European Wax Center, Inc. (NASDAQ:EWCZ) Q4 2023 Earnings Call Transcript

European Wax Center, Inc. (NASDAQ:EWCZ) Q4 2023 Earnings Call Transcript March 6, 2024

European Wax Center, Inc. beats earnings expectations. Reported EPS is $0.1, expectations were $0.08. EWCZ isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen. Thank you for standing by. Welcome to European Wax Center’s Fourth Quarter and Full-Year Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a Q&A session. [Operator Instructions]. On the call today are David Willis, Chief Executive Officer; and Stacie Shirley, Chief Financial Officer; and Andrea Wasserman, Chief Commercial Officer. I would now like to turn the conference over to Stacie for opening remarks. Ma’am, you may begin.

Stacie Shirley: Thank you, and welcome to European Wax Center’s fourth quarter fiscal ’23 earnings call. For today’s call, David will begin with a brief review of our fourth quarter and full-year performance and discuss our priorities for fiscal 2024. Then I will provide additional details regarding our fiscal 2023 financial performance and our fiscal 2024 outlook. Following the prepared remarks, we 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 differ 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’ll now turn the call over to David Willis.

David Willis: Thank you, Stacie, and good morning, everyone. Thank you for joining us today. We ended 2023 on a strong note with fourth quarter performance in line with our expectations. We made progress on our strategy of expanding net new centers and driving in-center sales, which are both key to the European Wax Center growth story. Additionally, we were pleased with our ability to drive in-center reservations during the quarter, which capped off a solid year of growth for European Wax Center. In 2023, we opened 100 net new units, driven by our committed franchisees and are proud to have delivered meaningful top line and bottom line growth across the Board, generating $955 million in system-wide sales, $221 million in revenue and $76 million in adjusted EBITDA.

Even in a challenging macroeconomic environment, the European Wax Center business model is consistent, anchored by the resiliency of our core guests whose commitment to their personal care routines did not waver throughout the year. Reflecting on my first six months as CEO, I could not be prouder of our teams. I want to thank our associates, franchisees, and in-center partners for their relentless focus on the work that drives results for our network and for living our values every day. This year, we’re excited to celebrate the 20th anniversary of the European Wax Center brand. In 2004, our founders created this category of out-of-home waxing when they realized that waxing was an essential and recurring service often performed in salons as an afterthought.

They introduced a high standard of professionalism by creating a business concept solely focused on a consistent, hygienic and efficient wax experience. 20 years later, we remain the undisputed leader in this industry. I believe that our leadership team and Board have advanced our founders’ vision and set our company on a path to unlock the true potential of European Wax Center with an asset light, predictable, high growth franchise model. In 2023, we achieved several milestones as a brand from strengthening our leadership team to deepening our relationships with our core guests and franchisees to innovating our product offerings. We work to position European Wax Center for further growth. Importantly, we delivered on both of our key growth vectors, expanding our footprint through new net center openings and driving in-center sales, which benefits system-wide sales and same-store sales growth.

I’ll discuss both of these in more detail now. I’ll start with our unit growth vector. In 2023, we delivered over 10% unit growth for a second year in a row, surpassing 1,000 centers nationwide and we are incredibly pleased to have met the high end of our fiscal 2023 net new unit guidance. We ended the year strong in Q4 by opening 18 net new centers across 13 different states. A 100% of our new center openings in 2023 came from existing franchisees, which speaks to the commitment and excitement they continue to have for the European Wax Center brand and our business model. Looking ahead in 2024, we expect to deliver 75 to 80 net new units, in line with our high-single digit unit growth algorithm. We’re pleased that our franchisees remain well capitalized and committed to growing with our brand.

Their continued demand underpins our robust development pipeline of over 370 commitments and provides us visibility to be able to continue to deliver against our high-single digit unit growth algorithm for 2025 and over the long-term. In partnership with our franchisees, we are focused on growing the top line in an existing centers, particularly through new guest acquisition, while taking a deliberate approach to new center openings in 2024 with focus on markets with less development activity over the last few years. To support our franchisees, our operations team is putting an even greater focus on refining and evolving our new center opening best practices, which in turn enhances our already strong unit economics. One initiative we’re particularly excited about is the network wide launch of our improved data driven pre-opening playbook.

