UK: Thorntons shares up despite FY profit fall

By Michelle Russell | 12 September 2012

  • Underlying profit drops 54%
  • Pre-tax profit of GBP0.9m but higher than City forecasts
  • Net sales fall 0.5%
Thorntons said the performance was affected by “weak consumer demand caused by a decline in discretionary income"

Thorntons said the performance was affected by “weak consumer demand caused by a decline in discretionary income"

Thorntons saw its share price rise this morning (12 September) despite lower full-year profits as an improved second-half performance led to better-than-expected pre-tax earnings.

In the 53 weeks to the end of December, Thorntons saw a 54% drop in underlying profit to GBP2.5m (US$4m). Including exceptional items of GBP3.1m, pre-tax profit plunged to GBP0.9m from GBP4.3m last year. However, analysts were expecting Thorntons to just break even at the pre-tax level.

The company saw its net loss widen in the period to GBP898,000 from GBP253,000 last year.

Thorntons said its full-year performance was affected by "weak consumer demand caused by a decline in discretionary income, combined with structural problems in many of the UK's high streets". Promotional activity also remained high, Thorntons said, as shoppers sought value, particularly around Christmas. Thorntons said gross margins came under pressure during the year, falling to 44% from 46.2% in fiscal 2011.

Shares, however, were up 4.25% to 28.41 pence at 09:31 today as the company said it saw "the strongest second half performance recorded by the business for three years" as a result of "a good Easter" period.

Own-store like-for-like sales declined by 3.8% during the year. The company said its store closure programme is "on track", with 36 stores closed during the financial year. Commercial sales, however, grew by 7.9% to GBP85m. In all, net sales dropped 0.5% to GBP217.1m.

Despite the "challenge" to profitability over the past year, chief executive Jonathan Hart said the actions the company has taken have "started to deliver benefits" during an "improved" second half.

"This last year was the first of our three-year plan to restore the company's fortunes," Hart said. However, he added: "We do not foresee the economic landscape improving in the near future. We have made our plans accordingly and believe that the actions we have taken and continue to take will deliver improvements to profitability. We therefore approach the coming year with cautious optimism," Hart said.

As part of the continued rebalancing strategy, the company said it will continue to focus on growing sales to its commercial partners, reducing its own store estate and retail sales volumes to "levels that will produce sustainable long-term profits".

For coverage of Thorntons' conference call on the results this morning, click here.

Show the press release

THORNTONS PLC
ANNOUNCEMENT OF PRELIMINARY RESULTS

Thorntons Plc ("Thorntons" or "the Company") today announced its preliminary results for the 53 weeks ended 30 June 2012.

Financial

· Revenues of £217.1 million (2011: £218.3 million)
· Profit before tax and exceptional items of £0.9 million (2011: £4.3 million)
· Exceptional items total £3.1 million (2011: £5.4 million) consisting of impairment and onerous lease provisions
· Net debt at period end was £29.1 million (2011: £24.5 million)
· Dividend waived (2011: 2.20p)

Operational

· Market share increased from 7.7% to 7.8% in a weak market
· Actions taken to improve first half margin decline have started to flow through in the second half
· Own Store like for like sales declined by 3.8%. Store closure programme on track - 36 stores closed in the course of the financial year
· Sales growth of 7.9% in the Commercial channel
· Franchise channel adversely affected by a weak economy and the administration of a major franchise partner
· Online consumer sales increased by 9.8%
· Production responded positively to changing market demand and manufacturing volumes maintained


Jonathan Hart, Thorntons' Chief Executive, said:

"This last year was the first of our three-year plan to restore the Company's fortunes. Despite the challenge to profitability over the past year, in particular during a difficult first half, the actions we have taken have started to deliver benefits during an improved second half. The quality of our products, our brand and customer loyalty remain our core strengths and we are pleased that our products continue to be as popular as ever. We do not foresee the economic landscape improving in the near future. We have made our plans accordingly and believe that the actions we have taken and continue to take will deliver improvements to profitability. We therefore approach the coming year with cautious optimism."


For further information please contact:
Nadja Vetter / Emma Crawshaw / Georgina Hall, Cardew Group T: 020 7930 0777


CHAIRMAN'S STATEMENT

During the past year Thorntons has continued to operate in a difficult trading environment as the UK economy moved into a double-dip recession. We maintained production volumes and grew our market share in an overall weak marketplace. This was, however, achieved at the expense of margin and as a result profitability was affected in particular during the first half of the financial year. We have taken actions to improve margins and the second half of the financial year saw encouraging year on year improvements, reviewed in the Finance Director's report.

