European Wax Center Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 11 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to European Wax Center's 2nd Quarter Fiscal 20 24 Earnings Call. At this time, all participants are in a listen only mode. After this previous presentation, there will be a Q and A session.

Operator

In order to facilitate as many participants as possible, we ask that you please limit yourself to one question and one follow-up during the Q and A session. If you have additional questions, you may rejoin the queue. On the call today are David Furr, Chief Executive Officer and Stacy Shirley, Chief Financial Officer. I would now like to turn the conference over to Bethany Johns, Director of Investor Relations. Ma'am, you may begin.

Speaker 1

Thank you, and welcome to European Wax Center's 2nd quarter fiscal 2024 earnings call. On today's call, David Berg will begin with a brief review of our Q2 performance and discuss our priorities for the balance of 2024. Then Stacy will provide additional details regarding our financial performance and updates to our fiscal 2024 outlook. Following the prepared remarks, the team will be available to take questions. Before we start, I would like to remind you of our legal disclaimer.

Speaker 1

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 the call, we will discuss non GAAP financial measures, which adjust our GAAP results to eliminate the impact of certain items.

Speaker 1

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.

Speaker 2

Thanks, Bethany, and good morning, everyone. Thank you for joining us today. Let me start by saying how excited I am to be back at European Wax Center, speaking with you all today as CEO once again. I first joined EWC 6 years ago and was energized by the opportunity to build and expand an iconic one of a kind brand. I was most excited about the company's undisputed leadership position, significant white space, passionate associates and consistent recurring revenue model that allowed our franchise partners to generate strong financial returns and reinvest in the brand.

Speaker 2

What I learned over the course of the past 6 years is there is a deep love for this brand from our guests, from our franchisees and also from our associates who are guided by our core values while feeling empowered to be their authentic selves, all of which make European Wax Center a great place to work. These unique attributes still exist at EWC today and I remain excited and optimistic about the potential that lies ahead for our company. At the same time, I know there is much work to be done to realize our potential and reposition EWC for sustainable long term growth. We're navigating an ongoing difficult macroeconomic environment that is affecting consumer spending across many categories and income levels. Yet it is our job to do everything we can do to drive growth despite the external challenges we are facing.

Speaker 2

There is strong alignment between the Board and the executive team on what needs to be done to deliver long term value to our guests, franchisees, associates and shareholders. I believe that we have built a solid foundation from which to address those challenges, but it is important to refocus on the strategies that will move the needle and ultimately drive results. Before I jump into the details of the quarter and our outlook, I would also like to extend a thank you to David Willis for all he's done for EWC in his 8 year tenure and for being an invaluable partner to me over the past 6 years. He played an integral part of our unit growth and development story and I truly wish him all the best in his future endeavors. Now let me turn to a brief recap of our 2nd quarter performance.

Speaker 2

Our outlook and my key priorities as I step back into the CEO role. During the Q2, our top line was modestly below our expectations. System wide sales grew 2.3 percent to $260,000,000 total revenue was just under $60,000,000 and same store sales increased 1.6%. We also opened at 8 net new centers in the quarter. I will go into more detail on our unit growth strategy in a few moments.

Speaker 2

We manage bottom line performance well with adjusted EBITDA coming in at $20,600,000 and adjusted EBITDA margin of 34.5%. During the Q2, we continued to see a challenging macro environment with consumers being more selective with their spend. Last quarter, we highlighted a few key initiatives designed to drive transaction volume in our centers, which we expected to ramp up substantially in the back half of this year. While delivering some improvement, the impact from these initiatives has not been large enough to offset softer transaction and new guest growth in this environment. As a result, we are reducing our outlook for the back half of twenty twenty four.

Speaker 2

Stacy will cover our updated guidance in a few minutes. We recognize we need to improve the effectiveness of our efforts to better position our franchise partners for long term success. Driving transaction growth in ramping and mature centers is a top priority for both our franchisees and management and we are actively collaborating with the network to refine our plans and achieve this objective. In pursuit of our shared goals and in light of the current operating environment, we have been working with our franchise partners over the past several weeks to reevaluate near term development plans and extend the timeline of new center openings. As a result, we are lowering our unit growth outlook for 2024.

Speaker 2

While we don't take this action lightly, it is the right thing to do, as we believe it will provide us and our franchise partners with more capacity and resources to address near term macro related challenges. Additionally, we are actively working with franchisees in certain geographies who are facing increased rent and labor costs to mitigate potential closures, including facilitating transfers to stronger operators. We continue to be pleased with the desire of our franchisee group to expand with the brand and support the network through these efforts. Importantly, existing franchisees remain committed to their long term development plans. The health of our franchisees remain strong as does our robust pipeline of over 370 locations.

Speaker 2

We are focused on the long term success of the network. Our franchisees have helped make us the undisputed leader in out of home waxing. They are the ones who serve our guests day in and day out and our job is to ensure they can do that to the best of their ability. Therefore, we have and will continue to explore ways to support them as we navigate this important time together. So what are we doing?

Speaker 2

What are our focus areas? Our financial performance and our new center productivity are inextricably linked and the underlying drivers for the accelerating both to a level that meet our expectations are the same, namely: 1, driving new guests to the brand 2, reactivating lapsed guests 3, fostering an amazing guest experience and 4, prudently investing in capabilities that will enhance financial performance. And above all, maintaining a close connection with our franchisees to confirm we are hearing our guests as we work together to grow 4 wall profitability. Let me double click on each of these in detail where our opportunities lie. We must 1st and foremost stay focused.