This playbook highlights some of our best-in-class centers that opened on day one with both the right number of new guests in their file and appropriately trained staff, which led to higher sales, revenue, and predictability compared to centers that opened without these elements. We believe this playbook will be a powerful tool for our franchisees moving forward. Before I turn to our next growth vector, I wanted to touch on our recent brand conference. Just two weeks ago, our teams were in Las Vegas with our franchisees. We spent the time hearing from those across our team and our network, sharing best practices and aligning on areas of focus for the brand and franchisees moving forward. We celebrated the wins we’ve had over the last year, but more importantly, kept our focus on the growth and opportunity we have together ahead.

Our franchisees walked away from the conference feeling excited and confident in the direction of European Wax Center. Turning to our second growth vector, driving in-center sales, which benefit system-wide sales and same-store sales growth. I’ll start with our guest trends in Q4. As expected, our core guests, which include both Wax Pass and routine guests, remained consistent in their frequency and spend. These guests remain committed to their personal care routines and represent a recurring and reliable revenue stream for our brand. In addition, exiting our third quarter earnings call, transactions among our less frequent guests remained stable. Driven by these stable transaction trends in our refined media strategy, full-year 2023 system-wide sales, revenue and same-store sales came in above the midpoint of the guidance we provided in November.

As we discussed last quarter, we remain focused on driving visits from both new and existing guests as well as attracting more guests to the brand through our attract more, buy more, visit more marketing strategies under Andrea’s leadership. We believe that our evolved approach to our commercial and data insights capabilities as well as our data driven marketing and media strategy will allow us to deliver a year of in-center sales growth at 5% to 7% for system-wide sales and 2% to 5% same-store sales growth in 2024. There continues to be a vast opportunity to drive new guests to the brand. And as discussed last quarter, we engaged a new media agency focused on implementing a streamlined media strategy across all of our paid digital channels and search efforts.

This strategy launched in Q4 with a singular focus of driving more guest reservations in-centers. A key pillar of our strategy is to optimize our approach to paid media by improving the efficiency of our media spend. I’m pleased to share that since our new media, search and performance creative agency took over in Q4, we’ve seen an improvement in our average cost per reservation across various search engines and social media platforms. While it is still early and we understand it will take time for this strategy to be fully implemented, we are off to a solid start and have good early reads on the reach, frequency, targeting and creative that will drive further efficiencies in these channels. We also see several areas of opportunity for us to continue to increase share of wallet from our existing guests.

We previously shared that we’ve been testing brow tinting in select centers. Historically, guests may have waxed their brows at European Wax Center, but went somewhere else to get them tinted. Our team has worked to develop a proven brow tint formula, which guests have enthusiastically responded to. We’ve been very encouraged by our ongoing tests as we’ve learned that it is a lever to bring new guests to the brand and we look forward to expanding this service to our network soon. Increasing frequency among our existing guests and converting non-core guests to Wax Pass user also remains a priority. As you know, Wax Pass holders visit more than twice as often and spend more than twice as much with the brand compared to our less frequent guests, making the Wax Pass membership program our most powerful frequency driver.

As we’ve evolved our data and technology functions, we’ve implemented key communication flows to encourage Wax Pass consideration and purchase in our marketing channels. Last quarter, wax passes and gift cards were available online for the first time in our brand’s history, which proved successful in retaining both new and existing guests. In addition, through our guest survey work, we’ve learned that while guests are attracted to the Wax Pass, they are less likely to commit to purchasing a full nine plus service Wax Pass until they visited and experienced the services we provide a few times. To encourage conversion and increase frequency and loyalty, we tested a three plus one Wax Pass offered only to new guests to incentivize trial by driving additional visits.

