European Wax Center, Inc. (EWCZ) Earnings Call Transcript & Summary

Hi, everyone, it's Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst, and it is my pleasure to welcome management of European Wax Center. This is their inaugural presence, visit or virtual visit at the Global Retail and Consumer Conference. So welcome team. A couple of housekeeping items. First, to those listening to the European Wax Center fireside chat, please take a moment to review the company's disclosure statement included on Slide 2 of the presentation. I have a disclosure to read on my side. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to our Morgan Stanley sales representative. Quick intro for me before I turn it over to Dave. This is a pretty exciting story. We got to know them over in the last 12 months, and it's one of our favorite business models that we cover. Without patronizing, we think management is world-class, high profitable model, both to the franchisee and to the company. And it's an exciting expansion story that we look forward to covering into the future. So with that, I'm going to turn over the meeting to David Berg to introduce the management team and say some few words, and then we'll get into the Q&A. And I do have fireside Q&A open. So if investors have questions, feel free to post them.

Thanks, Simeon. It's really a great pleasure to be here today in total European Wax Center. Let me introduce the folks on the call with us today. I'm David Berg, the CEO; Jennifer Vanderveldt, our Chief Financial Officer; David Willis, our COO; and Amir Yeganehjoo, who leads our finance and Investor Relations. Again, Simeon, thank you so much for having us. As you mentioned, EWCZ as we're traded is a category leader. In fact, really, our founders of 15-plus years ago, saw an opportunity to professionalize the home wax and hair removal business. And in doing so, really created the category. And we remain a category leader today in a very, very highly fragmented market, that is significant, about an $18 billion total addressable market here in the United States that continues to grow. We possess a strong business model that is asset light. We're 99% franchise and have a proven track record of success. We have a mantra leadership team is safe and views must match. And we're very proud of sort of opening a couple of quarters as a public company, but we've done that, and we'll continue to do so. We have several competitive advantages. It is a franchise business. It's asset light. Our franchisees earn a 60% cash-on-cash return at maturity, which makes us a very attractive franchise or partner. One of the best things it does is, in sense, our franchisees to reinvest in the brand. You'll hear from us throughout the day-to-day that 85% plus of our new unit growth is coming from our current franchisee base. It allows us to really work with them strategically and not have to go out and chase some franchisees in the system. One of the nicest things about the model is a recurring revenue model, our guests view their services as non-discretionary. It's repeatable, it's affordable and candidly, anybody with hair can benefit from it, because hair grows back. We have proprietary wax. We have proprietary retail products. We spent a lot of time on planning and will since the inception of the brand, hygiene has an absolute critical focus for us. That's becoming even more important as we come out of COVID. All of these can help keep our guests extremely loyal. We added the loyalty and trust by offering something that's call Wax Pass which you all should sort of think of, a subscription light model. It gives our guests a discount repurchasing multiple services at one-time and it ensured for our franchisees, a regular and predictable revenue model. We continue to innovate for the services and our products. We see potential to grow from our current 833 centers at the end of the third quarter to over 3,000 centers in the United States. And our long-term growth outlook improved a couple of things. One is high single-digit unit and comp growth. And second, low double-digit system-wide sales and revenue growth and low to mid-teens EBITDA growth that we work for. Simeon, thank you again for having us. I'm happy to turn it over to you to start the discussion.

Great. Thank you, and thanks for the introduction. So Dave, maybe we could start with the competitive landscape. What you're seeing -- I mean, is a bit of reopening. I think with getting waxes done and seeing people in the service business. And I'll tie this in, waxing is done in many different formats in the service or the beauty services industry. So how do you really track real time? How you're doing? How the competitive landscape is? And how you're growing relative to the industry?

