XP Factory significant rate of pace for opening new sites (LON:XPF)

XP Factory plc (LON:XPF) Chief Executive Officer Richard Harpham caught up with DirectorsTalk for an exclusive interview to discuss the Cardiff Boom Battle Bar acquisition, its concept, the performance of Escape Hunt and what investors can expect in the coming months.

Q1: Richard, an exciting acquisition of the Cardiff Boom Battle Bar franchise. What was the rationale behind this?

A1: Well, as you know, XP Factory, both through the Escape Hunt brand and through the Boom brand, is growing by franchise and by owner-operated sites.

For Escape Hunt, that has meant typically that the owner-operated sites would be in the UK while the franchise would be our international business. But for Boom, we’ve had a spread of owner-operated sites in the UK and indeed franchise units in the UK. Indeed that strategic focus of growing with both is really important for us and it’s really important for us because we are looking to get to scale quite quickly. There are lots of advantages to doing that and really cementing opposition as one of the preeminent players in the experiential leisure space.

With that as given, however, sometimes opportunities come up to bring franchisees back, which might be a little bit unexpected and we have very strict return on capital criteria, but when our franchisees can meet that requirement, then we are happy to entertain conversations about bringing the sites into the fold.

I suppose with Cardiff, it had been one of our top performing franchise sites all the way through from the beginning of its journey. The young founder, James, who had built that business up has done a phenomenally good job of creating a business that truly resonates with its local customer in Cardiff, that operates and has operated on fabulous numbers. But he has young guy aspirations to do lots of things and he approached us a while ago and said, would you be interested in bringing this business back into the owner operation?

When we looked at the numbers, which were very good as you’ve seen, a site that’s turning over circa £4 million a year, a business that returns very, very good EBITDA and indeed profits before tax. The returns criteria sat really well with what we do, they sat in line with our expected measures and so we entertained that conversation.

So, I’m delighted this morning to be able to announce that we have now bought that business, we have brought it into our operation. Clearly, it’s a business we’re excited about, clearly, it’s a business that we feel there’s more to come from and clearly, it’s a business which we’re just desperate to embrace and take on as our own.

So it’s a really exciting morning.

Q2: So, how is the deal structured?

A2: We’re paying just over £2 million for the business and that sets against last year’s EBITDA of around £440,000 and I would say that that EBITDA would’ve been somewhat higher had it not been Omicron hitting in Q4, so the multiple there is fairly self-explanatory.

In terms of what we are doing to pay for that, we are taking a tranche mechanism so we’re paying £600,000 upfront, and then we pay another £600,000 in around six months’ time, with the balance on the year anniversary of the acquisition.

Q3: Can you just remind us of what the Boom Battle Bar concept is and how many there are in the Group?

A3: The concept is a competitive socialising so by that, we mean these are large format bars, typically 10,000/15,000 square foot bars that have lots of different games available to the customer. So, it might be crazy golf, it might be augmented reality darts, it might be axe throwing, it might be shuffle boarding, we have typically 6-8 games per site, which we use to anchor the venues if you like.

Those sites then are bolstered like you might imagine with bar, with food, so typically it’s a street food style so it might vary a little by unit but that street food idea and the drinks, again, as you would imagine are heavily based around cocktail menus. So it’s a really exciting business, it’s resonating most I suppose with that 20-35 year old customer and, as you can see in our numbers, very fast growing.

So, as we’re sat today, we have 18 Boom sites trading in the UK, 6 of those with the acquisition of Cardiff and are owner-operated and 12 are franchised. We are in builds on an additional 5 owner-operated sites which we will have open before the end of the year so those are in Oxford Street in London, Plymouth, Leeds, Edinburgh and Birmingham. As well, we already have in builds an additional 3 franchisee sites, Bournemouth, Southampton and Chelmsford with a strong pipeline that underpins that.

So, just reinforcing that message that we’ve made before, this idea that we’ll have 27 units up and trading by the end of the year. We still feel that that target is very much on and that we have the coverage, both in the sites that are in build, and indeed in the additional pipeline to get us there.

Q4: How is the other of the business, Escape Hunt? How is the business performing there?

A4: Well, Escape Hunt is always going to take a really special place in my heart, we built it, we built it especially in the UK for nothing, and it’s a really beautiful business, I dare I say. It has been a consistent winner with customers, it’s very, very well reviewed by our customers, I think testament to the really, really wonderful teams that we have in place that just deliver great service, every single time.

So, it’s a really, really lovely business and fortunately it’s a business that’s just continuing to do really well. You might recall, back in the day, we used to talk about our box economic targets on premature business seeing us do £10,000 of sales a week and £3000 of EBITDA, that 30% EBITDA margin. I think it’s really encouraging to see that not only are the sales trending higher than that, the conversion to EBITDA is quite significantly higher than that, certainly at the moment so it’s a really lovely business from box economics perspective.

We have 17 sites, some owner-operated in the UK at the moment, we have a franchise network that is our international business, but for three overseas units, one in Paris, one in Brussels, one in Dubai, which two are owner-operated. So, in aggregate 20 owner-operated sites sat against the network of 25-30 franchisees internationally. Again, we have a further 3 sites in builds for the owner-operated business over here so 1 in Bournemouth, again, 1 in Oxford Street and 1 in Edinburgh.

In terms of that performance, we made reference to it this morning. If we look back to the eight-week period running into August this year versus last year – you’ll recall last year we were coming out of the COVID period – there was a real demand for businesses like ours, a real demand for leisure and of course, we were still benefiting from the VAT reductions that the government had made available to us to help our set to recover. So we had a really fast pace of growth last year, this time, and indeed we were delighted with how quickly our trading bounced back.

Against that backdrop, it’s really exciting this year to be able to compare our numbers and see that, in absolute terms, sales in Escape Hunt UK are 16% ahead on an equivalent basis, this eight weeks into August versus last year. Actually, if you strip out the VAT benefit from last year, it’s giving us an underlying growth rate year-on-year of 33%, of which 13 is born of like-for-like sales growth, that is same sites that were open last year as this year and how they have grown.

So, all of that is to say that it continues to be a very, very good business for us. It continues to be a business that’s delivering well in excess of its 30% EBITDA target and one that we continue to nurture and grow.

Q5: Now, as you’ve just said, trading is strong, what can investors expect to see in the coming months from XP Factory?

A5: I think our story will continue to be as it has been, and that is that we are very much building a business for the long term. We are setting significant foundations in place this year, the very clear reference points to that is just the very significant rate of pace at which we’re opening sites. So, investors will expect to hear us continually talking about that, as I say, on the Boom side, particularly, 18 sites to date, 27 by the end of the year, you will hear us talking about how that journey is going.

You’ll also hear us talking about what I believe are the critical steps towards building a business that will succeed into the longer term, where those critical steps are the delivery of your box economics across both businesses. So, for Escape Hunt, that is that consistent delivery of £10,000 a week in sales and £3000 a week in EBITDA, as I say, fortunately now it’s a slightly longer running business, we can see that that’s really being delivered. On the Boom side, the box economics are predicated a little more in return on capital, because we might have a 20,000 square foot site or a 8,000 square foot site, clearly they’re not going to do the same numbers, but the returns on capital will continue to be very, very strong. So you you’ll hear us talking about how we are moving further and further towards that target return on capital, those attractive box economics.

We made reference this morning to how good our progress has been on delivering those box economics. Clearly when you’re getting that right, and you are getting it right for customers, as evidenced by strong TripAdvisor reviews, Google reviews, Facebook reviews, then you can be fairly confident that by scaling up and by opening more and more sites, you will start to see the leverage that we’ve been talking about, and you’ll start to see a really exciting business being born.

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