Loungers Plc Regulatory News (LGRS)

12 July 2023

Loungers plc

("Loungers" or the "Group")

Audited results for the 52 weeks ended 16 April 2023

A year of success and strength

Opened a record 29 new sites, with plans to open around 34 in FY24

Loungers, a leading operator of all day café/bar/restaurants across the UK under the Lounge, Cosy Club and Brightside brands, is pleased to announce its audited results for the 52 weeks ended 16 April 2023 ("FY23").

Finance Summary

(1) Adjusted EBITDA is calculated as operating profit before depreciation, impairment, pre-opening costs, exceptional costs, and share-based payment charges.

(2) Proforma net debt on IPO on 29 April 2019

Financial Highlights

· Achieved record revenue of £283.5m (up 19% vs FY22 and 85% vs FY19) and a record 29 new sites opened

· Industry leading like for like (LFL) sales growth of 7.4% (one year) and 17.6% (three year) 

· Adjusted EBITDA of £47.3m represents growth of 66% since IPO in April 2019

· Operating profit of £14.8m declined vs FY22 reflecting the positive impact in FY22 of Covid related government support measures

· Cash generated from operating activities of £51.1m represents growth of 81% since IPO in April 2019

Operational Highlights

· Inflationary pressures mitigated and are now diminishing. Medium term goal to restore Adjusted EBITDA margins to pre Covid levels

· Consistently strong new openings in a variety of location models continue to increase average levels of sales

· Menu evolution driving sales growth and highlighting brand relevance and appeal

· Strong pipeline of new sites, with internal capability developed to accelerate to around 34 openings next year

· Identified potential for at least 600 Lounges across the UK

· Launch of new roadside brand Brightside, with two sites now open and a third to follow in August 2023

· Leadership and operational structure further strengthened to deliver continued growth and out-performance

Current Trading and Outlook

We continue to feel very positive about the outlook for our brands. Over the 12 weeks since the year end our LFL sales have been +5.7% despite the impact of Easter timing and we are pleased with our performance and trajectory. Our new site openings continue to perform exceptionally well, achieving record levels of sales, and our pipeline of new sites is as strong as ever.

We ended FY23 by accelerating many of the initiatives that have underpinned Loungers' resilience in FY23; opening six sites in six weeks across March and April, launching new innovative menus in Lounge and Cosy Club and restructuring benefits for our salaried staff. We are confident that the good momentum we are seeing across the business, as well as the investment that we continue to make in our operational structure, puts us in the best possible position to deliver further growth and profitability in FY24.

Nick Collins, Chief Executive Officer of Loungers said:

"I am delighted to be announcing another excellent set of results for Loungers. During the year we opened 29 new sites creating around 1,000 new jobs, launched an exciting new roadside dining brand and achieved industry leading LFL sales growth. We also converted well at the bottom-line achieving Adjusted EBITDA of £47.3m. This is the seventh year in succession we have delivered industry leading LFL sales growth and over that period the estate has grown from 44 sites to 232 today. We are proud to be making a positive contribution to high streets and communities across the UK and there are hundreds more locations around the country for us to target.

Based on our experience the UK consumer remains positive, inflationary pressures are diminishing and recruitment challenges have eased. As an example, a few weeks ago, we opened Ormo Lounge in the seaside town of Llandudno which achieved a record level of sales for any new Lounge opening in our 22-year history, reflecting the relevance of our offer and how well we trade by the coast.

More broadly, we are excited about our ongoing roll-out programme and the opportunity to bring our culture and hospitality to around 34 new locations in the coming year, with many more to come beyond that."

Analyst Presentation Webcast

An analyst presentation will be held today, Wednesday 12 July 2023, at 9:30am (BST). Participants wishing to join the webcast should contact loungers@powerscourt-group.com to request details.

For further information please contact:

Notes to Editors

Loungers operates through its two established complementary brands - Lounge and Cosy Club - in the UK hospitality sector. A Lounge is a neighbourhood café/bar combining elements of coffee shop culture, the British pub and dining. There are 195 Lounges nationwide. Lounges are principally located in secondary suburban high streets and small town centres. The sites are characterised by informal, unique interiors with an emphasis on a warm, comfortable atmosphere, often described as a "home from home". Cosy Clubs are more formal bars/restaurants offering reservations and table service but share many similarities with the Lounges in terms of their broad, all-day offering and their focus on hospitality and culture. Cosy Clubs are typically located in city centres and large market towns. Interiors tend to be larger and more theatrical than for a Lounge, and heritage buildings or first-floor spaces are often employed to create a sense of occasion. There are 35 Cosy Clubs nationwide.

Loungers launched its third brand, a roadside dining concept called Brightside, in November 2022. The first Brightside location opened on the A38, south of Exeter, in February 2023, the second in Saltash near Plymouth in June 2023, with a further site opening in Honiton on the A303 in August 2023.

Chairman's Statement

I am delighted to report on another year of excellent financial, operational, and strategic progress for Loungers. 

A record year 

In the financial year ending 16 April 2023 we opened a record number of new sites (29), achieved record turnover of £283.5m, and delivered Adjusted EBITDA of £47.3m. The business grew overall sales by 19.5% and posted like-for-like sales growth of 7.4% on a one-year basis - or 17.6% on a three-year basis (albeit an increasingly less relevant metric).

