The Investment Column: Thorntons keeps investors sweet

Customers of Thorntons, the luxury chocolate company, are not the only ones getting fat from the appointment of turnaround man Roger Paffard as chief executive. Mr Paffard's whirlwind plans to add more than 200 bigger and better-placed sweetshops to its portfolio of 300 in the next five years will certainly feed the fantasies of chocoholics.

Shareholders will also be feeling pretty satisfied. Since Mr Paffard joined almost two years ago and embarked on a radical store restructuring programme, Thorntons' share price has revived from a 135p five-year low. Yesterday's 32 per cent jump in full-year profits to pounds 11.5m lifted the share price 7.5p to 248.5p, a new high.

The restructuring to increase floor space and re-site shops in better locations is paying off so far. Refitted stores yield an average 12 per cent higher sales and turnover at re-sited shops is some 30 per cent better, Thorntons is achieving healthy like-for-like sales growth, up almost 13 per cent in the year and 7.5 per cent in the current quarter. Plans to expand the product range to include children's chocolates, a huge market neglected so far, and more emphasis on impulse buys like chocolate bars rather than seasonal gifts, make sense.

But there are three main worries. Firstly, margins. Opening more shops in prime sites will mean higher rents. A shift away from gifts to everyday chocolates and cheaper kiddie offerings will also squeeze returns. Then there are huge costs associated with expansion. Mr Paffard's plans to open 148 more stores by 2000 than his original target call for an extra pounds 40m on already hefty capital expenditure, pushing gearing to an uncomfortable 75 per cent.

Plans to consolidate chocolate packing into one factory and outsource and automate will save costs. The company also has strong cash flow. But Mr Paffard's expectations of a one-point lift in net margins in four years' time look a tight target. His promises to wipe out gearing in four years also look demanding.

The second issue is chocolate consumption. Given the rate of expansion, any tailing off of demand or switch to a competitor would hurt. Mr Paffard is reassuring here, saying that chocolate consumption has grown steadily at around 3 per cent a year and may even be counter-cyclical - people buy chocolate to cheer them up during recession. He also points to the group's growing stranglehold on the UK market, something that should deter competitors.

Finally, when Thorntons has finished coating the UK in sweet shops, where will it find growth? One idea being tested is Thornton coffee shops, but expect more news next year. Given the uncertainties, 20 times looks high enough.