Speaker 2

The business model remains sound, our franchisees are engaged, our guests love the brand and the services they receive. Thus, our focused efforts will be: 1st, inviting new guests to the brand. Our enhanced data analytics capabilities allow us to verify that we capture a high ROI on our marketing spend using the right channels and the right creative. We are pleased with the progress we are making and media efforts are driving incremental reservations, but we must build on this. We know as the category leader in what is still a vastly fragmented market that we have significantly more advertising dollars than the competition to deploy towards attracting new guests.

Speaker 2

Specifically, we are targeting both current waxers and those new to waxing. We must continue to optimize our use of franchisees marketing funds to be as efficient as possible in supporting our network, so we can put more dollars towards actively recruiting new guests to the brand. 2nd, we must do better at reactivating lapsed guests. This is our bring them back strategy. We know the ongoing challenging macroeconomic situation has impacted consumers' behavior across many categories, including ours.

Speaker 2

We are fortunate that our core wax pass and routine guests who comprise of approximately 75% of our sales consider out of home waxing with EWC to be non discretionary and their spend and visit frequency has remained stable, providing predictable and recurring revenue for us and our franchisees. However, we need to be better at reengaging guests already in our system. We have an opportunity to be more aggressive in our efforts to get lapsed guests back. We believe we have untapped potential in delivering great service to these guests and converting them into core guests over time, thereby increasing their loyalty to both their waxing routine and our brand. Our leadership position provides us with this unique capability.

Speaker 2

Our 3rd focused effort, we must foster an amazing experience at center level. We are relentlessly focused on partnering with our franchisees and deepening our relationship with our franchise advisory council, so they have the support they need and deserve from us. To start, as you may know, we launched a program referred to as Operation Elevate. The goal of which is to elevate 4 wall performance in select markets through training, coaching and ongoing development by our field trainers. We are encouraged by the early results here.

Speaker 2

On a per center basis, participants are demonstrating sustainable improvement in dollars per ticket, wax pass sales, product purchases and other key KPIs. However, we have an opportunity to accelerate adoption. As we continue to scale the program, we're making informed adjustments to enhance its impact. We've also seen promising results from our new center pre opening playbook. New centers opened in Q2 using the playbook are outperforming the 20222023 cohorts with notably higher sales and transactions in their 1st 3 months.

Speaker 2

We will take those applicable learnings and operationalize them in mature centers as well. Next, we will continue to focus on staffing levels. We know that properly staffed centers produce better results. So we will do a thorough review and ensure franchisees feel properly supported in this area. Finally, European Wax Center has always been known for cleanliness, hygiene, efficiency and expertise.

Speaker 2

This is demonstrated by our net promoter scores, which continue to be best in class. We must maintain this competitive advantage across all centers and continue to delight our guests with every service, so they can walk in and strut out. And finally, our 4th and final focus effort, we will make thoughtful investments to support our goals of driving new guests and elevating the guest experience. In the past, I've led successful gainshare structured agreements. We plan to evaluate partnerships with experts in marketing and technology, including AI to help drive transactions and incentivize those partners based upon delivering improved performance.

Speaker 2

We also have the opportunity to leverage our significant customer base and seek brand partnerships that can cast a wider net and introduce EWC to new guests. Even as the leader in this highly fragmented category, we have less than 15% market share. Gaining market share remains a large opportunity and we are pleased to have already driven a 22% increase in brand awareness year over year. We need to make deliberate investments in our app and website to make it easy for guests to book an appointment at the center of their choice for the time they want and the service they desire. Finally, we continue to advance our laser hair removal pilot, which has proven to be a valuable opportunity to add new guests to the brand and increase share of wallet from existing customers.

Speaker 2

We have made specific investments in laser expertise and marketing talent dedicated to this initiative. We plan to further expand the test to Florida, Pennsylvania and Ohio, bringing us to approximately 30 pilot centers in 4 states by the end of Q3. As I mentioned, our financial performance and our new center productivity are inextricably linked, driving and retaining new guests and improving transaction counts feed the flywheel for center development and expansion. When new centers ramp faster, our franchisees can generate higher four wall EBITDA and in turn continue to reinvest in the brand. In closing, my commitment to our associates, guests, franchise partners and shareholders is that we will continue to be guided by our values and relentlessly focused on driving new guests, retaining existing guests and making them loyalists to the brand, while improving our financial performance and expanding our leadership position.

Speaker 2

While it will take some time for us to get back to our full potential, we can assure you we are incredibly action oriented at EWC with a can do attitude. I know I can count on our amazing associates and franchisees to keep accelerating EWC forward. I'm encouraged by our franchisees' long term commitments to drive continued predictable unit growth as reflected in our robust pipeline. By narrowing our focus on the key priorities I highlighted earlier, I am confident that our saves and dues will match as we move forward and earn back your trust. I was excited about this brand's prospects when I joined as CEO in 2018 and as I rejoin as CEO in 2024, I have even more conviction that our best days are ahead of us.

Speaker 2

We will update you as we progress in our journey. And with that, I'd like to hand the call over to Stacy Shirley to discuss our Q2 financial performance and guidance for the balance of the year. Stacy?

