model with further stages available to be layered in after solid success foundations have been achieved.

Initial performance and customer response is encouraging. Given that the US business was closed for the majority of FY23, whilst an improved operating model and approach was being put together, sales declines £2.7m YoY.

The Instagram feed HotelChocolatUS is a good way to view current brand activity.

Japan £0.9m (FY22: £3.8m)

Equity Investment

A brand licence partnership in which Hotel Chocolat owns 20%

Eat Creator are the new partner for Japan since 29 December 2023, with 21 Hotel Chocolat locations across the country at the year end.  Eat Creator bring their skills to develop the model and offer local Japanese market expertise, providing the growth capital and the resources to achieve this. Hotel Chocolat brings a strong brand and supplies key products including some for onward assembly and packing within Japan. This has been achieved through a 20% equity investment in HC St Lucia Inc, a company incorporated in Japan (with Eat Creator owning the remaining 80%), and a royalty and distribution agreement on all sales as the business develops.

A key early achievement has been c.10 new 'made in Japan' products designed and introduced by the Eat Creator team in this period.

The Instagram feed Hotelchocolat_japan_official is a good way to view current brand activity.

Saint Lucia £4.7m (FY22: £3.8m)

A 100% subsidiary business

Solid progress has been made at our Rabot model farm, Rabot Hotel and the new Project Chocolat with the infrastructure now complete across all three areas of the business. As a key unique immersive brand experience we are now well set to benefit from the expected recovery of visitors to the island over the coming years. The business currently uses the discounted cash flow method when performing its annual valuation for impairment review. As a result of the expected short term impact of slower than anticipated recovery of visitor numbers to the island (which are still below pre-covid levels) we have recorded an impairment to the carrying value of £3.5m in the year. The Group remains fully committed to the exciting developments in St Lucia.

Our vision, conceived 20 years ago, is to connect the worlds of cacao agriculture and chocolate luxury:

·	Physically, from the experiences and unique propositions we have in St Lucia; and
·	Spiritually, through the positive impact our brand can bring everywhere, built out from our knowledge and confidence of what we are learning by being a gentle farmer of cacao.

The Hotel: award winning, with 25 rooms and an acclaimed restaurant serving cacao-inspired cuisine.

The Farm: 140 acres with shade grown, organic cacao, fostering astonishing biodiversity, soil quality and central fermentation activities for the independent island grower within our ethical programme. The principles of gentle farming were first tried and tested here before being adopted by our Ghana programme.

The Visitor Experience: known as Project Chocolat, the 6 acre site offers deeply authentic learning, dining and shopping within an expansive space that is already hosting tens of thousands of visitors per annum. The majority are US based and our aim is that, after an immersion in the Project Chocolat experience, they will never look upon chocolate in the same way again.

The Instagram feed ProjectChocolatSaintLucia is a good way to view current brand activity.

PROFIT SUMMARY

We entered the year over-leveraged on overheads and stock. The excess stock position and corresponding price discounting put downward pressure on product margins and higher absolute overheads led to lower Group operating margins. These factors together with the Group revenue declines, led to a statutory loss for the year.

After a year of wrestling the business back into a better shape, we exited the year with reshaped overheads, improved organisational design, lean stock levels and resurgent gross margins. Whilst the overall Group cash position has deteriorated in FY23, cash from operations was strong, driven by the action taken around our business shapers. These actions continue to impact cash from operations since the end of FY23, with favourable working capital movements compared to Q1 FY23.

We are determined that the focus on Business Shapers will deliver excellent improvements in profit returns for years ahead.

OUR SHAPE OF THE FUTURE

The Brand Shapers

Our brand always takes top priority for our resources and long-term focus. I am pleased with the energy we invested during FY23, with a number of initiatives to surface during FY24 across channels, products, team knowledge and ethics. Our everlasting brand values: to be original, authentic and ethical will be progressively strengthened as we follow through our Brand Shaper strategy.

Reinventing chocolate

- rolling out to an ever-larger audience for ever-greater impact

FY23 was dedicated to putting in the foundational design and test work on our latest store format to enable a rollout of 50 new locations in the UK within the next 5 years. The new format has approximately 100% more trading space than the current estate, with more room for a Velvetiser café and an enhanced layout for gifting and self-gifting ranges. We have used more reusable and long-lasting natural materials and a sharper more distinctive, post-modern look. This format works well out of town as it can draw its own footfall due to the quality of the offer and the customer database depth. Most locations offer parking and are near convenient major road networks, addressing clear 'white-space' store gaps we can see from our database analytics.

For FY24 we have 12 new locations targeted, four of them already opened. Each one will draw a large number of new customers into Hotel Chocolat, with a halo effect for all our channels.

Throughout FY23 we also invested in our customer relationship tools to increase customer lifetime value across channels, as well as our customer database analytical tools. We approach FY24 with a c.90% increase in our brand building media spend value with these enhanced abilities.

Velvetising the world

- leading and scaling the in-home drinkable chocolate market

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. The development of limited edition seasonal recipes continues apace, with stunning results from close matching lifestyle flavours with the weather. An iced drinking chocolate for the Velvetiser with real banana, chocolate and butterscotch sold out within 5 weeks around the time of writing this report. A pipeline of exciting new flavour launches for all palates and lifestyles is planned every quarter for the foreseeable future.

In Saint Lucia, we of course have Velvetisers installed in all our 25 bedrooms and they are on sale from the shopping space at Project Chocolat in US and UK voltage.

Our US Velvetiser website launched in July 2023 and we are pleased with operating model performance as well as customer reactions so far.

In Japan, Velvetisers are on sale through all 21 locations and customers may try the drinks in the cafés hot or iced.

Owning the chocolate alcohol category

- creating THE chocolate brand for the alcohol market

We are in the early stages of building this model relative to other categories we play in. During FY23, the UK distribution

focus included activating the on-trade with several successful collaborations. Significant distribution is in place with key major grocers, supported by 'always on' sampling though our UK store network. International solutions are in the developmental phase, with strong trade demand in several key markets.

Driving the nature positive cacao revolution

- unlocking customer power to help us make it right for farmer families and for nature

Having established some momentum behind gentle farming in Ghana, we will be increasing the prominence of this dimension of our brand from FY24 and throughout our multi- channel marketing. We know that we have a receptive and large audience who can join with us to make good things happen in cacao agriculture.

Building a super-brand

- earning pricing and loyalty power by investing behind our 3 brand values

To be Original, Authentic, Ethical are the 3 everlasting values. During FY23, we invested strongly in all 3, with the benefits set to be visible over FY24.

Original: c.28 new products for FY24 Christmas and Easter.

Authentic: a revamp of our internal School of Chocolate launches this Autumn, underpinning our team confidence and knowledge.

Ethical: our Gentle Farming Programme enters its third year in Ghana, supported by a key new product launching in the Autumn which helps fund our ambitious plans by contributing 100% of the sale proceeds.

