European Wax Center, Inc. (NASDAQ:EWCZ) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Thank you for standing by, and welcome to the European Wax Center’s First Quarter 2023 Earnings Results. [Operator Instructions]. As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Bethany Johns, Director of Investor Relations. Please go ahead.

Bethany Johns: Thank you, and welcome to European Wax Center’s first quarter fiscal 2023 earnings call. With me today are David Berg, Chief Executive Officer; David Willis, President and Chief Operating Officer; and Stacie Shirley, Chief Financial Officer. For today’s call, David Berg and David Willis will provide a brief overview of our first quarter performance and discuss our priorities for fiscal 2023. Then Stacie will provide additional details regarding our first quarter financial performance and our fiscal 2023 outlook. Following the prepared remarks, David, Stacie and David will be available to take questions. Before we start, I would like to remind you of our legal disclaimer. We will make certain statements today which are forward-looking within the meaning of the federal securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued today.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to different materially. Please refer to our SEC filings as well as our earnings release issued today for a more detailed description of the risk factors that may affect our results. Please also note that these forward-looking statements reflect our opinions only as of the date of this call and we take no obligation to revise or publicly release the results of any revision to our forward-looking statements in light of new information or future events. Also during this call, we will discuss non-GAAP financial measures which adjust our GAAP results to eliminate the impact of certain items. You will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures in our earnings release.

A live broadcast of this call is also available on the Investor Relations section of our website at investors.waxcenter.com. I will now turn the call over to David Berg.

David Berg: Thank you, Bethany, and good morning everyone. Thank you for joining us today. We are pleased to deliver solid Q1 performance in line with our expectations as our says and dos match for the eighth consecutive quarter since we became a public company in 2021. We generated $218 million in system-wide sales, $50 million in total revenue and $16.3 million in adjusted EBITDA, representing 6%, 10% and 8% growth respectively. We delivered 4.5% same-store sales growth and opened 34 net new centers, the most centers ever opened in a single quarter since the brand was founded in 2004. We continue to drive both of our key growth vectors. Unit growth driven by our franchisees excited about the strong return on invested capital and in-center sales growth.

Our focus on these vectors remains steadfast as we look ahead. And I would like to extend our sincere thanks to our associates and our franchisee partners for their commitment to our ongoing success and for living our values every day. European Wax Center created the category of professionalized out-of-home waxing and continues to be the undisputed leader in a highly fragmented space. Our model is fueled by the recurring nature of hair growth and our loyal guests who consider waxing to be a nondiscretionary part of their personal care routines. Our highly trained wax specialists deliver consistent, efficient and professional services with our unique Comfort Wax at a reasonable price in clean, hygienic centers. These qualities and our relentless focus on delighting our guests sets European Wax Center apart from others.

And our scale is truly unmatched. With almost 1,000 centers nationwide offering a high quality inclusive experience, European Wax Center is uniquely positioned to provide out-of-home waxing to every body. And our tech-enabled scheduling and efficient waxing regimen allow our guests to get in and get out as part of their busy days. Our new advertising campaign launched earlier this month features distinctive creative visuals that leverage our brand authority to invite all customers to wax with us and reinforces our status as the category expert. Our Wax Pass program also continues to be a key differentiator. Wax passes provide our guests with a discount for prepurchasing a body-part specific package. For instance, 12 eyebrow waxes for the price of 9 during our semi-annual promo periods.

Wax Pass holders are our most loyal guests. They make up about 40% of our customers, but generate 2/3 of our visits and network sales. With the recent implementation of our enterprise data warehouse and enhanced CRM capabilities, we’ve been able to identify an additional cohort of routine guests who also visit European Wax Center regularly, an average of 8x per year but who do not currently have a Wax Pass. Together, both Wax Pass holders and routine guests drive more than 75% of total visits and network sales. Both cohorts have remained incredibly consistent in their waxing routines in terms of both their frequency and their spend. They continue to view our services as nondiscretionary even in an uncertain macroeconomic environment. In addition, we remain focused on our less frequent episodic guests where we see an opportunity to improve visit frequency and spend.

Our strategic pillars are unchanged. And we are deploying additional levers to drive transactions and basket size in 2023 that gives us confidence in reiterating our full year guidance. David Willis will cover these in more depth in a moment. We expect these efforts, coupled with our unit expansion, to enable us to generate long-term revenue growth, leverage our fixed cost profile for EBITDA margin expansion and generate significant free cash flow over time, all of which translates to significant value creation for European wax center’s franchisees and our shareholders. With that, I’d like to turn the call over to our President and COO, David Willis, to discuss recent trends and our 2 key growth vectors, expanding our footprint through new center growth and driving in-center sales.