Speaker 1

Thanks, David, and welcome back. 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 10 Q filed with the SEC today. As a reminder, both fiscal years 20222023 included a 53rd week, but fiscal 2024 returns to a 52 week year. Now let's begin with our Q2 financial results.

Speaker 1

We added 8 net new centers during the quarter and system wide sales increased 2.3% to $260,200,000 During our semiannual wax pass promotional period, wax pass conversion grew solidly year over year and demonstrated both the value of our Wax Pass as well as the continued stability of our Wax Pass guest. Same store sales increased 1.6 percent and total revenue, which includes wax and retail products we sell to the network, increased 1.3 percent to $59,900,000 As expected, gross margin improved 180 basis points to 73.2 percent, primarily due to product cost savings versus the prior year. Q2 SG and A decreased 8.7 percent to $12,900,000 and improved 230 basis points to 21.6 percent of revenue. SG and A this year benefited from lower incentive compensation expense and the receipt of legal judgment proceeds, partially offset by an increase in technology expense. The improvements in gross margin and SG and A I just described were more than offset by a $2,900,000 or 4.60 basis point increase in Q2 advertising spend year over year, which was in line with the expectations we communicated last quarter.

Speaker 1

This planned investment largely contributed to the 2nd quarter adjusted EBITDA decrease of 2.6 percent to $20,600,000 and adjusted EBITDA margin decrease of 140 basis points to 34.5 percent. With higher interest income in 20.24, net interest expense decreased to $6,400,000 from $6,800,000 in the same period last year. Income tax expense decreased to $1,700,000 from $2,800,000 last year as our effective tax rate improved to 22.5% from 33.1%. GAAP net income increased 7.3 percent to $6,000,000 and adjusted net income grew 4 percent to $7,300,000 Turning to the balance sheet. We ended Q2 with $55,700,000 in cash and net cash provided by operating activities was $14,400,000 compared to less than $200,000 in investing outflows.

Speaker 1

One of the most attractive characteristics of European Wax Center is our ability to generate strong free cash flow. Even in a constrained macro environment, our asset light, capital light model generates excess liquidity. During the quarter, we deployed $10,000,000 of that cash flow to repurchase Class A shares, demonstrating our conviction in the underlying value of our business model and its long term financial potential. We have $40,000,000 remaining under our current share repurchase authorization and our $40,000,000 revolver remains fully undrawn. At quarter end, we had $392,000,000 outstanding under our senior secured notes and net leverage was 4.3 times adjusted EBITDA.

Speaker 1

Turning now to our revised outlook for the balance of 2024. As we shared last quarter, our initial 2024 guidance was predicated on both a stable macro environment and the ramping impact of our key early stage initiatives that would primarily benefit the second half of the year. Our national media, local marketing and operational initiatives are each driving improvement in their respective areas. However, as David noted, that improvement has not been sufficient to overcome the softer macro environment and its impact on new guests and transaction growth. As a result, we are revising our financial guidance to reflect current trends through the back half of twenty twenty four.

Speaker 1

As we learn more about what is resonating with guests in this environment, we will make adjustments to our current initiatives to increase their effectiveness, while also exploring new opportunities to drive guest acquisition and transactions. As David mentioned, given lower than expected transaction volumes, we have partnered with franchisees to reevaluate near term development plans, translating to a revised 2024 outlook of 27 to 32 net new center openings. We believe this reset will allow us and the network to devote resources to driving more new guests and increasing transactions, which we expect will support higher average unit volumes. We believe that the reacceleration of center openings will be closely tied to the rebound in transaction growth at existing centers. I do want to reiterate David's comments that we remain confident in the strength of our 370 unit pipeline as well as our long term market opportunity.

Speaker 1

Returning to our 2024 financial guidance. Our system wide sales outlook for the year now moves to a range of $930,000,000 to $950,000,000 Adjusting for the 53rd week of fiscal 2023, our revised guidance translates to approximately flat growth at the midpoint. We expect same store sales to be in the range of down 1.5% to up 0.5% with total revenue of 2 $16,000,000 to $221,000,000 Our current trends are tracking in line with these ranges. In terms of profitability, we continue to expect that cost savings will drive gross margin improvement to approximately 73% for the year. We now expect adjusted EBITDA between $70,000,000 $74,000,000 which continues to include an incremental investment of up to $4,000,000 of operating expenses to support the expansion of our laser hair removal pilot, the majority of which will be spent in the coming quarters.

Speaker 1

Higher interest income is benefiting net interest expense and as a result our full year interest expense outlook is now $26,500,000 We are currently projecting our 2024 effective tax rate will be approximately 25% before discrete items. Given our capital structure, we expect our blended statutory tax rate will be approximately 20% 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 19,000,000 dollars $22,000,000 And finally, for modeling purposes, we currently expect that 4th quarter top line and bottom line dollars will look fairly similar to the Q1 this year. While the majority of our remarks today have been on near term dynamics, I'd like to take a moment to focus on the long term opportunity that remains core to the European wax center story. We have a highly cash generative and asset light model that gives us the ability to invest in our business and drive shareholder value.