Sales declined by 0.5% to £217.1 million (2011: £218.3 million) and profit before tax and exceptional items was £0.9 million (2011: £4.3 million). This performance was affected by weak consumer demand caused by a decline in discretionary income, combined with structural problems in many of the UK's High Streets, which continued to suffer from high vacancy rates and weak footfall. Promotional activity remained high as shoppers sought value. This was most evident around our key Christmas season which negatively impacted gross margins and consequently profitability as stated in our trading statement in December. These events reaffirmed our three-year strategic plan to rebalance the business, create a smaller Retail estate, revitalise our brand and, most importantly, restore profitability.

Our strategy to rebalance the business is progressing well and has started to bear fruit: in the second half we delivered a strong Easter across all our channels and ended the year with good growth in our Commercial channel and a small like for like growth in our Own Stores. Reducing exposure to underperforming stores in weaker locations whilst growing our sales through other channels, specifically through our Commercial channel with our grocery partners, is proving the right way forward for our business.

The UK High Street
Following our strategy review last year we announced that we would reshape our Own Store portfolio having concluded that we could trade profitably from an estate of approximately 180 to 200 stores. These stores will be located in vibrant High Streets and malls with sustainable footfall and rents that support our business model. Our exit from the remaining stores is progressing well and this will continue throughout the next two financial years. The majority of these stores will close upon their lease expiry. During the period, 36 stores were closed at a cost of £1.0 million (2011: £0.6 million)

In May this year our largest franchisee went into administration. This contributed to a significant decline in Franchise store numbers and sales in the final quarter of the year. Our remaining franchisees, whilst similarly challenged by the overall environment did, however, respond positively to the new ranges and initiatives for spring 2012.

Commercial customers
Despite the challenging economic environment our business with third party retailers, particularly the major grocers, continued to grow both in terms of sales and market share where our leadership of the inlaid boxed chocolate market was maintained. As we rebalance we anticipate that this growth will continue, offsetting the reduction in sales due to the decline in our Own Store numbers.

Pension scheme
Following the regular triennial review the pension scheme actuarial deficit as at 31 May 2011 increased to £29.4 million. Despite regular contributions to the scheme the deficit has grown due in particular to the impact of the Bank of England's fiscal policy on the discount rates being applied to future liabilities. Since the year end an agreement with the Pension Trustees has been concluded which secures an increase in regular funding and a cash payment of £1.0 million into the scheme.

Dividends
The Board is not recommending a final dividend.

Employees and Directors
I would like to take this opportunity to acknowledge the commitment, passion and hard work of the people at Thorntons. Along with our franchisees and commercial and business partners, I would like to thank them all for their continued support. I would especially like to express my sincere thanks and best wishes to those in our Own Store teams that have had to leave us during the past year as we proceeded with store closures. I am delighted that we have been able to retain so many but I have been overwhelmed by the positive approach shown by those to whom we have regrettably had to say good-bye.

In February Mike Killick joined Thorntons as Finance Director succeeding Mark Robson, whom I would like to thank for his positive contribution to the business.

In February Keith Edelman joined the Board as Non-Executive Director, bringing considerable and valuable experience in retail and general management. Since the year end we have further strengthened the Board with the appointment of Martin George as Non-Executive Director with effect from 1 November 2012. Martin has extensive experience in the marketing and commercial development of consumer brands and we look forward to his future contribution.

With regard to the role of Chairman, I announced my intention to retire from the Board this time last year. The Board has now asked me to remain in role until February 2013 after which Paul Wilkinson, currently the Senior Non-Executive Director, will succeed me as Chairman. Paul has significant knowledge and understanding of Thorntons, gained not least through his six years as Non-Executive Director, and considerable FMCG and Board experience. I am confident that he will do an outstanding job as we continue to implement our strategy. From February 2013 Keith Edelman will become the Senior Non-Executive Director.

Outlook
Following a difficult first half and many quarters of continuing tough trading conditions I have been heartened by the level of sales in the final quarter of the year. Albeit a nine-week period that accounts for less than 12% of our sales, our Own Store like for like sales were positive and our sales to Commercial customers particularly strong.

We do not expect the external economic environment to improve. However, we enter the financial year with a strong order book from our Commercial customers for the Christmas period, trading plans for our Own Stores and Franchises supported by new year-round and seasonal ranges as well as having secured some new international business. Additionally we will continue to seek margin improvements and cost savings. Whilst we have confidence in our plans we are mindful of the challenges in these difficult and uncertain economic times.


