Thorntons; presentation by Jonathan Hart, Chief Executive. Reassuring! Interim results confirm progress.

17th Sep '13 by johnrosier

3 comments 7046 reads

New Holding: I have bought a 3% holding in Thorntons this afternoon; Results for the year ended June 2013 issued last week indicated that the recovery at the company is well underway. The shares have recovered from a low of 10p in January last year so I could be accused of being a little slow on the uptake! I feel however that with the strong momentum in the business and at the current valuation there is scope for further share price appreciation; something the directors clearly agree with having spent £175,000 on shares at 88p following the results.

The turnaround: last week's results showed revenues up 1.8% to £221m, profit before tax and exceptional items at £5.6m compared to £0.9m the year before and the operating margin increased to 3.3% v 1.3%. Cash generated from operations increased to £8.3m (2012;£1.5m) and net debt was reduced slightly to £27.5m (2012; £29.1m). These improvements have been driven by the strategy of shifting the emphasis of the business towards the Fast Moving Consumer Goods Division (FMCG) whilst reducing its own stores estate within the Retail Division. The FMCG Division, which includes UK Commercial sales (sales through third party retailers) International sales and private label, saw turnover increase by 19% to £101.1m. The Retail Division, which includes sales through its own stores , Franchise and Thorntons Direct saw sales fall by 9% to £120m, primarily due to the closure of non profitable stores; 35 stores were closed during the year leaving a total of 296 at the year end. Like for like sales were encouraging as although down 0.8% overall there was some growth in the second half. The declared objective is to reduce the number of own stores to 180-200, with a further 40 being closed during the current year.

Jonathan Hart, the relatively new chief executive, ( appointed in January 2011) succinctly describes the strategy;

"Our strategy remains: rebalance sales and costs in our Retail division where net contribution is low and grow our FMCG division where net contribution margin is significantly higher."

Conclusion; The company has made good progress in the last financial year which has been rewarded to some extent through a strong recovery in the share price. I think however that there could still be quite a lot more to go for. Consensus forecasts for the current year ending June 2014 are for 37% earnings growth to 7.8p putting…

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johnrosier

9th Oct '13

Thorntons (94.5p and 4.1% of JIC Portfolio). Q1 sales to 5th October released this morning show sales of £47m, up 2.1% on a year ago. The FMCG Division saw sales up 11.0% whilst the Retail Division saw sales down 5.7%. However, readers will know that management is shifting the emphasis of the business to FMCG and away from Retail, where it closed eight poorly performing stores during the quarter. Like for like sales in Retail were down 0.4%. Franchise sales were up 17.3%.

Jonathan Hart the Chief Executive expressed confidence in the key Christmas period “"We are pleased with the performance of both our operating divisions in the first quarter, and we have made further good progress in rebalancing revenues towards our FMCG division. We have an exciting Christmas offer across the business and are encouraged by the strong order book within our FMCG division. This puts us in a good position ahead of the key Christmas trading period.”

Conclusion; this was a new holding introduced to the portfolio only a few weeks ago. To recap; consensus forecasts for the current year ending June 2014 are for 37% earnings growth to 7.8p putting the shares on a PE ratio of 12.2x. This is followed by a further 45% growth to 11.3p putting the shares on a PE ratio of 8.5x June 2015 earnings. This seems very cheap to me and also to the directors who spent £175,000 on shares at 88p following the results in September!

30th Jan '14

Thorntons (139p and 5.4% of JIC Portfolio) I attended a presentation by Chief Executive, Jonathan Hart yesterday evening. To summarise: The process of re-balancing the business towards the FMCG (Fast Moving Consumer Goods) Division and away from the Retail Division is working, with strong sales growth being achieved at considerably higher margins. The margins on FMCG, where it sells through the major supermarkets and independents are around 21% compared to about 2.5% through its retail estate. The margins on the Retail Division will improve as it focuses down to an estate of around 180 -200 profitable stores. By the end of this fiscal year, (June 30th 2014), it will have closed around 120 stores and expects to close a further 40-60 over the next 2 -3 years. As it is simply a matter of waiting for the leases to run out, the cost of closing a store is insignificant.