We also opened our 200th site (Cosy Club Chester) and ended the year on 222 sites including the opening of the first Brightside, our new roadside restaurant brand, on the A38 near Exeter. The momentum of FY23 and the quality of our new site openings has been maintained into the new year, with the recent opening of Ormo Lounge in Llandudno representing, from a sales perspective, the biggest Lounge opening in our history.

A strengthened team

During the year, we made some key hires into newly created roles for the business: Guy Youll joined the business as Chief People Officer in the autumn, and has quickly set about delivering a better, more joined up people strategy. Having a proven people leader of his calibre is already helping us to substantially build on great work like The Commitments (our five point covenant with our employees), and will ultimately only make the business an even better place in which to work; Kate Lister joined us at the same time as our first ever Marketing Director, and has made an immediate impact in helping us to move away from our previous 'light touch' approach to promoting our brands; and, more recently, Jono Jenkins, who was previously Lounge Head of Food, has been promoted to Commercial Director. Having someone senior leading our commercial team should help us deliver not just our immediate goals, but also our more medium to long term ambitions.

It isn't all one-way traffic, however, and we are sorry to say goodbye to Amber Wood who leaves her role as Cosy Club MD in August. Amber has been an integral part of the Loungers journey for a number of years now and has achieved a huge amount in her time with us. We were very lucky to have Amber as part of our executive team, and I wish her all the very best for the future. 

Exceptional resilience in the face of multiple challenges

Loungers has been a listed company for over four years now and in that time it's fair to say we have had to deal with some unprecedented challenges, most notably the Covid pandemic. Despite having to be constantly reactive, and at times having to roll with multiple punches, the executive team, masterfully led as ever by Nick Collins, has risen to every challenge. With the exception of the period in which we were unable to trade due to the UK hospitality industry being forced to close, the business has delivered time-and-time again.

Our brands have proved to be exceptionally resilient and, through constant innovation and evolution, our offer is more relevant and compelling than it has ever been before. Whilst the majority of businesses in our sector have struggled, Loungers has thrived, and whilst many of our peers still talk about 'recovery' we have been back to full speed for over 18 months now - with the business enjoying significant growth despite the challenging backdrop. When comparing our FY23 results to our results for FY19, which was our year end just before the business listed on the London Stock Exchange, Loungers now has 52% more sites. This in turn has increased revenue by 85%, generated 66% more Adjusted EBITDA, and reduced net debt by £21.5m. In short, there is a great deal for the business to be extremely proud about, not the least the fact we have created 3,675 new jobs in the last four years - creating fantastic career opportunities for people from all backgrounds, all over the UK. 

Time to celebrate success stories across the sector: not all doom and gloom

During the pandemic, the UK hospitality industry received unprecedented levels of government support thanks in no small part to the tireless efforts of the various trade bodies that represent the sector. This support was, of course, very much required and more than justified, given the sector was forced to close entirely at times due to the various lockdowns. Since emerging from the Covid period, the industry has been significantly impacted by soaring energy costs, high inflation, the rising cost of labour, the cost-of-living crisis, and rail strikes (most acutely felt by London-centric businesses) and lobbying for more government support continues. Whilst highlighting the issues the sector continues to face and seeking more government support is understandable, it concerns me that hospitality is now viewed as a sector that is still very much on life-support. 

Clearly it is very challenging at the moment, particularly for smaller independent businesses in our sector who have been hit by outrageous and unsustainable energy costs. But surely we need to start to provide some balance to the way the sector portrays itself, because it is simply not accurate to characterise it as being all doom and gloom. As our results show, Loungers is doing extremely well and I make no apology for the success we continue to enjoy. Operating a hospitality business has always been challenging and our continued success is down to a number of factors, not least the hard work and talent of our executive team and our site teams' dedication to providing consistently great hospitality. However, at the heart of our success has been our ability to make the most of the cards we have been dealt and to get our heads down and crack on. This is undeniably a major reason why we emerged strongly from the Covid lockdowns and is also why we are successfully navigating the cocktail of challenges the sector faces post-pandemic.

And Loungers is by no means alone. There are countless other hospitality businesses that are growing, investing, creating jobs, building their brands, and being ambitious. A lot of these businesses, almost all of which are privately owned, are not making the same mistakes as others, because they have learnt from them, and instead of pausing their innovation and evolution post-pandemic they have accelerated it. They are helping to rejuvenate our high streets and aid the economic recovery and it is time that we start to shine a light on the success stories of our sector instead of allowing a message of woe to be promoted. 

The investment community too needs to start hearing a different, more up-to-date message. Just because a number of over-leveraged casual dining brands have failed over the last few years doesn't mean that casual dining is totally broken. Indeed, most of the growth and innovation in the sector is currently in casual dining. Likewise, just because certain high-profile operators are reducing their leisure/retail park estates doesn't mean that these types of locations are absolutely off-limits. Indeed, some of our best performing Lounge sites are in exactly the locations that sector commentators seem to have condemned.

The UK consumer is on the one hand looking for familiarity but also for adventure. They are attracted to brands that they feel constantly deliver a great experience but also, and most importantly, that they feel are relevant. Brands that have failed in recent years have done so for a number of reasons; their offer hasn't evolved, their sites look tired and under-invested, and the business model that sits behind the brand is broken. These brands have lost their relevance and the UK consumer has simply moved on to better, more relevant brands operated by smart management teams who know not to repeat the mistakes of others. 