The Business Shapers

We established the Business Shaper strategy during FY23 to drive the UK business to a recurring 20%+ pre-IFRS 16 EBITDA margin. Since the deployment of the new Business Shapers, we have seen significant progress and expect to carry this momentum into FY24.

Trading margin¹

Improved by 0.7 percentage points in H2 FY23 vs prior year, driven by improved inventory control methods. Short shelf life product levels are now at historical lows resulting in lower levels of discounting. Over the course of FY23, aged finished goods as a proportion of finished good stock has reduced from 13% in calendar year 2022 to 1% at FY23 year end. This means customers are getting the freshest and tastiest stock and the business is reaping the full-price rewards of higher margins and minimal discount from short shelf life. Price increases on selected product ranges also contributed.

¹Trading margin is defined as sales less standard costs less the following price variances: - calculated standard cost of goods to purchase order - purchase order to invoice.

Overheads

Organisational restructuring was completed in the closing months of FY23 with the objective of supporting higher performance. A leaner approach for our vertically integrated business structure and methods meant that £5m of ongoing permanent costs (salary related) were removed vs FY22. Several high level appointments were made during the year, with deliberate high investments behind strategic decisions fully costed into this reduced overall overhead base.

Inventory balances

Have been tightened significantly, with total inventories down 19% vs FY22 closing balances. Finished goods inventories are down over 23% YoY whilst availability is still excellent, in the mid-high 90%.

Manufacturing cost of goods

Efficiency gains here have been deliberately delayed by 6-9 months as the business re-prioritised the pull forward launch of new products to ensure it can optimise FY24 Christmas and Easter trading seasons by addressing gaps in the product range. However, the detailed workstreams to deliver these gains are fully in place to deliver the goals we have set.

Cost of service

In FY24 and onwards, this will benefit from reduced distribution centre costs with c.50% of the Northampton DC now generating income through a sub-let.

OPERATIONAL OUTLOOK

Our view ahead assumes a low-growth general consumer demand environment and stubborn cost inflation in the UK.

Some of the key trends noted, and the steps taken to address them, are:

Demand: We anticipate that competition for household spending will increase in the short-term due to macro factors. In order to help drive demand during our peak period, we have included in the FY24 business plan an enhanced marketing budget with c.£9m brand building media spend from October through to March 2024 - an increase of c90% on FY23. This type of activity has previously proven, in FY22 in particular, to be successful in driving demand in all channels (FY22: c£11m brand building media spend).

Channel mix: Partly due to macro-economic factors, we are seeing a shift in consumer preference toward the store channel. Our response to this has been to allocate substantially more capital expenditure to new store space and anticipate a conservative level of digital growth over the next 3 years.

Customer behaviour: Whilst purchase frequency remains high, we have seen a slight reduction in the average order value. To fill gaps in our price points resulting from recent increases, we have accelerated the development of c.28 new products

to achieve an optimum price architecture for our customers in the upcoming peak periods, commencing Christmas 2023.

We have further invested in CRM activities to ensure we maximise available returns from our existing loyal customer base, including a successful trial of AI software tools - which from FY24 onwards we will fully benefit from.

Additionally, in June '23, we launched 'Love Match', which is a strategic initiative to drive enhanced conversion rates and loyalty by close matching customers' individuality to the perfect match of chocolate from within the extensive breadth of the Hotel Chocolat range. The full benefits of this will be seen from FY24 onwards.

Current trading is encouraging, however with our key Christmas trading period to come the majority of H1 sales will be delivered in Q2 consistent with prior years.

ANGUS THIRLWELL

Chief Executive

FINANCIAL REVIEW

		FY23 (53 weeks)			FY22 (52 weeks)
	Underlying before exceptional and adjusting items	Exceptional  items1	FY23  reported	Underlying before exceptional and adjusting items	Exceptional and adjusting items1	FY22 reported
Revenue	204.5	-	204.5	226.1	-	226.1
Cost of sales	(85.3)	-	(85.3)	(93.8)	(5.5)	(99.3)
Gross profit	119.2	-	119.2	132.3	(5.5)	126.8
Operating Income	0.3	-	0.3
Operating expenses	(95.4)	(5.8)	(101.2)	(91.5)	(24.9)	(116.4)
Underlying EBITDA	24.1	-	-	40.8	-	-
Share-based payments	(1.5)	-	(1.5)	(0.5)	-	(0.5)
Depreciation & amortisation	(20.5)	(0.1)	(20.6)	(16.1)	-	(16.1)
Loss on disposal	(0.2)	-	(0.2)	(0.5)	-	(0.5)
Profit/(Loss) from operations	1.9	(5.9)	(4.0)	23.8	(30.4)	(6.6)
Finance income*	0.4	0.1	0.5	1.0	-	1.0
Finance expense	(3.2)	-	(3.2)	(1.9)	-	(1.9)
Share of joint venture loss*	-	(0.3)	(0.3)	(1.2)	-	(1.2)
(Loss)/profit before tax	(0.8)	(6.1)	(6.9)	21.7	(30.4)	(8.7)
Tax credit/(expense)	-	-	0.7	-	-	(0.7)
Loss after tax	-	-	(6.2)	-	-	(9.4)
EPS basic	-	-	(4.5p)	-	-	(6.9p)

*Interest receivable and share of joint venture loss have been classified as exceptional items as the Japanese JV entered Civil Rehabilitation in July 22.

¹Alternative performance measurements (APMs).

REVENUE

Revenue for the 53 weeks ended 2 July 2023 decreased by 10% to £205m (FY22: £226m), driven by lower online and international revenues. UK sales declined by 8% year-on-year, with online sales continuing to decline at 26% as the channel mix rebalances after COVID-19, however, physical retail stores delivered growth of 8% on FY22 as consumers returned to stores. Similarly, performance in resale partners declined driven by the online channel and strategic decisions to withdraw from lower margin resellers.

International revenue decline also weighed on Group performance as the strategic decision to reset the operating model in both the Japanese and US markets materialised.

Lower revenues led to reduction in marketing investments in the second half of FY23 with specific focus on pulling back from the digital and ecommerce channel where return on investment has dropped throughout FY23 due to significant cost inflation.

Revenue £m	FY23	FY22	FY21	FY19
UK channels International	197.3m 7.2m	214.5m 11.6m	159.4m 5.2m	127.7m 4.7m

GROSS MARGIN

Statutory reported gross margin of 58.3% increased by 2.2% compared with FY22. This was primarily driven by the release of prior year stock provisions which were unwound during the year. The high stock levels carried into FY22 were unwound in H1 FY23 through discounted pricing. This has resulted in a substantial decrease in finished goods inventory which has released cash. Gross margin in H2 FY23 has benefited from lower aged finished goods inventories with less price discounting and reduced inventory provisions. This has resulted in H2 FY23 gross margin increasing 10.6% year-on-year.

