Loungers reports availability of prime-pitch opportunities in strong target locations has increased

02 December 2020

Loungers plc has reprted a "very strong resumption of trading post the first lockdown that provides confidence in Loungers' ability to out-perform in a post Covid-19 environment" as it issued its results for the 24 weeks ended 4 October 2020

The 24 week period being reported on includes 11 weeks of lockdown, four weeks of phased re-opening, four weeks of Eat Out to Help Out ("EOTHO") in August, and finally five weeks of relative normality, albeit this five week period included the introduction of the "Rule of 6", the 10pm curfew and local lockdowns in Wales.

Revenue decline of £26.3m (33.0%) to £53.5m reflects the impact of national lockdown to 4 July. Post reopening like for like (LFL) sales growth of +25.1% between 4 July and 4 October. Adjusted EBITDA of £13.2m, down 8.8% (H1 2020: £14.5m). IAS 17 Adjusted EBITDA of £8.7m, down 14.6% (H1 2020: £10.2m)

Non property net debt of £13.6m, a reduction of £21.9m over the FY20 year end. Completion of equity raise (net proceeds £8.1m) and agreement of additional £15m revolving credit facility ("RCF")

Operational Highlights
· Significant market out-performance post re-opening to 4 October
- Headline LFL sales growth of +25.1% in the period to 4 October is testimony to the strength of our concepts and our teams
· Continued evolution of our offer
- Covid-19 has provided both the requirement and the impetus to evolve our offer at pace. The successful introduction of our order at table app and the need to reduce the scale and complexity of our menu whilst maintaining its broad appeal are clear examples
· Material reduction in non-property net debt to £13.6m

- This provides the balance sheet strength not only to withstand the second and potential future lockdowns but to ensure the Group is well positioned to resume its roll-out strategy and benefit from an increasingly tenant friendly property market, where prime pitch properties in strong target locations are available at attractive rents
· Roll-out programme recommenced in a measured fashion
- During the first half Cosy Club Brindleyplace and Ponto Lounge Hull were opened, whilst Sentado Lounge in Sittingbourne opened shortly after the half year end. Currently on site in Stourbridge and Wolverhampton and scheduled to open early in the New Year.

Current Trading and Outlook
· The strength of our trading in the first half was maintained through to the second national lockdown commencing on 5 November
· Underlying LFL sales performance (excluding the positive impacts of EOTHO and the VAT reduction) of -1.1% in the period to 4 October declined only fractionally to -1.3% in the extended period to 4 November, in spite of the growing impact of the 10pm curfew and the ultimate inclusion of 55 of our sites in Tier 2 and 3 areas
· In the short term we expect a more severe impact on sales. In England we have 60 sites that will remain closed under Tier 3, with 91 sites trading in Tier 2 and three sites trading in Tier 1. In Wales we have 14 sites that will be subject to increased restrictions from 4 December
· The strength of our brands and the manner in which they performed coming out of the first lockdown provides confidence for the future and we would expect a strong trading environment for our brands once Covid-19 restrictions are eased
· We anticipate returning to a run rate of 25 new site openings per annum during the course of the financial year ending April 2022

Nick Collins, Chief Executive Officer of Loungers said: "The last six months have been challenging, but I am immensely proud of how we have reacted and delivered such a strong performance. We are fortunate that due to our suburban and market town locations, the flexibility of our offer, and our fantastic team, we have been able to trade well when given the opportunity to open our sites. As we dare to look beyond Covid-19, Lounge and Cosy Club have never seemed more relevant, and we approach 2021 with enthusiasm and optimism. Our strong balance sheet will enable us to get back to doing what we do best, opening 25 sites a year, creating over 500 jobs a year, investing in high streets across the UK and looking after our customers and teams. With the encouraging news on the development of vaccines, it certainly feels like that time is within reach and I would like to say a huge thank you to our teams for their commitment and engagement over these past difficult months.

"We are grateful to the ongoing support we have received from the Government, in particular for our employees through the furlough scheme, and recognise our position is one of relative security. However, the recent restrictions imposed are bewildering, unfair, appear to lack any scientific basis and will decimate the hospitality industry across the UK. On re-opening in July our sector invested hugely in providing a safe environment for people to eat and drink-out, and then demonstrated it was indeed safe during Eat Out to Help Out in August. These most recent interventions, at the most critical time of year for the sector, will cost hundreds of thousands of jobs, see the demise of thousands of pubs, bars and restaurants and leave vacant properties across the UK. The impact on the livelihoods and health of the sector's predominantly young workforce and on communities and high streets across the UK will be felt for years to come.

"I would strongly urge the Government to engage with our sector, provide immediate, targeted support where required, and re-consider the ill-thought through policies that have brought much of our industry to its knees."

Operating review
Trading
The phased re-opening of our sites between 4 July and 7 August was a clear success. The intense and entrepreneurial approach we adopted during the first lockdown ensured we hit the ground running on reopening, with well-prepared teams operating in a safe, yet welcoming and familiar, environment for our customers.

This approach was reflected in our trading performance with our sites typically taking two to three weeks to return to pre-lockdown levels of sales and subsequently predominantly volume-driven like for like growth. We experienced a modest capacity reduction in the sites due to distancing requirements but in the majority of cases this did not impact our level of sales.