Exciting times ahead

On which note, as Loungers enters FY24 we are in a great place, and I firmly believe that we are armed with the best thought-through and most realistically deliverable strategic plan that the business has ever had. We will open another record number of new sites in FY24, which will be overwhelmingly dominated by Lounge openings, including our first sites in the North East. Lounge will break through the 200 sites landmark and, with a sizeable runway ahead of us, we believe there is scope for at least 600 Lounges across the UK.

We will continue to be selective about Cosy Club opportunities and look forward to opening our first ever site in Oxford, a city in which we envisage having at least four Lounge sites in the future, when we open Cosy Club Oxford in late summer.

At the time of writing our second Brightside has recently opened on the A38 near Saltash and our third site will open on the A303 near Honiton in early August. Whilst we have already learnt an awful lot about operating a roadside brand in just a short space of time, with three sites open and a summer's trade ahead there will be a lot more to learn and the brand will inevitably need to spend some time 'in the lab'. However, we are encouraged by how Brightside has traded to date and remain hugely excited about its potential.

In the case of both Cosy Club and Brightside, we will remain disciplined in our approach to new openings and will not allow either brand to distract the business from the overall strategy which, for the foreseeable future, remains taking full advantage of the sizeable runway we have identified for new Lounge sites.

Despite the challenging trading conditions, we are, as ever, working tirelessly to improve the business and our brands. There is a real ambition within the executive team to make tangible progress on a number of areas of the business where we believe we can improve, particularly in light of the key hires that we made in FY23. Most notably, we believe we can improve margin, develop even better capex controls, and promote a more fully-formed, authentic ESG strategy that has total buy-in from our teams. 

A big thank you to all our people 

On the subject of our teams, the importance of community engagement post-pandemic has never been greater, and the business owes a huge debt of gratitude to our wonderful site teams and the hardworking, talented ops team that support them. They not only provide first-rate, genuine hospitality, but also work tirelessly to help us earn our place on every high street and in every town centre where we are lucky enough to operate. As always, my sincere thanks goes to them for their outstanding commitment, professionalism and enthusiasm for providing outstanding quality and service to our customers.

Alex Reilley

Chairman

12 July 2023

Chief Executive's Statement

Introduction

I am pleased to report on a very successful year for Loungers. We achieved record revenue of £283.5m, operating profit of £14.8m, opened a record 29 new sites, and our Adjusted EBITDA performance of £47.3m represents growth of 66% since our IPO in 2019. Our LFL sales performance has consistently out-performed the wider sector, according to the Coffer CGA Tracker and we have successfully mitigated much of the inflationary pressure, which is now diminishing.

Sales performance and our evolving offer

Our sales performance throughout the year was once again exceptional, achieving underlying LFL sales growth of 7.4%.

In a year of fluctuating consumer sentiment and inconsistent macro-economic signals, it was hard to ascertain any material shift in our customers' attitudes towards going out, or their behaviour once they were in our premises. Covid, or any lingering nervousness as a result of it, was certainly not a factor throughout the year. It continues to be the case that the evolution and value of our offer, alongside our ability to deliver it well operationally, are the core factors that drive our sales growth.

We have delivered some fantastic menu evolution during the year, and I look forward to seeing this momentum continue into FY24. Over the last three years we haven't been as bold evolving our food offer as we might have liked, predominantly as a result of the trickier employment market and our determination to make life as easy as possible for our kitchen teams, avoiding more substantial change. However, the most recent March 2023 menu change in Lounge saw some really bold and more significant changes, which have had a material impact on our food sales mix, as have the more recent changes in Cosy Club. Our development teams in both food and drink have never been so strong and there is a healthy restlessness to drive further evolution and improvement.

The table below shows our annual LFL sales performance over the last ten years. Over this period the estate has grown from 44 sites to 222. The consistency of our performance whilst having gradually accelerated the roll-out is second to none and demonstrates the relevance of our offer, our understanding of the UK consumer and the strength of our team.

1 Based upon 13 weeks trading not impacted by lockdowns / restrictions

2 44 weeks ending 23 February 2020

Conversion and inflationary pressure

I am pleased with the way in which we have managed the cost base in the business in an inflationary environment and we continue to be very well-placed versus our peers as a result of our growth and operational flexibility.

In the first half we saw some margin deterioration, predominantly due to wage inflation. Whilst annual National Living Wage increases of 10% are of course a significant factor, how we manage labour is also critically important. Our labour management, coming out of a very tight labour market, improved throughout the year, and I was more pleased with our performance in the second half.

On the food and drink side, we have mitigated inflationary pressure well, and price increases alongside our rolling supplier renegotiation program, have allowed us to slightly increase our food and drink margin. In the second half of the year we started negotiations in respect of several material food and drink supply contracts which will see further margin benefit in FY24 as these negotiations draw to a close. It remains the case that our significant growth allows us to challenge hard on cost and mitigate some of the inflationary pressure. We took a further step on the supply-chain consolidation journey during the year, through our switch to Bidfood and have learnt more about the actions we will need to take to optimise the supply chain further.

We continue to benefit from our May 2020 electricity and gas hedge which runs until September 2024, albeit as a result of our growth 25% of the estate is hedged at higher levels. This will continue to have a modest negative impact on our conversion over the next couple of years, but we will look to offset this as we challenge our energy efficiency in the sites.

There is no doubt that the inflationary environment has eased, and whilst wage inflation through annual National Living Wage increases is here to stay, our medium-term margin outlook is positive. It's critical that we strike the right balance between margin protection and value for money and the 10-year LFL sales chart above would suggest that we have historically got the balance right. This year I anticipate maintenance of our gross profit margins as we move towards our medium-term goal of restoring margins to their pre Covid levels.

