I’ve moved this stock to my potential buy list after a 30% rise in earnings

Today’s strong full-year results put this business on my radar as a stock to consider buying for its ongoing growth prospects.

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Profits have taken off for Loungers (LSE: LGRS) and it’s now a stock for me to consider buying.

The company has been rolling out its café/bars/restaurants across the UK for more than two decades, and operating conditions have been improving recently.

Today’s (9 July) full-year results report contains many positive figures, with year-on year earnings up by just over 30%. However, judging by the outlook statement, the expansion programme may have much further to run. So the stock may make a decent long-term investment from where it is now.

A decent growth runway

Chairman and co-founder Alex Reilley said the company has a pipeline of sites to open in the current trading year and beyond.

Cash and earnings are flowing in, and borrowings look manageable. So the firm is well placed to take advantage of favourable lease terms negotiated with struggling landlords.

The economic troubles of recent years have taken their toll on many businesses, and that means Loungers has a good choice of new venues at good-value rates. In one example, Reilley said bank closures are providing the firm with “excellent” prime pitch locations in towns and suburbs and they are often “wonderful” buildings.

Loungers operates three brands. Cosy Clubs targets large towns and city centres, while Loungers serves smaller secondary locations in high streets and market towns. The third brand is Brightside, the firm’s new roadside restaurant chain established in 2022.

Chief executive Nick Collins said the company opened 36 new sites overall in the trading year to 21 April 2024, and closed one. The pace of expansion is brisk. The firm now has around 250 venues, the majority of them branded Loungers.

Collins said the improving macroeconomic environment, falling interest rates and declining inflation are all good for the business. In the longer term, Collins thinks aiming for 665 sites overall is a “conservative” target.

Succeeding where others aren’t

If that goal proves to be achievable, shareholders could enjoy a happy journey ahead. But there are risks, of course.

I can’t help but compare the success of Loungers with the underperformance of Tasty — the Wildwood restaurant chain owner. The contrast demonstrates how critical it is for a hospitality business to give customers what they want.

One of the main risks for Loungers’ shareholders is the company may one day drop the ball, causing its brands to lose popularity.

Another risk is valuation. As growth stories become known, investor speculation tends to push up a firm’s rating. The Loungers share price has been buoyant in the lead-up to today’s bumper figures.

With the stock near 286p, the forward-looking earnings multiple is running at just over 20 for the current trading year. However, that rating is set against City analysts’ expectations for another advance of almost 30% in earnings this year. Although such high growth rates may not happen every year.

On balance, and despite the risks, I’m keen to carry out further research here. My aim is to watch the shares and consider buying a few at opportune times to hold for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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