Speaker 1

Even in a challenging operating environment, we believe EWC's cash on cash returns remain compelling on both an absolute and relative basis. And our franchise partners remain committed to developing their portfolios over time. In turn, we remain committed to driving new guests to the brand, supporting our franchise partners and generating long term shareholder returns. With approximately 10 60 centers today and a long growth runway ahead of us, we remain confident in our unmatched leadership position in the highly fragmented out of home hair removal industry. We'd now like to turn over the call for questions.

Speaker 1

Operator?

Operator

Thank first question coming from the line of Randy Konik with Jefferies. Your line is open.

Speaker 3

Yes. Thanks a lot and good morning everybody. I guess Stacy as a point of clarification, when I'm looking at the revised guidance, the EBITDA dollar guide is not all that it's not down significantly. I think you spoke about some cost saves. Are those as we think about beyond this year and into the coming years, are those cost saves kind of temporary?

Speaker 3

Are they permanent? I'm just trying to get a sense of you have a very high margin structure that seems sticky and I want to just kind of get some perspective on is it in fact going to remain sticky in the out years going forward? Thanks.

Speaker 1

Good morning. Thanks, Randy, for the question. Yes, so a couple of things. One, as you as we've talked about and seen in the past couple of quarters, our gross margin, right, we've seen an improvement there year over year and we've talked about that from a cost savings perspective. And we would expect that that would continue.

Speaker 1

We're expecting to be around that 73% for the full year. And there's no reason for us to anticipate that that would go down in future years. And then from an expense perspective, we would expect to leverage that top line. We did have some favorability in the quarter, some of which was timing and some of it is just trying to be obviously as conscious as we can from an expense standard point in this very difficult environment.

Speaker 2

Yes, Randy, I think, listen, we've been consistent in this story that as we grow top line, we've got the opportunity to expand EBITDA margin. Our cost structure here at HQ does not require continued adding of heads and expense. So as Stacy said, as we grow top line, we would continue to believe that EBITDA margins will expand.

Speaker 3

Got it. And I guess David just lastly for you, you gave us a couple a number of points that you're focused on. Maybe give us some perspective on top 1 or 2 things you're kind of really focused on day to day. I just want to like how you're prioritizing all the different points to kind of set forth on the call this morning. What's most important to you?

Speaker 3

And to the Army of the employee base, what are you most kind of getting what are the top 1 or 2 messages you want to get across them over the coming 6 months and year?

Speaker 2

Yes, Randy, thanks for the question. Listen, I think you know me and one of my key tenants in our leadership responsibility is to be crystal clear about what we're focused on and what our priorities are. If I sort of canvas what I've heard from franchisees and what we think is the most important thing in this business, it's 2 things and they're really kind of the top two priorities that I spoke to. 1 is, how do we drive more new guests into this brand? How do we attract more?

Speaker 2

And then second, how do we drive transactions? If we you know the flywheel that where we can get centers that have faster ramping, better 4 wall EBITDA, that just is an opportunity for our franchisees to reinvest in this amazing brand and that flywheel just keeps moving. We've got to do a better job at number 1, driving new guests into the brand, retaining them and increasing transactions. Those are the top 2 key priorities for the organization.

Speaker 3

Super helpful. Thanks guys.

Speaker 2

All right, Randy. Thank you.

Operator

Thank you. And our next question coming from the line of Scot Ciccarelli with Drew. Your line is open.

Speaker 4

Hey, good morning. This is Josh Young on for Scott. So obviously the new center openings are down significantly for 24. But can you just give us any idea when you think you might be able to get back to a more normal pace here? Is it something that happened in 2025 or you think that's further out?

Speaker 2

Hey, Josh, thanks for the question. Listen, I think it's a great question because we really view the action that we took. And as we said not a decision that we took lightly. This is a temporary reset. We think it's really important in concert with our franchisees to really focus on driving those top two initiatives that we spoke to.

Speaker 2

Our view is we get tickets back on track, we get new guest counts moving in the direction that we want and we will go back to the kind of growth that we're accustomed to in terms of new center openings. We feel incredibly confident as we look long term given our pipeline and given our franchisees real desire to continue to invest in this brand. So this is a temporary reset, a temporary hold and we expect to get back on track to our normal growth rates and NCOs as soon as possible.

Speaker 4

Yes, that's helpful. Thank you. And then just one other one. So it sounds like the 4 wall productivity has come down quite a bit for some centers here. Can you just help quantify that decline for us?

Speaker 4

And then is that widespread across the base or are there more specific regions or pockets where you're seeing that more pronounced?

Speaker 1

So I'll start this and David you can add any color. But yes, certainly the 4 wall profitability has been pressured as we've been very challenged from the standpoint of the new guests in the transaction. As it relates to geography, there are certain geographies that are more impacted. We've talked before about the West Coast as it relates to higher rents and higher labor costs and that certainly has put more pressure on a cash flow perspective on some of those particular franchisee centers.

Speaker 4

Okay. That's helpful. Thank you. Thanks, Josh.

Operator

Thank you. And our next question coming from the line of Dana Telsey with Telsey Advisory Group. Your line is open.

Speaker 5

Hi, good morning, everyone. Good morning. And nice to hear from you again, David. David, as you think about your 2 initiatives of driving new guests to the brand and reactivating lapsed guests, at this time is one weaker than the other? Is the cadence of what you expected from new guests weaker than what you're seeing in reactivating lapsed guests?