Excluding exceptional provisions, gross margin of 58.3% represents a decline of 0.2%, with two main causes:

·	In response to rapid sales growth forecasts in FY22, the Group produced additional inventories which were then sold at reduced prices throughout H1 FY23 placing downward pressure on gross margin.
·	This was offset by inventory provision releases in FY23 due to significant progress that has been made on our Inventory Shaper where, at 2 July 23, Finished Goods Inventories expiring within three months at the end of FY23 reduced to less than 1% of total Finished Goods Inventories, down from 13% at 26 June 2022.

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. There is still significant opportunity for revenue growth in our core UK market and this is supported by strong in-store performance in FY23 despite the rebalancing of ecommerce revenues. Our international operations have been reshaped with a relaunch of the brand in both North America with a lower risk, capital light operating model and Japan, with a new partner in which we have a 20% equity investment and distribution and royalty arrangements in place. This allows us to take advantage of the significant potential demand for the brand in these markets.

OPERATING EXPENSES

Before exceptional costs and adjusting items, operating expenses less operating income of £95.4m increased +4.3% year-on-year (FY22: £91.5m). As a transition year, operating expenses were the focus of structural cost reductions to reduce operational gearing and reduce the Group's fixed cost base to deliver more efficiencies. Significant reductions were made to headcount costs across the year with specific focus on central and administrative roles and has removed £5m from the Group's underlying cost base moving forward compared against FY22. This restructure created an exceptional cost as outlined below.

Utility prices were higher YoY with the forward contracts put in place during FY23 rolling into new contracts at lower unit prices in FY24.

A foreign exchange loss of £0.8m was recognised in operating expenses (FY22: £0.4m profit) in relation to stock purchases in EUR & USD.

OPERATING INCOME

During the year, the Group received operating income of £0.3m made up of:

·	£0.2m rental income from the sub-lease of the Northampton Distribution Centre (FY22: £nil); and
·	£0.1m research and development credit for FY20 & FY21 HMRC R&D claim (FY22: £nil).

UNDERLYING EBITDA

Underlying EBITDA of £24.1m or 11.8% of sales compares to £40.8m or 18.1% of sales in FY22. Whilst the Group has seen the expected significant deterioration in Underlying EBITDA in FY23, it is encouraging to see the progress made on our Business Shapers in FY23 that will enable the Group to more readily invest behind future growth opportunities.

Underlying EBITDA is a not a statutory GAAP measure, but is included as an additional performance measure (APM).

EXCEPTIONAL ITEMS

The reported result for FY23 includes £5.9m of exceptional items within operating expenses, plus a further £0.2m relating to non-operating expenses. The exceptional costs relate predominantly to the impairment of the estate in St Lucia of £3.5m and strategic choices to restructure the cost base in FY23 of £1.6m. The impairment of the estate in St Lucia is driven by continued Covid-19 disruption where visitor numbers to the island have not recovered to pre-pandemic levels. As a result the short term valuation using the discounted cash flow method has decreased, as the key sensitivity of this valuation method lies in the revenue assumption, which leads to swings in valuation both ways as revenue assumptions change YoY. The Group remains fully committed to its exciting development opportunities in St Lucia as a unique driver of brand value.

Additionally, the remainder of the charge is made up of:

·	£0.3m of the operating expenses relating to the Japan JV (Joint Venture) which were written off in the year;
·	Store impairment reversal of £0.1m;
·	£0.1m loss on disposal of coffee hardware tooling;
·	£0.5m FX on LT loan which reverses FX on US loan which was provided for in FY22; and
·	Non-operating exceptional expenses relating to the Japan JV of £0.3m for share of JV losses offset by interest receivable of £0.1m.

JAPAN JOINT VENTURE - PROGRESS UPDATE ON WINDUP OF HCKK

Having previously provided financial support to the JV in the form of investments, loans and guarantees, the Directors of the Group concluded that it was inappropriate to continue to advance further working capital to the venture. In July 2022, the JV entered Civil Rehabilitation "Minji Saisei" under the supervision of the Tokyo court. The Group does not believe that there will be any further exposure in relation to the Japan JV. At the date of publication the process is ongoing.

FINANCE INCOME AND EXPENSE

Finance income of £0.5m is primarily interest received from the bank.

Finance expense of £3.2m comprises £1.1m of bank RCF interest and £1.9m of interest on leases under IFRS 16, and £0.2m of interest on derivative financial instruments.

DEPRECIATION

Depreciation and amortisation of £20.5m compares to £16.6m in FY22. Key capital investments in the period included upgrades to the manufacturing facility, internal fit-out of a newly leased second distribution centre, with 1 new store and 1 relocation to larger sites in existing locations.

LOSS/(PROFIT) BEFORE TAX

Underlying loss before tax of £0.8m (FY22: underlying profit of £21.7m) is before exceptional costs and adjusting items totalling £6.1m which result in a reported statutory loss before tax of £6.9m (FY22: £8.7m loss).

TAX

Tax for the period is a credit of £0.7m (FY22: £0.7m charge). In FY22 there was a tax charge despite the statutory loss as the investment related to exceptional items were disallowed for corporate taxes. The current year tax credit is made up of £0.1m current tax credit and a £0.6m deferred tax credit.

EPS AND DIVIDENDS

The reported loss results in a loss per share of 4.5p which compares to a FY22 loss per share of 6.9p.

CASH

In the period, the Group generated operating cashflows of £22.3m before movements in working capital.  After movement in working capital cash flows are £17.1m which includes £6.4m paid to settle financial guarantee contracts for the Japan JV.

Capital expenditures in the period totalled £10.3m, with £0.5m being a loan to the Japan JV prior to Civil Rehabilitation.  A £0.1m investment was made to acquire 20% equity in HC St Lucia Inc in Japan, with the balance invested in working capital.

At 2 July 2023 the Group had cash on hand of £11.2m with all of the £50m RCF facility remaining undrawn. In H1 FY23 the Group utilised the RCF by drawing down £34m; the drawdown was also repaid in this period.

As at 10 October 2023 the Group remains well capitalised with £30m headroom comprising of £8m cash on hand and £22m of unutilised facilities within its £50m RCF, immediately prior to the peak cash-generating trading period.

INVENTORY

Closing inventory of £35.0m represents a decrease of £8.0m YoY. The majority of the decrease is due to the Group's intention to materially reduce inventory to a level reflective of prudent sales forecasts with a modest buffer to allow sales outperformance to forecast.

OTHER WORKING CAPITAL

Trade and other receivables decreased from £17.5m to £12.9m mainly due to £4.6m of prepaid deposits for goods which transferred into inventory.

Current liabilities decreased from £57.4m to £39.5m primarily as a result of:

·	a reduction in capital, inventory and other expenditure reduction having a positive impact on trade payables and accruals; and,
·	settlement of £6.7m financial guarantee contracts on behalf of the Japan joint venture.

GOING CONCERN

The Directors have undertaken a comprehensive assessment in order to conclude that the Group has the ability to trade as a going concern based on forecasts drawn up to 31 December 2024, considering the current macro-economic environment and the potential impact of relevant uncertainties facing all businesses, together with the Group's ability to influence its activities and hence the financial position, cash flows and profitability.