We were pleased with the results of the test in the fourth quarter and plan to roll out this network wide this Spring. On the operations side, we have implemented new leadership to oversee the local marketing team that supports and works directly with our franchisees. We’ve also repositioned our field trainers by embedding these experts in local markets to further aid and coach franchisees and center associates in driving ticket value and frequency in-centers. These in turn drive system-wide sales. Ultimately, we are confident in our ability to drive new guests to the brand while increasing average ticket value and frequency among existing guests through the initiatives I’ve outlined, which we believe will help us achieve another strong year of top line growth in 2024.

Before I pass it to Stacie, I wanted to touch on our laser hair removal pilot. As we’ve discussed over the last two quarters, we believe that offering additional hair removal modalities could be an effective method of attracting new guests to the brand, increasing share of wallet from existing wax guests and enhancing already robust four wall economics over time. We launched our pilot laser test in six New York area centers in Q4 and have been pleased with the results seen thus far. We were able to generate strong sales from both new and existing guests while minimalizing cannibalization of existing core waxing services. Based on results to date, we are expanding our pilot test to more centers in New York this quarter and planning to make additional investments to support this test in other select states throughout the year.

Stacie will provide more detail on this shortly. While we see this as a potential additive opportunity to expand our brand and the model, European Wax Center remains the dominant player in our category with the strong and resilient core service offering, waxing. As we introduce laser on a pilot basis, we believe we are uniquely positioned to leverage our scale and our footprint as the experts in out-of-home hair removal. With that, I’d like to hand the call over to Stacie Shirley to review our financial performance and our guidance details for fiscal 2024. Stacie?

Stacie Shirley: Thanks, David. Before I begin my remarks, I’d like to remind everyone that in some instances, I will speak to adjusted metrics on this call. And as I mentioned, you can find reconciliation tables to the most comparable GAAP figures in our press release and 10-K filed with the SEC today. Turning to our financial performance. As David mentioned, we delivered strong results in line with expectations, thanks in part to our core guests remaining committed to their waxing routines. Q4 system-wide sales increased 7.2% to $241.7 million and total revenue increased 5.2% to $56.3 million. Top line growth was primarily a result of unit expansion including 18 net new centers during the quarter. Same-store sales also increased 1.3%.

From a profit standpoint, fourth quarter gross margin improved approximately 240 basis points to 72%, primarily due to favorability in our wholesale margins. Fourth quarter SG&A decreased 6% to $13.7 million and as a percent of revenue was 24.4% compared to 27.3% last year. This decrease was driven by lower technology and insurance costs for the quarter, partially offset by increases in payroll and benefits and expenses related to the pilot of laser hair removal. Q4 adjusted EBITDA was $19.3 million, an increase of 0.3% versus last year. Fourth quarter adjusted EBITDA margins decreased 170 basis points to 34.2%, driven by higher advertising, some of which was a shift into the fourth quarter and expenses related to our laser pilot. GAAP net income increased 59.1% to $3.6 million, while adjusted net income declined from $48.7 million in Q4 2022 to $6 million in Q4 2023, primarily due to the income tax benefit recognized in fiscal 2022 from the release of a valuation allowance on deferred tax assets.

For the full-year, we opened 100 net new centers, approximately 10.6% unit growth, above our long-term high-single-digit growth target. System-wide sales increased 6.3% to $955 million and total revenue increased 6.6% to $221 million. And same-store sales increased 2.9%. Top line growth was driven by new centers opened and increased spending by guests at our centers. Full-year SG&A increased 0.9% to $59.5 million and as a percent of revenue was 26.9% compared to 28.4% last year. This improvement was driven by lower professional fees and technology costs for the year. Adjusted EBITDA was $76 million, an increase of 6.1% compared to $71.6 million in fiscal 2022. Adjusted EBITDA margins decreased slightly by 10 basis points year-over-year to 34.4%, partially due to increased corporate marketing and expenses related to our laser pilot.

