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Is UK stock Hotel Chocolat among the best shares to buy now?

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Kirsteen Mackay
·3-min read
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Graph Falling Down in Front Of United Kingdom Flag
Graph Falling Down in Front Of United Kingdom Flag

Hotel Chocolat Group (LSE:HOTC) has well and truly displaced Thorntons as the number one British high-street chocolate shop. The London-listed UK stock has done phenomenally well this past year while Thorntons is now closing all its remaining shops. Does this make it one of the best shares to buy now?

Investment risks and rewards

The AIM-listed group has a market cap of £495m and revenue rose 11% year-on-year for the 26-week period to 27 December. It’s made an impressive digital transition, which is clearly paying off. The company recorded major consumer growth in its UK, US and Japanese markets. But is the future going to remain as sweet for Hotel Chocolat, or should shareholders get out while the going’s good?

I do wonder if its growth is sustainable. The pandemic has led to store closures, which have reduced retail sales. Its rise in online sales has made up for this. However, I think many more people are opting to buy expensive chocolates online as either a gift to the loved ones they can’t spend time with, or treating themselves as an alternative to dining out or spending on services. Once the economy reopens and people can socialise again, I wonder if luxury chocolates may not have such a strong appeal.

I also think the growth of independent chocolatiers could present an ongoing threat to the company. Hotel Chocolat needs to stay appealing and ahead of the newcomers if it wants to keep growing its revenue.

There’s also changing consumer sentiment to consider. With a multitude of options at our fingertips, businesses are vying for custom and consumers can very quickly turn away from one brand to try something new. And as Thorntons’ woes prove, the chocolate market can be a tough one.

HOTC does have some unique gift ideas such as its cleverly marketed Velvetiser for making a luxury hot chocolate at home. At £99.95 a pop, that’s great for the bottom line and it’s something the company is very proud of. I do think it’s got the wow factor, but on closer inspection it doesn’t appear to be much more than a glorified milk frother and it only makes one cup. Therefore, I believe it’s going to need to extend its range of marketable products if it wants to maintain market share.

Hotel Chocolat financials

Based on earnings per share (EPS) of 2p, its current price-to-earnings ratio (P/E) is 197. Much like the products it sells, that’s one very expensive UK stock. EPS are projected to rise to 10p by 2023, which would bring the P/E down to 39. Not cheap, but not quite so outlandish either.

The company has currently suspended its dividend. This is unlikely to be reinstated soon as the company concentrates on extending its reach abroad. I can see Hotel Chocolat is a good company with impressive growth opportunities ahead. But its share price is very expensive, and that puts me off investing.

I’m not tempted by this UK stock because I think it’s operating in a highly competitive space and benefiting from the stuck-at-home economy that could soon be over. I’d prefer to buy alternative UK stocks such as AstraZeneca, which I think is among the best shares to buy now.

The post Is UK stock Hotel Chocolat among the best shares to buy now? appeared first on The Motley Fool UK.

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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Hotel Chocolat. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2021