Loungers pushes estate expansion forwards

In these times of great economic uncertainty, it is all too easy for hospitality companies to limit investment and focus on existing estates. Some have even taken to selling off sites to raise cash. Loungers (LGRS) has not taken this approach. The company, which trades under the Lounge and Cosy Club brands, has opened 15 new sites so far this year and now has the capacity to open up to 34 sites annually. Panmure Gordon analysts pointed to Loungers’ “aggressive rollout plan” and argued the estate has the “potential to quadruple in size”. The direction of travel is encouraging, especially as the company is benefiting from more people eating and shopping locally post-pandemic.

There is a hard balance to strike between raising prices and protecting margins in this environment. This challenge was highlighted by the 580 basis point contraction in the gross profit margin. But Loungers’ approach of raising prices below the market rate hasn't stymied top-line growth, with like-for-like sales up by 17 per cent in the half on a three-year basis.

In very good news for costs, the company hedged most of its utilities back in 2020 through to late 2024. This sets Loungers apart from many of its peers. On the other hand, management pointed to the annual increase in the national living wage as a key cost pressure, and this will rise by 10 per cent in April. Labour market challenges will not dissipate any time soon.

Peel Hunt analysts noted that the company was highly rated pre-pandemic, but while “its operational lead has extended... its valuation is now one of the lowest”. The shares trade at 21 times the house broker’s 2023 earnings forecast. With progress being made in the expansion of the estate, Loungers looks relatively well positioned. Hold.

Last IC View: Hold, 189p, 13 Jul 2022