David, over to you.

David Willis: Thank you, David, and good morning everyone. Turning first to our unit growth vector. As David shared earlier, we opened 34 net new centers in Q1, densifying markets in key states like California, Florida and Illinois. We have incredible momentum as we approach 1,000 centers across 45 states, demonstrating that the European Wax Center brand resonates everywhere. Franchisee demand, especially among multi-unit developers remains robust. More than 90% of our pipeline is comprised of existing franchisees who are largely focused on densifying the top 20 markets nationwide. We are also welcoming new franchisees and expanding our reach in tertiary markets. By way of example, in Q1 we signed an agreement with a small family office to develop nearly 20 centers in Southern Georgia and Alabama.

The development personnel we invested in this year are helping structure multi-unit development agreements for our larger franchisees in addressing pent up demand from smaller operators who want to add 1, 2 or 3 centers to their existing portfolios. As a reminder, our centers have a relatively modest initial investment of approximately $350,000 to $400,000. We are confident that our franchisees remain well-capitalized amidst this rising interest rate environment, with sufficient funding to continue growing the European Wax Center footprint. Continued demand is also helping us reach our targeted long-term franchisee mix sooner than expected. At the IPO, we communicated a long-term expectation that 1/3 of our centers would be owned by each of 3 groups, smaller independent operators, self-funded multiunit developers and private-equity backed operators.

While our current location mix is 50% independent, 30% self-funded, and 20% private-equity-backed, opening the approximately 400 centers in our existing licensed pipeline will bring that mix close to 1/3 each within the next few years. Each of these groups is tremendously valuable to the brand and continues to demonstrate their steadfast commitment to our long-term growth. In addition to delivering significant unit growth, our field and operations teams are dedicated to improving 4-wall performance. We are focused on preparing new centers for opening, driving faster achievement of breakeven and building the pipeline of current and future wax specialists. As we’ve shared before, new centers opened in 2020 and 2021 are generating above-average sales volume in their first few years.

Therefore, we are developing a new center marketing toolkit, leveraging best practices from these cohorts to help replicate those trends across the network with the goal of delivering breakeven profitability even faster. In April, we rolled out a new reporting tool to our network that offers better access to real-time benchmarking analytics and performance data. Lastly, we are reaping the rewards of our efforts to deepen the wax specialist pipeline. Our beauty school partnership program continues to expand with positive recommendation ratings from 97% of participants. Our careers website generated double the number of wax specialists applications year-over-year. As a result, the average number of wax specialists per center has increased versus 2022.

Through these initiatives, we are widening the gap as the undisputed leader in a highly fragmented category. As a reminder, we remain the only nationwide brand in out-of-home waxing. We are 6x larger than the nearest competitor by number of units and 11x larger by network sales. With the unmatched demand from our franchisees, the strength of our development strategy and the effectiveness of our operational efforts, we control our destiny as we work towards tripling our current footprint to an estimated 3,000 centers over the long term. Now turning to our second growth vector, driving in-center sales, which benefits both system-wide and same store sales growth. We achieved this by strengthening guest engagement through our 3-pillared attract-more, buy-more and visit-more strategies.

As always, the attract-more pillar focuses on bringing new guests to European Wax Center. Our comprehensive media strategy has generated a significant increase in brand awareness year-over-year. We’re seeing a lot of traction. And we believe that our bold new advertising campaign, Every Body Smooth, will help us continue to grow awareness in 2023. For the balance of the year, we’re adjusting our media mix, shifting a portion of our media spend out of awareness-driving activities and into very targeted action-driving performance media channels that have previously worked well to convert guest awareness into guest visits. We also recently partnered with a messaging platform to increase guest reviews on Google. Online reviews are critical as they drive SEO optimization and help potential new guests understand the value of out-of-home waxing, particularly for intimate services.

Because our highly trained wax specialists are one of our key differentiators in the drivers of in-suite unit economics, online reviews highlighting these experts offer a great opportunity to drive new guest acquisition. Existing franchisees piloting the platform last year saw a lift in transactions. So we are excited to implement this initiative across the network. Our second pillar, buy-more, focuses on increasing the average ticket in centers. Ticket size is primarily driven by the type of service performed, the number of services per transaction, or SPT, and retail attachment. While our service mix stays relatively consistent, increasing SPT and retail attachment can be a very impactful driver of ticket value. We are currently testing bundles and service pairings, which make booking multiple and incremental services easier for guests.