There's a couple of things, Simeon. First of all, all of our centers are open, so we don't have any centers that are closed. We -- clearly, in the spring of 2020, all of our centers have to close as a result of the health mandates across the country. They open on a staggered basis. We knew that as we reopened our guests were going to come back. So there's pent-up demand. They had some personal services. So that didn't surprise us. Nor were we surprised when the guests got back on the regular vision. So as we talked to the non-discretionary nature of out-of-home waxing and the royalty to the EWC brand, and we saw that, such that within a 12-month period of time, we were at or above where we were in terms of our 2019 performance. We thought -- we think it's best to compare against 2019 like-for-like and all the centers are open, except for California. And in Q2 and Q3, we called out California specifically, that, that had a 450 basis points to 500 basis points negative impact on us as they lagged. They just -- they were closed longer than week than the rest of the country. So 43 of the states are doing fantastic, and California is starting to -- we usually see some good momentum there. From a competitive standpoint, Simeon, I mentioned sort of our focus on hygiene. We doubled down our efforts during COVID. We brought a third-party safety expert in to really walk from the front door all the way to the back of the house to look at every single touch point, not just for our guests, but also for our associates. And it was equally important that our associates felt like it was safe to come back in, and we just keep hygiene front and center. There are certainly other salons, When you talked about the fragmentation market, there are 10,000-plus mom-and-pop salons that are doing wax. There are also high end spas that do waxing as an ancillary service. Some of that are dermatology and skin care services. All we do is wax. We focus on waxing, and we will continue to do so. For a couple of data points to your questions. We know that one in 5 of our guests coming into us and with closed borders, who is coming from a competitor. We engage a third-party international and consulting group, to take a look at the market in the old time with 5% to 10% of mom and pops would not open on October. We did not have a single franchise in sales as a direct result of COVID. I think it speaks to the strength of our franchise network, the work, that partnership we've had with them, and we've come back strong such that everybody is open. We hear a lot, Simeon, certainly of late and on the coast about lazy. And we certainly keep an eye on competitive services like sugar and laser. Our modality of the wax is growing at 2.5x a phase of the other modalities. So we couple that with our leadership position, a 7x bigger in terms of unit comp, 10x bigger in terms of revenue as our next biggest competitor, we feel like we're really well put and in the right spot. Laser, there's some companies that are going public, they're talking about going public. I think in some ways, all ships are going to rise. There's going to be a little bit more awareness around hair removal, that's great. It's a different customer than we have. It's more expensive. It certainly takes a much more significant capital investment. Our centers, we can open our franchisees open for about $350,000. There isn't a high a new form and specialized equipment. We don't have to have a position. But I think the franchise ability of laser is going to be a little bit more difficult than what we have. So we keep an eye on things. I think we believe we'll continue to take market share from the mom and pops and are really pleased with the benefit out of that.

Dave, connected to that, I wanted to ask why does European Wax Center win? You're clearly winning, and you just said we're taking share from mom and pops. What are the differentiating attributes? And obviously I can try to answer, but I think it's helpful to frame it on year-on-year.

No, it's a great question and I think there is, I think there's 3 or 4 things. And finally, is actually go back to the inception of brand, what the founders are, was the opportunity to professionalize out of home wax, this it is an relegated for the back room, not the training. So if I look at sort of the 3 or 4 things that are different that are differently chosen, one is that we will focus on hygiene. As I said at the outset only become more important. Second is our over investing in training. So every one of our, justification, what we call wax structure has to be licensed by the phase in which they operate. In addition to that, they have to go through our training certification program to become a wax specialist at European Wax Center and that's not just about how do I make sure how to apply the wax at the right temperature, so that it's efficacious as possible, but it's also around that who gets this done. And how do I make sure that guest, if we talk about one of our values that we delight our guests and every single service that we provide and every single center, the training has always them something that's critically equivalent important. Third, just from our pure sales standpoint, we've been able to make investments from a technology standpoint, particularly around the best places to put business. We put our brand assets with during COVID, believe it or not, which led that timing actually throughout the portfolio. But it allows us to have a multiple price cubes, gain more flexibility through the -- our pricing across the network. But as importantly, we invested in these best technology, the best experienced technology. So in every wax and so for those of you that aren't familiar typical European Wax Center is above 1500 square 4 feet and there are 7 wax [ streets ] that are around 100 square feet within each wax street will be got an eye to the wax specialists to come in and say, hey, Simeon within 5 weeks ago always ever gone into legs wax, what cost did he buy? When was his last visit? How does his reward points look like? And then speak to the consultant and seller and say, hey, would you like to add our service? Hey, would you like to add on a product that adds to the efficacy of the sort of the hair removal service. So I think those kind of 4, 5 points just make us, just make though. That's why we're differentiated, going from that competitive set.

Yes. And thanks for the leg waxing color. Can you mention high-end spa? And I wanted to ask, because, again for the sake of people listening, what do you aspire to be perceived as a high-end spa with value of the mom and pop? And can you, should you be the highest end spa given your scale and then maybe kind of incorporate the new build the new interior look to it. So just understand where you fit into the market.

Yes. So we're not ever going to be the everyday low price folks, and we're not ever going to be the change our hotspot. We think that we want you to have a delightful experience at fair price. So we know that given our experience, we are a market leader and folks follow us. If we take price within 3 to 6 months, the rest of the industry follow from a pricing standpoint. We are right in the zip to with everybody else from a pricing standpoint, the high end spa with little more expenses in New York. And we don't -- we don't view that, given the margin profile that our franchisees have in the EBITDA margin that they can drive from a 4-wall standpoint. We do aspire the next-generation of the center is really focused around how do we make it most profitable for the franchisees and continue to enhance that type of sets. So we make it easier for the guests to navigate their way through. We've gone through contract. We have contact with checking now. So we can be sitting down at Starbucks. When you took a retail food center where we are, and you get a notice patient with your black specialists when you're ready to do improvements, you come in, you don't have to talk to anybody, you go immediately into the wax room and get service. So that driving of that revenue optimization within the wax fleet is critically important to our franchisees. They care about how much money that will need. So -- and the look and feel that has really super, fine, white -- with receptive deal to be there. But honestly, sort of the day and age of sitting in a waiting room is gone, and people would much rather be -- I know my appointment is at 11:00, I get in, I'm going to see my wax specialist at 11:00 and 11:15 I'm off the road and wax specialist, can get it done.

One more on the sort of background, and I'm going to play to -- it's about service and tracking service levels and making sure that it's consistent, because I think you mentioned hygiene, you mentioned guest service and overinvestment in training. So how maniacal are you about tracking, I don't know if it's customer satisfaction or even your employee to make sure that, that experience is consistent every single time?

Yes. So you know, I've spent most of my career in franchising, it came on a hospitality. And if you got a lot of the experience in the hotel, you can go with $1 in New York. The same is true for us. So we have to have and make sure the same experience in a 10-year-old center on the Upper East side of Manhattan as we do in our new center in Lincoln, Nebraska. So that maniacal focus on training is absolutely there. So if you -- if [ David Roll ] is insisting or and the full teams are focused on that. What we did was, we built out a franchisee support appeal team. So we have partners and what we call franchise business consultants, partners with our franchisees across the country, and they're dedicated to a certain number of centers that they support. They help drive profitability, but as equally important to make sure we drive guest satisfaction. And we measure via NPS, like most of the retailers and restaurants and hotels. And we are very proud that we've added NPS for AE. And that again, in my career, the retailer and hospitality guys unheard of. But if you think about of Simeon from the intimacy of the service, the trust level between the guest and the efficient has to be there. And what we've been able to do is expand that, not just to the efficient such as a brand. So that consistency of service is there, and we are absolutely about measuring it. It's part of our weekly KPI report on leadership yet and we talk about every single day.

Great. I want to transition, but I'm going to -- one more preface before we transition to initiatives, is the marketplace and your growth within it. And I'll get more specific about some of the nuances in a second. But I would say this, the blind spot, I feel, for us and a lot of questions we've gotten from investors is, look, you have this massive TAM that you could grow into, you can get to the 3,000 stores. And we know there's tons of mom-and-pops out there. But we know that waxing is done in small places. And nail salon could do something, some public company that have a small sidebar of service and the question over time is how well do you understand, how deeply penetrated the market is such that as you expand at the rate you're going, there's not cannibalization, the productivity holds up, so that you can be much more deeply penetrated into these markets. So high level around that growth question and not cannibalizing and growing in a quality way.

Yes. I think there's a couple of things that we thought about. So when we talk about going from 833 to 3,000, a few points that are, I think, important. One, Simeon, I mean, that's our stand with box today, right. That's not an alternative format. That1,300 to 1,500 foot box that we know how every single day. 2 is that 75% of our growth is in coming from places where we already have a presence. So we don't have to go into these new markets. So this is -- you know us, we talk about protect and expand. But what we've got market share, and we're the leader, how do we continue to accelerate on that. Third is there isn't a single market where we are overpenetrated, where we're over densified. So when we did our studies to get to that 3,000 number, you can -- as you know, you can toggle cannibalization, right? So we put in very conservative cannibalization of 5% to 8%, which we think is absolutely fair, and that got us to that 3,000. The last, we're maturing our franchise business. We know we spent a lot of time sort of educating folks on that the founders use an area representative model and we went out to build franchisees. Those are all gone. So now we own the relationship directly with our franchisees. And what that's allowed us to do is partner with our franchisees and more and more private equity that are coming into our system and give exclusive rights to a territory or to a DMA. So if historically, you and I had franchises that were a couple of miles of -- we for 1.5 million plus AUV, something like that, hey, there's plan at the top of third center and that makes sense, the economics, the demographics all makes sense. You and I probably had hurt from it, right? If now you become that exclusive franchisee to that network, your 1.5 million so you might say, okay, I'll let a newer center, I'm going to build another center 1 mile from here, and I'm going to have 2 centers that are doing $1.3 million or $1.40 million each. So as we mature this, I mean, that's a lot easier play for us to continue to expand. So I thought maybe you're going slightly differently with that question, but why aren't you growing faster? Because we certainly know on asset-light models and great peers like Wingstop and Planet Fitness, they are going faster than this. We talk about practice work. And we talk about sort of 7% to 10% of our base, the governor for us is that, again, all the respect, as you know, on the broader plan business, love that model, it's a little bit different plan model -- a little bit different labor model for us. We have to have these licensing and certified expectations to clients to provide us consistent with service. It's not really that minimum wage kind of handing out of have the opportunity, sort of enjoy. So that's our governor. We do think with private equity coming in and well-capitalized franchisees that can grow that we can we can grow faster, but we think this is the right way to guide the market. So the good news is it's not a real estate problem. It's not a lack of interest problem. It's not because our franchisees don't want to do it. We're just trying to be really thoughtful to ensure that consistency.

Thanks for that, Dave. Following up on something you just said with private equity coming in. I think in the past, you've talked about having a balanced portfolio in terms of owners of the franchisees. But I keep hearing also private equity coming in. Does that create a disconnect, the private equities coming in, that means you have a lot of big owners or not necessarily?

Yes. It's a great question. What we've sort of guided through and kind of where we think the puck is going, is that we think in terms of a third or fourth. So right now, we have 255 and in -- that's a lot of franchisees. Again, that was born out was real or they just went out and find our franchisees and people have no any clue. We think a third of our network going forward. We'll continue to be the small business office and honestly is part of our retail. We think it's very important that we support small businesses. I love franchisees that have [indiscernible] 3, 4, 5 centers, because they're in them every day, they're investing in it, generally, how to invite working there, some working there, they know their guests and they're involved in TE. They will have third of our network that will be those smaller operators. Then we'll have roughly a third of our operators that are well capitalized on their own. And have an -- they've done successful, and they feel growth on their own. And those are folks that we're talking with about multiunit development leading in a particular geography where they already have sense. Then that last curve is probably a group of franchisees that either want to monetize or don't quite have the cash on your own to grow at a pace of handed life. And they take on a private equity product. So we've been doing, they would roll for just -- what I'm actually doing now -- we have 6 private equity firms in the system, matched up with some of our best franchisees and they, too, are -- while they all buy up on franchisee new locations, it's always in hand. A private equity firm, with partnership with their franchisee partner has to also commit to new unit growth. So if you can't just be -- I'm not going to go let some additional do a roll-off strategy, you've got to put these up masks on that door. So we still like that balance is great. And by no means, what I think private equity is [indiscernible] system. I think we [indiscernible] I mean to your question, those bigger groups will have more units, but we will still have a significant number of smaller franchisees, as I think it's great for the franchisees.

Yes. Makes sense. So now, 2 initiatives. I think it's better to maybe be broader on this question. So can we talk about the key strategic initiatives of preload wax pass or loyalty, tech stack, many other service initiatives to put it all in one, so we know what are the priorities for '22?