XP Factory CEO on Interim Results, Division Performances and Growth Expectations (LON:XPF)

XP Factory plc (LON:XPF) Chief Executive Officer Richard Harpham caught up with DirectorsTalk for an exclusive interview to discuss interim results, the performance of Escape Hunt & Boom Battle Bar, hoe the expansion strategy contributed to growth and profitability, reliance in the industry, and what we can expect from the Group in the coming year.

Q1: Richard, could you just start by taking us through the financial highlights?

A1: I guess the key place to start is the result of this significant period of growth we’ve had in site openings. What that’s done is seen us double our revenues again so you’re seeing 12 month number of £45 million of sales, literally double the previous year. I think what’s been really encouraging is to see quite significant growth on both brands within that number.

So, Escape Hunt delivering £13.5 million from the owner-operated estate was in and of itself 38% up on prior year, and Boom Battle Bar obviously, which is a much younger business, grew at 200% relative to last year delivering £28.6 million of sales from the owner-operated estate. Whilst yes, of course, there is some quite significant sales growth being born of the new sites, I think really encouragingly, as operators, we’re still seeing these very, very strong like-for-like sales performances in both brands. Escape Hunt delivered 17% like-for-like sales relative to last year, and Boom Battle Bar 29.

So, a very strong performance, I would say at least at that top level, but really encouragingly we’ve seen that rate of change, if you like that doubling of numbers flow all the way through the P&L. So we’ve seen GP double, we’ve seen EBITDA double this year to £5.5 million.

It feels like a very strong performance for the group, lots of highlights within each brand, which I’m sure we’re going to talk about, but really, this transformation of scale is evident. I suppose the number that we’ve not previously talked about is operating profit and for the first time, we’ve really smashed through that operating profit hurdle and delivered £1.8 million of operating profit as well.

So a very strong period to December last year.

Q2:  More generally then, how is each division of Boom Battle Bar and Escape Hunt performing?

A2: Well, we’re really delighted with both. And, you know, we’ve talked about this a little bit before, but both businesses are in a slightly different stage of their life cycle.

Escape Hunt being, to call it mature is probably a little bit too soon, given that it’s still only 6-7 years old but nonetheless, Escape Hunt is the more mature of our two businesses. It’s had another fantastic year so, as I mentioned, it delivered a very strong sales growth, 38%, and I mentioned already the 17% like-for-like sales but within that like-for-like, and what’s been so fascinating is to see that the rate of sales increase has been almost exactly the same irrespective if you like, of how old the units are. So, even our oldest cohort of seven sites still delivered 16% like-for-like, and those are 7-year-old sites, and they’re still playing the same games that we had in place back then so a really, really strong performance on the top line for Escape Hunt.

We’ve been in this privileged position for Escape Hunt for a while now to see this very strong conversion to EBITDA, and again, that continued in the 12 months to December so landing as we did at 42% EBITDA on that business was a very, very strong performance.

We opened an additional site in the year, so we opened a new Escape Hunt in Woking, which again has come out of the blocks really well. It’s a very, very consistent business, it continues to be incredibly highly regarded by customers, it continues to operate at that 98/99% customer satisfaction rating. So it really is a bit of a crown jewel, I would suggest, Escape Hunt.

Then if we look to Boom Battle Bar, as I say, a much younger business for us, so much so that we don’t really have like-for-like counterfactuals to refer to even last year, but nonetheless, the sales growth has been phenomenal, 200% up over the period, 29% like-for-like as I suggested.

Within that sales growth, we have opened three new sites so we opened sites in Canterbury, Dubai, and Southend, and then we brought back, more towards the back end of the year, five of our franchisee sites as well. So, that business is really kind of moving very, very much in the right direction, the sales growth is of course really important, and it’s particularly important because it leverages a relatively fixed cost base really effectively.

So, what you’re seeing therefore is this increasing rate of EBITDA margins at the bottom end as well. So we closed the year at 18% EBITDA in that business, the second half was at 23%, and what this is really kind of showing is we’re exactly where we would expect to be, and we would hope to be on that maturity curve, where EBITDA is creeping closer to our midterm target of 20-25%. 

It’s worth pointing out that of course in the early part of the year, you’ve got such young sites, which we expect to make some trading losses so you get a dilution over the year as young sites grow, they come through their trading loss period and out. So, seeing 23% delivered in H2 was really encouraging, seeing 18% delivered overall was again really encouraging, and it’s a business that’s starting to really kind of flourish.

Q3: How did the expansion strategy, particularly the opening of the new owner-operated sites and the acquisition of franchise sites, contribute to growth and profitability of both Boom Battle Bar and Escape Hunt in 2023?