People and culture

Improving as an employer, and protecting and nurturing the Loungers culture, continue to be the foundations of our roll-out strategy. Last year (FY22) we introduced The Commitments, setting out to our team what we wanted to represent as an employer, and this year we have worked hard to fulfil these commitments. We regularly survey our team to understand how they feel about working for Loungers - the most recent survey confirmed that we are performing better, but there is still more that we can do.

Towards the end of the year we restructured our site salaried team's pay, transferring some cash away from potential bonus awards and increasing salaries across the board, resulting in on average +11% salary increases. This has made us more competitive from a salary point of view and helped our team address the cost of living increases that they are experiencing. For our hourly paid team, whilst we continue to pay slightly above average rates, we have worked hard to maintain our appeal through benefits including free staff food and drinks for all shifts and staff discount alongside the softer aspects such as not having to wear a uniform, and our annual staff party Loungefest. One of the consistent messages we hear from our team is that it's not all about pay. Working in hospitality should be rewarding and fun, and this is inherent in the Loungers culture.

For anyone wanting a career in hospitality, there can be no better home than Loungers. This year saw a record number of promotions from people working at site level into our operations team. We have introduced new processes to ensure we are recognising talent and the desire to progress earlier, and are allowing people the best opportunity to succeed through development programs. We have a unique opportunity to shape careers in hospitality and progress talented individuals early in their careers.

The appointment of Guy Youll as Chief People Officer in the second half of the year was an important step in the journey. As we head into FY24, the People side of the business has never had more prominence and we are excited about the opportunities in respect of recruitment, learning and development and career progression.

I am enormously grateful to our teams across the country for their commitment and contribution over the year. Working in hospitality is incredibly rewarding but can also be demanding at times, and our continued growth and success reflects the efforts of our amazing teams in Lounge, Cosy Club, Brightside and our head office.

The roll-out and the opportunity in front of us

During the year we opened 29 sites - 24 Lounges, four Cosy Clubs and our first Brightside. To facilitate this, we managed the phased introduction of a fifth build team, increasing our annual site-opening capacity to around 34 sites per year.

We continue to open sites very well, with newer sites increasing the average level of unit sales and EBITDA and achieving our returns hurdle. The diversity and quality of site openings during the year really highlights the opportunity in front of us, particularly from a Lounge perspective.

Lounge's uniquely consistent success in a variety of location types clearly demonstrates the relevance of our offer and the positive impact we have in communities. Over one stretch during March and April we opened six sites in six weeks, illustrating the roll-out capability within the business. Our typical Lounge openings are in small market-towns or secondary-suburbs, but we continue to see real success in coastal locations and exceptional out-performance in the occasional retail park. Retail parks are interesting - historically they have been talked-down, but I think this is more as a consequence of the quality or relevance of food and drink offer within them. Our experience suggests that the right locations with a strong retail and leisure offer and therefore strong footfall, represent an excellent opportunity for us.

The more sites we have opened, the more we have learnt about the type of location in which Lounges perform well, and we are now very confident there is scope for at least 600 Lounges across the UK. We have a detailed target list which is derived and updated from road trips carried out by the executive and property teams over the last 20 years; our combined knowledge of small and medium UK towns is impressive. When we reference the existing Lounge estate and its performance alongside the estates of other national food and drink operators, it would suggest 600 is a conservative target. We have also looked at the Cosy Club list and believe the potential scale here is realistically between 50 and 65 sites. In FY24 we expect to open one Cosy Club, and going forward the ratio of Cosy Club new openings to Lounge new opening is likely to continue to be low as we look for opportunities in a diminishing pool of potential locations.

Geographically we continue to push further into the North and the South East with openings in Richmond (North Yorkshire), and Clacton-on-Sea (Essex). The Lounge new site pipeline continues to be in excellent shape, with FY24 likely to see further expansion in the North West and the North East and continued infill across England and Wales. It remains our strategy to gradually nudge into new territories so we can pull on culture and team strength to ensure we open new sites well. We get asked a lot about when we will get to Scotland, and it feels like the next year or two should see a Loungers presence there.

On the Cosy Club side, we opened four sites during the year in Chester, Canterbury, Harrogate and Milton Keynes and are opening in Oxford towards the end of the summer. The sites have opened well and highlight the diversity of property type and our design team's ability to transform space. Potential Cosy Club locations however are less numerous and at present, outside of Oxford we don't have further Cosy Club opportunities in the pipeline.

Brightside

The first Brightside restaurant, our new roadside dining brand focused on busy A roads close to towns, opened its doors in Exeter on 10th February, and post year-end we have opened our second Brightside in Saltash. It has been a fantastic opportunity for the talent across the business to come together to create something that we are all enormously proud of. The sites look fantastic, the food and drink offer is exceptionally good, and differentiated from the Lounge and Cosy Club offers, whilst drawing on our core strength of all-day dining. Whilst Loungers has become a big business, at its heart is a young, entrepreneurial team and approach, and Brightside has given us the opportunity to express ourselves.

We have been relatively pleased with the very early sales performance at Exeter and Saltash and are excited about the forthcoming opening in Honiton. Customer reaction has been largely excellent and we have learnt some important lessons already in the early weeks of trade. The next three months will be a great test - and opportunity - for the business as the three west-country locations trade over the busy summer period. We look forward to providing an update in November with further thoughts on the brand and its performance.

