Plenty of high street names are struggling at the moment. The price of imported goods is rising with the weakening of sterling since the EU referendum and retailers are fearful about what will happen to consumer confidence as we move towards Brexit.
Perhaps investors in the sector should be looking to a company that has just posted a 229% rise in profit, and which — despite the challenging outlook for retail and the wider economy — is looking forward to “further progress in the year ahead.”
Taste of success
I’m talking about premium chocolatier Hotel Chocolat (LSE: HOTC), which today released its first set of results since listing on the stock market in May.
The company reported a 12% rise in revenue to £91.1m, having opened seven new stores during the year, taking its total estate to 83 stores. Digital sales growth was particularly strong at 20%.
The company has a pipeline of further store openings, a new website set to launch and management reckons it can offset higher raw material prices by finding manufacturing efficiencies rather than increasing prices for consumers.
Managing costs as the company grows is already a major theme. This year’s EBITDA margin (before exceptional costs) improved from 9.7% to 13.5%, feeding through to that 229% leap in profit I highlighted earlier.
Hotel Chocolat was floated at 148p, but the shares are now trading at nearer 248p. So, what of the current valuation?
The company reported statutory earnings per share (EPS) of 3.9p, which gives an eye-watering price-to-earnings (P/E) ratio of 63. However, I think a better guide is to take pre-tax profit before (legitimate) exceptional costs and apply a standard tax rate. On this basis I get EPS of 6.4p, which brings the P/E down to 38.
If Hotel Chocolat can deliver EPS growth of 30%, the forward P/E comes down to under 30, giving an attractive growth-at-a-reasonable-price valuation. Such growth looks entirely possible, so I tentatively rate the stock a buy.
A giant awakens
If EPS growth of 30% sounds worthy of investor attention, how about growth of 162%? That’s what City analysts are forecasting Tesco (LSE: TSCO) will deliver for its financial year ending February 2017.
After five years of earnings declines, there’s increasing evidence that the supermarket giant has finally got to grips with both its internal problems and the external challenge of co-existing with budget chains Aldi and Lidl.
Half-year results released earlier this month showed Tesco making further strong progress in every department, while recent numbers from Kantar Worldpanel showed the company nudging up its market share for the first time in five years.
Despite the challenges created by Brexit and weak sterling, Tesco’s management is confident enough of its progress and prospects to have publicly declared the profit margin target it’s looking to achieve by the end of its 2019/20 financial year.
Growing investor optimism has pushed the shares up to 212p, giving a current-year forecast P/E of close to 30. However, earnings growth and the restarting of dividends don’t always come through quite as quickly or as vigorously as the market hopes in these situations, so I rate the shares a hold at their current level.