Speaker 5

2nd, you had a new national media agency you hired. You were testing some local media agencies. Is that initiative still in place and what are you learning? And lastly, you mentioned higher rents and potential center closings. Have you seen that at all?

Speaker 5

And is there any adjustments that you need to make to the franchise model in terms of fees that the franchisees are asking for? Thank you.

Speaker 2

Yes. Thanks Dana. Listen, I think if you look at those top two priorities probably the driving of new guests outweighs the retention. I think the opportunity for us with lapsed guests given our enhanced capabilities and data analytics, we can really identify those guests that haven't been visited us in 6 months. That's what we define as a lapsed guest.

Speaker 2

So we can go back and target that guest very specifically. As I mentioned in my opening remarks, how do we get a bit more aggressive in terms of getting that guest back so that we can wow her with an amazing experience when she comes into the center. But if I had to handicap both of those or prioritize both of those, really driving new guests, continue to drive new guests in the brand is the top priority. We talked about those initiatives that you called out that help drive new guests, the national media change as well as an increased focus on local marketing. We have been very pleased with the results that we've seen there in terms of driving reservations.

Speaker 2

But remember that those marketing efforts are just one piece of or one leg of the maybe a 4 or 5 legged stool in terms of driving new guests in. And we'll continue to invest those dollars that have the highest ROI from a marketing standpoint to drive new guests. So we're pleased with those Dana, we'll continue those and it's our job to think of some other opportunities where we can attract new guests into the brand. I think the higher rents and the closures, we wanted to be open with that and transparent about particularly in California where rent rates have gone up, certainly labor costs, we're all aware of what's going on even at entry level positions that that is impacting particularly our California centers. The team has done an amazing job where we might have a center or a group of centers that just say, hey, it's gotten a little bit too tough that we brought in stronger operators to take over some of those locations that's happened in California.

Speaker 2

So that gives us great encouragement that we've got franchisees in this brand that love this brand and are absolutely willing to step in and help. So we continue to mitigate that. Joel Larkin and his team are working constantly with our franchisees on if they've got a rent renegotiation, how we manage those labor costs. I alluded to the notion of labor staffing is really critically important for all of our centers. So those are things that we just continue to work with our franchisees on every day.

Speaker 2

If I got if I'm not sure, Dane, I understood that the fees comment, but at this point, we don't see any change to our structure in our franchise or marketing fees at this time.

Speaker 1

One thing I would add to that as it relates to the centers, let's not forget that from a cash on cash perspective, they are still very, very strong, plus 50%. And so although there has been some pressure with the tickets and transactions overall, there's still overall a really incredible four wall profitability model.

Speaker 2

Yes, Seity, it's a great point. And Dana, I mean one of the things we really haven't done in a conservative effort because we've got such great group of franchisees that reinvest in this brand. We know that even at 20% 4 wall EBITDA margins, this is a very attractive model for franchisee. And as Stacy said, 50% plus cash on cash returns. We've got folks that are continually looking to come into the brand and we will ramp up our efforts to bring more folks franchise network because the business model is so strong and we've got a real high demand there of folks that want to come in.

Speaker 2

So that's again, I think a real positive for the brand.

Speaker 5

Thank you.

Speaker 2

All right, Dana. Thank you.

Operator

Thank you. And our next question coming from the line of Lauren Hutchinson with Bank of America. Your line is open.

Speaker 2

Hey, Lauren.

Speaker 5

Good morning. Good morning, David. I just wanted to follow-up on the decision to delay some of the new center openings. Was that something that was driven by franchisees or purely an EWC decision? And also, are you hearing any pullback concern in the long term pipeline of franchisee interest?

Speaker 2

Yes. Lorraine, thanks for the question. It was as you know, we try very hard to make sure that we've got a great relationship with all of our franchisees and particularly our franchise advisory council. So we're in conversations with them at all times. We thought the initiatives that we launched in Q1 were going to have a faster impact.

Speaker 2

When those things did not quite develop as fast as we thought given the macroeconomic situation, We started having conversations with our franchisees and as Q2 results kind of unfolded, went back to our franchisees, talked with them and just said, hey, what makes the best sense? And we agreed in concert with them that the right thing to do is to focus on the key initiatives that we have to drive our business. I want to reassure you and all the folks on the call that the long term development goals are the same for us. So this is just moving things out a bit so that we can focus on this near term opportunity we've got with the current situation. But we feel incredibly confident of our growth rate, of our franchisees commitment to continue to develop.

Speaker 2

And as I said in my opening comments, this is really just a short term pause to get us back on track and get the business right at sort of from a core level.

Speaker 6

Thank you.

Speaker 2

Thanks, Lorraine.

Operator

Thank you. And our next question coming from the line of Corrine Wolfner with Piper Sandler. Your line is open. Hey, good morning team. Thanks for taking

Speaker 7

the question. You had commented that the economics for the franchisees are actually still pretty good and the cash generation is still pretty good. What are you hearing from them around their motivation to continue growing even further and generate even stronger returns, especially the ones that are just sitting kind of comfortably with where they're currently at? Thanks.

