The continued outperformance of Thorntons’ commercial division proves the UK confectioner’s strategy to rebalance its business model is paying off, analysts have suggested.
The chocolate and toffee producer, which has implemented a strategy that it hopes will see commercial become its largest channel, this morning (16 January) reported total sales growth of 5.4%.
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While own store like-for-like sales declined 1.3% as a result of planned store closures, commercial sales grew by 26.4%. This follows a 9.8% increase in the firm’s first-quarter in October, with 2012 full-year commercial sales up by 7.9%.
Investec analyst Bethany Hocking said it was a “good Christmas” for Thorntons.
“The continued outperformance of commercial, together with some encouraging signs in private label and international, are evidence that the strategy is working, in our view.”
Conlumino retail consultant George Scott said Thorntons strategic on-going move to a wholesale business model is evident in its increase in UK commercial sales.
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By GlobalData“To this end, it can take confidence from an encouraging improvement in market share. This approach leaves Thornton’s well placed to benefit from the relatively consistent footfall at grocery outlets, compared to the high street locations of its retail outlets,” Scott said.
Indeed, Panmure analysts Philip Dorgan and Jean Roche said the confectioner’s overall performance this quarter is “quite a contrast to last year”, when the company issued a profit warning before Christmas. The analysts added: “[This is a] clear sign that its strategic plan to rebalance its sales towards commercial and thereby restore its profitability to industry competitive returns is beginning to work”.
Elsewhere, Thorntons has gained momentum in international markets, as it focuses on developing commercial relationships in English-speaking countries. A strong performance in Australia and South Africa especially contributed towards international growth of 69% during the quarter.
Thorntons own store and online Direct businesses were the only ones to suffer in the quarter, with the latter falling by GBP0.7m as a result of the late deployment of a new website combined with operational issues.
Three store closures resulted in the retail decline, leaving an estate of 27 less outlets than in the same period last year. While this fall was expected as the group refocuses its business model, Scott believes this was a weak performance from a retailer that relies on seasonal trade.
“It is fair to say that in this area Thorntons has failed to balance the challenges of having a widespread market presence while remaining a desirable brand. It continues to face competition from premium chocolate rivals, notably Hotel Chocolat, which are better positioned to draw in hard-pressed consumers closely scrutinising discretionary luxury purchases.”
While the retailer may continue to experience shortfalls in trading performance over the next two years as its turnaround plan is completed, Scott believes the Thorntons brand has become “increasingly less relevant with the UK retail audience”.
“Its new vision to focus on selling to the mass market through grocery multiples has undermined its exclusive credentials and ability to extract a premium on its product.”
Nonetheless, Roche and Dorgan believe that looking forward, while they are expecting sales to fall “slightly” over the next four years – as the company repositions its high street portfolio – they expect compound growth in EPS of 40%.
