Vox Sector Special: Six innovative companies leading the rebound of the UK hospitality and leisure sector

It has not been an easy few years for the British hospitality and leisure (H&L) sector. First, Covid-19 decimated sales in 2020 and 2021. Then, the industry's rebound was slowed by the cost of living crisis and high inflation affecting consumer spending. While Covid's effects on the economy appear to be in the rearview mirror, inflationary pressures and high costs of living continued to affect H&L sales into H1 2023.

While inflation has peaked by all accounts, rising interest rates have replaced it as the most significant headwind for the industry, quickly approaching 6% as the government tries to curtail spending - which naturally affects non-essential spending the most.

However, there is light is at the end of the tunnel that the industry is quickly approaching. Energy prices, supply chains, and inflation have all begun to normalise, and it is widely believed that interest rates will peak early next year. As a result, H&L businesses are optimistic as Barclays found that 78% are confident of growth in 2023. Average leisure spend continues to rise past inflation in most cases, with young adults (under 25) in particular spending 28% more in pubs and bars and 26% more on eating out than they did in 2022.

While businesses have seen significant cost increases over the past year, they have only passed around half of that on average to consumers, helping the latter through the cost of living crisis. Meanwhile, roughly half of H&L businesses have upgraded or expanded their premises this year amid significant innovation in the field, particularly in competitive socialising (e.g. arcade games, axe throwing, escape rooms, etc.)

Therefore, there is good reason to be optimistic. The closely related travel industry has showed us that pent up demand is a powerful force and consumer spending is not always correlated with macroeconomic trends. While costs are rising, so is revenue, with H&L businesses expecting a 33% year-on-year growth in revenues on average in 2023. Where hospitality and leisure is still hurting, an attractive value proposition exists and where it is spending on upgrades, diversification and expansion, there is potential for growth.

In this context, we present to you six innovative H&L companies that have made notable recent headlines. We recommend investors bullish on H&L and the economy in H2 2023 and 2024 follow these companies as they are bound to keep markets engaged through the sector's recovery.

Loungers

Loungers (LGRS) Follow | LGRS operates all day cafes, bars and restaurants across the UK under the Lounge, Cosy Club and Brightside brands. The company opened a record 29 new sites in FY23 (ended 16 April 2023) that created 1,000 jobs, with plans to open another 34 locations in FY24. This week, it announced the opening of its 200th Lounge, the Verdetto Lounge in Buckingham. 

Amid this aggressive expansion, Loungers achieved record revenues of £283.5m in FY23, up 19% from last year and up 85% from FY19. Like-for-like (LFL) sales growth was 7.4% from FY22, with an adjusted EBITDA of £47.3m representing 66% growth since IPO in April 2019.

In its most recent full-year accounts, Loungers expressed optimism about the sector. Inflationary pressures are now diminishing - the company said - as it set a medium-term goal to restore adjusted EBITDA margins to pre-Covid levels. A strong pipeline of new sites, and menu evolution continued to drive sales growth, with 34 new openings planned for next year and "identified potential" for 600 Lounges across the UK.

Overall, Loungers is well positioned for continued growth. It generated £51.1m from operating activities in FY23, up 81% since IPO 4 years ago. Steady sales growth and a robust pipeline of new sites underpins the company's momentum into the holiday season and beyond.

Brighton Pier

Brighton Pier (PIER) Follow | PIER owns and trades the famous Brighton Palace Pier, as well as 12 premium bars nationwide (including two ping-pong concept bars) and 8 indoor mini golf sites. The company recently released a trading update, detailing impressive financial performance for the 18 months to December 2022. The report reflects the first uninterrupted trading period post-pandemic.

The company's financial performance was driven by pent-up consumer demand and government assistance, enabling it to repay £9.1m of debt (44% of borrowings) and enter the current market with strong momentum. Revenue clocked in at £58.9m during the period, compared to £13.5m in the 12 months to June 2021. Pre-tax profit was £7.6m, compared to £4.2m in the prior period, and group EBITDA was £13.8m, up from £4.7m.

The company's pier division brought in the most revenue at £25.3m with Brighton Palace Pier being the most visited free-to-enter attraction in the UK, reaching over 4.2 million visitors in 2021.

In the earlier months of the reported period, Brighton Pier's diverse offering enabled it to capitalise on the surge in demand for leisure activities following the final removal of Covid-19 restrictions. Strong demand across all 4 of the company's divisions resulted in an all-time-high group revenue of £15.9m in the 13-week period to the end of September 2021. Brighton Pier attributed this surge in revenue to targeted government support through business and VAT relief, alongside consumers sitting on savings built up from Covid-19 restrictions leading to a strong rebound in consumer demand post-pandemic - the aftereffects of which are still felt.

Brighton Pier said it remained profitable through 2022's rising inflation on the back of a strong balance sheet and asset base. Despite external headwinds continuing into 2023, the group reported like-for-like revenues ahead of pre-Covid levels, indicating that the business is managing to successfully bat away continuing cost pressures and remain profitable, positioning it well for continued growth.

City Pub

City Pub Group (CPC) Follow | CPC owns and operates 46 premium pubs across the southern half of England and Wales, largely in London, cathedral cities and market towns, each tailored to its local market. 41 of the 46 are trading and 5 are in development.

City Pub sales have already returned to pre-Covid levels, and the group now has a fully refurbished and well-invested estate to generate forward momentum. Even as refurbishment was finalised last year, the company reported a very low £4m of debt at the end of 2022, following a £16m sale of 6 pubs and 3 non-core leaseholds last year.