Additionally, offering a small discount on a service bundle will benefit cost-conscious guests while generating more total dollars for the brand. Our third pillar, visit-more, is designed to increase visit frequency among existing guests. We are currently focused on enhancing guest frequency through Wax Pass holders in part by deepening our existing incentives for centers to drive incremental Wax Pass sales. This is a tried and true tactic we have used during our semi-annual promo periods. As a reminder, Wax Pass holders visit more than twice as often as episodic guests. As David mentioned, our Wax Pass holders and routine guests, our core customers, are driving over three quarters of network sales and have not changed their waxing routines.

Not unexpectedly and validated by recent guest survey work. Episodic guests are more sensitive to economic pressures and have lowered their beauty-related spend as a result of the current macro environment. Unlike our Wax Pass holders and routine guests who remain strong, our episodic cohort has softened in recent weeks. Driven by this change in trend, we have leveraged our new data environment to identify last episodic guests and we are using our CRM tools to incentivize them with specific targeted offers for both services and retail products. Our CRM capabilities are unmatched among our highly fragmented competitive set and the most effective tool for driving visit frequency and average ticket. We’re in the early innings of delivering personalized emails and text messages to those guests which are already generating higher transactions versus control groups.

Ultimately, we are confident that we have the right initiatives in place to deliver additional engagement across our guest database, including our episodic cohort. As we execute on our attract-more, buy-more and visit-more initiatives, we expect to attract new guests to the brand, convert them into repeat guests, and drive valuable Wax Pass adoption. With that, I’d like to hand the call over to Stacie Shirley to review our financial performance and our guidance for the remainder of fiscal 2023. As a reminder, Stacie joined the European Wax Center team at the end of March, and she’s already made an incredibly positive impact on the organization. We’re thrilled to have her on board and look forward to partnering with her to drive long-term growth and success.

Stacie?

Stacie Shirley: Thanks, David, and good morning, everyone. I’m excited to be on my first earnings call as part of the European Wax Center team. Before I begin my remarks, I’d like to remind everyone that in some instances I will speak to adjusted metrics on this call. You can find reconciliation tables to the most comparable GAAP figures in our press release and 8-K filed with the SEC today. Turning to our financial performance. We delivered solid first quarter results in line with our expectations. Q1 system-wide sales increased 5.5% to $218.4 million, and total revenue increased 9.8% to $49.9 million. Top line growth was driven by our 2 growth vectors, including 11.9% unit growth. As David mentioned, our 34 net new centers were the most we’ve ever opened in a single quarter.

Both our ramping and mature centers contributed to our 4.5% same-store sales increase, driven by price increases implemented in early 2022. From a profit standpoint, first quarter gross margin of 71% was in line with our full year guidance. Q1 adjusted EBITDA of $16.3 million increased 7.5% over last year. And adjusted EBITDA margin was 32.7%, exceeding our expectations of approximately 30%. SG&A expense timing, particularly for advertising, professional fees and payroll generated approximately $1 million in favorability for Q1. Adjusted EBITDA margin decreased 70 basis points year-over-year, primarily due to the addition of the medical supplies we now sell to franchisees, which are accretive to gross profit, but have a lower margin rate than the wax and proprietary retail products that drive the majority of our product revenue.

Below the line, adjusted net income of $3.4 million differs from adjusted EBITDA of $16.3 million for the 3 primary reasons. First, interest expense was $6.9 million, an increase of $5.4 million year-over-year as a result of the whole business securitization we completed in April 2022 that locked in a fixed 5.5% rate on all of our long-term debt. Second, depreciation and amortization were $5.1 million for the quarter. The majority of this $4.7 million relates to the noncash amortization of intangible assets, such as franchisee relationships and area representative rights that were established prior to our IPO. And third, the income tax component. In Q1, we recognized a GAAP income tax benefit of $0.5 million versus non-GAAP income tax expense of approximately $1 million.

We released our valuation allowance on deferred tax assets in Q4 of 2022. And as a result, we expect to recognize tax expense annually compared to the negligible amounts incurred during the period covered by the valuation allowance. As a reminder, exchanges from Class B shares to Class A shares will impact our effective tax rate over time. So we will provide quarterly rate updates for modeling purposes. In terms of the balance sheet, we ended the quarter with $45.9 million in cash and $397 million outstanding under our senior secured notes. Our $40 million revolver remains fully undrawn. Net leverage continues to decrease and was 4.8x adjusted EBITDA at the end of Q1 compared to 5.6x in Q2 2022 after the securitization was completed. We continue to expect to delever approximately a full term from 2022 to 2023.

Operating activities generated $4.2 million in cash during the first quarter and investing outflows totaled $360,000. We did not repurchase any stock during the quarter and have approximately $30 million remaining under our current authorization. Our industry-leading free cash flow profile gives us continued optionality to deploy cash to the benefit of our model, our network and our shareholders. Turning now to our outlook for 2023. As David described, the Wax Pass and routine guests driving more than 75% of our system-wide sales have continued to demonstrate resilience and consistency. Their visits are not wavering, demonstrating that European Wax Center provides a nondiscretionary service to these cohorts that they value as part of their personal care regimen.

