Lindt Earnings: Record First-Half EBIT Margin Leads to Guidance Increase; Shares Expensive

Wide-moat Lindt & Spruengli LISN, or Lindt, delivered strong first-half results, with 10.1% organic sales growth and a record EBIT margin of 12.2% (structurally lower compared with the 2022 full-year margin due to gifting seasonality but an almost 300-basis-point improvement compared with the same period of last year). However, reported sales growth only amounted to 4.7% as the strong Swiss franc weighed on the top-line result.

In light of the strong first-half delivery, 2023 full-year guidance was increased for both organic growth and EBIT margin. Management now expects to deliver organic sales growth in the range of 7%-9% (compared with 6%-8% previously) and an EBIT margin improvement of 30-50 basis points (versus 20-40 basis points previously). We expect both these metrics to land at the upper end of the guidance and forecast organic sales growth of 8.5% and EBIT margin of 15.4% (versus our 15.3% previous forecast, representing a 50-basis-point year-over-year improvement). Still, we expect net sales will only be 4.3% higher than in 2022, at CHF 5.2 billion, given the currency headwind. These updates, together with a time value of money adjustment, lead us to increase our fair value estimate by 2.4% to CHF 86,000. We continue to view shares as expensive, trading at a premium of around 20% to our fair value estimate.

Management expects higher raw material costs in the second half, which explains the more muted margin improvement guidance for the full year compared with the first half. The world price for cocoa reached a new long-term high at the beginning of the third quarter. Cocoa futures prices have surged by over 30% since the beginning of the year, and although margins have been protected by hedges so far, the higher cocoa price will be felt more acutely going forward. On the other hand, Lindt is experiencing operating leverage as it relates to other cost buckets, and further efficiencies in North America should support the full-year margin delivery.