The brand has been revitalised over the last year with clear brand positioning to create a “powerful and coherent range” and it has been innovative with the introduction of “decorative moulded” chocolate such as The Snowman range at Christmas and the attractive looking Easter Eggs which will soon be appearing on the shelves. (The Lindt Easter Bunnies have to be covered in gold foil to make them look attractive; Thorntons may have stolen an edge here.) Although currently only about 2% of sales, they have ambitious growth plans for the International Division.

It manufactures all its chocolate at its Derbyshire factory and having spent 25 years “trying to keep the factory full” it will be investing around £7m to increase capacity in its inlaid chocolate line and on decorative moulded. Due to a deficit of £28m on its pension scheme, it is paying a contribution of £2.75m a year. Given this commitment and its cap-ex plans it will not be recommending a dividend in the near future and not until it feels strong enough to pay one that is well-covered.

In the year ending 30th June 2013 operating margins improved to 3.3% from a low of 1.3% the prior year. Hart is targeting a doubling in margins from last year’s figure. Consensus forecasts for the current year ending June 2014 are for margins of 4.2% rising to 5.1% next year. The company’s Christmas trading update of 16th January showed sales at the FMCG Division up 17.1%, like-for-like in the Retail Division up 3.5%, (the best result since 2006) and overall sales up 6.3%. (The Retail Division saw total sales fall 2.9% reflecting the closure of unprofitable stores during the period). At the time I was slightly surprised there were no upgrades to forecasts but I guess that gives scope for them to beat current consensus figures.

Conclusion; Hart took charge of a demoralised company and has clearly got it back on course; profitability is improving, its brand positioning is clear and there is greater confidence within the business. The target is very clear; to create a strong and confident business and brand, and to improve margins to industry competitive levels. This will be driven by further growth in FMCG and also through building the nascent International Division. Consensus forecasts are for June 2014 earnings per share up 37% at 7.9p valuing the shares at 17.5x. Forecasts of a further 42% growth value the shares at 12.4x June 2015 followed by 36% growth putting the shares on 9.1x June 2016. I came away with a good feeling about my holding; whether 5.4% of the JIC Portfolio, (second largest holding), is a bit racy is debatable but for now I am a Happy Holder and looking forward to the post Easter trading statement.

3rd Mar '14

Thorntons (Market Capitalisation; £105.1m, 153p and 5.7% of JIC Portfolio). Interim results for the 28 weeks ending 11th January 2014 showed revenues up 4.5% to £139.7m, driven primarily by growth in the FMCG division where sales were up 14.5% to £70.6m. Profits before tax grew by 47.3% to £7.2m and the operating margin rose to 6.2% from 4.9%. Earnings per share were up 73% to 7.8p.
Whilst growth was driven by the FMCG division it was encouraging to see like-for-like sales in the Retail Division at +2.1% compared to -2.2% in the prior year. It closed 15 stores during the period with a further 25 earmarked for the second half leaving it with around 255 stores at the year end, well on its way to its target of between 180 and 200 stores. Both divisions have benefited from the re-launch of its Classics and Nostalgia ranges and from its seasonal specialities such as the Snowman licensed range which sold well at Christmas.

Conclusion: Everything seems on track with the re-emphasis of the business towards FMCG paying dividends with strong sales growth and improved margins. Consensus forecasts are for June 2014 earnings per share up 35% at 7.7p valuing the shares at 19.8x. Forecasts of a further 50% growth value the shares at 13.2x June 2015, followed by 32% growth to June 2016 putting the shares on 10.0x. Given current forecasts I think that the valuation can be justified but would not want to see any slowdown in the current momentum within the business. Happy Holder!

Thorntons; presentation by Jonathan Hart, Chief Executive. Reassuring! Interim results confirm progress.

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Johnrosier

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