In reaching their conclusion, the Directors' considerations have included the following factors:

·	That the Group continues to operate within its facilities, which are used to fund day-to-day working capital requirements.
·	The availability of funding in the form of a £50m RCF. This was extended by 12 months on 29 September 2023 through the exercise of an extension option which takes the agreement out to July 2025.
·	The headline covenants remain unchanged: of achieving positive cash in January 2024, of net debt to EBITDA (pre-IFRS 16) of less than 2.5 times, and EBITDA to interest greater than 4 times. These covenants are tested at the end of each financial quarter on a twelve month rolling basis.
·	In order to support additional inter-company lending to the Group's St Lucian business to fund further infrastructure investment there is a condition to add the Group's two St Lucian legal entities to the agreement as obligors. To secure this inter-company lending, a share pledge is required to be completed within 60 days of execution of the amended and restated RCF agreement. It is the opinion of the Board, acting upon external legal advice, that this is a straight forward legal process, fully achievable in the required time frame. This opinion underpins the Board's going concern assessment.
·	The Groups' current cash position as at 10 October 2023 is £8m, giving £22m headroom within the facility as the business approaches the peak trading period, with around 85% of annual revenues still to achieve with the five largest seasonal gifting seasons still to come.
·	The ability to progressively reduce working capital levels by leveraging the vertical integration from manufacture to end-consumer, including the ability to use prices to influence demand.
·	The ability to communicate with a database of two million active customers at modest cost in order to stimulate sales demand.
·	Multiple levers of mitigation in the form of discretionary spend-reduction opportunities.
·	Having made significant capital investments to increase capacity in recent years, the Group has sufficient operational headroom to support several years of volume growth and can therefore exercise discretion over the timing of further capex.
·	Consideration of specific factors impacting current and estimated future consumer demand, including channel and category sales performance.
·	Current elevated levels of consumer price inflation, which may create pressure on consumer discretionary spend, leading the Group to prepare a number of possible scenarios for sales demand during the going concern period review.

The Directors have modelled a number of scenarios, including a reverse stress test. In the scenarios sales are flexed, along with the impact on related expenses, working capital changes and other mitigations such as cost reduction and timing of capital expenditures. These scenarios are used to evaluate the implications for gross margins, operating expenses, profitability, working capital, capital expenditure and the consequent financial position, including operating within financial covenants attaching to the RCF. For each scenario, the Directors have identified relevant actionable mitigating measures that the Group could undertake at its own discretion to adjust future cash flows and continue to operate within their facilities.

In making their assessment, the Directors have reviewed management forecasts based on scenarios reflecting full-year sales in line with FY24 Budget along with scenarios showing declines vs budget of -10% (-2% YoY) and -20% (-13% YoY) which reflect the Directors' view on most probable worst case scenario and a reverse stress test respectively.

The Directors have considered the impact of mitigations and the Group's ability to implement these changes at its own discretion. The Directors have also considered the probability of each sales scenario, concluding that the most extreme sales decline scenario reflected in the reverse stress test is of remote probability. As a result, the Directors have concluded that the use of the going concern basis of accounting is appropriate for the period to 31 December 2024.

ALTERNATIVE PERFORMANCE MEASURES (APMs)

Management believes that Underlying EBITDA, Underlying Operating Profit and Underlying (Loss)/Profit before tax are useful measures for investors because these are measures closely tracked by management to evaluate the Group's operating performance and to make financial, strategic and operating decisions. These may help investors to understand and evaluate, in the same manner as management, the underlying trends in operational performance on a comparable basis, period on period.

Alternative performance measure	Closest equivalent IFRS measure	Definition/reconciling items
Underling EBITDA	Profit/(Loss) from operations	Underlying EBITDA is defined as earnings before net finance costs, depreciation and amortisation, profit/loss on disposal of assets, share-based payment charges (and related taxes), share of profit/loss of JV, tax and exceptional and adjusting items.
Underlying Operating Profit	Profit/(Loss) from operations	Underlying Operating profit is defined as profit/loss from operations before net finance costs, share of profit/loss of JV and exceptional and adjusting items.
Underlying (Loss)/Profit before tax	(Loss)/Profit before tax	Underlying (Loss)/Profit before tax is defined as (loss)/profit before tax excluding exceptional and adjusting items.

RECONCILIATION OF ADDITIONAL PERFORMANCE AND STATUTORY MEASURES

Underlying EBITDA

	53 weeks ended	52 weeks ended
	02 July 2023	26 June 2022
	£000	£000
(Loss) from operations	(4,013)	(6,596)
Less:
Exceptional items	5,948	28,779
Adjusting items	-	1,621
Share-based payments	1,525	453
Depreciation & amortisation	20,423	16,059
Loss on disposal of non-current assets	193	516
Underlying EBITDA	24,076	40,832

Underlying operating profit

	53 weeks ended	52 weeks ended
	02 July 2023	26 June 2022
	£000	£000
(Loss) from operations	(4,013)	(6,596)
Add:
Exceptional items	5,948	28,779
Adjusting items	-	1,621
Underlying operating profit	1,935	23,804

Underlying (loss)/profit before tax

	53 weeks ended	52 weeks ended
	02 July 2023	26 June 2022
	£000	£000
(Loss) before tax	(6,933)	(8,719)
Add:
Exceptional items - operating	5,948	28,779
Exceptional items - non-operating	211	-
Adjusting items	-	1,621
Underlying (loss)/profit before tax	(774)	21,681

JON AKEHURST

Chief Financial Officer

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the period ended 02 July 2023

		53 weeks ended	52 weeks ended
		02 July 2023	26 June 2022
	Notes	£000	£000
Revenue		204,500	226,133
Cost of sales		(85,298)	(93,810)
Cost of sales - exceptional	1	-	(5,501)
Gross profit		119,202	126,822
Other income		319	-
Operating expenses		(117,586)	(110,140)
Operating expenses - exceptional	1	(5,948)	(11,849)
Impairment of financial assets - exceptional	1	-	(11,429)
Operating loss	2	(4,013)	(6,596)
Finance income	3	494	1,035
Finance costs	3	(3,153)	(1,910)
Share of joint venture post-tax results		(261)	(1,248)
Loss before tax		(6,933)	(8,719)
Tax credit/(expense)		702	(720)
Loss for the period Other comprehensive (expense)/income: Items that may be reclassified to the income statement in subsequent years		(6,231)	(9,439)
Fair value movement on cashflow hedges		481	1,451
Ineffectiveness in cashflow hedges transferred to the income statement		(355)	-
Deferred tax credit/(charge) on derivative financial instruments		197	(385)
Currency translation differences arising from consolidation		(9)	(355)
Currency movement on net investment		237	1,297
Deferred tax charge on net investment currency movement		(59)	(324)
Forex reclassified to inventory/cost of sales		(815)	96
Other comprehensive (expense)/income, net of tax		(323)	1,780
Total comprehensive expense for the period		(6,554)	(7,659)
Earnings per share - Basic and diluted	4	(4.5p)	(6.9p)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 02 July 2023