Whilst the business has evolved in reaction to Covid-19, a number of these developments will benefit both brands in the longer-term:
• The introduction of our order at table web-based app has been a notable success. The app initially represented 40% of sales in Lounge and with the subsequent requirement to order at table increased to in excess of 70%. Over the coming months we will benefit more as a result of its impact on speed of service, labour costs, ease of access to customer feedback and average spend;
• The menus in both brands have reduced fairly significantly. Whilst we are likely to see modest increases in the coming months, we anticipate a longer-term reduction in menu size benefitting our consistency, speed of service, margins, and team engagement;
• Through regular and honest communication, we have enhanced the culture in the business and anticipate this being reflected in the loyalty of our team and levels of staff retention. In addition, our management team applied their entrepreneurial approach over this period to challenge all aspects of the business.

Since re-opening we have reacted effectively and efficiently to the introduction of the Rule of 6, table-service only, test and trace, a 10pm curfew and Tiers 1, 2 and 3. Each of these interventions has presented significant challenges to our team and required changes to our processes to implement new rules and explain them to our customers. I am enormously grateful to our team, who in each instance, have risen superbly to the challenge and not allowed these restrictions to affect the customer experience. Our strong sales performance reflects both the outstanding efforts of our team and the relevance and flexibility of our offer and locations.

It was hugely frustrating and disappointing to have to close our sites once again with the announcement of the Wales 'firebreak' lockdown, and the subsequent second lockdown in England on 5 November. Ahead of closing the sites, the more onerous Tier 2 and 3 restrictions imposed in October were starting to negatively impact our sales in the North West of England. Following the Government's announcements last week, from today we will have 14 sites trading in Wales, 3 sites reopening in Tier 1 in England, 91 sites reopening in Tier 2 and 60 sites that remain closed as they are included in Tier 3. We anticipate reduced levels of trade in the Tier 2 sites on the basis of our experience ahead of the most recent lockdown. As a business we are fortunate that Christmas is not as materially important as is it for many in hospitality, however it is bewildering that the Government has chosen to penalize the hospitality sector with no credible evidence to justify it. As a result of these decisions 36% of our sites will be closed for at least the next two weeks. We will monitor developments in respect of the Tiers and reopen sites as and when we have the opportunity.

The most recent restrictions imposed by the Governments in England and Wales will subdue sales in the coming weeks and the scope of further potential restrictive measures in the New Year remains unknown. We do however take enormous confidence from the overwhelmingly positive response from our customers and anticipate continuing our track record of market out-performance once we are trading again without such severe restrictions.

Roll-out and pipeline
Having put the roll-out programme temporarily on hold in early March it has been particularly pleasing to be able to resume new site openings, even if at a measured pace. We have opened three new sites to date in the current financial year and are due to open sites in Stourbridge and Wolverhampton early in the New Year. We now expect to open a total of eight sites in the financial year to April 2021.

The impact of Covid-19 on the property market has enhanced and accelerated trends we were already seeing. The availability of prime-pitch opportunities in strong target locations has increased, not least as a result of the large number of retail and hospitality CVA's. In each of the five years up to the year ending April 2020 we opened over 20 sites. Over this period our performance track record and consistency of sales growth across all cohorts demonstrated the robustness of our property model. The current increasingly tenant-friendly property market will allow us to open sites generating higher levels of sales and EBITDA.

Our property team are now focused on re-building our pipeline, with competitive tension allowing us to drive better deals, but perhaps more importantly offering us access to better sites in better locations. We anticipate returning to a run rate of 25 new site openings per year in the financial year ending April 2022.

Financial Performance
The headline financial performance, which saw adjusted EBITDA of £13.2m showing only a relatively modest decline of 8.8% against a revenue decline of 33.0%, can only be understood with the following context:

· The 24 week period being reported on includes 11 weeks of lockdown, four weeks of phased re-opening, four weeks of EOTHO in August, and finally five weeks of relative normality, albeit this five week period included the introduction of the "Rule of 6", the 10pm curfew and local lockdowns in Wales;

· Tight financial control during lockdown, with all site teams placed on furlough and benefitting from the support of the Coronavirus Job Retention Scheme;

· A rapid return to pre Covid-19 levels of trading. Typically, sites took two to three weeks to achieve pre Covid-19 sales levels;

· The beneficial impact on EBITDA margins of Government initiatives including the temporary reduction in the VAT rate charged on food and non-alcoholic drinks and the business rates holiday; and

· The EOTHO campaign that ran across Monday to Wednesday throughout August and drove substantial incremental volumes without impacting later week volumes

In the period post reopening from 4 July to 4 October headline LFL sales were +25.1%. Excluding the positive impacts of EOTHO and the VAT reduction the underlying LFL result was -1.1%.

This robust underlying performance, allied to the Government initiatives referred to above and described in greater detail below, helped to offset the not insignificant additional costs of operating in a Covid-19 safe environment, notably additional labour costs and Covid-19 consumables spend. The net effect however was a significant expansion in the Adjusted EBITDA margin to 24.7% (2020 18.1%). This margin expansion was driven by the gross profit margin, which increased to 46.1% from 41.5%, a reflection of the flow-through from the VAT reduction only partially being offset by additional labour costs.

Exceptional costs of £0.6m include the costs of:
· Removing and storing excess furniture and soft furnishings from our sites to enable adherence to social distancing requirements; and
· Professional fees in connection with the extension of our banking facilities to provide adequate funding headroom

Current trading and prospects
The strong performance post reopening and through to 4 October was maintained in the weeks through to the second lockdown on 5 November. Whilst the impact of the 10pm curfew and the increasing number of sites falling into Tiers 2 and 3 was felt, the Group continued to benefit from a very strong performance in its Tier 1 sites, notably in the South West.

It remains unclear how we will trade following re-opening in England and with the latest restrictions in Wales, not least during the Christmas trading period, however the strength of our brands and the manner in which they performed coming out of the first lockdown provides us with confidence for the future.