Thorntons’ strategy remains on course despite sales plunge

Thorntons’ shares plunged by as much as 12.5% today after it announced a double-digit first-quarter sales fall – but those looking at the longer term might find more reason for cheer.

The chocolatier hit a year-low of 87p this morning, before recovering back to 94.3p by mid-afternoon after posting an 11.9% fall in first-quarter sales.

Thorntons had previously advised of quarter-to-quarter “volatility” as it shifts to being a more fmcg-focussed business and the increased effect of order phasing – but it was the scale of the decline, in both retail and trade sales, that shocked investors.

However, what appear to be appalling figures (certainly compared to apocalyptic headlines attached to far smaller sales falls for the supermarkets), look less worrying when seen alongside Thorntons’ insistence it will still hit improved full-year profit targets.

It said today the sales fall will reverse in the second quarter and it expects to see UK commercial sales grow in the first half, meaning it stuck to guidance of pre-exceptional profit before tax of £9.65m (rising from £7.5m last year).

We will probably need to wait until those second-quarter numbers come through to judge whether these figures represent underperformance or simply increased seasonable variation.

Thorntons certainly flagged the sales fall in its full-year results, arguing that quarterly sales comparisons would become a less useful comparative metric as the nature of the business changed.

Importantly, Thorntons has recorded market share gains according to the latest 12-week Nielsen data and the first quarter represents only around 20% of its annual revenues.

The sales fall was higher than many analysts expected (N+1 Singer had predicted a 10% decline), but analysts were unshaken in their positive view on the company.

Charles Stanley maintained its Buy recommendation with a 200p target price, writing: “We think this confidence [on hitting full-year profit forecasts] likely reflects good margin and cost control, as well as management’s view on the Christmas stock-build patterns from the larger grocery partners, giving good visibility on the critically important Q2 (which typically represents 40%+ of total annual sales).  We still believe that the group is making substantial, sustainable progress in broadening and deepening its business with the UK supermarkets and convenience store channel.”

N+1 Singer also retained its Buy recommendation, with a 165p price guidance, noting: “Although the numbers may look bad, with management having already given some guidance around the approximate shape of trading in fmcg this year, they are also in keeping with full-year assumptions.

“Although there is greater volatility from a grocery sector that is in disarray and from quarter on quarter phasing variations, turning Thorntons into an international fmcg business with a right-sized multichannel UK core remains a deliverable ambition in our view and management continues to deliver on its strategic goals.”

The concern for Thorntons may be that the market is struggling to believe it can actually hit profit forecasts while the grocery sector is going through this turmoil – certainly the recent experience with Tesco is a reminder that profit guidance can be very different to the profit that’s actually delivered.

However, there is no suggestion that Thornton’s fundamental strategy is not still on track – the company’s problem is just that it is re-engineering the business in the gaze of the public markets, used to quarterly revenue comparatives to measure the health of listed companies.

The long-term signs are encouraging – but the share price is unlikely to pick up significantly until Thorntons can grow its commercial sales significantly to negate falling retail revenues.

In this sense, its first-half results will be crucial as it encompasses the crucial Christmas period that accounts for over 40% of revenues. Investors will expect clear signs of progress – Thorntons won’t be the only grocery company banking on a strong Christmas to reassure a nervous market.