Our impact on society and the environment

Community has been at the heart of our business for our 20 year history and is the core focus of our positive impact. With the opening of every new Lounge comes new jobs, a place for anyone in the community to meet and support for local charities, causes and groups. Through our 29 new openings we have created around 1,000 new jobs and significantly 21% of these are in government identified "Levelling Up" areas. 

This year we have prioritised both Community and wider Force for Good activities in our strategy and planning. This has resulted in the establishment of our first ever Force for Good Committee, led by our COO, and a Force for Good Roadmap that unites our commercial, maintenance, people, marketing and food teams. Highlights include an update to our build specification to make our sites more energy efficient, an energy reduction and waste sorting project which will be delivered directly by our 200+ site teams, the investment in seven Regional Community Managers to extend our local outreach and a full review of our supply chain so we have clarity on our ingredients and confidence in our Modern Slavery Act ("MSA") Commitments. Whilst our senior leadership is 36% female we believe that we have significantly further to go, not least in improving the gender balance within our operational leadership. 

We are pleased to share our first full Scope 1-3 carbon mapping in this report, in next year's report you will see our carbon roadmap including stepped green energy targets and our plans to convert our full estate to electric only. 

Management team

We remain very focused on evolving and building the strongest management team in the sector to facilitate the successful roll-out of our brands. As mentioned above Guy Youll joined us as Chief People Officer during the year and we also welcomed Kate Lister who joined as our first Marketing Director. Jono Jenkins was promoted to Commercial Director following four-years as Lounge Head of Food. We will continue to seek to internally develop and progress people where we have the opportunity.

Amber Wood has decided to leave in August following eight successful years with Loungers plc, including the last six as Cosy Club Managing Director. Amber has played a really important role in the growth and success of the Cosy Club brand, and leaves with my enormous gratitude for a job very well done. We are currently recruiting for her replacement.

Current Trading and Outlook

We continue to feel very positive about the outlook for our brands. Over the 12 weeks since the year end our LFL sales have been +5.7% despite the impact of Easter timing and we are pleased with our performance and trajectory. Our new site openings continue to perform exceptionally well, achieving record levels of sales, and our pipeline of new sites is as strong as ever.

We ended FY23 by accelerating many of the initiatives that have underpinned Loungers' resilience in FY23; opening six sites in six weeks across March and April, launching new innovative menus in Lounge and Cosy Club and restructuring benefits for our salaried staff. We are confident that the good momentum we are seeing across the business, as well as the investment that we continue to make in our operational structure, puts us in the best possible position to deliver further growth and profitability in FY24.

Nick Collins

Chief Executive Officer

12 July 2023

Financial Review

Overview

In last year's financial review I reflected upon a year in which we had very much seen a return to normality, at least in the context of being able to trade free of restrictions. With hindsight, and looking back upon a year in which inflation really took hold, such references to normality look rather optimistic. That said the financial highlights below continue to demonstrate strong rates of revenue growth, both in terms of like for like sales from our mature estate and from new site openings, and when the positive impacts of government support measures in the prior year are adjusted out, a solid operating margin % performance against a challenging backdrop.

Year on year revenue was up by 19.5% to a record £283.5m. Whilst our sales growth benefitted from the absence of any negative Covid impact, it also reflects strong one year like for like sales growth of 7.4% (over the 48 weeks to 16 April 2023) and the positive impact of our new site opening programme, with 29 sites opened in the financial year. The headline reduction in operating margin from 12.0% to 5.2% in large part reflects the cessation of government support measures to assist the hospitality sector during Covid. The reduction in VAT alone, which ceased on 31 March 2022, was responsible for incremental sales and operating profit of £15.1m in FY22; adjusting out this benefit reduces FY22 operating profit to £13.4m and operating margin to 6.0%. Further detail on profit margins pre and post Covid is provided below.

Net cash generated from operations of £51.1m represented 108% (2022: 130%) of IFRS 16 Adjusted EBITDA and reflects the working capital benefits accruing from the strong like for like sales performance and the new site opening programme. The reduction from FY22 reflects the one-off working capital rebuild enjoyed in FY22 as the estate returned to unrestricted trading after the third lockdown. Post investing and financing outflows, which included the acquisition of three freeholds for a net £3.7m, cash balances decreased by £4.9m to £26.4m. Total IFRS 16 net debt increased by £20.3m to £140.9m, the increase driven by taking on new leases with a capital value of £24.5m at inception.

We use a range of financial and non-financial measures to assess our performance. A number of the financial measures, for example Like for Like ("LFL") sales and Adjusted EBITDA are not defined under IFRS and accordingly they are termed Alternative Performance Measures ("APMs"). The Group believes that these APMs provide stakeholders with additional useful information on the underlying trends, performance and position of the Group and are consistent with how business performance is measured internally. Adjusted EBITDA is also the measure used by the Group's banks for the purposes of assessing covenant compliance.

Reconciliations of statutory numbers to adjusted numbers reported below are included after the financial statements as an annex to this Strategic Report on pages 23-24.

The table below summarises the key APM's under both IFRS 16 and IAS 17 and covers the past two financial years as well as the financial year ending 21 April 2019. The rationale for including the FY19 numbers is twofold:

· It provides a clean non-Covid impacted comparative against which more meaningful comparisons of profit margins can be made, and

· It serves to demonstrate the significant growth achieved by the business in the four years post IPO, in spite of the significant challenges that have arisen in that period.