Speaker 2

Yes. I think there's probably 2 things I would comment on. Number 1 is that we've got an incredibly robust pipeline of 3 70 plus locations. We have not had anybody kind of back off those development obligations, Corinne, in the out years. And then second, as I alluded to in my comments that we have stronger operators that have stepped up and say, hey, where somebody wants to exit the system or isn't it performing to the degree that they think they can operate a store, we absolutely have them coming in and taking over.

Speaker 2

So we believe that our franchisee base and obviously in close concert with our franchise advisory council hearing what their concerns are, but we're not hearing a concern about boy, we don't want to continue to grow with this brand. We've said it before, we have franchisees that have multiple concepts and we've seen them exit other concepts and double down their investment in EWC and continue to feel very strong about our long term growth opportunities in terms of unit growth.

Speaker 7

Great. Thank you. And then if you could just provide a little bit of clarity around the back half phasing with Q3 and Q4. I think you provided a little bit of color with Q4 looking similarly to Q1. Was that on a dollar basis?

Speaker 7

And then, how should we think about the new unit growth in Q3 versus Q4? Thank you.

Speaker 1

Sure. Sure. Thanks for the question. So as it look as you think about Q3, Q4, yes, we made a comment about Q4 being similar in dollars to Q1. Obviously, that's going to depend on where you're going to fall out in the overall range, but that is what we intended on that.

Speaker 1

The only other thing I would say, as you think about the cadence of quarters, Q3 will have a little bit heavier expense base based on a higher investment in advertising. As we think about the quarters we want to spend more sooner to drive transactions and try to get those new guests into the center. And then professional fees will be a little bit higher in Q3 as well and that's really just a function of timing.

Operator

Great. Thank you.

Speaker 1

Thank you.

Operator

And our next question coming from the line of Simeon Gutman with Morgan Stanley. Your line is open.

Speaker 8

Hi, good morning, everyone. Hi, David. I wanted to ask, lapsed Guess. Can you talk about if there is a number one reason or if there's multiple reasons why the Guess lapses? And I want to also talk about Wacker turnover.

Speaker 8

It seems like that could be at the crux of it and thinking about the labor model, the pay model, is there anything special in all the years of looking at this business that can be done to ensure that the continuity of the person doing the waxing is still there?

Speaker 2

Yes. Simeon, hey, thanks for the question. On LAPSUS as I mentioned sort of our really the enhanced capability we've got around data analytics and CRM to really get at that lapsed guests and find out why she hasn't visited us in 6 months is much more robust than it has been. So that allows Andrea and her team to really give a tailored message out to those guests. Probably in broad strokes, there is a group of that guests that just it's gotten too expensive.

Speaker 2

It's gotten tough in this macroeconomic situation to come in. We hear from our guest surveys that that has impacted their decision and their frequency of visit. So we've got opportunity Simeon to go address that concern with that lapsed guest. But, I will tell you that our ability to really hone in on why somebody hasn't come back in 6 plus months is much better than it has been and allows us to be very specific in the offer and the attraction or the offer to get them back in. Clearly, we think once we get you into the center, it's our opportunity to show you an amazing experience in the best in class environment at EWC and get you on as a Wax Pass holder longer term.

Speaker 2

So that's the goal and kind of the attract, retain and reward that guest as they come in. Waxer turnover really not an issue. We certainly coming out of COVID and for many quarters while I was in the chair, we talked a lot about the supply of wax specialists. We feel great about that. The industry relations team has done an amazing job at fostering relationships so that we feel very good about that pipeline.

Speaker 2

My comment in my opening remarks was how do we think about really revenue optimization for per wax suite and that involves the right labor staffing model. We think we can work with our franchisees to help with that, so that we're properly staffed at the right hours so that we do maximize the return on those waxers. As you know, legally the compensation structure for associates in the franchisee wax centers is up to that franchisee. We certainly have conversations with them about what is the best incentive program for those waxers? How do we incent them to rebook guests?

Speaker 2

How do we incent them to add on a retail product? How do we incent them to get another service? And that's another opportunity for us to take that best in class learning for those centers that have had great retention of wax specialists that are driving the most revenue per wax suite. So those are things that we continue to share out with our franchisee network.

Speaker 8

Okay. And a follow-up thinking about the entire footprint in the U. S, would we be surprised at how similar performance looks across markets, mature, immature geographies? Are there anything is there anything standout thinking about both network footprint, franchise development and then overall performance?

Speaker 1

I'll start with the performance. I mean, certainly as you cut it into different regions, you're going to see some variation, right? And again, same thing that we've been talking about with the West Coast being more pressured because of their cost structure overall. So that's probably the biggest call out I would say.

Speaker 2

Yes. I mean, Simeon, listen, we're disproportionate in kind of 5 or 6 states that really drive a significant portion of our business. I think from a growth standpoint, there are bigger we continue to look at those top 5, 6 states where there are growth opportunities. We want to protect and expand where we've got good market penetration and make sure that we're doing what's right in terms of making sure we are the place of choice. But also take our brand and expand it into areas that makes sense.

Speaker 2

So I think the good news about our geographic expansion on new center development is that it's in places where we're well known, but we've also got opportunities in new areas. But I think that we've highlighted kind of those higher cost areas in California, specifically in rent and labor, that continue to we continue to work with those franchisees on how to best maximize their 4 wall.

Speaker 8

Great. Thanks. Take care. Good luck.