A3: So, maybe the best way to think about that is bridging it almost year to year so in the year to ‘22, we delivered £22.6 million of sales, and in the year just closed, we delivered £45 million so that’s obviously a doubling in scale.

I suppose if we were to talk about the constituent parts of that growth in round numbers, Boom Battle Bar like-for-like sales delivered just under £3 million of that growth year on year, and Escape Hunt like-for-like sales delivered just over £1.5 million of that movement in sales growth. So, essentially £4.5 million being born off the like-for-like, the maturing nature of the sites that we had.

Specifically to your question, the new sites that we opened have been quite significant so for Boom, obviously being kind of the lion’s share, if you like, £11.4 million of that sales growth was born of the new sites which we’d opened through the back end of the prior year. Escape Hunt, similarly, £2.2 million there, so £13.5 million coming from new sites that we’d opened within that growth. Specifically, the franchisee sites which we bought back delivered circa £5 million in the year of sales growth to us. I hope that gives you a bit of a flavour for where those chunks are.

So, specifically around bringing franchisee sites back into the flock, it’s not that this is something we’re looking to do as a matter of cause, but as we’ve mentioned before, when opportunistically there is the time to be able to do it, we are keen to engage because if we can deliver these sites on rates of return on capital which are at least as good as what they would be were we opening new sites and arguably better, especially given that we can typically get them vendor financed, it makes a lot of sense for us to do that. We’ve talked about it before, but you will continue to see us bring franchisee sites back into the flock, the extent to which those opportunities arise.

Q4: XP factory has demonstrated remarkable resilience within the leisure industry. Could you explain why you think that is?

A4: I think we have a number of facets that are really going in our favour at the moment.

I think firstly, we are lucky to have two businesses which play broadly to the same audience but are a little bit nuanced at the margin so Escape Hunt, for example, is very much more a family-focused business, perhaps than Boom, which is typically young couples, groups of friends. So, what that means is that you get a smoothing effect across the year so for Escape Hunt, we will do really, really well in holidays, which are often, be that half term, summer holidays, Easter holidays, Christmas holidays, etc., and Christmas aside, those other holiday periods are typically a little bit weaker for bar businesses. So we get a natural hedge there, which is really, really powerful.

I think where on the Boom side particularly we’ve been very fortunate is that having an offer which really does focus in and around the games, as well as obviously having the huge wet lead participation, it means that we’re attractive and we’re busier through the week and earlier in the day. So, we don’t rely simply on it being a Friday night and a Saturday night business, we have participation through the day and in the earlier week, and that really helps, especially when you consider that so much of our cost base is broadly fixed. That additional sales trajectory at the beginning of the week and earlier through the day, leverages that fixed cost base really, really well.

I suppose the third point which has gone for us is that our customer is really quite broad for both so we do really well with corporate businesses on both sides, on both brands. So Escape Hunt has always done well with corporate businesses, Boom does really well with corporate businesses, particularly, Wednesday, Thursday nights, obviously through Christmas, it was fantastic. So we’ve got a broader customer offer, I think our physical offer lends itself to being slightly broader through the day parts and through the earlier week. Of course those two businesses hedging themselves a little bit naturally just because of their different customer profiles has really helped.

The only other thing I would say is that we have been pretty militant about holding price at levels as affordable as we can possibly make them. Wherever possible, we choose to further sales by trying to increase capacity so what can we do to increase capacity, i.e. drive volume, and have that the constituent part of like-for-like sales rather than pushing price. So, that might be trying to work out how we get more bar space into Boom, it might be how we get new escape rooms into existing sites, creating capacity to drive volume rather than going to price. That combined with our position where we’ve absorbed quite a lot of the price increases that we’ve seen on the supply side, I think is really paying dividends because it means that customers have recognised that we’ve not profiteered from some of the dynamics which maybe others in our space have done a little bit. I think customers recognise that it’s quite easy to compare us to other operators.

So, being affordable is a really important thing and I think certainly in the current climate, it’s been pretty advantageous to us.

Q5: Just looking forward then, what can we expect to see from XP Factory in the next year?

A5: Well, you can expect to see more of the same. Of course, we will be looking to do more new sites on both businesses, we’ve talked about this before, but where we’re now in this fortunate position where we can afford to fund them organically from existing cashflow, that’s a really powerful position to be in. So we will continue to be building sites on both businesses.

You’ll see us continuing, particularly on the Boom side, which is our younger business, to learn and to watch and to improve. We’ve made a lot of operational improvement over the last 12 months, we will continue to do such and hopefully we’ll continue to see that drive in the margin improvements, the flow through improvements, and most importantly, the top line sales growth, which is the thing that allows us to perform.

So, you’ll see much of the same, just hopefully at a greater scale.

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