(1)Proforma net debt on IPO on 29 April 2019

Revenue of £283.5m compares to £237.3m in the year to 17 April 2022, headline growth of 19.5% and if the one-off benefit of the VAT support is excluded from FY22 revenue growth of 27.6%. Over the four years since IPO the Group has grown revenue by 85.3%, a function of growing the estate by 52% and consistently strong like for like sales performance, whether measured on a one year, three year or four year basis.

Adjusted EBITDA (IFRS 16) of £47.3m delivers a margin of 16.7%, some 5.9% down on FY22. As noted earlier FY22 does not provide a particularly helpful comparison, impacted as it was to the downside by restricted trading for the first four weeks and then suffering the effects of the Omicron strain over Christmas, whilst to the upside it benefited from the VAT reduction (worth £15.1m) and business rates support (worth £3.3m). Whilst somewhat historic, the four year comparison against FY19 is perhaps more useful in understanding how the Group's profitability has developed, firstly in response to the changes brought about over the Covid period and secondly over the period of significant cost inflation and allied pressure on the consumer over the past year.

Over the four year period Adjusted EBITDA (IFRS 16) has grown by 65.9%, with a more modest decline in Adjusted EBITDA margin of 2.0%. The Group has worked hard to balance the impacts of cost inflation with the need to retain its core value for money principles, and whilst it is always disappointing to report a margin decline, we believe that the correct balance has been struck. The damage has largely been done at the gross profit margin line, with a decline of 1.4% over the four years and improvements in food and drink gross margins not being sufficient to offset the labour cost pressures from a combination of a very tight labour market and significant national living wage increases.

The IFRS 16 Adjusted EBITDA measure does of course exclude the benefit delivered from our strong control of property costs and the continued reduction in our rent to revenue ratio, down to 4.6% in FY23 from 5.2% in FY19. Accordingly, on the IAS 17 basis the margin decline versus FY19 is reduced to 1.4%.

Non-property net debt increased to £6.0m, a year on year increase of £5.0m. This largely reflects the acquisition of Route Restaurants Limited and Nightlife Leisure (South West) Limited in order to gain access to two freehold sites for the development of the Group's Brightside brand and the increase in the build pipeline and related capex costs at the year end in FY23.

Impairment costs

The statutory operating profit of £14.8m is after incurring net impairment charges of £1.6m. These costs include

· £2.9m relating to the impairment of right of use assets

· £0.5m relating to the impairment of property, plant and equipment

· The release of impairment provisions totaling £1.8m that were established in FY20.

The impairment methodology included the calculation of a value in use for all sites. This valuation was based upon three year site cash flow forecasts covering FY24 through FY26 which incorporated assumptions regarding future trading, and a full allocation of central costs and maintenance capex spend. The release of excess impairment provisions created in FY20 relates to the improved trading performance in a number of sites relative to the assumptions about future trading made in FY20.

Long Term Employee Incentives

Employee engagement and retention remains a key area of focus, and share awards continue to play a significant role in these efforts. During the year the Group granted further share awards under the employee share plan (471,500 shares) and the senior management restricted share plan (537,653 shares). These awards were made to a total of 1,055 employees who work across the business, predominantly at site level, and in hourly paid and salaried positions. In addition, awards covering 770 employees and in respect of 724,483 shares vested in the year.

The Group recognised a share based payment charge in the year of £4.0m (2022: £3.2m), the charge covering the employee share plan, the senior management restricted share plan and the value creation plan.

Finance Costs and Net Debt

Finance costs of £7.6m (2022: £6.9m) include IFRS 16 lease liability finance costs of £6.1m (2022: £5.7m) and bank interest payable of £1.5m (2022: £1.2m). The Group received interest of £0.2m (2022: £nil) on its positive cash balances to leave net bank interest payable broadly flat year on year. 

Net debt at the year end including property leases of £140.9m (2022: £120.6m) reflects the impact of adding new lease liabilities of £24.5m in the year.

At year end the Group's capital structure included a £32.5m term loan and a £10m revolving credit facility ("RCF") due for repayment in April 2024. Subsequent to the year end the Group has refinanced its borrowing facilities with its existing lenders, paying down £12.5m of the term loan to leave a term loan debt of £20.0m and extending the RCF to £22.5m to leave total facilities unchanged at £42.5m. The new facilities run for three years to June 2026. The Group's interest rate hedging arrangements ended in July 2022, and whilst the Group's positive cash balances provided an element of natural interest rate hedge the new capital structure will be more efficient in minimizing interest costs. The Board continues to consider the options for hedging the interest rate risk on the outstanding term loan.

Taxation

The Group has reported a tax charge of £0.4m for the financial year to 16 April 2023 (2022: charge of £3.7m) and at year end carried a corporation tax receivable of £0.1m (2022: £0.1m receivable) and a deferred tax asset of £0.9m (2022: £1.4m). The corporation tax charge represents 5.5% of profit before tax (2022: 17.3%), benefiting from the 130% capital allowance super deduction, and without which the corporation tax rate would have been 20.9%.

Cash Flow and Capital Expenditure

Net cash generated from operating activities of £51.1m (2022: £69.6m) reflects a working capital cash inflow of £7.3m (2022: cash inflow of £19.7m). The reduced working capital cash inflow reflects the one-off benefit to working capital in FY22 as the Group emerged from lockdown and rebuilt its negative working capital position.