Notes		As at 02 July 2023 £000	As at 26 June 2022 £000
ASSETS
Non-current assets
Intangible assets		1,292	1,818
Property, plant and equipment	5	65,612	68,579
Right of use assets	6	45,066	51,560
Equity investments		125	-
Investments in Joint Venture		-	-
		112,095	121,957
Current assets
Derivative financial assets		-	668
Inventories		35,040	43,062
Trade and other receivables		12,945	17,541
Corporation tax receivable		2,354	3,264
Cash and cash equivalents		11,196	17,569
		61,535	82,104
Total assets		173,630	204,061
LIABILITIES
Current liabilities
Trade and other payables		(28,787)	(39,441)
Lease liabilities	6	(10,622)	(10,390)
Other financial liabilities		-	(6,660)
Derivative financial liabilities		(115)	(48)
Provisions		(23)	(907)
		(39,547)	(57,446)
Non-current liabilities
Lease liabilities	6	(37,339)	(44,145)
Deferred tax liability		(408)	(1,130)
Derivative financial liabilities		(17)	(38)
Provisions		(2,840)	(2,919)
		(40,604)	(48,232)
Total liabilities		(80,151)	(105,678)
NET ASSETS		93,479	98,383
EQUITY
Share capital		138	137
Share premium		78,193	78,014
Retained earnings		10,566	13,499
Translation reserve		390	399
Merger reserve		223	223
Capital redemption reserve		6	6
Other reserves		3,963	6,105
Total equity attributable to shareholders		93,479	98,383

The financial statements of Hotel Chocolat Group plc, registered number 08612206 were approved by the Board of Directors and authorised for issue on 11 October 2023. They were signed on its behalf by:

Jon Akehurst

Chief Financial Officer
11 October 2023

CONSOLIDATED STATEMENT OF CASH FLOW

For the period ended 02 July 2023

		53 weeks ended	52 weeks ended
		02 July 2023	26 June 2022
	Notes	£000	£000
Loss before tax for the period		(6,933)	(8,719)
Adjusted by:
Exceptional items	1	4,315	28,779
Share of JV loss		261	1,248
Other income from JV		(109)	-
Depreciation of property, plant and equipment and impairment	2	8,776	6,506
Depreciation of right of use assets	2	11,040	9,545
Amortisation of intangible assets and impairment		597	565
Reversal of amortisation (SaaS)		-	(557)
Gain on lease modification		(4)	162
Net interest expense	3	2,659	875
Share-based payments		1,525	621
Loss on disposal of non-current assets	2	193	516
Operating cash flows before movements in working capital		22,320	39,541
Decrease/(Increase) in trade and other receivables		5,096	(3,286)
Decrease/(Increase) in inventories		7,678	(20,267)
(Decrease)/ increase in trade and other payables and provisions		(18,003)	(4,217)
Cash inflows generated from operations		17,091	11,771
Interest received		444	28
Corporation tax received/(paid)		1,003	(533)
Income received from JV		109	-
Interest paid		(3,320)	(1,988)
Cash flows from operating activities		15,327	9,278
Purchase of property, plant and equipment		(9,754)	(24,212)
Purchase of intangible assets		(497)	(1,504)
Proceeds from sale of fixed assets		132	-
Loan to joint venture		(500)	(6,300)
Acquisition of equity investment		(125)	-
Cash flows used in investing activities		(10,744)	(32,016)
Issue of ordinary shares		180	40,343
Costs associated to issue of ordinary shares		-	(1,002)
Utilisation of revolving credit facility		34,000	-
Repayment of revolving credit facility		(34,000)	-
Lease payments		(11,073)	(9,650)
Cash flows (used in)/from financing activities		(10,893)	29,691
Net change in cash and cash equivalents		(6,310)	6,953
Cash and cash equivalents at beginning of period		17,569	10,046
Foreign currency movements		(63)	570
Cash and cash equivalents at end of period		11,196	17,569

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the period ended 02 July 2023

	Share capital	Share Premium	Retained earnings	Translation reserve	Merger reserve	Capital redemption reserve	Other reserves	Total
	£000	£000	£000	£000	£000	£000	£000	£000
Equity as at 27 June 2021	126	38,684	22,938	754	223	6	3,102	65,833
Loss for the period	-	-	(9,439)	-	-	-	-	(9,439)
Gain on cash flow hedges	-	-	-	-	-	-	1,451	1,451
Deferred tax charge on derivative financial instruments	-	-	-	-	-	-	(385)	(385)
Currency translation differences arising from
consolidation	-	-	-	(355)	-	-	-	(355)
Currency movement on net investment	-	-	-	-	-	-	1,297	1,297
Deferred tax on net investment currency movement	-	-	-	-	-	-	(324)	(324)
Cash flow hedge transferred to inventory/cost of sales	-	-	-	-	-	-	96	96
Total comprehensive (expense)/income for the period:	-	-	(9,439)	(355)	-	-	2,135	(7,659)
Transactions with owners:
Issues of share capital	11	39,330	-	-	-	-	-	39,341
Share-based payments	-	-	-	-	-	-	629	629
Deferred tax credit on share-based payments	-	-	-	-	-	-	239	239
Equity as at 26 June 2022	137	78,014	13,499	399	223	6	6,105	98,383

Loss for the period	-	-	(6,231)	-	-	-		-	(6,231)
Fair value movement on cash flow hedges	-	-	-	-	-	-		481	481
Ineffectiveness in cashflow hedges transferred to income statement								(355)	(355)
Deferred tax credit on derivative financial instruments	-	-	-	-	-	-		197	197
Currency translation differences arising from	-	-	-	(9)	-	-		-	(9)
consolidation
Currency movement on net investment	-	-	-	-	-	-		237	237
Deferred tax on net investment currency movement	-	-	-	-	-	-		(59)	(59)
Cash flow hedge transferred to inventory/cost of sales	-	-	-	-	-	-		(815)	(815)
Total comprehensive (expense)/income for the period:	-	-	(6,231)	(9)	-	-		(314)	(6,554)
Transactions with owners:
Issues of share capital	1	179	-	-	-	-		-	180
Share-based payments	-	-	-	-	-	-		1,525	1,525
Deferred tax charge on share-based payments	-	-	-	-	-	-		(55)	(55)
Transfer un-utilised share-based payments	-	-	3,298	-	-	-		(3,298)	-
Equity as at 02 July 2023	138	78,193	10,566	390	223		6	3,963	93,479

Notes

Hotel Chocolat Group Plc (Company number: 08612206) is a company incorporated and domiciled in the United Kingdom, its shares are listed on the AIM Market of The London Stock Exchange. The registered office is Mint House, Newark Close, Royston, Hertfordshire, SG8 5HL. The nature of the group's operations and its principal activities are set out in the strategic report.

