Chocolate maker Lindt & Sprüngli saw its sales and profits slide in the first-half of 2020. Looking forward, the Swiss company is cautious about the near term due to Covid-19 but remains confident about its prospects further ahead. Dean Best reports.
Shares in Lindt & Sprüngli softened today (21 July) after the Switzerland-based chocolate business reported a decline in first-half sales and profits.
However, that investor sentiment soured was likely less due to Lindt’s performance in the opening six months of the year – the 8% fall in the company’s organic sales was actually better than analysts had expected – but more to the fact the Lindor maker is not expecting its margins to rebound to levels seen in 2019 until 2022 or even 2023.
The uncertainty about the impact Covid-19 could continue to have on certain parts of Lindt’s business – principally on its own retail stores and the travel-retail market – has caused the company’s management to be cautious about the outlook for profits.
However, Lindt said it expects its sales growth to recover in 2021 and the group remains sure about the longer-term demand for its “premium” range chocolate.
Lindt sales sour – but not as much as feared
The owner of brands including Excellence and Ghirardelli posted first-half sales of CHF1.54bn (US$1.65bn), which amounted to a decline of 8.1% on an organic basis. After a “strong start” to the year in the first quarter, the Covid-19 lockdowns of late-March, April and into May hit sales from Lindt’s own retail outlets, which number around 500 worldwide and, in 2019, accounted for 13% of total sales.
Meanwhile, the company’s business in the travel-retail sector suffered from the slump in international business and leisure travel. Lindt’s travel-retail sales were down around 75% on 2019 levels. And, in Italy, Lindt saw pressure on sales through the traditional retail trade, which is a notable channel in one of the company’s largest European markets.
As with other packaged-food groups, sales of Lindt’s products to eat at-home fared better. The company pointed to the “double-digit” growth of its Excellence brand. E-commerce remains a small chunk of Lindt’s revenues but its business in the channel doubled and now accounts for 4% of sales.
Geographically, Lindt’s performance was mixed. The company managed to eke out some growth in France and Germany, said business was “stable” in the UK and Spain but did see Covid-19 hit operations in Switzerland, the aforementioned Italy and other markets, too, including Australia, China and Brazil. Sales in North America slid more than 8%, hit by the closure of Lindt’s own stores and by Covid-19 weighing on gift sales for the company’s Russell Stover brand.
Volumes were down only 1.4% but the mix impact of closed retail outlets hit sales. Overall, it was, CFO Martin Hug said, the first time for more than 25 years Lindt had booked a fall in sales on an organic basis. Nonetheless, the 8% fall was better than analysts had expected. “Organic sales growth was mainly better in France and Germany, which made the positive trend,” MainFirst analyst Alain Oberhuber said.
Nonetheless, with sales going sour in the first half (the strength of the Swiss franc also contributed to sales falling more than 12% on a reported basis), Lindt’s EBIT tumbled from CHF126m in the first half of 2019 to CHF17m in the opening six months of this year. Hug pointed to “Covid-related diseconomies of scale and the negative mix impact on the top line”.
Some recovery in second half
Over 2020 as a whole, Lindt expects its sales to fall by 5-7% on an organic basis, suggesting some ground will be made up in the second half of the year. Hug said Lindt saw “some normalisation” of its sales trends in June as lockdowns eased, which, he added, “is reassuring for the future”.
Lindt forecast its annual EBIT margin will be “around 10%”, which compares to the 1.1% generated in the first half, as more of the company’s retail stores re-open – but still below what the group has generated in recent years.
Nevertheless, Hug acknowledged those forecasts are based on assumptions. “Everything depends on how Covid-19 develops which nobody can predict with certainty,” he told analysts today.
The assumptions include what Hug called “no major, second Covid-19 waves that require further widespread lockdowns”. Pressed on the analyst call about whether this assumption on lockdowns was out-of-date, given last week’s renewed action in California, for example, Hug insisted Lindt had taken into account the prospect of local lockdowns and said the company’s estimates was based on the likelihood there wouldn’t be another, similar “huge lockdown, where everybody basically is closing down” that much of the planet had seen in April and May.
However, Jean-Philippe Bertschy, an analyst at Swiss bank Vontobel, questioned why Lindt’s forecast for sales implied it expected volumes to fall in the second half, given the key Christmas selling season is on the horizon. Hug pointed to a likely slow recovery in sales from Lindt’s retail stores, even as they re-open.
