Summary
- Lindt reported strong organic sales growth despite macro challenges.
- Near-term economic weakness may impact premium chocolate sales.
- Long-term prospects are positive, with premium chocolate demand rising worldwide.
- Competitors are circling the premium chocolate space, but Lindt has differentiating features to maintain pricing power.
Despite operating challenges from inflation, Lindt & Sprüngli ( OTCPK:LDSVF ) reported strong performance in 2022 (FY ended December 2022) with organic sales up 10.8% to CHF 4.97 billion in line with a broader trend in the premium chocolate sector as the revival of socializing activities drove demand for premium chocolates. Italian chocolate giant Ferrero Rocher reported a 10.4% increase in sales for the year ended August 2022.
All regions saw robust growth. In Europe, Lindt’s biggest market by revenues, organic sales were up 5.3% YoY to CHF 2.3 billion from 2.33 billion in 2021. North America, Lindt’s second-biggest market saw organic sales rise a solid 15.7% YoY to CHF 2.03 billion from CHF 1.69 billion in 2021 with all subsidiaries including Russell Stover (whose sales contracted in 2021 due to supply chain and labor issues) recording double digit growth during the year. Lindt's 'Rest of the World' segment saw the strongest growth with organic sales up 16.6% to CHF 0.65 billion with major markets such as Brazil, Japan, and China, as well as Lindt’s Global Travel Retail Division seeing good growth.
Lindt is “confident” of achieving an operating margin (EBIT) of 15% for 2022, which is an improvement from 14.1% in 2021.
Economic weakness may impact near term premium chocolate sales
Near term, economic weakness amid rising inflation and shrinking consumer purchasing power could impact premium chocolate makers such as Lindt as customers cut back on premium products. In the U.S., - the world’s biggest confectionery market and the world's biggest importer of chocolate and chocolate products - 2022 was a good year but showed early signs of consumer spending weakness as chocolate sales rose in dollar terms but dipped in unit volumes. With interest rates expected to continue rising this year and expected to remain elevated for longer than originally projected, premium chocolate sale growth may take a near term hit. Meanwhile input cost inflation could impact margins and earnings.
Lindt noted 2023 is expected to be another challenging year due to inflation and plans to achieve 6%-8% sales growth as well as rising operating margins, in line with its medium to long term objectives.
Longer term however, premium chocolate demand is robust and Lindt is poised to capitalize.
Premium chocolate sales outpacing overall chocolate market
Premium chocolate is becoming increasingly popular, and premium chocolate sales are expected to grow in the high-single digits globally outpacing the overall chocolate market which is expected to grow in the mid-single digits over the coming years. The premiumization trend is playing all over the world, with growing health awareness and, in emerging markets, rising incomes and therefore rising consumer purchasing power, driving demand for more expensive and better quality chocolates.
Lindt, the world’s leading premium chocolate brand with an estimated market share of 30% is well positioned. Famous for premium chocolate treats such as pralines and chocolate balls, the company has a solid portfolio of premium chocolate brands with a presence all around the world, including its namesake Lindt brand, American premium brand Ghirardelli Chocolate, Italian premium brand Caffarel, and Austrian premium brands Hofbauer and Küfferle.
Competitors however are increasingly taking notice of the premium chocolate opportunity; Ferrero Rocher is repositioning its chocolate portfolio to attract premium chocolate consumers, especially in the U.S.. Ferrero’s Baby Ruth candy bar for instance underwent a recipe overhaul in 2020 which saw the removal of artificial colors and flavors, while Butterfinger was improved by switching to a better quality chocolate coating, better quality peanuts, and the removal of artificial colors and flavors. In addition, Ferrero Rocher introduced their range of premium chocolate bars recently, which appear to be in direct competition with Lindt’s own range of premium chocolate bars.
Mondelez ( MDLZ ) meanwhile, which owns premium Belgian chocolate brand Côte d'Or has also highlighted premium chocolate as an area of focus and is investing to grow its share .
Although rising competition may limit Lindt’s revenue and earnings growth prospects, the company does have a competitive differentiator to help maintain pricing power as well as market share; Lindt is one of the world’s very few major bean-to-bar chocolate manufacturers, a differentiating feature that could give the company an edge in product quality control, as well as a marketing edge in terms of appealing to ethically-conscious consumers seeking transparency, and sustainability from their premium chocolate brand. Although larger chocolate rivals may attempt to adopt a bean-to-bar approach, implementation is generally quite complex and may take years to catch up to Lindt whose has been operating their bean-to-bar cocoa bean supply chain traceability and sustainability program for over a decade .
Capitalizing on new opportunities
Lindt continues to innovate and explore opportunities within the chocolate space. Vegan chocolate is expected to grow in the mid-teens over the coming years and Lindt has been quick to respond having launched vegan products across several countries including US , UK , and Australia , some of which have bagged awards from institutions including the National Confectioners Association and PETA .
Lindt is financially solid with a total debt to equity of just 33%, and operating cash flows on a clear upward trajectory over the past decade.
Operating cash flows have consistently covered Lindt's capital expenditures which have generally hovered roughly around CHF 200 over the past few year years except in 2014 when Lindt acquired Russell Stover for more than USD 1.5 billion . Lindt's healthy financials position them well to make investments and acquisitions as required to capitalize on emerging opportunities going forward.
Conclusion
Lindt currently trades at a trailing P/E of 48 which is rather pricey and the stock may be viewed as a hold. Analysts are generally skewed towards a hold rating.
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Lindt & Sprungli: Sweet Prospects As Premium Chocolate Demand Grows