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

Good afternoon. Sorry. Happy 4:00 hour. It is my pleasure -- oh, I'm Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst. My pleasure to welcome European Wax Center to the Morgan Stanley Global Consumer & Retail Conference. It's another one of these companies that is first time here and first real eligible time to be here in person, so thank you. Represented by David Berg, CEO; and David Willis, COO and CFO. I'm going to read a quick disclosure, take a seat, and we'll get underway. 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 your Morgan Stanley sales representative. Okay. 33 minutes, I will take over most of the questions. If folks have questions, feel free to just wave your hand, and we'll get the runner to you.

Maybe let's start -- I wrote down consumer demand. But let's -- maybe -- I want to hear because this is the first time you're at this event.

Yes.

Not a new company. People know what Wax Center is all about. But can you talk about maybe what's misunderstood or what's underappreciated in the market, your perception based on the last 1.5 years or so of interaction then?

Sure. And Simeon, thank you for having us. We're delighted to be here. I think we IPO-ed in August of 2021. And even at that time, we kind of said, "Hey, where do we land, right?" We're franchise concepts, we're 99% franchise. So there are some elements of franchising and restaurants. And then there is a membership aspect to our business with something we call a Wax Pass, which is more akin into a Planet Fitness. So we had discussions about how do we present ourselves. In a way, there's a little bit of this tweener notion. So I think that perception, Simeon, is still out there about kind of exactly where do we land. I think we've hopefully done a good job. And in the next 32 minutes, maybe we can do a better job of saying, really, we're much more around a membership-light type of model that has a very recurring, predictable revenue model. We have tremendous stickiness and loyalty with our guests. And for those of you in the room that don't know, very simply, what we do is we remove hair from your body in an out-of-home waxing center. We have over 900 centers we call our store centers in the U.S. across the country and incredibly loyal guests to European Wax Center. And we have something that's called a Wax Pass. And the Wax Pass is really an economical bundle for our guests to come in and pay for 9 services and get the benefit of having 11 or 12 services. Twice a year, we offer 12 for the price of 9. And that guest, our top quintile of guests, kind of to move into the question about the consumer, Simeon, was the top quintile of guests is incredibly loyal and predictable, comes and visits us 10 times a year, spends over $500 a year with us. We know spends more money on retail products that we attach and refers us to more friends, which is one of the top ways that we drive new guests in the system. So long winded set up to say, I think if there was a misunderstanding, what we're trying to really make sure people understand that this is a recurring nondiscretionary service that we offer to our guests across the country.

So let's connect that back to the first question, which is softening consumer discretionary spending, wide range of outlooks for '23. And we're not talking about '23 per se. Are you seeing anything -- what -- we've talked about good or bad and behavior of your customer, high versus lower income or top or bottom tiers behaving different?

Yes. I think the answer is yes. I think we have seen some difference in our top decile versus our bottom decile. And we talked about this in our Q3 announcement that if you take sort of our top 4 deciles, so 80% of our guests, their behavior over the last 3 quarters has been consistent. In fact, our top decile guest is actually coming more often and spending more money with us over the last 2 quarters. So that's really good news for us. And that top 20% of our guest accounts for over 55% of our revenue. So we really ring-fence kind of that best guest that, that revenue is protected. Where we saw some softness at the end of Q2 and Q3, and we spoke to this in our earnings announcement, was it that episodic guest, that guest that doesn't have a Wax Pass that maybe comes in 3 or 4 or 5 times a year. She was spending more time in between each visit. So instead of coming every 40 days, she was coming every 47 or 48 days. I use a female pronoun here because 95% of our guests are female today. So that's been the difference. A reminder to the audience that our typical guest is -- skews at a higher household income, so north of $100,000, skews a little bit more suburban and is a little bit older. It's kind of that 38- to 41-year-old demographic. So probably a little bit more immune to some of the inflationary pressures that we've been feeling. But that lower-income episodic guests, we did see a little bit of softening in terms of the time between visits.

Apologies if this was implied, the episodic guess is what portion of sales?

Less than 10% of our sales.

Right. Got it. Okay. On the TAM, out-of-home waxing, where does your penetration sit today? Where does it go over time? And then we'll talk about the competitive set.