John von Spreckelsen
Chairman
11 September 2012


CHIEF EXECUTIVE'S REPORT

The past year has seen some of the most challenging economic conditions in Thorntons' history.

Sales in the year fell by 0.5% to £217.1 million, partly due to the impact of our store closure programme. Our reported pre-tax profit before exceptional items was £0.9 million (2011: £4.3 million). Net debt at 30 June 2012 was £29.1 million (2011: £24.5 million), partially affected by the timing of balancing quarterly VAT payments.

Although a multi-channel strategy helps to de-risk our business, the impact of the weakness in the economy was felt across the Company. Consumer spending continued to be squeezed and this was most evident during our key Christmas selling season when customers purchased selectively which resulted in a higher proportion of sales coming from lower priced items and promotional lines. This had an adverse effect on both revenues and margins as our sales mix shifted into promoted lines and we lost sales of higher priced items. Our overall production volumes were however maintained as a result of the changing mix between Retail and Commercial sales as we progress our strategy.

In recent years increasing business costs, in particular raw material costs, have put pressure on our margins. Since we produce most of our own products, we are afforded the opportunity to influence product costs. During the course of the year we took a number of actions to mitigate such pressures including product and packaging engineering, ingredient optimisation and procurement initiatives. Although the benefits of such actions take some time to feed through into the business we did begin to see year on year improvements in margin during the second half of the year. We expect these benefits to continue into the current financial year.

Despite these strong headwinds, we have made progress with the implementation of our strategy and delivered an encouraging second half performance. Our share of the UK chocolate market grew further to circa 7.8% (2011: circa 7.7%), reflecting the continued strength of the Thorntons brand with our customers.

Strategy

The 2012 financial year saw us begin the implementation of our new strategy, announced in June last year, which set out our plan for the future of Thorntons. Underpinning this plan are three main objectives:

Rebalance our sales and resources to ensure we are where our customers want to buy from us, be that on the High Street, in supermarkets or online. We want to meet our customers' current and future needs, trading from a reduced but sustainable and profitable Own Stores estate whilst growing sales across our other channels, specifically our Commercial channel, which will become our largest channel over the next two years.

Revitalise the Thorntons brand, developing the year-round chocolate gifting market, whilst retaining our special reputation for the key seasons. Through the creation of clear and consistent brand positioning supported by outstanding new products, we want to encourage our customers to buy from us once more per year.

Restore our profitability to industry competitive returns over the medium to long term.

We have made good progress in implementing this three-year plan. The past year has presented many challenges but we have been encouraged by the way in which the business has demonstrated its ability to cope with these difficulties. I am confident that the core direction of our strategy is right.


The year in review

Retail

Total Retail sales including Own Stores, Franchise and Thorntons Direct declined by 5.2% to £132.1 million (2011: £139.5 million).

Own Stores
Good progress was made with the store closure programme. During the period, 36 stores were closed at a cost of £1.0 million (2011: £0.6 million) and three stores were refurbished, two of which were successful resites, resulting in a total of 330 stores at the year end (2011: 364). We remain on track to reach our target of 120 closures over the three-year period.

Overall Own Store sales were down 5.8% to £111.4 million (2011: £118.3 million), reflecting the reduced estate and declines in like for like performance. Sales in Own Stores declined on a like for like basis by 3.8% as a result of the further weakening of consumer expenditure and footfall. As mentioned earlier, this was particularly apparent during the key Christmas period.

Improvements were made in merchandising, trading and new products. We launched a number of initiatives to improve the customer experience including "Smiles" sampling, new "Finishing Touches" including improved gift-wrapping service and gift creation and our customer experience measurement programme. We believe our strong Easter performance and improved like for like sales in the final quarter of the year reflect the impact of these initiatives.

During the year we opened three stores trading in a new format focusing on year-round gifting supported by an outstanding customer experience. Whilst it is still early days, we have been encouraged by their performance. We have taken learnings from these stores to improve the wider estate as well as informing future refurbishments.

Recognising the challenging conditions in many of the more distressed locations where we trade and may have plans to close, we adopted a tactical trading approach which presents a simpler offer through a reduced range supplemented by residual, short-dated and end-of-line products. Consumers in these locations have responded positively to these "Outlet" stores which will decrease in number as our closure programme continues.

Franchise
Franchise sales for the period declined 7.8% to £10.7 million (2011: £11.6 million). Our franchisees were similarly affected by the difficult trading conditions resulting in a dampening of prospective franchisees' appetite for investment.

During the year we were affected by the challenges facing our major franchise partner which culminated in their administration in May 2012. We are encouraged that this business has subsequently been purchased by new owners.

