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

We're very happy to have David Berg and David Willis from European Wax Center here for a fireside chat. We appreciate your interest, and thanks, guys, for coming.

Thanks for having us, Lorraine.

Happy to have you in Miami.

Glad to be here.

It's snowing in New York today. So we're all thrilled to be here. I wanted to just kick it off with a bigger picture question about your target customer. Who is she? How often does she come in? What are the attributes that you see in your customer?

Well, your pronoun was right. Today, our guest profile skews about 95% female. So from a demographic standpoint, think kind of 35- to 40-year old higher household income, about 110% of household income and skews a bit more suburban. So that said, we think there's a significant opportunity for us with the male customer, and we're going after the male customer with a little bit more vengeance. From a guest kind of who visits us, we have something that's called Wax Pass, which many of the listeners, I'm sure are aware of. And this is kind of our membership light model where you buy a Wax Pass for body part specific and you pay for 9 services and get either 11 or 12, depending upon if it's during our promotion. And that Wax Pass customer generally comes on average about 7.5x a year. We then helicopter up to our best guests. So our top quintile comes 9.5 x a year. And the great news about these Wax Pass overs, that makes up over 2/3 of our service revenue. So we've kind of ring-fenced that guest is doing great, coming as often, pre-economic downturn as post economic downturn and spending as much, if not more, money with us. So that's kind of our core guests today.

Okay. And then what are the most popular services and maybe give us an idea of the price points?

Yes. So we have services that started $12 and run up in the -- depending upon the geography, probably top end around $80. We skew 80-plus percent as body services and the other 15-plus percent, 20% in face services. The most popular service is the Brazilian bikini service followed by eyebrows is our second most popular service.

Okay. And what's the size of the market? What share do you have? And then maybe talk a little bit about the other modalities and the share that they have as well?

Sure. So when we talk about market size and total addressable market, we talk in terms of the U.S. So about an $18 billion total addressable market in the U.S. for hair removal. In our modality, out-of-home waxing, it's growing at about 8.5% to 9% CAGR. So kind of 2.5x the CAGR of some of the other modalities like sugaring or laser, our competitive set, there are a couple of regional players, but the vast majority of our competitors set are the mom-and-pop salon. So 10,000-plus very, very fragmented market. And even at our nearly $900 million of system-wide revenue is still a very small percentage in terms of overall market share. We think it's our opportunity to continue to take -- grow with market share but also take market share within the addressable market that we have.

I think the number one question I always get is around laser. And if you've seen any developments in laser that make it more effective across a broader group of people or cheaper. That seems like the biggest competitive threat. Just curious for an update on that.

Yes. So my short answer would be no, not cheaper and not more effective. The -- we've done a fair amount of work around laser. It gets a lot of publicity -- probably more publicity than some of the other hair removal modalities, particularly on the coast. And we certainly have seen private equity making investments into laser concepts. There's a couple of call-outs. One would be that it is, we think it's a different customer based upon our consumer surveys. It's a more expensive service, probably 40 percentage-ish of the guests that we talked to would not consider it because of the expense. It doesn't work on all body types and all hair types. So there are some needs to augment your laser with a different modality of hair removal like shaving or waxing. We do keep an eye when laser comes into a DMA where we are and what kind of impact that has on our business. And we haven't seen a degradation in terms of our transactions, or our tickets when laser comes in. So we keep an eye on it. Candidly, there's a part of us that we like to hear more people talking about hair removal. So all ships rise as laser gets more publicity.

And then shifting back to the consumer, how are they holding up, given inflationary pressures and all the shocks we've seen?

Yes. D.W., do you want to maybe just talk through.

You bet. So David touched on this a little bit. The majority of our revenues, we feel we can really ring fence and not worry about it. Those Wax Pass holders are top quintile guests. They're coming with the exact same visit frequency that they've been coming over the last several years. In fact, they're spending a little bit more money with us as well. We've seen since really exiting second quarter last year, ticket tends to be quite stable. We still think there's opportunity. We know that there's a very small part of our guest segment file that probably was coming 5 times a year on average is now coming 4 times a year. We know who she is, and we're doing some outreach and messaging to try to get her back on her regular visit frequency. But all in, we're feeling pretty good about the overall guest profile.

I think one of the common misperceptions that I always hear is that waxing is like a spa, like a treat. And I think what you've seen with the Wax Pass as people view it as more of their personal care routine or necessity? And so what you're seeing with the Wax Pass or more loyal guests as steady as that?

It really -- And I'm David. It really is. This is part of our guest nondiscretionary personal care. This isn't sort of okay, I'm going to go to dance or a date or a special event, that's not -- this is our best guests are coming in 8, 9, 10 times a year on a regular rhythm as part of their regular hygiene. Candidly, as hair growth goes, so does the need to take it off. So it's not -- it is a nondiscretionary service and that's -- it's great from our franchisees predictability that they know that guest is coming in, so they know that revenue stream, and it's also we reward that guest with the economical bundle of the Wax Pass to reward and incent them to come in on that regular basis.