Cash outflows in the year in respect of capital expenditure totalled £37.0m (2022: £22.8m) and compare to the cost of fixed asset additions (excluding right of use assets) recognised in the year of £39.2m (2022: £26.2m). Capital expenditure incurred in the year of £39.2m (2022: £26.2m) included £29.6m in respect of new site openings, of which £26.9m related to the 29 sites opened in the year (2022: total new site capex spend of £19.6m of which £18.2m related to the 24 sites built and opened in the year). In addition capital expenditure in the year included £2.7m on the Lounge kitchen reset programme, completed in May 2023 (2022: £0.6m) and a further £0.9m in respect of the freehold purchase of our Cosy Club Canterbury site.

As referenced earlier, the Group invested a further £2.7m in the acquisition of Route Restaurants Limited and Nightlife Leisure (South West) Limited.

Key Performance Indicators ("KPI's")

The KPI's, both financial and non-financial, that the Board reviews on a regular basis in order to measure the progress of the Group are as follows:

(1) One year LFL calculated over 48 weeks from16 May 2022

(2) Three year LFL calculated over 48 weeks from 17 May 2021 and excluding VAT benefit

Going Concern

In concluding that it is appropriate to prepare the financial statements for the year to 16 April 2023 on the going concern basis attention has been paid both to the current sector headwinds in terms of consumer confidence and inflationary pressures and also longer term risks such as climate change.

The Group has traded successfully over the past year, and ended the year with net debt (including property leases) of £140.9m and total liquidity of £36.4m.

In order to assess the Group's going concern position the Board has considered a base case and downside case scenario. The base case assumes below inflation selling price increases and flat volumes and reflects current assumptions in respect of future cost inflation and incorporates increases in energy costs to reflect the continued opening of new sites whose energy costs are hedged at current rates. The base case scenario indicates that the Group has significant headroom in respect of both its liquidity position and its banking covenants.

In the downside scenario it has been assumed that sales volumes fall by 10% from the base case with an associated reduction in labour and variable cost efficiency and a resultant 38% decline in adjusted EBITDA. Under this scenario the Group is able to maintain its new site opening programme and continues to have significant liquidity and banking covenant headroom and accordingly the Directors have concluded that it is appropriate to prepare the financial statements for the year ending 16 April 2023 on the going concern basis.

Gregor Grant

Chief Financial Officer

12 July 2023

Consolidated Statement of Comprehensive Income

For the 52 Weeks Ended 17 April 2022

Consolidated Statement of Financial Position

As at 16 April 2023

Consolidated Statement of Changes in Equity

For the 52 Weeks Ended 16 April 2023

Consolidated Statement of Cash Flows

For the 52 Weeks Ended 16 April 2023

NOTES TO THE PRELIMINARY FINANCIAL INFORMATION

1. General information

Loungers plc ("the company") and its subsidiaries ("the Group") operate café bars and café restaurants through three complementary brands, Lounge, Cosy Club and Brightside.

The Company is a public company limited by shares whose shares are publicly traded on the Alternative Investment Market ("AIM") of the London Stock Exchange and is incorporated and domiciled in the United Kingdom and registered in England and Wales.

The registered address of the Company is 26 Baldwin Street, Bristol, United Kingdom, BS1 1SE.

2. Basis of preparation

The consolidated financial statements of the Loungers plc Group have been prepared in accordance with UK adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards.

The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivatives) at fair value through profit and loss. The financial statements are presented in thousands of pounds sterling ('£000') except where otherwise indicated.

The accounting policies adopted in the preparation of the Financial Statements are consistent with those applied in the preparation of the financial statements of the Group for the year ended 17 April 2022.

The auditors' reports on the accounts for the 52 weeks ended 16 April 2023 and 17 April 2022 for Loungers plc were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

The financial statements for Loungers plc for the year to 16 April 2023 will be delivered to the Registrar of Companies shortly. The financial information contained within this preliminary announcement for the periods ended 16 April 2023 and 17 April 2022 does not comprise the statutory financial statements of Loungers plc.

In concluding that it is appropriate to prepare the FY23 financial statements on the going concern basis the Directors have considered the Group's cash flows, liquidity and business activities in accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting 2014 published by the UK Financial Reporting Council.

As at 16 April 2023 the Group had cash balances of £26.4m (2022: £31.3m) and undrawn facilities of £10m (2022: £25m), providing total liquidity of £36.4m (2022: £41.3m). The Group did not utilise its RCF facilities during the year to 16 April 2023. Subsequent to the year end, the Group has refinanced its banking facilities, using its excess cash balances to pay down £12.5m of its term loan. At the same time the Group's RCF was increased to £22.5m to leave total bank facilities unchanged.

The Group has modelled financial projections for the going concern period to the 4 August 2024 based upon two scenarios, a base case and a downside case. The base case incorporates the Board approved budget for FY24 as well as the first 16 weeks of the FY25 business plan. The base case assumes below inflation selling price increases and flat volumes. It reflects current assumptions in respect of future cost inflation and incorporates increases in energy costs to reflect the continued opening of new sites whose energy costs are hedged at current rates. The base case scenario indicates that the Group has significant headroom in respect of both its liquidity position and its banking covenants.

In the downside scenario it has been assumed that sales volumes fall by 10% from the base case with an associated reduction in labour and variable cost efficiency and a resultant 38% decline in adjusted EBITDA. Under this scenario the Group is able to maintain its new site opening programme and continues to have significant liquidity and banking covenant headroom.

3. New standards, amendments and interpretations adopted

Amendments to accounting standards applied from 18 April 2022 were as follows:

· Scope amendments to IAS1, IFRS Practice Statement 2 and IAS8 regarding accounting policy disclosures

· Amendments to IAS12 - deferred tax related to assets and liabilities arising from a single transaction

The application of the above did not have a material impact on the group's accounting treatment and have therefore not resulted in any material changes.