We opened 19 new franchise locations during the year and closed 69 (of which 46 were with our major franchise partner) resulting in 177 stores at the year end (2011: 227).

A combination of the above factors meant that we have been unable to deliver on our plan to open a franchise in the majority of locations where we closed an Own Store. In light of this, we have adapted our franchise offer to include a new "mini-franchise" format, which requires less space and lower investment. This new format has been well received and the first opened in August 2012.

Thorntons Direct
Thorntons Direct sales over the period rose by 4.2% to £10.0 million (2011: £9.6 million). Our online consumer business grew strongly by 9.8% with good performances at Christmas and Easter. Visitors to our website grew by 13% and orders by 15% reflecting a further improvement in conversion levels. During the year, we put considerable effort behind the development of a new website, which will launch later this month. The new website will offer greater flexibility for both us and our customers, along with opportunities to further enhance personalisation.

Our corporate sales declined slightly as customers continued to be cautious about their level of spending in this area.

Sales & Operations

Commercial sales
Commercial sales grew by 7.9% to £85.0 million (2011: £78.8 million). Both sales and margins came under pressure during the year which saw the total boxed chocolate market decline by 4%. Nevertheless, our overall market share grew by 0.2% to 11.7%*. Whilst we maintained our position as the leading brand in inlaid boxed chocolate with 33.1%* we placed a great amount of effort in growing our share in the key seasons.

Our share in Christmas and Easter specialities grew considerably to 2.7% (2011: 0.9%) and 3.9% (2011: 3.0%) respectively as a result of strong new products and promotions*. Whilst sales of Christmas seasonal products were positive, the overall Christmas period failed to deliver to our expectations and we subsequently made a number of changes to both channel management and trading plans. The effect of this was encouraging and resulted in a strong period of trade through Easter and the year end.

* Source: AC Nielsen July 2012

Export sales
Within this Commercial Sales performance Export sales grew by 8.3% to £3.9 million (2011: £3.6 million). Our tax- and duty-free sales continued to grow strongly and we saw good growth in a number of territories including South Africa and Australia. Sales to the Republic of Ireland weakened reflecting the poor local economic conditions.

We have now completed our strategic review of international opportunities, the conclusions of which are presented later in this report.

Manufacturing operations
Maintaining or growing our production volumes is a key element of our rebalancing strategy. We are pleased that despite the challenges of the past year we have been able to maintain our production volumes and kept production overheads broadly flat. This is due to the continued benefits of investment and good manufacturing disciplines. We were able to respond quickly to changing demand levels during the year, evidence of the inherent flexibility of our production capability and also the skill and experience of our outstanding Derbyshire manufacturing team. Whilst raw material prices have fluctuated we continue to ensure that we buy in a timely and effective way.

The outsourcing of our Warehousing and Distribution to our new partner, DHL, was completed during the financial year and had a positive impact on service levels, where we saw further improvement from 97.8% in 2011 to 98.1% this year.

Brand and product innovation

Following the presentation of our strategy and the restructuring of our Marketing and New Product Development teams under our newly appointed Director of Brand & Customer Marketing, we have undertaken a thorough review of our brand in the context of our strategy and vision "to be Britain's best-loved chocolate brand making every customer smile". We now have clarity about who we are and what makes us different. Our customers have so many things to say to those they care about and we want to help them say it with chocolate. Underpinning this are our values of Creativity, Excellence and Bringing People Together which will help inform our people, their actions and our communication with our customers.

In this context, we have also simplified our categories, ranges and approach to our customers which will support our activity for next year. A full review of our brand identity has been completed and will start to become visible over the year ahead.

New products are always of critical importance to Thorntons and never more so than now as we seek to gain reappraisal from our customers, encouraging them to see us as relevant all year round, as well as for the key gifting occasions. In addition to the significant levels of product innovation at these key seasons, the past year saw the successful introduction of our "Little Gifts" range of affordable chocolate gifts ideal for those "just because" moments.

We introduced Hampers and Alphabet Truffles into our Own Stores and Franchise channels, both of which continued to be successful online along with further growth in sales of Photo Boxes. Our "Perfect Hearts" along with our "Perfect Eggs" allowed our customers to create personalised, bespoke gifts which were very well received and our "Best of British" range, introduced for the summer of celebration, has also been particularly successful.