Full-year interest expense increased to $26.7 million from $23.6 million in 2022 primarily as a result of higher interest rates following our refinancing, which closed in April 2022. Lastly, adjusted net income declined to $22.5 million in 2023 from $71.5 million in 2022 due to the income tax benefit we recognized in fiscal 2022 related to the release of the valuation allowance on deferred tax assets. And GAAP net income decreased to $12.3 million from $13.6 million the prior year. Turning to the balance sheet. We ended the quarter with $52.7 million in cash and $394 million outstanding under our senior secured notes. Our $40 million revolver remains fully undrawn. Net leverage at the end of fiscal 2023 was 4.4x adjusted EBITDA. Keep in mind that we spent $30 million in fiscal 2023 to buy back stock.

Excluding this, we would have been approximately 4x levered. Over the past 14 months, we fully utilized our $40 million stock buyback authorization. For fiscal 2024, we plan to continue to de-lever nearly an additional full turn to approximately 3.5x based on our fiscal guidance that I’ll give shortly. Net cash provided by operating activities was $55.6 million in fiscal 2023 compared to less than $1 million in investing outflows, a staple of our asset light, capital light model. Turning now to our updated outlook for 2024. As a reminder, both fiscal years 2022 and 2023 included a 53rd week. We will return to a 52 week year in fiscal 2024. We estimate that the contribution of the 53rd week is approximately equal to an average fourth quarter week.

As David mentioned earlier, we plan to open 75 to 80 net new center openings in 2024. Nearly all of our 2024 openings will be from existing franchisees. Looking at the current development schedule and commitments, the timing of these openings will be back half weighted within an estimated one-third in the first half and approximately two thirds in the second half. We expect seven net new openings in Q1. From a top line standpoint, we expect system-wide sales between $1 billion and $1.25 billion which represents a growth rate of approximately 6.5% to 9% on a 52 week adjusted basis and total revenue between $225 million and $232 million. Beginning in 2024, we will remove the surcharge to franchisees that we put in place during COVID to help offset elevated supply chain costs, which will impact full-year 2024 revenue.

We expect system-wide sales and revenue to be the lightest in Q1 and heaviest in Q2 consistent with last year and slightly more weighted towards Q3 versus Q4 compared to prior year. We also expect 2% to 5% same-store sales growth for the year. We anticipate Q1 to be the lowest with a consistent ramp-up in same-store sales throughout the year as the in-center sales initiatives that David mentioned take root. Our overall top line outlook assumes that our growth initiatives will help drive new guests to the brand and increase average ticket and frequency among existing guests as we progress through the year. We expect to drive relatively modest gross margin expansion. Our model naturally generates meaningful SG&A expense leverage and we are reinvesting a portion of this in 2024 to support our strategic initiatives and growth.

Our adjusted EBITDA outlook is approximately $75 million to $80 million. First, this range includes the full-year impact from investments we made in key strategic hires in 2023. Second, this range includes approximately $4 million of operating expenses, which are foundational and mostly onetime in nature to support our expanded laser hair removal pilot that David discussed. The majority of these expenses will be incurred in the back half of this year. As David mentioned, we are still in the early stages of this pilot, and while we’ve seen encouraging results so far. We remain focused on our strong and resilient core service offering waxing. Excluding the laser investment, we would expect to see approximately 130 basis points of adjusted EBITDA margin expansion for our core waxing business in 2024.

We expect approximately $28 million of interest expense this year. We currently believe our 2024 effective tax rate will decrease to approximately 25% before discrete items. Given our capital structure, we expect our blended statutory tax rate will be 21% and expect it to increase over time as pre-IPO shareholders exchange their Class B shares for Class A shares. As a result, we expect adjusted net income between $22 million and $25 million. In summary, we are entering 2024 with confidence in the strength of our resilient asset light model, the recurring predictable visits from our core guests and well capitalized franchisee base. We are pleased with the progress we have made in our in-center sales growth strategy and will focus on driving and obtaining new guests in 2024.

We believe we are making investments in the right areas to extend our position as the undisputed hair removal category leader and continue to take share in this highly fragmented category. We’d now like to open up the call for questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions]. And our first question coming from the line of Randy Konik with Jefferies. Your line is now open.

