Loungers And Hotel Chocolat Group – Overpriced Or Buyable?

Loungers (LON:LGRS) – Inflationary Pressures Continue To Diminish

Last Friday morning, ahead of the café/bar/restaurant group’s AGM, the company issued a Trading Update for the 24 weeks to 1st October.

It stated that, for the first half of the current year to end April 2024, it expects total revenue of £149.6m, up 22.3% on the previous year (£122.3m), while noting that inflationary pressures were continuing to diminish in line with Management expectations.

The group’s balance sheet remains strong with non-property net debt at 1 October 2023 of £14.3m (£9.5m), reflecting the timing of September month end working capital cash outflows.

Group CEO Nick Collins stated that:

“I am delighted with our strong trading performance across both the mature estate and our new openings.

Our consistent sales growth reflects the continued evolution of our offer and the resilience of the UK consumer and high street.  

We have now opened 34 sites in the past 12 months, creating around 1,000 jobs in the process, and 72 sites since the last Covid lockdown.  

With a great pipeline of further openings in front of us I have never felt more optimistic about our prospects.”

The group operates in the UK hospitality sector through its two established complementary brands – Lounge and Cosy Club.

Nationwide there are some 201 Lounges, offering a neighbourhood café/bar combining elements of coffee shop culture, the British pub and dining.

Principally located in secondary suburban high streets and small town centres, the sites are characterised by informal, unique interiors with an emphasis on a warm, comfortable atmosphere, often described as a “home from home”.

Typically located in city centres and large market towns the 35 Cosy Clubs are more formal bars/restaurants, offering reservations and table service but sharing many similarities with the Lounges in terms of their broad, all-day offering and their focus on hospitality and culture. 

Interiors tend to be larger and more theatrical than for a Lounge, and heritage buildings or first-floor spaces are often employed to create a sense of occasion. 

In November last year the group launched Brightside, its third brand, a roadside dining concept.

The first Brightside location opened south of Exeter in February this year, followed by the June opening near Plymouth and the third in Honiton in August.

The total estate now numbers 238 sites, with another 17 scheduled to open taking the current year’s tally to 34, a record number of openings for the group.

We can expect to see the Interims published on Tuesday 28th November, together with a more up to date report.

Analysts Anna Barnfather and Nishant Dahad at Liberum Capital currently have a Buy note out on the group, looking for a Price Objective of 400p a share.

They estimate that the current year to end April will see takings of £332m (£284m) helping to push pre-tax profits up to £12.0m (£9.4m), with earnings standing still at 8.1p a share.

For next year they have pencilled in sales of £382m, £13.8m profits and 9.4p earnings.

Their 2026 estimate suggests even further increases to £436m revenues, £16.4m profits and earnings of 11.3p per share.

Recognising that this group’s management, with its firm financing, is on a strong expansion push, while also widening its operating margins, perhaps helps to underline the current rating of its shares.

Two years ago they touched 297p, in January this year they peaked at 230p, before easing back to 178p which was their lowest for the year.

On Friday night they closed at 186p, after a large day’s trading volume of some 630,000 shares dealt, which was more than three times the recent daily average.

What does highlight the potential of this group is the effect of the Apollo Private Equity bid for one of its competitors, The Restaurant Group, on a take-out rating about a third higher than Loungers.

Furthermore, agitator TMR Capital, which pushed TRG to sell off all but its Wagamama side, reckons that TRG is worth 23% higher than the Apollo offer.

So, what would that value Loungers out at then?

I would think that there is no need to chase, but the shares are a good Hold.

I can see them edging back above the 200p level very soon, possibly before the end of next month and the publishing of its Interim Results.

(Profile 03.09.19 @ 205p set a Target Price of 275p*)

Hotel Chocolat Group (LON:HOTC) – Front Footing It

My favourite chocolate retailer has not had a good time in the last year.

Two profit warnings this year alone – not too impressive.

However, getting all that behind it now could well provide investors with an ideal opportunity to get aboard as its Management starts to show its pace and commitment.

They put into effect big changes in the group’s ranges and product pricing.

In addition, there has been a big drive on reduction of costs across the board.

Founded by Angus Thirlwell and Peter Harris, who are still executives within the business, Hotel Chocolat is a premium British chocolate maker with a strong and distinctive direct to consumer brand.

The group is unusual in being a grower (organic cacao farm in Saint Lucia), a manufacturer (Cambridgeshire) and owning its extensive direct to consumer channels (branded stores, websites).

The results for the trading year to end June reported revenues of £204.5m (£226.1m) while recording an underlying pre-tax loss of £0.8m (profit of £21.7m).

After those statements earlier this year the sales and profits fall were in line with expectations.

In last Thursday’s results announcement the company stated that:

The Board continues to believe that the Hotel Chocolat brand has an exciting future both in the UK and internationally as evidenced by continuing growth of UK stores and proven consumer demand in both the US and Japan.

Lower sales driven by online and international sales reductions led to the anticipated small underlying lossin FY23, however, the business is underpinned by a strong balance sheet and healthy cash position exiting FY23 with significant liquidity provided by the Group’s RCF agreement.”

Analysts at Liberum Capital, led by Wayne Brown, reckon that the group’s shares are now worth a Buy note, especially considering their low rating.

They estimate that the current year to end June 2024 will see a slight increase in sales to £212m, with profits bouncing back up to £4.2m, worth 2.3p in earnings per share.

For 2025 Liberum sees the recovery continuing with £223m revenues, profits of £11.8m and earnings of 6.4p per share.

The brokers have a Price Objective of 180p a share against Friday night’s closing level of 142.5p.

They have been as high as 232p in February this year, but have since been down to a low of 100p, just two months ago.

That is a big fallback in price over the last two years, after peaking at 532p.

The pressure came after the massive online surge in business influenced by Covid fell away when the lockdowns ended ahead of Ukraine and cost-of-living surges.

The next Update from the group is likely to be in January.

Co-Founder and Chief Executive Officer Angus Thirlwell stated that:

“Hotel Chocolat is on the front foot again.

The hard, foundational work we put in last year is now starting to deliver the results for us.”

My feeling is that the shares could fall back in the face of some profit-taking after the recent uplift, then possibly offering investors the opportunity to jump aboard ahead of the inevitable Christmas spending and accompanying publicity.

(Profile 21.03.19 @ 340p set a Target Price of 402p*)

(Asterisks * denote that Target Prices have been achieved since Profile publication)

Mark Watson-Mitchell: