Loungers (LGRS:AIM) is in a sweet spot as an investment, offering both revenue growth and increasing margins as it benefits from scale efficiencies.

The ability to trade throughout the day appeals to a broad demographic with around 90% of customers visiting for more than one occasion, demonstrating the attraction of the format.

Arguably the offering is even more relevant in a post-pandemic world and lends itself to hybrid working patterns and community-based socialising while the suburban and high street locations also play into the company’s hands.

The damage caused to hospitality has created a favourable market tailwind for Loungers to exploit and it has plans to accelerate the rollout of sites to 25 a year with flexibility to do more as circumstances permit. The company recently said its pipeline of new sites had never looked so strong.

Management has identified the potential to grow to around 500 sites across the UK over the medium term from the current 184, implying an almost three-fold increase in the size of the group and providing a good growth profile for investors.

Analysts at investment bank Berenberg believe the company is being conservative and there is potential for 1,000 sites over time. Loungers is very profitable and mature sites earn over 30% returns on the capital invested.

The company has reached a tipping point where cash generated from its existing business can fund the opening of new sites while the increasing scale brings efficiencies and provide the potential for expanding operating margins.

Loungers operates two brands. A ‘Lounge’ is equal part restaurant, pub and coffee shop and can be found across the UK in small towns and communities. Each has its own individual name which connects to the history of the town. There are 153 of these sites nationwide.

A ‘Cosy Club’ is a more formal restaurant located in larger towns providing table service and reservations. It has 31 Cosy Club sites.

There are always risks and headwinds to consider when investing in the hospitality sector and another lockdown would impact the business – current disruption to the sector could hurt earnings temporarily so investors need to be patient – but we believe the ship is in strong hands and able to weather future storms.

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