4. Operating profit

The operating profit is stated after charging / (crediting):

5. Finance Costs

6. Tax charge on profit

The income tax credit is applicable on the Group's operations in the UK.

7. Earnings per share

Adjusted earnings per share is based on profit for the year before the following adjusting items: impairment charges and reversing credits, profit or loss on disposal of fixed assets, and acquisition related transaction costs.

8. Goodwill

Goodwill of £113,227,000 arose on the acquisition of a majority stake in the Group by the former controlling party, Lion Capital LLP, on 19 December 2016.

Goodwill of £1,495,000 arose on the acquisition of Route Restaurants Limited and Nightlife Leisure (South West) Limited on 1 December 2022

9. Property, plant and equipment

The above includes assets in the course of construction with a total cost of £2,467,000 (2022: £1,031,000) which have not been depreciated to date.

Impairment of property, plant and equipment and right of use assets

The Group has determined that each site is a separate CGU for impairment testing purposes. Each CGU is tested for impairment at the balance sheet date if there exists at that date any indicators of impairment. All sites were reviewed in FY20 following the first national lockdown and an impairment of £9.8m was booked in the FY20 financial statements. Following reopening a number of those sites have generated sufficient cashflows to justify an assessment that impairment is no longer necessary and consequently a reversal of £1.8m has been released to the income statement (2022: £nil). Conversely, the assessment carried out at the end of FY23 indicated that a further ten sites showed potential impairment and a £3.4m charge has been recognised in respect of these sites (2022: £nil).

The value in use of each CGU is calculated based upon the Group's latest three-year forecast. The site cash flows include an allocation of central costs and ongoing capital expenditure to maintain the sites. The cash flows exclude any growth capital. Cash flows beyond the three-year period are extrapolated using the Group's estimate of the long-term growth rate, currently 2.0% (2022: 2.0%).

The key assumptions in the value in use calculations are the like for like sales projections for each site, changes in the operating cost base, the long-term growth rate and the pre-tax discount rate. The post-tax discount rate is derived from the Group's WACC and is currently 9.0% (2022: 9.0%).

The cash flows used within the impairment model are based upon Board approved forecasts. Management has performed sensitivity analysis on the key assumptions in the impairment model using reasonably possible changes in the key assumptions. A reduction in site cash flows of 10% in each year would result in an incremental impairment charge of £1,000,000 (2022: £2,984,000). A 100 basis point increase in the discount rate would result in an impairment charge of £400,000 (2022: £1,431,000) and a 50 basis point reduction in the terminal growth rate would result in an impairment charge of £100,000 (2022: £295,000).

10. Borrowings

Secured bank loans

The Group's bank borrowings are secured by way of fixed and floating charges over the Group's assets.

The facilities entered into at the time of the IPO provide for a term loan of £32,500,000 and a revolving credit facility ("RCF") of £10,000,000. The term loan is a five-year non-amortising facility with a margin of 2% above SONIA. In June 2023 the Group completed a refinancing of it debt arrangements, reducing the term loan to £20,000,000 and increasing the RCF by £12,500,000.

The term loan and RCF are subject to financial covenants relating to leverage and interest cover. There were no breaches of these tests in the years to 17 April 2022 or 16 April 2023.

At 16 April 2023 the term loan was fully drawn while nothing was drawn on any of the revolving facilities (2022: term loan fully drawn and £nil drawn down under the RCF).

11. Analysis of changes in net debt

Non-cash movements in bank loans due after one year relate to the amortisation of bank loan issue costs.

12. Post balance sheet events note

On 4 May 2023 the Company allotted and issued 359,000 ordinary shares of 1 pence each in the Company following the vesting of awards made to 718 Group employees pursuant to the Company's Employee Share Plan. At the same time the Company applied for a block listing of 477,962 ordinary shares of 1 pence each to satisfy such options as might be exercised from time to time under the Senior Management Restricted Share Plan award which vested on the 29th April 2023.

On 7 June 2023 the Group entered into a new senior facilities agreement with its existing lenders Santander and Bank of Ireland. Under the terms of the new agreement the Group reduced its term loan from £32,500,000 to £20,000,000 and increased its RCF from £10,000,000 to £22,500,000, The new facility terminates on 7 June 2026. The term loan is non-amortising and bears interest at between 1.75% and 2.5% over SONIA subject to the Group's leverage. At inception of the new facility the Group was paying a margin of 1.75%. The term loan and RCF are subject to financial covenants relating to leverage and interest cover, these are unchanged from the original facility.

On 8 June 2023 the Group repurchased 195,000 ordinary shares which are now held in treasury.

13. Reconciliation of statutory results to alternative performance measures

The Group references Like for Like (LFL) sales growth as a key APM. LFL sales growth excludes the sales from sites that have been open for less than 18 months. During the year ended 16 April 2023, the comparator periods are the 48 weeks ended 17 April 2022 for the one year like for like (excluding the four weeks ended 16 May 2021 when sites could trade external areas only) and the 44 weeks to 23 February 2020 for the three year like for like (excluding the eight weeks to 19 April 2020 when the business was impacted by the onset of Covid and the first national lockdown). The four year like for like period is on a comparable 52 week basis. The benefit from the VAT reduction during the Covid-19 pandemic is excluded in calculating the LFL result.