Basis of preparation

Whilst the financial information included in this announcement has been prepared on the basis of UK-adopted International Accounting standards, this announcement does not itself contain sufficient information to comply with UK-adopted International Accounting Standards.

The financial information set out in this Preliminary Announcement does not constitute the Group's Consolidated Financial Statements for the period ended 2 July 2023 but is derived from those Financial Statements which were approved by the Board of Directors on 11 October 2023. The auditor, RSM UK Audit LLP, has reported on the Group's Consolidated Financial Statements and the report was unqualified and did not contain a statement under section 498 (2) or 498 (3) of the Companies Act 2006.

The statutory financial statements for the period ended 2 July 2023 have not yet been delivered to the Registrar of Companies and will be delivered following the Company's Annual General Meeting.

The consolidated financial information has been prepared in accordance with UK-adopted International Accounting Standards in conformity with the requirements of the Companies Act 2006 ("IFRS"). The financial statements have been prepared on the historical cost basis, except for the revaluation of derivative financial instruments and the equity investment that are measured at fair values at the end of each reporting period, as explained in the accounting policies below.

New standards, amendments and interpretations, that were effective in FY23, impacting the Group that have been adopted in the annual financial statements for the year ended 02 July 2023, and which have given rise to changes in the Group's accounting policies are set out below. None of these changes had a material impact upon the financial statements.

·	Annual Improvements 2018-2020 Cycle - Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS41
·	Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16)
·	Onerous Contracts - cost of fulfilling a contract (Amendments to IAS 37)
·	Reference to the Conceptual Framework (Amendments to IFRS 3)
·	Initial Application of IFRS 17 and IFRS 9 - Comparative Information (Amendments to IFRS 17) (issued on 9 December 2021)

New standards, amendments and interpretations which are not yet effective at the reporting date but will be adopted in future reporting are set out below:

·	Classification of liabilities as current or non-current (Amendments to IAS 1)
·	Lack of exchangeability (Amendments to IAS 21)
·	Definition of Accounting Estimate (Amendments to IAS 8)
·	Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)
·	Non-current liabilities with covenants (Amendments to IAS 1)
·	Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction - Amendments to IAS 12 Income Taxes

Going concern

The Board has concluded that it is appropriate to adopt the Going Concern basis.

The Directors have undertaken a comprehensive assessment in order to conclude that the Group has the ability to trade as a going concern using forecasts drawn up to 31 December 2024, considering the current macro-economic environment and the potential impact of relevant uncertainties facing all businesses, together with the Group's ability to influence its activities and hence the financial position, cashflows and profitability.

In reaching their conclusion the Directors' considerations have included the following factors:

·	That the Group continues to operate within its facilities, which are used to fund day to day working capital requirements.
·	The availability of funding in the form of a £50m RCF committed until July 2025 through an amended and restated RCF agreement that was entered into on 29 September 2023, where the option to extend the existing agreement by 12 months until July 2025 was exercised.
·	The headline covenants remain unchanged: of achieving positive cash in January 2024, of net debt to EBITDA (pre IFRS16) of less than 2.5x, and EBITDA to interest greater than 4x.
·	In order to support additional inter-company lending to the Group's St Lucian business to fund further infrastructure investment there is a condition to add the Group's two St Lucian legal entities to the agreement as obligors. To secure this inter-company lending, a share pledge is required to be completed within 60 days of execution of the amended and restated RCF agreement. It is the opinion of the Board, acting upon external legal advice, that this is a straightforward legal process fully achievable in the required time frame. This opinion underpins the Board's going concern assessment.
·	The Groups' current cash position as at 10 October 2023 is £8m, giving £22m headroom within the facility as the business approaches the peak trading period, with around 85% of annual revenues still to achieve with the five largest seasonal gifting seasons still to come.

The ability to progressively reduce working capital levels by leveraging the vertical integration from manufacture to end-consumer, including the ability to use prices to influence demand.

·	The ability to communicate with a database of c.two million active customers at modest cost in order to stimulate sales demand.
·	Multiple levers of mitigation in the form of discretionary spend-reduction opportunities.
·	Having made significant capital investments to increase capacity in recent years, the Group has sufficient operational headroom to support several years of volume growth and can therefore exercise discretion over the timing of further capex.
·	Consideration of specific factors impacting current and estimated future consumer demand, including channel and category sales performance.
·	Current elevated levels of consumer price inflation, which may create pressure on consumer discretionary spend, leading the Group to prepare a number of possible scenarios for sales demand during the going concern period.

The Directors have modelled a number of scenarios, including a reverse stress test. In the scenarios sales are flexed, along with the impact on related expenses, working capital changes and other mitigations such as cost reduction and timing of capital expenditures. These scenarios are used to evaluate the implications for gross margins, operating expenses, profitability, working capital, capital expenditure and the consequent financial position, including operating within financial covenants attaching to the RCF. For each scenario the Directors have identified relevant actionable mitigating measures that the Group could undertake at its own discretion to adjust future cashflows and continue to operate within their facilities.

In making their assessment the Directors have reviewed management forecasts based on scenarios reflecting full-year sales in line with FY24 Budget along with scenarios showing declines vs budget of -10% (-2% YoY) and -20% (-13% YoY) which reflect the Directors' view on most probable worst case scenario and a reverse stress test respectively.

The Directors have considered the impact of mitigations and the Group's ability to implement these changes at its own discretion. The Directors have also considered the probability of each sales scenario, concluding that the more extreme sales decline scenarios are of remote probability. As a result, the Directors have concluded that the use of the going concern basis of accounting is appropriate because there are no material uncertainties related to events or conditions that may cast significant doubt about the ability of the company to continue as a going concern in the period to 31 December 2024.

1.	Exceptional items

	53 weeks ended 02 July 2023 £000	52 weeks ended 26 June 2022 £000
Impairment and write off related to Joint Venture investment, net of exceptional credits Saint Lucia impairment Goodwill impairment Store impairment release Material non-recurring events: operating costs	258 3,498 - (70) 2,262	21,836 1,200 425 (5,225) 5,042
Total operating expenses - exceptional Material non-recurring costs: margin	5,948 -	23,278 5,501
Total exceptional items	5,948	28,779

Impairment and write off related to Joint Venture investment

During the year ended 02 July 2023, £nil impairment was provided (26 June 2022: £21,836k) related to the Joint Venture investment.

Exposure of £592k was written off during the year ended 02 July 2023 relating to loans provided to the Japan Joint Venture before the Joint Venture obtained Court approval for Civil Rehabilitation restructuring proceedings (Minji Saisei).

Offsetting these costs is £109k received from the Japan Joint Venture as repatriation of funds as the restructuring proceedings progress to their conclusion. During the year ended 02 July 2023, an FX gain of £225k was realised when financial guarantee contract liabilities supporting the joint venture were settled.