Speaker 1

One real quick follow-up. I missed, Corin, when you asked about the split of the NCOs over the balance of the year, as we're looking at that Q3, Q4, it's pretty evenly balanced between the two quarters.

Speaker 2

Thanks, Simeon.

Operator

Thank you. And our next question coming from the line of Jonathan Komp with Baird. Your line is open.

Speaker 9

Yes. Hi, good morning. Hi, David.

Speaker 2

Hey, John. How are you?

Speaker 9

Good. Thank you. I want to follow-up just as you look at the second half performance, I think you're implying same store sales slightly negative overall and certainly, it looks like maybe more pressure on mature stores. So could you maybe just comment a little bit more broadly what you're seeing at mature stores? And then David, as you think about moving the needle, is it really refocusing on a few specific initiatives already in place?

Speaker 9

Or are there more new initiatives needed within the action plans?

Speaker 1

I'll start. So yes, that's fair what you said. More pressure on the mature centers. As you think about those ramping centers, there's more of a tailwind there just based on the function of being new to market, etcetera. And also, we called out that, although a small group, our NCOs that have started out with the new playbook have been doing very, very well.

Speaker 1

But as we look between ramping and mature, definitely more pressure on the mature centers to get that new guest and to build on the transaction. And so that's where you think about the second half, exactly what you said is accurate.

Speaker 2

And John, listen, I think at a high level, 1st and foremost, it's just those focus on like the key 3 or 4 things that I outlined in my opening comments. To your question about, hey, are there some things that we need to do differently? The answer is yes. We will continue to focus on those initiatives that we launched in Q1 that are working, particularly the national media spend and the emphasis on local marketing, but we know we need to do more. They have not those initiatives on their own have not produced enough.

Speaker 2

So that's part of our challenge and our opportunity working with our franchisees to really identify what are those couple of things and we've got some ideas that we'll certainly keep you apprised of as we move along in our journey. But we're going to stay hyper focused on those key priorities and not get distracted, but really drive new guests and increase transactions that again feeds that flywheel that allows our franchisees to continue to reinvest in this amazing brand.

Speaker 1

As it relates to the guide overall, I would also say, when you look at the $930,000,000 to $950,000,000 in that second half, it certainly is assuming that there is continued pressure in the second half. The $950,000,000 would assume that we're basically kind of where we have been. On the $930,000,000 though, that's going to assume that there is some potential allowance for a downtrend and that's how we've looked at it.

Speaker 9

Okay, that's helpful. Thank you. And then David, since this is the first time to speak with you in a while, could you just maybe share your thoughts on the laser initiative? Why is that the right thing to focus on at this stage as you're refocusing on the overall base? Or it's said differently, is that something you think could materially move the needle on unit economics going into next year?

Speaker 9

Just curious your thoughts there. Thanks again.

Speaker 2

Yes. Thank you, John. Hey, listen, I think we start with what does the brand give us permission to do and what does our guests give us permission to do. So as we thought about and John, you know me well enough that I'm not going to do things that are sort of 6 rings outside the bull's eye. Hair removal via another modality, I.

Speaker 2

E. Laser made sense to us and our guests told us yes, we would be willing to do that and we would trust EWC to deliver that service. So we felt like we absolutely had permission from a brand standpoint and a guest standpoint. When we did sort of the business case around this, it can have a material impact on the financial health of our franchisees. So we're excited about, A, just the opportunity to show our franchisees.

Speaker 2

That's why we're expanding the pilot. The initial rollout of the pilot in New York has gone very well. We have franchisees that are raising their hands saying, hey, I want to try this. I want to put this into our center. And we'll continue to, as we've said before, be very thoughtful about the pilot.

Speaker 2

But we do think this could be a materially positive impact on those centers that take up laser as an additional service.

Speaker 9

Great. Thank you.

Speaker 2

Thank you, John.

Operator

Thank you. Our next question coming from the line of Kelly Kreyger with Citi. Your line is open.

Speaker 7

Hi, thank you. Welcome back, David.

Speaker 10

Hi, Kelly.

Operator

Just a

Speaker 6

question on the macro. Can you just talk about what you're seeing from a customer cohort perspective, maybe an income perspective, what happened throughout the quarter versus your expectations and versus 1Q just given the call out of the weakening macro? And then just secondly, I'm just curious if you're what you're planning to do with the promotional strategy, are you going to use the Wax Pass promotions as a tool to kind of go after those lapsed and new guests? Thank you.

Speaker 2

Yes, Kelly, thanks. I think from a macro standpoint, the great news is that still approximately 75% of our revenue is coming from our core guests. That guest that has a wax pass or is there on a regular basis. So we feel good about that portion of it. And candidly that customer segment for us has higher household income is probably a bit more immune to the macroeconomic situation.

Speaker 2

Where we've seen the drop off is in what we historically have called that episodic guest or the guest that comes in on occasion. And we through our consumer surveys, we've seen that that the macroeconomic situation has impacted that guest. So we need to be creative about how we get that guest back into the center. But it is a very positive note that the behavior, the frequency, the rate with which our best guests are coming in continue to do so. We've got to drive new guests into the system that as we talked about a key priority.

Speaker 2

But that's really sort of how that breaks out from that guest cohort. Promotional strategy, obviously, we have those promotions around the 9 plus 3. We need to think more creatively about other opportunities. We launched a 6 plus 2 wax pass out in California to help those folks that might not be able to afford a 9 plus 3 that was taken up very well. So we will continue to look at, do we have the right pricing, do we have the right promotional strategy.