In the meantime our brand remains strong. Thorntons was ranked eleventh on the list of the most highly rated brands by UK consumers (YouGov BrandIndex 2011). We retain the highest brand advocacy of any premium chocolate manufacturer and our spontaneous brand awareness reached 50% at Christmas 2011, consistently the highest in our category (HPI Brand Tracker). Over 95% of our customers rate their overall store experience as four or five out of five and 89% rate their likelihood to recommend similarly (ORC Customer Experience Survey).

Our brand and chocolate-making skills continue to win awards. Led by our Master Chocolatier, Keith Hurdman, who continues as the Academy of Chocolate's Chocolatier of the Year, three of our chocolatiers won gold and silver medals at Hotelympia in the Petit Fours class. We were also proud that our Centenary marketing campaign was recognised by the Marketing Society and won an Award for Excellence.


The year ahead - the second year of our plan

Rebalancing

We will continue with our Own Store closure programme and expect to close around 40 stores over the course of the current financial year. When store leases expire we will take advantage of opportunities to extend our period of trading on significantly reduced rent. Most of the stores identified for closure continue to make a positive cash contribution, albeit an unsatisfactory one, so we are in control of this programme and will take advantage of short-term opportunities should they arise. We routinely review our long-term objective and remain confident that we can retain a sustainable and profitable Own Store estate of between 180 to 200 stores.

Our plans for our Franchise channel are not based on improvement in the underlying economy and prospective franchisee sentiment. We now anticipate a low percentage of franchise openings in Own Store closure locations but are more confident of the wider opportunity that our new "Mini-Franchise" format presents. Whilst we have not budgeted to recover any business with our major franchise partner, we are currently working with the new owners and have recommenced modest levels of trading.

Thorntons Direct will be boosted by the new website launching in September 2012, with improved functionality and improved personalisation. We are also working further on improving our operations and delivery services ahead of our peak trading period.

Our ambition for the Commercial business is that it should be able to generate over half of our overall sales over the next two years, making it the largest channel. With a strengthened team we are focusing on building on our positive relationships with the major grocers, achieving broader and deeper year-round listings supported by further strong growth in share during the key Christmas and Easter seasons.

During the year ahead we expect to rebuild our Retailer Brand business, an area which we have previously moved away from due to low margins. As a result of the quality, flexibility and efficiency of our New Product Development and Manufacturing we have secured profitable business from retailers at home and overseas. We do not however currently supply private label to existing commercial customers who sell the Thorntons brand.

We have now completed our review of the opportunities for developing our business internationally. The coming year will see us embark upon the first stage of a long-term development programme that has the prospect of adding significantly to the overall profitability of the business over a three- to five-year time frame. We have a targeted approach to a few markets where we can learn and develop our international capabilities. Alongside the further development of our tax- and duty-free business, we will start with a focus on English-speaking markets where the Thorntons brand has an existing level of awareness as well as some modest sales. We will not export our retail format nor pursue Franchise at this time but will invest resources solely on developing commercial relationships. We will not incur heavy investment or start-up losses.

We expect that rebalancing during the year ahead will benefit growth in production volumes with manufacturing overheads remaining broadly flat.

Revitalising

We will continue to focus our energies on improving our Own Stores, making them the place where the Thorntons brand is brought to life. Ahead of Christmas we will refurbish three further stores with a refined version of our new store format. Taking learnings from our new store format and building on last year's activity, we will embark on further improvements to merchandising in our core estate in the coming year. This will be supported by enhancements to our customer engagement focus including additional support to our new "Finishing Touches" programme.

In the autumn we launch our new boxed chocolate brand, created to appeal to the less formal, female customer, a range that will signal our intent to encourage new year-round purchase occasions, expanding the market and inviting reappraisal of our brand. This supports a strong programme of new product development that includes a re-launch of our models range, further new "Little Gifts", a trio of limited edition "Wow" boxes in addition to a Christmas seasonal line-up that includes two new iconic Continental items: our first Continental advent calendar and a magnificent Christmas table centrepiece.

With the work on the Thorntons brand now complete we are embarking on an extensive programme to review almost all of our products over the course of the next year. This will deliver a step change in our ranging, packaging and merchandising by the autumn of 2013.

Restoring profitability

Restoring profitability is our top priority. We have taken a number of actions to rebalance our business and revitalise our brand which we believe will deliver improved profits. We have also invested significant effort in product and packaging engineering, ingredient optimisation and procurement. Combined with the restructuring and outsourcing completed during the past financial year, these actions should positively impact margins and profitability.

In the meantime we have created and adopted new approaches to manage costs and cash aggressively and will continue to do so.

 

Original source: Thorntons

Sectors: Confectionery, Financials, Retail

Companies: Thorntons

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