As mentioned earlier, we have launched several initiatives to drive transactions and ticket size across all of our guest database and particularly targeting our episodic guests. As I’ll describe shortly, while these efforts will slightly impact the cadence of the year, we expect this data-driven targeted reengagement to support our previously communicated full year guidance. In terms of our unit growth, we have incredible momentum. As a reminder, we delivered more than 10% unit growth in 2022 and expect to deliver another 10% in 2023. A handful of Q1 new centers opened a few weeks earlier than expected. And 80% of our 2023 new centers are open or under construction as of the date of this call. As a result, we now expect to open slightly more than half of our 95 to 100 projected openings in the first half of 2023.

New centers continue to generate a strong maturity curve and their sales ramps in years 2 through 5 will drive same-store sales in 2023. We remain very confident in our long-term goal of delivering at least 3,000 European Wax Centers nationwide. Our expectations remain unchanged for 2023 system-wide sales of between $965 million and $990 million and total revenue between $222 million and $229 million, implying 7% to 10% growth for both metrics. With our increased focus on driving wax pass sales in our semiannual promo periods of May, June, November and December, we believe that Q2 and Q4 will be 75 to 100 basis points higher as a percentage of full year system-wide sales than they were in 2022. As a reminder, system-wide sales are recognized as payments for wax passes are received, while same-store sales reflect the Wax Pass visits as they are redeemed.

As I just mentioned, the new initiatives we are rolling out to drive guest engagement are expected to impact our top line cadence. For Q2, we expect comps to be in the low-single-digit as the impact of our new initiatives ramp up and then return to mid-single-digits in the back half as guests respond to our targeted outreach and Q2 Wax Pass sales generate future return visits. We remain focused on our 2 key growth vectors and are confident in our mid-single-digit full year comp guidance. Turning to profit. We continue to expect adjusted EBITDA in a range of $77 million to $80 million. From a cadence standpoint, we expect the timing dynamics I mentioned earlier to ship approximately $1 million of Q1 SG&A expense favorability into Q3 with mid-30s adjusted EBITDA margins resulting for Q2 and Q4.

Our 2023 interest expense outlook remains approximately $28 million, slightly weighted in Q4 given a 53rd week in 2023. Due to additional exchanges from Class B to Class A shares, our expectations for 2023’s blended statutory tax rate has increased to 20% from 18%. While we continue to expect adjusted net income within our existing range of $22 million to $24.5 million, the rate increase will drive approximately $0.5 million of incremental tax expense this year. On a final note, as we look ahead, we expect to return to meaningful EBITDA margin expansion in fiscal 2024 as our efforts are designed to generate long-term revenue growth, enabling margin expansion as well as significant free cash flow over time. With that, I’d like to turn the call back to David Berg to wrap up our prepared remarks and open it up for Q&A.

David?

David Berg: Thank you, Stacy. In summary, we remain pleased with our continued top line growth, the resilience of our Wax Pass and routine guests and their enthusiasm for the brand. Their recurring predictable visits give us incredible confidence in the health of our business model over the long term. We recognize that an uncertain consumer environment has impacted a smaller segment of our guests who are more economically sensitive. We believe we’re focused on the right initiatives to support our continued performance in 2023. And we look forward to updating you next quarter on our progress. In the meantime, our franchisee base is stronger than ever and continuing to invest in European Wax Centers nationwide. We remain the undisputed leader in out-of-home waxing and believe that our efforts are only widening the gap between us and competitors in this highly fragmented category. We now like to open up the call for questions. Operator?

Q&A Session

Operator: [Operator Instructions]. And our first question comes from the line of Randy Konik from Jefferies.

Operator: And our next question comes from the line Dana Telsey from Telsey Advisory Group.

Operator: And our next question comes from the line of Scot Ciccarelli from Truist Securities.

Operator: And our next question comes from the line of Jonathan Komp from Baird.

Operator: And our next question comes from the line of John Heinbockel from Guggenheim Partners.

Operator: And our next question comes from the line of Kelly Crago from Citi.

Operator: [Operator Instructions]. And our next question comes from the line of Simeon Gutman from Morgan Stanley.

Operator: This does conclude the question-and-answer session of today’s program. I’d like to hand the program back to David Berg for any further remarks.

David Berg: Thank you, Jonathan. Thanks, everybody, for joining our call this morning, and we will look forward to speaking with you and chatting in August about Q2. I appreciate everybody taking the time this morning. Have a great day.

Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.