“While we will see some improvements in some of the channels, we still think even in the second half, we will not be back to the same level as in 2019,” Hug said. Lindt, he explained, expects sales from its own stores to be “somewhere around 80% of the 2019 levels” in the second half. “Nobody really knows how the consumer will behave during Christmas in our own stores,” he added. “With social distancing etc., you’re logistically not able to perform so many transactions.”
2021 margin outlook prompts questions
Lindt is forecasting its sales in 2021, on an organic basis, to be “slightly above” the company’s own annual target for growth of 5-7%, based on its business, in Hug’s words, “bouncing back” next year from the Covid-19 doldrums of 2020.
At MainFirst, Oberhuber is forecasting growth of more than 8% but Lindt’s 2021 sales forecast prompted no direct questions from analysts. Where there was scrutiny was on the company’s forecast on margins. Hug said Lindt expects the company’s EBIT margins “still to be under some pressure next year” and be “back at around 15% in roughly two years from now”.
Jon Cox, an analyst covering Lindt for Kepler Chevreux, asked why Lindt was not forecasting its margins would bounce back next year. Hug said it would “take time” for Lindt’s own retail business to “normalise” as people slowly return to stores. The Lindt CFO pointed to the pressure on the travel-retail sector, which he described as “very profitable” for Lindt, as well as the challenges in the traditional channel in Italy.
“We want to be one of the structural winners out of this crisis”
He also cited Lindt’s belief in continuing to invest in marketing and would spend “slightly more” on advertising than in 2019. “We want to be one of the structural winners out of this crisis. We have high liquidity so we will continue to invest behind our brands, because we are very confident about the mid-term.”
At Vontobel, Bertschy says should Lindt get back to a margin of around 15% in 2022 or 2023 it “would be faster than we have anticipated” but the chocolate maker’s outlook on margins was a key talking point and likely weighed on the company’s share price today, which was down 4% at the close of trading.
“The new normal will look like the old normal”
Amid the challenges of the first half, with Lindt’s own stores closed for much of the second quarter, with international travel drying up and with social distancing hitting sales at Easter, the company still believes it saw reasons to be positive about the longer term.
“Future demand for Lindt & Sprüngli’s premium chocolate remains intact,” Hug said. “We continue to see significant demand for our products, and we are more determined than ever to exploit that unchanged potential. We are confident because we have seen, even under the weight of such extreme external factors, that underlying consumer demand has remained buoyant. In short, for us, the ‘new normal’ will look remarkably like the ‘old normal’.”
Focusing on at-home consumption, Lindt, Hug insisted, had been gaining market share “in most of our markets” through its “key franchises” of Lindor and Excellence. Asked if Lindt had seen consumers, with economic storm-clouds overhead, starting to trade downwards, Hug pointed to other ways Covid-19 has been shaping consumption.
“I can rather see an acceleration, in the example of Excellence, people who have been working from home, who can maybe not go out to a cinema or to a restaurant, so they buy a nice chocolate and they buy a chocolate with high quality,” he asserted. “How I assess right now the crisis, it’s really the decline in sales is really mainly coming from channels that were not available to the consumer and not because the consumer has decided not to buy high-premium chocolate.”
Strategically, Hug says Lindt sees “the premiumisation of Anglo-Saxon markets”, (such as the US, the UK, Canada and Australia), as well as plans to invest in what the company calls “new growth markets (like Japan, China, Brazil and Russia) will “generate significant incremental business”.
“We are particularly focusing, if you look at the big markets, on the US, because the US is the biggest market at the end of the day,” Hug said. “Twenty per cent of the worldwide chocolate market is the US, so a lot of the spend is going there. Then also in other growth markets, especially where we don’t have a big retail operation, where we are building up the market with our own wholesale, like Russia for example. In the UK, we continue to invest. It’s a very important strategic market for us.”
And e-commerce, where in common with a number of packaged-food majors, Lindt saw a spike in sales in the first half, the company will also invest. “The online channel is a strategic priority for our business,” Hug said. “We can see definitely this growing very fast.”
Overall, Lindt’s confidence in its position in “premium” chocolate appears sound, although investors will be watching closely developments in its retail channels. Combined, Lindt’s stores and the travel-retail sector account for just short of a fifth of sales and, like all of us, the company will be unsure about how that side of its business will develop in the coming quarters with Covid-19 still in circulation and consumer caution weighing on traffic – or, worse, fresh lockdowns.