Okay. So the addressable market here in the U.S. for all sort of hair removal, that's shaving, laser, sugaring, waxing, is about $18 billion. Within our space, the out-of-home waxing category, that accounts for about $6.5 billion of that. If you think about where we are in terms of our revenue, we're still a small player. Even though we're the absolute undisputed leader, we're 7x bigger than our next biggest competitor from a unit count standpoint and over 10x bigger from a system-wide sales standpoint. The CAGR, the growth for our category, out-of-home maxing is growing at 2.5x the other modalities. So we kind of like where we're positioned as a leader in that category in the modality that's growing faster than the other hair removal options. And I think if you want me to go into competition, I'm happy to do that. I'll sort of...

Yes. I know. And layer that, who is your best competitor? And do they have any scale?

Yes. So the competitive set is quite interesting. There are a handful of regional out-of-home waxing stores or shops, the biggest of which is called waxing the city. They have about 150 centers. We're over 900, and there are a couple of other regional players that have 40 or 50 centers. The vast majority of our competitor set is highly fragmented, about 10,000 mom-and-pop out-of-home hair removal waxing salons. There are also ancillary services and some of the high-end day spas that would offer waxing. But our largest competitor set is really those independently owned salons, so highly fragmented market. Again, we feel great about the efficacy, the time efficiency that you get at European Wax Center, the amount of time that we spend training, the consistency across our entire network position in a market that's highly fragmented, and it's our opportunity to continue to take market share.

I want to jump to the franchise model for a minute. It seems like the European Wax is a best-in-class model and you're doing it with others executing the plan. So one, how do you maintain that level of differentiation on consistency in a, whatever, an intimate type of service that you're providing?

I think this really goes back to the beginning of the brand, right, and to the founders' credit. They really -- they focused on 3 things that were -- that have been with us for the past 20 years. First was hygiene. And I think today, that's become, certainly post COVID, that's been a condition precedent, really table stakes. But it's been part of our brand ethos from the get-go. In fact, when they created the brand in the early 2000s, they saw the opportunity because the out-of-home waxing at the time was really relegated to the back of the house of salons, not very hygienic. The estheticians probably weren't trained or licensed, which is the second element, a huge focus on training to ensure consistency across all of our centers. It's always been at the forefront of European Wax Center's brand value proposition. So every esthetician that works for European Wax Center has to be licensed in the state in which they operate, but they then go through our certification program. And until they go through that and pass that certification program, they won't be able to deliver a service to a guest. And then the third element is just the overall 360-degree guest experience, a real focus on making sure, one of our values is that we delight our guests. To make sure that we are enhancing our guest lives, we talk about a guest walking in and strutting out and having confidence after getting our service. Our NPS scores are near 80 across the network from an average standpoint. So those are the things, I think, from an operational standpoint that do differentiate us.

And the pipeline from IPO until today, our perception is that the interest is massive, and the economics are great. How has the interest rate environment changed, if anything, the demand or potential pipeline for interested franchisees?

Yes. D.W., you want to?

It really hasn't is the short answer. Most of our franchisees are very well capitalized. We've talked before about over the last couple of years, we've had a keen amount of interest from institutional shareholders that want to partner with our existing operators. Those folks that have entered the system have been very active from both an acquisition and a development perspective. And this interest rate environment really has not influenced or tempered their demand to open more centers or require -- expand their footprint. So up to this point, we've been very pleased. The visibility in our pipeline, over 90% of all new centers are coming from our existing franchisee base. So we're really pleased that our existing franchisees want to expand their footprint with us. We talk a lot about kind of the institutional capital-backed players, the multiunit developers because they're really the ones that are making commitments to develop bigger headline numbers, but we're equally interested in the mom-and-pop franchisees. They might own 3 or 4 centers today. They continue to want to build another 2 or 3 centers with us. So we're quite pleased with the demand we've seen on the license pipeline.

Okay. Something -- jumping back to competition for a minute. There is that independent channel. It's -- you mentioned the size of your business and how big the industry is. I guess there's a little bit of a blind spot because of the data that is available and the type of competitors. We know that there is hotel and lodging doing the service. There's probably nail salons, as you mentioned, that are doing this. It's the invisible capacity that creates maybe some uncertainty. You've been around this business for -- I'll mess up the number of years.

4 plus.

Okay, 4 plus. What have you learned about that invisible capacity that we don't appreciate?