Speaker 2

By no means will EWC ever be a discount brand. We don't need to do that, But where we can get the use of promotion is really to get that guest, that new guest into the center or a lapsed guest back into the center. So that again, with the services that we provide, we can get them on that wax pass and make them a loyal EWC guest.

Speaker 6

Thank you. And just question on the sort of implied well, I guess, speaking specifically about your 2024 cohort of new stores, just based on the revised guidance, it doesn't look like you're expecting much of a contribution from new stores. Maybe there's something else offsetting that, like even excluding the 53rd week impact. It doesn't seem like the same source or the system wide sales guidance expects much contribution for that. So just curious how that 2024 new store cohort is performing versus expectations in your outlook for the year?

Speaker 1

Sure. So let's start with expectations. So we launched an NCO playbook late in Q1. And so Q2 with the 8 net new centers that we have opened, we've seen really good results from a standpoint of system wide sales as well as their tickets. And that's a function of them really following this playbook, making sure that they were spending money in local marketing, that they were staffed appropriately and that they had a strong guest list at opening day.

Speaker 1

So that has been very exciting to see and we feel very good about that. As far as the overall impact with that number 27% to 32%, there's not a huge impact on the top line of what we are expecting from a system wide sales. So you're correct in that regard.

Speaker 5

Thank you.

Speaker 4

Thanks, Kelly. Thank

Operator

you. And John Heinbockel, your line is now open. Hey, David.

Speaker 10

I wanted to start with, when you look at new guests, I don't know what the volume is, right, that you're bringing in a year. But maybe remind us the percent of new guests that are wax pass, the percent that start episodic. And then you've got new content out there, right, new creative around really focusing on the wax specialists, which I think is quite differentiated. When you think about the opportunity, is the message is the right one, but maybe not in the right channels? What do you think the message still needs to be refined?

Speaker 10

Where's the bigger opportunity, the message or how you're delivering it?

Speaker 2

Hey, John. So, I was worried when I didn't hear you asking a question that maybe you were boycotting me. So it's nice to hear your voice again, John. Thanks. Listen, on New Guest, we have a very deliberate sort of selling process to get them into a wax pass, right.

Speaker 2

And as you know, we've had a 1st wax free promise since the inception of the brand that continues to help us drive new guests into the brand. And what we've seen is that there is an opportunity to offer that guest on their first visit a pretty attractive 3 plus one opportunity, right? We're testing this. We think that makes sense. While we have the guests in there, they've been wowed.

Speaker 2

That's a little bit of a departure from the past, but to try to get them into the system faster. And we think that's something that we continue to roll out with our franchise and work on to get them into the back into the center rather than kind of wait to the 3rd or 4th visit. And so as you know, once we convert those to a wax pass that essentially becomes a membership light model and we get to enjoy more lifetime value from them. On the marketing piece, we feel great about our creative. As I said in my opening comments that we're going to continue to focus on ROI and our marketing spend.

Speaker 2

So right channel, right creative, right messaging. We continue to refine that. Andrea and her team are always looking at what makes sense. We think highlighting the wax specialists made absolute sense. They are the ones that have the most trusted relationship with our guests and highlight why we're the best in the industry to do that.

Speaker 2

But that's something we continually tweak to make sure we're sending the right message and driving the right results.

Speaker 10

And maybe because I know you lapsed guests are not as important in the scheme of things, right, as new guests. But can you size that when I think about how many lapsed guests you have, right? I don't know if it's several 100,000, it's probably not a 1,000,000, but maybe it is. The size of that and then what you think is 10% a fair conversion rate or is that overly optimistic?

Speaker 2

On new guests or last guest, John?

Speaker 10

Last guests. Yes. Good.

Speaker 2

Yes. I think that's fair. One of the things that we probably got a million plus emails addresses of guests that have not visited us in the past 6 months. So our opportunity to go drive those folks back into the system is critically important. We have new guest targets.

Speaker 2

We have conversion rate targets that we want to get back to get those folks back in the system. Again, that lapsed guest a lot of the feedback has been more challenging economic situation these days for those guests and we've seen that challenge. So we continue to think about how we're creative and how we can be really offer unique opportunities to incent them to come back in. But I think from a prioritization because I got to ask the question, lapsed guests are incredibly important to us because they've come to us. It's very rare that we see guests, I'm not coming back there because I had a lousy experience.

Speaker 2

That's not the situation. So we know we've got guests out there that would love to come back. We just got to make it worth their while to come back in.

Speaker 4

Okay. Thank you.

Speaker 2

All right, John. Thank you.

Operator

Thank you. I'm showing no further questions in the queue at this time. I will now turn the conference back to Mr. David Burke for any closing remarks.

Speaker 2

Thank you, operator. Thank you all very much for joining us. Again, as I said at the outset, as excited as I was when I came on board in 2018, that enthusiasm, optimism and excitement is back in tenfold as I reenter. I've gotten even in a few short hours that I've been here an incredibly strong welcome from our associates, from franchisees and we certainly look forward to keeping you all posted on the progress we're making in the coming weeks months. So thank you all for joining us today.

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Earnings Conference Call
European Wax Center Q2 2024
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