And you talked about the frequency going from 5 to 4. What are you doing specifically to try to reengage that guest?

We're using our -- we're building our CRM muscle, and we are segmenting them with different -- not just messages but I should say, not so much just different promotions, but really messaging. If she was coming on a regular basis, we don't think we need to offer a heavy discount to get her back in there. But more -- the messaging profile that we're doing with each one of these segments is slightly different, but it's mainly outreach, trying to get her back in center.

And then what about promotions? You've added some new promotions, some additional weeks of promotions. Can you talk a little bit about that and then how the economics flow to you versus the franchise?

Yes. So as a leading -- really category killer out-of-home wax, we don't believe we need to be a discount kind of a business, and we're not. And I think we -- promotion maybe is a word that we perhaps misconstrued, but let me be really crystal clear. We have 2 promotional periods around our Wax Pass sales. So if you buy a Wax Pass normally, as I said, you buy 9 and get 2 free. During our promotional periods, which are May and June and November and December, you pay for 9 and get 12, so 9 plus 3, that's really our only promotion. We certainly have limited time offer. Retail product that we do intentionally to run out of supply to build demand and get excitement to have attachment for our guests, in addition to our regular 30 SKUs that we carry in the center. But we are not an overly discounting brand nor do I think we need to be. One promotion we did run in 2022,was something we call a 3 plus 1 Wax Pass. So as it implies, same 25% discount as 9 plus 3, but you bought 3 Wax Passes and you got the benefit of 4 visits. And we've always offered that to students, but we offered it more broadly late Q3, Q4 of last year to really help that guests that was probably feeling some of the inflationary impacts to say, okay, maybe you can't afford $500 or $600, full Wax Pass, let's get you on a Wax Pass to do -- to get you back into the brand, and we saw a really nice lift in terms of the 3 plus 1 Wax Passes that we're able to sell. But as importantly, we've retargeted those guests that bought a 3 plus 1 Wax Pass and introduced them to the 9 plus 3, and we saw a very nice lift in terms of people converting into 9 plus 3, which we think was incremental to our business. We don't have any of those promotions planned for 2023 other than our traditional May, June, November, December time frame around the 9 plus 3 Wax Pass promo.

There were some limitations on the 3 plus 1 as well.

Yes. Great color. The 3 -- so our typical Wax Pass, the 9 plus 2 or 9 plus 3 does not have an expiration date. We did put an expiration date on the 3 plus 1 Wax Pass holder.

And on a similar note, maybe we can talk a little bit about pricing. Historically, you've been successful raising prices in the past. How are you thinking about that this year? How are you stratifying price by maybe geography or service?

So throughout the country, we have about 7 different price zones. As the franchisor, each year we recommend to the network pricing that we think they should take, and that's informed from consumer research, price elasticity studies, kind of over the history of the brand, we found ourselves in the pattern of taking price every other year. In each of the last 2 years, we took price in the first quarter of each of the last 2 fiscal years. So on all service SKUs in 2021, and then we targeted the body service SKUs in 2022. As David mentioned, with 60% of our services on a Wax Pass, it takes about a full year to get the benefit of a price increase because, obviously, if we sold a price increase -- a Wax Pass before the price increase, that guest will continue using that over the course of the next year. We're continuing to do some homework on the guests and some price elasticity work. The guidance that we gave for fiscal 2023 does not assume that we'll take price this year, but we're doing some more homework on that to the extent that analysis suggests that we should take more price, we'll obviously do that and update our outlook based on that.

Okay. And then shifting back to Wax Pass. Can you talk about how Wax Pass sales have gone in the past couple of quarters? And then how that informs your ability to predict your business over the next several quarters?

We really talk about the Wax Pass as the harbinger or the leading indicator of the health of our business. So those 2 promotional periods, Lorraine, that I spoke to you, we saw in both of those 2 month periods 16% lift in Wax Pass sales from the prior year in both our May-June promotion and our November-December promotion. So we feel great about that lift in the number of folks that are committing to come into the center 10-plus times a year. And similarly, as we've gotten into 2023, even though it's not promotional, we continue to be very pleased with the Wax Pass sales. So it is a great indicator. It's staying strong. And as we've said many times, that 60-plus percent of our revenues are coming from most folks on Wax Passes.

And then could you talk about some of the initiatives in place to drive rebookings and maybe increase the purchase frequency?