Yes, I think there's -- the -- that's why we talk about independent salons, and that's probably a broader -- it includes that invisible capacity, Simeon, that you're talking about. I think there's a couple of data points. We knew -- we commissioned the study before IPO, kind of a state of the union on what was going on with the competitive set. And they opine that 5% to 10% of those folks would not make it through COVID. We saw evidence of that in 2021 as 1 in 5 of our new guests that came to us, and we had a 30% increase in new guests in 2021, 1 in 5 of those was coming from the competitive set. So we feel good about, again, our space in that category that's growing the fastest as the undisputed leader that we can continue to take market share from those folks, either -- as they don't meet the standards that we have and simply can't compete. I mean there are some other inherent scale advantages that we have. We take a 3% marketing fee from our franchisees, and we spend all that money. That's an EBITDA-neutral intake for us. That kind of marketing power and capacity is not had by our competitor set. We have a proprietary wax mix that you can only get it at European Wax Center. We have proprietary retail products that are actually clinically proven to help with -- to retard hair growth, that our competitor set doesn't have. So we feel like those -- and investments we've made in technology around the guest experience that, that mom-and-pop competitor just can't make.

Okay. One more on macro. Inflation or hyperinflation, is the business priced for it, both from an input cost, labor cost and then the pricing at the end market that -- or to the customer that you've done?

Yes. So we -- historically, probably when the founders ran the business, there was more of an ad hoc price taking. Since 2018, we've been more deliberate and scientific about our pricing, engaging in elasticity studies. So we took price in 2021, and we took that across all of our services. In 2022, we took price against particular body part services that candidly are quite inelastic. So the bikini services and Brazilian services are our #1 and #2 SKUs. And I think using that methodology, we take a look at -- we have assumptions on is there going to be a degradation in terms of number of services that we provide. We take a backward look to see if that was the case. And in both instances, where we've taken price, we haven't seen any kind of decline in ticket attrition. I think as we look forward, we haven't guided at all in 2023 about taking price. We do think that's something in our arsenal that we could pull if we needed to. And Simeon, given our leadership position, we see within 60 to 90 days that competition comes along in terms of our price leadership and follows.

So I infer then that the market hasn't moved past you in terms of price.

It has not. I think we will probably be marginally higher than the mom-and-pops. We will be lower than certainly the day spas, but we like to think about an amazing experience at a fair price that really, again, came out of the founders that was part of what their brand promise was.

With Wax Pass, you introduced a couple of smaller versions this year to drive frequency. I think it was a 4 for 3?

Yes.

How is the uptake? And what's the stickiness of these customers?

Yes. So we announced in Q3 that go back to that bottom quintile of guests, that episodic guest that was spending more time in between visits. We thought there was an opportunity for us to deliver a package to a more cost-conscious guest. And one of the things, having been in franchising a long time is that you don't want to introduce something new to the network. So we've always offered that 4 for 3 or 3 plus 1 as we call it, so buy 3 and get 4 services. That had always been an offer that we had in the network, but it was only offered to college students. So you think about probably the most cost-conscious consumer that we have. We just opened that up to a broader set of consumers. We were very pleased with the uptake that we got on it. But we looked at that with, really, a lifetime value mindset. It wasn't just let's go offer 3 plus 1 for 6 weeks to drive transactions. We really thought that this was an opportunity to introduce that cost-conscious guest into the brand. We now have those names of folks. We have a retargeting CRM effort going back to them, thanking them for their 3 plus 1 purchase and offering them the 9 plus 3 Wax Pass, plus an additional benefit with rewards points to get them on that more induced drug, which gets them stickier with that 9 plus 3. So that was kind of the lifetime value. The second thing we did for the cost-conscious guest was we drive average ticket in a couple of ways, and this is our buy-more stool -- leg of the stool. And that's -- you can attach more retail products, so make sure that you buy a retail product or have additional services. So we put an offer out in the fall that said, if you add a new service, so if you come in and just do your legs, if you added your underarms, you would get that for 50% off. Again, as with the 3 plus 1 guest, we're retargeting that guest that took that 50% off and offering them a Wax Pass with some additional incentive that get it for that body part.

Okay. 95% of the customer base, female.

Yes.

The 5%, have you seen an inflection in that? Or it's been fast growing because it's a small base and it continues to?