XP Factory plc (LON:XPF) Managing Director Richard Harpham sat down with DirectorsTalk for an exclusive interview to discuss the Cardiff Boom Battle Bar acquisition, its concept, Escape Hunt’s performance and what investors can expect in the coming months. come.
Q1: Richard, an exciting acquisition from the Cardiff Boom Battle Bar franchise. What was the reason 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 owner-operated sites.
For Escape Hunt this generally meant 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 variety of owner-operated sites in the UK and even franchised units in the UK. Indeed, this strategic goal of growing with both is really important to us and it’s really important to us because we’re looking to grow quite quickly. There are a lot of benefits to doing this and really cementing the opposition as one of the pre-eminent players in the experiential leisure space.
That said, however, opportunities sometimes arise to bring franchisees back, which can be a little unexpected and we have very strict return on capital criteria, but where our franchisees can meet this requirement, we are happy to have conversations about bringing the sites into the fold.
I guess along with Cardiff it was one of our most successful franchise venues since the start of its run. The young founder, James, who had built this business, has done a phenomenal job of creating a business that really resonates with his local client in Cardiff, which is and has been running with fabulous numbers. But he has young man aspirations to do a lot of things and he approached us a while ago and said, would you be interested in bringing this business back into the owner’s operation?
When we looked at the numbers, which were very good as you saw, a site making around £4m a year, a business making very, very good EBITDA and even pre-tax profits. The performance criteria were very much in line with what we’re doing, they were in line with our expected metrics, and so we had that conversation.
So I am delighted this morning to be able to announce that we have now purchased this business, we have integrated it into our operations. Clearly it’s a business we’re passionate about, clearly it’s a business we think there’s more to come and clearly it’s a business we’re just desperate to embrace and take like ours.
So it’s a very exciting morning.
Q2: So how is the deal structured?
A2: We are paying just over £2m for the business and that compares to last year’s EBITDA of around £440,000 and I would say that EBITDA would have been a bit higher had Omicron n hadn’t hit in the fourth quarter, so the multiple there is pretty self-explanatory.
In terms of what we do to pay for that, we use an installment mechanism, so we pay £600,000 up front and then pay another £600,000 in about six months, the balance on the anniversary of the year of acquisition.
Q3: Can you just remind us what the Boom Battle Bar concept is and how many there are in the group?
A3: The concept is competitive socializing, so by that we mean large format bars, usually 10,000/15,000 square foot bars that offer many different games to the customer. So it can be crazy golf, it can be augmented reality darts, it can be ax throwing, it can be shuffleboard, we usually have 6-8 games per site, which we use to anchor the websites if you wish.
These sites are then reinforced as you can imagine with a bar, with food, so it’s usually street food style, so it might vary a bit from unit to unit, but this idea Street food and drinks, again, as you might imagine, are heavily based on cocktail menus. So it’s a really exciting business, I guess it resonates the most with that 20-35 year old customer, and as you can see from our numbers, it’s growing really fast.
So as we sit today we have 18 commercial Boom sites in the UK, 6 of those with the Cardiff acquisition and are owner operated and 12 are franchised. We are currently building on 5 additional owner operated sites which we will have opened before the end of the year, so these are in Oxford Street in London, Plymouth, Leeds, Edinburgh and Birmingham. Additionally, we have already built 3 additional franchise locations, Bournemouth, Southampton and Chelmsford with a strong pipeline underpinning this.
So just to reinforce this message that we’ve been doing before, this idea that we’ll have 27 units in place and on the market by the end of the year. We still believe that goal is well met and that we have the coverage, both in sites under construction and, indeed, in the additional pipeline to get us there.
Q4: How is the other company, Escape Hunt? How is business doing there?
A4: Well Escape Hunt is always going to take a really special place in my heart, we built it, we built it specially in the UK for nothing, and it’s a really great company I dare say . He’s been a consistent winner with customers, he’s rated very, very highly by our customers, I think that’s a testament to the really, really wonderful teams we have in place who deliver great service, every time.
So it’s a really, really beautiful company and thankfully it’s a company that continues to do very well. You may remember back then we used to talk about our box economic targets on premature business, seeing us doing £10,000 in sales a week and £3,000 in EBITDA, this EBITDA margin of 30%. I think it’s really encouraging to see that not only are sales tending to be higher than that, but the conversion to EBITDA is significantly higher than that, certainly right now, so it’s a really nice business from a box economics perspective.
We have 17 sites, some of which are owner operated in the UK at the moment, we have a franchise network which is our international business, but for three overseas units, one in Paris, one in Brussels, one in Dubai, two of which are owner-operated. So, in total, 20 owner-operated sites sat against the network of 25-30 franchisees internationally. Again we have 3 more sites under construction for the owner operated business here, so 1 in Bournemouth, again 1 in Oxford Street and 1 in Edinburgh.
As for this performance, we referred to it this morning. If we look back on the eight-week period that ended in August of this year compared to last year – you will recall that last year we were coming out of the COVID period – there was a real demand for companies like ours, a real demand for leisure and of course, we still benefited from the VAT reductions that the government had made available to us to help our whole to recover. So we had a very fast pace of growth last year, this time around, and we were indeed pleased with how quickly our trading rebounded.
Against that backdrop, it’s really exciting this year to be able to compare our numbers and see that in absolute terms, Escape Hunt UK sales are up 16% on a like-for-like basis, this eight weeks into August compared to last year. In fact, if you take out last year’s VAT profit, that gives us an underlying growth rate of 33% year-over-year, of which 13% comes from sales growth at home. ‘identical, ie the same sites that were open last year as this year and how they have grown.
So, all that to say, it continues to be a very, very good business for us. This is still a business that is well above its 30% EBITDA target and one that we continue to grow and grow.
Q5: Now, as you just said, trading is strong, what can investors expect in the coming months with XP Factory?
AT 5: I think our history will continue to be what it has been, which is to say that we are building a business for the long term. We’re putting some important foundations in place this year, the very clear benchmarks to that are just the very important rate at which we’re opening sites. So investors will expect to hear us continually talking about this, like I said, from the Boom side, in particular, 18 sites so far, 27 by the end of the year, you’ll hear us talk about how this trip is going.
You will also hear us talk about what I think are the critical steps towards building a business that will be successful in the long run, where those critical steps are delivering your box economy across both businesses. So for Escape Hunt it’s this consistent delivery of £10,000 a week of sales and £3,000 a week of EBITDA like I said thankfully now it’s a business that kinda works longer, we can see that this is really delivered. On the Boom side the economy of the box relies a bit more on return on capital because we could have a 20,000 sq ft site or an 8,000 sq ft site clearly they won’t do the same numbers, but the returns on capital will continue to be very, very strong. So you’ll hear us talk about how we’re moving more and more towards that goal of return on capital, those attractive savings.
We made reference this morning to the quality of our progress in achieving these box savings. Obviously, when you do it right and you do it right for customers, as evidenced by the great reviews from TripAdvisor, Google, Facebook, you can be pretty sure that by increasing and opening more and more sites, you’ll start to see the leverage we’ve been talking about, and you’ll start to see a really exciting business spring up.