XP Factory plc (LON:XPF) Chief Executive Officer Richard Harpham caught up with DirectorsTalk for an exclusive interview to discuss financial highlights, 2028 growth targets, the £10 million credit facility with Barclays, restructuring the balance sheet, growth initiatives, and what we can expect from the group in the next six months.
Q1: Richard, could you just walk us through the financial highlights, particularly the 33.2% increase in group revenue, and what the key drivers were behind the growth?
A1: The key driver, I suppose, behind the growth is twofold on the revenue line.
First, and probably most importantly, is a good, strong like-for-like performance in both brands so yet again, we’ve seen volume-driven like-for-like at Escape Hunt, circa 3% and Boom Battle Bar, circa 4.4% in that period. Actually, if you were to normalise for the weeks of the rioting, actually that’s 5.6-ish percent in both businesses. Fundamental growth in both businesses, volume-driven like-for-like, I think is a really, really strong place to start.
If you compare that to the broader leisure market, which I believe grew at 1.6%, but specifically the bar subsector, so more akin, if you like, to Boom Battle Bar, which declined by 6.8% over the equivalent period, I’d say that in and of itself was a very, very strong performance.
Of course, that in and of itself does not make up the 33% increase, and that is made up by the new sites that are opened, or indeed acquired over that period. The lion’s share of that growth is coming from Boom, where in the period we acquired from our franchise network back another three sites, Aldgate, Wandsworth and Bournemouth.
So, those really are the main drivers, if you like, of that additional growth but fundamentally, very, very strong performances in both businesses from a sales perspective.
Q2: Now, XP Factory has demonstrated above-industry growth. What key factors differentiate it from competitors and how will these advantages help achieve the 2028 growth targets?
A2: I think one of the areas that has certainly, in my view, benefited us quite significantly is because the businesses are innately slightly higher margin than conventional businesses in the hospitality sector. That is because, of course, game in both businesses, the game in Escape Hunt is almost 100% of sales, and that’s very, very high margin and the game in Boom is circa 40% of sales, again, at a very high margin.
So, because of that, it’s meant that we have a little bit more margin overall in the site economics to play with, which has allowed us to hold pricing really pretty flat for the consumer over some very, very turbulent times in a very tough consumer environment. I think that’s one of the things that for me has made a big difference to just being able to offer a consistent price that customers are expecting, hopefully backed up by industry-leading service. We’re delighted, of course, still to sit numbers one and two on the aggregated consumer review platforms for both businesses.
So, I think that for me is probably one of the key reasons, making sure that you’re always offering the best value proposition that you can, and backing it up with service, which is hopefully market leading.
Aside from that, I think that we happen to be in a really exciting space. The experiential subsector within leisure is definitely where consumers want to be, it’s where they want to spend time with friends, it’s where they want to enjoy team socials at work.
So, we’re in the right space, I think we’re doing a lot of the right things, and hopefully that continues, and hopefully that continues to build our competitive advantage.
Q3: How does the company plan to utilise the £10 million Barclay’s credit facility to support its growth ambitions for Boom Battle Bar and Escape Hunt?
A3: Well, this is really exciting. We’ve talked for a long time about the opportunity we’ve seen laid out ahead of us in the UK and we’ve talked about a runway for both businesses that dramatically exceeds the position that we have today. Of course, the challenge has been, how do you fund the growth into that?
We ticked the right boxes initially, we’ve got 50% return on capital in both businesses, that’s great. We’ve got strong like-for-likes, that’s great. We’re showing box economics that are very strong, again, in both brands. So, that is good in and of itself but what we haven’t had was the facility to really go after that runway opportunity once we were back to being able only to build sites from the cash that we generate internally.
So, now that this facility is there, it’s really exciting for us and we’ve put out a pretty ambitious plan that will look to double the size of the EBITDA within the business over the next four years and put 50% on revenue.
In numbers, we’ll see a plan that gets us to £90 million of sales at around 15% EBITDA, that will run rate in round numbers at about £100 million of revenue at £15 million of group EBITDA. So, over a pretty short period of time, that becomes, I think, a pretty aggressive target for us, certainly ambitious, but entirely facilitated now by this facility that we have in place in Barclays, whilst I might add maintaining net debt ratios that should be in and around one times, not more. So, we still won’t be seen as a highly leveraged business.
Q4: Now, you mentioned restructuring the balance sheet to facilitate share buybacks and dividend payments. Can you just expand on this growth initiative?
A4: I suppose the reason for wanting to do it, I guess, is fairly obvious. There is a point at which you look at the return that we’re getting on equity, and you look at the return that we get on capital and those things are at the moment in a very soft market, really quite significantly disconnected.
If we have return on capital that sits at 50%, we have a free cash flow yield at around 20%, based on the numbers that you’ve just seen, it should make sense that our return on equity is moving very much closer to that dynamic. At the moment, it is not, the markets are very soft.
So, by restructuring the balance sheet, and by essentially moving money away from the share premium towards distributable reserves, it gives us that facility, should we wish to do so, either to buy back our own shares, because they seem really very, very well priced, or indeed to pay money back to shareholders via dividends.
However you cut it, this feels like a very sensible next step for us and indeed a good move forward in our journey as we grow as a business.
Q5: What can we expect to see from XP Factory over the next six months in terms of developments or milestones?
A5: You’ll be seeing us really kick off now that strategic work with a vengeance.
So, you’ll see an uptick in the rate of sites that we are starting to bring into the pipeline, you’ll see that pipeline expand significantly, we’ll be moving towards a growth rate that will look circa 8-10 Escape Hunts a year, probably 2-4 very big Boom sites per annum.
We’ll be moving into that really exciting phase of next level growth, if you like, so that will be the big update to follow.