Randal Konik: Thanks a lot and good morning everybody. I guess, David, maybe we could get a little bit more of a deeper discussion on learnings from the brow test, the continued testing of laser. Maybe give us some perspective on what you’re seeing in terms of lift in revenue per visit? What are you seeing in the differences in the type of guests entering to test those products? Are they already waxed customers that are now trying an additional service or vice versa? Just be really helpful to understand what you’re seeing more specifically. And then as it relates to just long-term store growth, we’re coming off a year where you had peak, I think unit openings ever showing a lot of underlying strength in demand from existing franchisees.

What do you think is a kind of a doable long-term kind of thought around openings per year? Would we be thinking this 75% to 80% is kind of the most realistic to think through over the medium term? Just that would be helpful as well. Thanks guys.

David Willis: Sure, Randy. Good to talk to you. Let me — maybe take those in reverse order, if that’s okay. As it relates to kind of our view on new units per year, the high-single digit outlook for 2024 is in line with our long-term growth algorithm. We’re taking a deliberate approach on markets this year. As you mentioned Randy, we were well ahead of our high-single digit algo the last two years and we plan to focus on markets this year that have had less development activity over the last couple of years to allow those markets that were most active time to absorb those centers. We believe delivering the high-single digit unit growth after two years of exceeding these targets is candidly a testament to the strength of the overall model.

We have a robust pipeline of licenses that gives us confidence and visibility to delivering high-single digit unit growth not just for 2024, but for 2025 and beyond. So overall, I think we continue to feel really good about kind of our unit growth algorithm. As it relates to laser, you may recall, we had a handful of initial objectives we wanted to pressure test in this pilot. One is can we attract more new guests to the brand with laser? The second is can we increase share of wallet from our existing waxing guests? And the overall assessment was can we enhance what we think are already robust four wall economics. So the trends to date have demonstrated encouraging results on all of these. The one franchisee that is participating in our pilot and the six center pilot up in New York has seen enough to want to extend to some additional centers in the same market.

We still have some things to learn. So we do plan the purpose of extending the pilot into other centers and other markets this year is to really further learn some of the items that we haven’t figured out with 19, 20 weeks into our initial phase of the pilot. I do want to remind Randy, you and everyone that we continue to view laser as additive and accretive to our core business. We do remain the dominant player in our category and we think our core business remains very strong. As it relates to brow tinting, the original thought there was can we use brow tinting as a basket driver to increase dollars per ticket for our guests. And ultimately, we would like to use that as a behavioral change, where we can maximize revenue in the same 15 minute window that we’re using for the eyebrow.

Eyebrows are number two service of all of our core service SKUs. So the play there is really can we get folks to buy two services and we optimize the same 15 minute window. We’ve seen enough there in the tests. Our wax specialists are really encouraged by the brow tinting. Our guests the new formula is resonating with our guests. That’s what’s really driving our decision to roll this out network wide later this year. Hopefully, Randy I addressed most of you out there.

Randal Konik: Super helpful. And just a quick follow-up. Just on capital structure, how do we — you bought back nice amount of stock, you’ve fully completed the authorization on the share repurchase program. How do you want us to think about your optimal leverage ratios, your thirst for — in the Board for future share repurchase activity? Just kind of remind us how you think about capital structure in the business given the healthy amount of strong and predictable cash flow? Thanks guys.

David Willis: Yes. Thanks, Randy. So our asset light, capital light model does continue to enable us to generate meaningful free cash flow. So I think it really gives us flexibility. We will continue to evaluate best options on excess cash, how to deploy that and drive value for shareholders, we’ll continue to evaluate that with our Board, Randy.

Randal Konik: Thanks guys.

Operator: Thank you. And our next question coming from the line of Lorraine Hutchinson from Bank of America. Your line is now open.

Unidentified Analyst: Hi, this is Melanie on for Lorraine. I was just hoping you could break down the components of the 2024 comp guidance. What are the puts and takes to achieve the low end versus the high end? And is there any implication for price changes for the year? Thanks.