Saint Lucia impairment

There is an impairment of £3,498k during the year ended 02 July 2023 (26 June 2022: £1,200k) relating to the assets of the Saint Lucia business. The charge in 2023 related to the decline in the value of the Rabot Estate as tourism in Saint Lucia has not fully recovered from the impacts of COVID-19.

Goodwill impairment

£nil impairment was provided during the year ended 02 July 2023 (26 June 2022: £425k). The goodwill arose from the acquisition of Rabot 1745 Limited which is no longer supportable as Rabot 1745 Limited is no longer trading.

Store impairments

US gain on remeasurement of lease liabilities

There was no further release or charge during the year ended 02 July 2023 (26 June 2022: £3,491k release) relating to the release of lease liabilities of the US stores.

UK store impairments

There is an impairment release of £70k during the year ended 02 July 2023 (26 June 2022: £1,734k release) relating to fixed assets of stores. The release is primarily due to the improved trading conditions during the period as well as management's assessment of future cash flows over the remaining lease period for each store. The key assumptions used in the future cash flows were sales and EBITDA (based on board approved plans), assumed nil growth rate for 5 years and a discount rate of 10.790% (26 June 2022: 9.670%).

Material non-recurring events - operating costs

Restructuring costs

An expense of £2,110k was incurred during the year ended 02 July 2023 (26 June 2022: £181k) relating to staff redundancy costs.

This expense is partially offset by a release of the share-based payment forfeited in relation to the restructure of £477k (26 June 2022: £nil).

Capital cash deposit impairment

In the prior year, there was a provision of £2,477k for doubtful recovery of a cash deposit made to a manufacturer of capital equipment that went into administration. No provisions have been recognised in the year ended 02 July 2023.

Sale and operation planning process

In the prior year, non-recurring professional fees totalled £809k in relation to the implementation of a new sales and operating planning process. No fees have been incurred in the year ended 02 July 2023.

US exit costs

In the prior year, there was a provision of £611k incurred in relation to recovery of rent deposits and staff redundancy. No provisions have been recognised in the year ended 02 July 2023.

Onerous contracts

In the prior year, forward contracts for items of stock had been entered into to support activities in the US and Japan markets. Following management's decision to exit these markets, £964k had been provided for. No additional provisions have been recognised in the year ended 02 July 2023 for US and Japan markets.

Coffee machine tooling

During the year ended 02 July 2023 coffee machine tooling was written off totalling £126k (26 June 2022: £nil) following the exit from this product category.

FX on long-term loan

During the year ended 02 July 2023, an FX expense of £503k (26 June 2022: £nil) was recognised in relation to the US intercompany loan that was provided for in the period ended 26 June 2022. £392k relates to the reversal of a FX gain realised during year ended 26 June 2022, and £111k FX loss during the year ended 02 July 2023.

Material non-recurring events - margin

During the year ended 02 July 2023, there were no material non-recurring events that impacted margin.

Discontinued UK stock lines

No additional provision was made during the year ended 02 July 2023 (26 June 2022: £2,959k) relating to the exit certain UK product categories.

US stock provision

£nil provision made during the year ended 02 July 2023 (26 June 2022: £2,542k) relating to US stock following the decision to exit the US market in FY22.

2.	Loss from operations

Loss from operations is arrived at after charging/(crediting):

Notes		53 weeks ended 02 July 2023 £000	52 weeks ended 26 June 2022 £000
Staff costs		67,019	60,146
Government grants received1		-	(94)
Depreciation of property, plant and equipment	5	8,776	6,506
Depreciation of right of use asset	6	11,040	9,545
Amortisation of intangible assets and impairment		597	565
Reversal of amortisation (SaaS)		-	(557)
Loss on disposal of non-current assets		193	516
Exceptional items	1	5,948	28,779
Loss/(profit) on exchange differences		849	(346)
(Release of provision)/write down of inventory recognised as a (credit)/expense		(5,927)	9,797
Impairment of trade receivables		22	(2)

1 Government grants received include the Retail Hospitality Leisure Grant Fund and the Closed Business Lockdown Payment.

3.	Finance income and expenses

	53 weeks ended 02 July 2023 £000	52 weeks ended 26 June 2022 £000
Interest from related party	-	967
Interest from related party - exceptional*	50	-
Interest on bank deposits	444	68
Finance income	494	1,035
Interest on bank borrowings	1,071	552
Unrealised interest on derivative financial instruments	4	12
Realised interest on derivative financial liabilities	207	165
Interest on lease liabilities	1,871	1,181
Finance expenses	3,153	1,910

*Interest of £50k was calculated in relation to loan made to the Japan Joint Venture during the year ended 02 July 2023 before the Joint Venture obtained Court approval for Civil Rehabilitation restructuring proceedings (Minji Saisei) in July 2022. As the entity has ceased trading the finance income has been categorised as an exceptional item.

4.	Earnings per share

Loss for the period is used in the calculation of the basic and diluted earnings per share. Diluted loss per share is capped at the basic earnings per share as the impact of dilution cannot result in a reduction in the loss per share.

The weighted average number of shares for the purposes of diluted earnings per share reconciles to the weighted average number of shares used in the calculation of basic earnings per share as follows:

	53 weeks ended 02 July 2023	52 weeks ended 26 June 2022
Weighted average number of share in issue for the period - basic	137,428,284	136,313,568
Effect of dilutive potential share:
Save as You Earn Plan	-	172,020
Long-Term Incentive Plan	7,423	125,380
Founder Shares	-	113,536
Weighted average number of shares in issue used in the calculation of earnings per share (number) - Diluted	137,435,707	136,724,504
Earnings per share - Basic and diluted	(4.5p)	(6.9p)

As at 02 July 2023, the total number of potentially dilutive shares issued under the Hotel Chocolat Group plc 2021 Long-Term Incentive Plan was 2,507,592 (26 June 2022: 3,649,911). Due to the nature of the options granted under this scheme, they are considered contingently issuable shares and therefore have no dilutive effect.