The pub operator launched a share buyback programme in October 2022, acquiring 1m shares to date, representing nearly 1% of its issued share capital at a cost of £830m. The current valuation of the estate of £160m equates to NAV of 150p/share, compared to a current share price of 85.5p

So far in 2023, the company has shown encouraging performance, with LFL sales in Q1 13% higher compared to 2022 and ahead of expectations, providing confidence in the full-year outlook. Performance was underpinned by increased demand amid abating inflation, and significantly helped by operational improvements and refurbishment of the estate.

City Pub's portfolio is 61% freehold, which accounts for 90% of its investment. This gives the company a strong asset backing and helps protect margins as it does not need to spend much on rent. This, together with historically low bank borrowings, puts City Pub in a strong financial position for future growth.

Ten Entertainment

Ten Entertainment (TEG) Follow | TEG is the second largest ten-pin bowling operator in the UK with a total of 49 sites trading under the Tenpin brand. The company's shares are up 30% in the past year on strong sales growth through FY22 and FY23 so far.

Like-for-like sales growth in H1 2023 was 1.6% compared to the same period last year. This growth builds on record-breaking performance in H1 2022, which established a new baseline for the company. Ten Entertainment is now delivering sales 57% ahead of pre-Covid levels, demonstrating the enduring appeal of bowling in the growing competitive socialising sector.

To make its proposition even more appealing, the company decided to freeze bowling prices at 2019 levels and limit food and drink price increases to inflation-tracking only. At the same time, Ten Entertainment continued to expand with 4 brand new centres in 2023 and 7 refurbished locations in H1 2023, helping revenue growth.

Last year's H1 benefited from reduced rate VAT for hospitality and business rates relief. These measures contributed £2m of pre-tax profit, which was not repeated in H1 2023. Yet, Ten Entertainment expects to report pre-tax profit for H1 23 slightly ahead of last year, further demonstrating underlying growth.

The company has also benefited from low energy prices that it negotiated before the energy crisis in Europe, helping it avoid a major cost shock. These prices are secure until September 2024. Additionally, it has signed a new electricity deal using 100% renewable energy, giving it further energy price certainty to September 2026.

Profitable growth should continue in H2 2023, with full-year results expected to meet market forecast.

XP Factory

XP Factory (XPF) Follow | XPF is one of Britain's leading experiential leisure businesses, operating the Escape Hunt and Boom Battle Bar brands. Like Ten Entertainment, XP Factory reported strong trading in H1 2023 on the back of significant expansion in FY22, testifying to the growing appeal of competitive socialising. XPF shares are up 42% in the past year.

Turnover grew over 130% in H1 2023 to £18.8m from £8.1m a year ago, driven by an increase in number of sites and strong like-for-like growth in both Boom Battle Bar and Escape Hunt. As of June 2023, XP Factory had 27 Boom Battle Bar sites, up from 17 last year, and 46 Escape Hunt sites, up from 42 last year. This followed 288% year-on-year revenue growth in FY22 to £22.8m, underpinning the company's strong post-Covid recovery.

In H1 2023, Boom Battle Bar sales increased 19% and Escape Hunt was up 20% on a like-for-like yearly basis. EBITDA was up 245% to £3.8m for the sites that XP Factory owns (roughly half), and for the franchised locations EBITDA was up 30% to £1.5m. XP Factory held £3.6m in cash on 30 June 2023, up from £3.2m six months ago.

XP Factory's trading in 2023 so far has exceeded management expectations as group turnover more than doubled, Boom Battle Bar sales increased more than 400%, and EBITDA margins continued to trend toward mature targets. The company is continuing its aggressive expansion in the UK and abroad. In addition to the abovementioned increase in the number of Boom and Escape Hunt locations in H1 (in total up 24%), XP Factory company opened a new Escape Hunt venue in Woking and a new Boom site in Dubai, with both reporting strong trading so far.

XP Factory also has 2 new Boom sites under construction in the UK due to open in the coming months, and in June completed the acquisition of 2 further former Boom franchise sites in Chelmsford and Ealing. Group cash was a healthy £3.6m, available to fund further expansion, although strong cashflows from recently opened locations has made borrowing an attractive option to speed up growth as well.

Despite the cost of living crisis affecting leisure spending, XP Factory saw trading in July significantly ahead of May and June, with even better trading forecast for August based on early indications. In addition to strong summer trading, the company is seeing record pre-bookings for corporate and group sales for H2, increasing revenue visibility and confidence in full-year performance in line with market forecast.

Everyman Media

Everyman (EMAN) Follow | EMAN is an independent cinema group in the UK operating 41 venues as of June 2023. The company focuses on enhancing the movie watching experience with premium food, drink, seating, service, and atmosphere offered to its customers. As movies have come back in full force in 2023, the company reported strong summer trading, expecting to meet full-year market consensus.

Everyman continues to grow operationally and financially, remaining a popular choice for consumers during the summer months. While sales were lacklustre in H1 2023 to 29 June 2023, dipping to £38.7m from £40.7m, July trading put revenue back on track for full-year growth amid record breaking sales from blockbusters like Barbie and Oppenheimer. It should also be noted that while sales and EBITDA fell in H1 compared to last year, FY22 benefited significantly from reduced VAT rates, adding £0.9m to EBITDA, which was not available this year.

Helped by summer blockbusters, Everyman trading was exceptional in July, delivering record admissions and revenues up a third to £10.6m and a doubling of EBITDA to £2.6m. Everyman said that performance had continued into August, and with a strong pipeline of H2 releases – including Meg 2 and Gran Turismo - it was on track to hit full-year expectations for revenue of £94.4m and adjusted EBITDA of £17.2m.

While the Hollywood writers and actors strike is still a cause for concern for the entertainment industry, Everyman’s rapid growth is forecast to continue into the medium term, helped along by a new £35m banking facility to support ambitious expansion plans. After opening 3 new venues in H1 2023, the chain now operates 41 cinemas, with another set to open in October alongside a well-developed pipeline of new locations.