Hotel Chocolat Group PLC (AIM:HOTC) has become the latest British retailer to crash and burn in the United States market.
This morning the chocolate brand warned in a trading update that its balance sheet was significantly affected by the cost of closures in the States.
It said it expects to report a statutory loss for 2022 “predominantly as a result of non-cash impairment provisions and costs arising from discontinued activities including the closure of retail stores in the USA”.
Hotel Chocolat now operates just one store in the US that is anticipated to close next year as it moves towards selling products online.
Its exit from the US market follows a swathe of retailers that have headed over the Atlantic and failed to make their mark.
Tesco PLC (LSE:TSCO) famously attempted to expand across the pond in 2006, but exited the market seven years later, selling its stores to Yucaipa Companies.
Its retreat followed similar US market entries that have failed to take off by J Sainsbury PLC (LSE:SBRY), Marks and Spencer Group PLC (LSE:MKS) and WH Smith PLC (LSE:SMWH).
Sainsbury’s attempted to launch in the US market in the eighties and nineties, but its food and drink sales were dwarfed by its home market.
Since selling off its airport division WHSmith USA Travel Retail to Hudson Group, WH Smith has since attempted to revive its offering in the US market through its travel venture InMotion.
Last May, HSBC announced that it had exited the US market for retail banking. Noel Quinn, group chief executive of the bank, said in a statement at the time that the bank simply “lacked the scale to compete”.
Following Hotel Chocolat's backfired expansion into the US and Japan, it could be a case that things get worse for the chocolate seller before they get better.
The company is scaling back, cutting investment in its US and Japan joint venture, and focusing on low capex product lines such as the new Velvetiser hot chocolate and cream alcohol ranges, it indicated in a statement today.
Liberum analyst Wayne Brown said in an analyst note today: “FY’23 will be a transitionary period as the business will reshape accordingly and pair back investment in some of its newer ventures.”
“Together with near-term cost inflation this will lead to some short-term forecast pain for FY’23 but lays the foundation for the deliverability of c.20% EBITDA margins within three years’ time,” he added.
Hotel Chocolat is not as profitable as it once was, so is refocusing on its home market to manage supply chain costs and reduce spending on less profitable ventures abroad.
Like many retailers, it is battling ongoing costs related to paying staff a living wage in the UK, together with the effects of inflation on utilities, materials and property, and operating expenses as it looks to increase production in its core market.
The company has secured a new decade-long lease on a second distribution centre in Northampton that is expected to become operational in the first half of next year.
It is also boosting production of Unbelievably Vegan milk chocolate and plans to increase its UK factory capacity by 80% over pre-pandemic levels next year.
Luckily for the chocolate brand, the strength of its core UK operations is expected to drive its metrics in 2022.
UK sales were 35% ahead of last year and 68% ahead of 2019, it said, helping to drive a 37% uptick in annual group revenue to £226mln. Loyalty customers now account for 71% of its direct-to-consumer sales value.
Hotel Chocolat said it intends to expand UK production to produce 380mln product items by next year up from 210mln in 2019.
It will focus on retention marketing, which it said is more profitable that trying to win new clients, as well as discounts to drive profit margin, better procurement, more efficiency, and economies of scale.
Liberum recommends investing in its shares as a ‘buy’, but cut its target price to 300p from 620p to reflect the “lower short term forecast” for 2023.
Indeed, Hotel Chocolat has now forecast for 5% sales growth in 2023, down from 16%, anticipating that its sales margin will improve incrementally through to 2025.
“The strategy should deliver incremental profit and cash generation and see a rapid rebuilding of margins,” Brown said.