5.	Property, plant and equipment
		Freehold property	Leasehold improvements	Furniture & fittings, equipment & hardware	Plant & machinery	Total
		£000	£000	£000	£000	£000
52 weeks ended 26 June 2022
Cost:
As at 27 June 2021		19,947	1,884	41,281	38,834	101,946
Additions		2,715	93	4,481	16,923	24,212
Disposals		(3)	-	(1,154)	(126)	(1,283)
Reclassification2		-	-	(1,453)	-	(1,453)
Translation differences		1,588	-	402	3	1,993
As at 26 June 2022		24,247	1,977	43,557	55,634	125,415
Accumulated depreciation & impairments:
As at 27 June 2021		(3,426)	(842)	(29,858)	(14,324)	(48,450)
Depreciation charge		(253)	(192)	(3,852)	(2,209)	(6,506)
Disposal		-	-	1,082	-	1,082
Reclassification2		-	-	610	-	610
Impairment (charge)/release1		(1,200)	-	1,130	(2,477)	(2,547)
Translation differences		(371)	-	(654)	-	(1,025)
As at 26 June 2022		(5,250)	(1,034)	(31,542)	(19,010)	(56,836)
Net book value:
As at 26 June 2022		18,997	943	12,015	36,624	68,579

53 weeks ended 02 July 2023
Cost:
As at 26 June 2022	24,247	1,977	43,557	55,634	125,415
Additions	1,065	2	5,559	3,128	9,754
Disposals	-	-	(3,448)	(2,627)	(6,075)
Reclassification3	(2,492)	(95)	156	2,670	239
Translation differences	(617)	-	(17)	(1)	(635)
As at 02 July 2023	22,203	1,884	45,807	58,804	128,698
Accumulated depreciation & impairments:
As at 26 June 2022	(5,250)	(1,034)	(31,542)	(19,010)	(56,836)
Depreciation charge	(305)	(192)	(4,332)	(3,947)	(8,776)
Disposal	-	-	3,312	2,501	5,813
Reclassification3	-	-	-	-	-
Impairment (charge)/release1	(3,498)	-	70	-	(3,428)
Translation differences	135	-	6	-	141
As at 02 July 2023	(8,918)	(1,226)	(32,486)	(20,456)	(63,086)
Net book value: As at 02 July 2023	13,285	658	13,321	38,348	65,612

¹ The following impairments were made in the period ended 02 July 2023: Saint Lucia estate impairment charge £3,498k (26 June 2022: £1,200k), Store impairment release £70k (26 June

2022: £1,130k release) and capital cash deposit impairment charge £nil (26 June 2022: £2,477k). The capital cash deposit has been disposed during the period ended 02 July 2023.

² Reclassifications during year ended 26 June 2022 represent right of use assets previously categorised within furniture & fittings, equipment & hardware.

³ Reclassifications during the year ended 02 July 2023 represent asset under construction brought forward balances from freehold property and intangible assets to categories across PPE.

As at 02 July 2023, the net book value of freehold property includes land of £2,521k (26 June 2022: £4,509k), which is not depreciated. Included in freehold property is £585k of assets under construction (26 June 2022: £2,438k). Included in Furniture & fittings, equipment & hardware is £388k of assets under construction (26 June 2022: £2,005k). Included in Plant & machinery is £198k of assets under construction (26 June 2022: £7,475k).

6.

Leases

The lease liability is initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate (IBR). The determination of the discount rate is considered to be a significant judgement. The discount rate applied ranged between 0.93% and 8.9% (26 June 2022: 2.0% and 4.8%). 

All leases where the Group is a lessee are accounted for by recognising a right of use asset and a lease liability except for:

·	Leases of low value assets, and
·	Leases with a term of 12 months or less.

Amounts recognised in the consolidated statement of financial position

Right of Use Assets	Land & buildings £000	Equipment £000		Total £000
As at 27 June 2021	30,351	6		30,357
Additions to right of use assets	31,159	-		31,159
Amortisation	(9,539)	(6)		(9,545)
Reclassification	843	-		843
Effect of modification of lease	(1,281)	-		(1,281)
Derecognition	(597)	-		(597)
Impairment release1	604	-		604
Foreign exchange	20	-		20
As at 26 June 2022	51,560	-		51,560
Additions to right of use assets	4,060	356		4,416
Amortisation	(11,001)	(39)		(11,040)
Effect of modification of lease	550	-		550
Derecognition	(412)	-		(412)
Foreign exchange	(8)	-	(8)
As at 02 July 2023	44,749	317	45,066
	Land & buildings	Equipment	Total
Lease liabilities	£000	£000	£000
As at 27 June 2021	39,497	67	39,564
Additions to lease liabilities	29,604	-	29,604
Interest expense	1,181	-	1,181
Effect of modification of lease	(4,331)	-	(4,331)
Derecognition	(989)	-	(989)
Lease payments	(10,764)	(67)	(10,831)
Foreign exchange	337	-	337
As at 26 June 2022	54,535	-	54,535
Additions to lease liabilities	4,015	356	4,371
Interest expense	1,862	9	1,871
Effect of modification of lease	546	-	546
Derecognition	(417)	-	(417)
Lease payments	(12,895)	(49)	(12,944)
Foreign exchange	(1)	-	(1)
As at 02 July 2023	47,645	316	47,961

During the period ended 02 July 2023, all leases entered into are on normal terms. During the period ended 26 June 2022, a new lease for a distribution centre in Northampton was entered into and £24,703k was included in the additions of the right of use assets and lease liabilities. The lease term is 10 years, the Group has no right to extend or terminate the lease and there are no variable lease payments associated with the lease arrangement.

1 Land and building impairment was £nil in the period ended 02 July 2023 (26 June 2022: £604k).

	02 July 2023 £000	26 June 2022 £000
Non-current	37,339	44,145
Current	10,622	10,390
Total lease liabilities	47,961	54,535

Leases - cash outflow

	02 July 2023 £000	26 June 2022 £000
Capital element of lease cash outflows	11,073	9,650
Interest element of lease cash outflows	1,871	1,181
Low value lease cash outflows	5	4
Short term lease cash outflows	1,959	892
Variable lease cash outflows	4,204	3,661
Total contractual cashflows	19,112	15,388

Amounts recognised in the consolidated statement of comprehensive income

	Land & buildings	Equipment	Total
	£000	£000	£000
52 weeks ended 26 June 2022
Depreciation charge on right of use assets	9,539	6	9,545
Impairment release	(604)	-	(604)
Interest on lease liabilities	1,181	-	1,181
Expenses related to low value leases	-	4	4
Expenses related to short term leases	116	776	892
Expenses related to variable lease payments1	3,612	49	3,661
As at 26 June 2022	13,844	835	14,679

53 weeks ended 02 July 2023
Depreciation charge on right of use assets	11,001	39	11,040
Interest on lease liabilities	1,862	9	1,871
Expenses related to low value leases	-	5	5
Expenses related to short term leases	201	1,757	1,958
Expenses related to variable lease payments1	4,148	56	4,204
As at 02 July 2023	17,212	1,866	19,078

  1 The amount recognised in the income statement that arises from rent concessions to which the Group has applied the practical expedient under IFRS 16 for the period ended 02 July 2023 is £134k (26 June 2022: £407k).

Maturity analysis of Lease Liabilities

Lease liabilities	02 July 2023 £000	26 June 2022 £000
Maturity analysis - contractual undiscounted cashflows
Less than one year	12,461	10,610
Between one and two years	10,295	11,023
Between two and five years	18,896	21,993
After five years	13,305	18,062
Total contractual cashflows	54,957	61,688

The Annual Report & Accounts for the 53 weeks ended 2 July 2023 will be posted to shareholders during the week commencing 23 October 2023. The document will also be available on the Group's website at www.hotelchocolat.com and in hard copy at Mint House, Newark Close, Royston, Hertfordshire, SG8 5HL.

ENDS

 

END