Yes. So rebooking is a really important metric for us. We know if you rebook much more likely to actually come to that visit, 25 or 30 days after you've made your rebooking appointment. So we took some of our corporate dollars and ran a contest. We know that contest with our field associates that work for our employees of our franchisees are very effective in driving the kind of behavior that we want to see. So we ran a rebooking contest in late 2022 and saw a significant lift, about 600, 700 basis point lift in rebooking from 45% to 52% rebooking. So right now, if you kind of -- if you decouple how our rebookings are made, about 50%, a little over 50% are in center, about 30% online and then the rest of it on the app. So that just continues. It's another one of those great harbingers to say the health of the business as folks rebook that will come back. We've extended that contest into 2023 to continue to drive that behavior. And similarly, as we revamp our rewards program, we specifically reward our guests for rebooking.

And what is the contest mean? Is that an incentive for the receptionist for the esthetician?

Contesters money. Yes. This is basically incenting $500 or $1,000 to those folks that are the top 25 or top 50 folks that excel on rebooking. So it's that simple.

Makes a lot of sense. Moving on to product. Retail product sales are very important to the franchisees. Can you just talk us through the evolution of your product offering, where you stand today? And then any plans to drive that as a higher percentage of the mix?

Sure, you want to go?

Sure. So I'll start with kind of the overall portfolio is about 30 different retail product SKUs. If I look at our average franchise 4-wall P&L, retail products represent on average about 7%. So 93% of their revenues are really coming from offering the waxing services themselves. Attachment rates have kind of been in the low teens. These are products really designed to enhance the efficacy of the service and treat the skin in between waxing appointments. Our lineup of retail products, we introduced in 2021, we saw a nice lift in attachment. Now the best retailers in the network are converting about 20% of their tickets will include the sale of a retail product. We really want our guests to look at our waxers as that consultative expert and more recommend, we don't want our guests to feel like we're doing a hard core sales pitch while we're in the wax suite. So we found that really the highest conversion rates in our -- from our best retailers are those more experienced waxers that can talk about the benefits that these products will provide our guests and treat the skin in between. There are meaningful revenue generators for us, though, about 60% of our revenues come in the form of product. About half of that are the wholesale products, the wax that's used in every single service administered to a guest and the other half in terms of retail products. So we think it's a -- we have decent conversion rates, but we feel like there's opportunity to improve those as well.

And what's the incentive structure for the waxer to sell a product?

So most of our franchisees will provide incentive compensation as a percentage of retail attachment. So there's 3 ways our waxers on average get paid. One is a base hourly rate. Obviously, our customers provide tips. And then what we have is incentive compensation. Most of our franchisees will incentivized based on retail attachment, a percentage of service revenues and what we call services per ticket. As we think about trying to maximize revenue per wax suite hour, our waxers make more money and our franchisees make more money if they can provide 2 or 3 services in that same 15-minute appointment. So a lot of our folks will incentivize our waxers on services per ticket.

So they'll be in suite, they'll be recommending a separate body part also.

That's exactly right.

Okay. And then what about -- what's the incentive structure for the waxers as they become better and better? So more effective at getting 2 appointments into a 30-minute time frame, things like that.

That's exactly right. So first, they will typically have a higher base rate. So just their flat hourly rate will be a little bit higher than the less experienced waxers. They're ultimately trying to drive more revenue per wax suite hour for that 15-minute appointment. So if they can do 2 or 3 services in that same 15-minute appointment, it's a larger dollar value ticket, they typically will get a percentage of that in the form of tips. So it really benefits both the waxer and the franchise owner.

And how is competition for estheticians and then your compensation as it compares to others?

So we -- our franchise owners can really commit to new candidates that we have -- as the market leader in the space, we can candidly commit a much higher level of volume, which translates to more income for those waxers. Our best franchisees really incentivize our waxers to be their own entrepreneurials. We can guarantee a certain level of tickets out of the gate, which I think makes us a very attractive employer of choice. But then those waxers can build their own books. They have our red level waxers, which are our most proficient waxers. They have a very loyal book of guests that like to visit them time in, time out. So that's how we really drive higher retention as well.

And you've been able to now, at this point, get as many waxers as you need?

We have. I think our average franchisee would say both the quantity and quality of the candidate pool has improved dramatically over the last several quarters. Coming out of COVID, there was a few markets that had permitting bottlenecks and licensing bottlenecks. So we talked a lot about in 2021 staffing and the need to recruit more waxers. Our network feels like they've got the right level, right number of waxers, and we spend a lot more time working with franchisees on utilization, scheduling efficiencies and retention strategies to get the wax from kind of begin or level up to expert level where they can make more money.

Great. And then moving over to new centers. This is a key to the European Wax story. Can you talk us through the new center economics, the cost to open a center breakeven maturity and then the consistency of how these centers ramp?

Yes. I think the good news is that it's incredibly consistent. So if we look at cohorts that are even 6, 8, 9, 10 years old, the ramping has been very similar across all cohorts. In fact, in the last year, we've actually seen better first and second year volumes than we have in years past. But incredibly consistent ramp. So the sort of basic economics are $350,000 to open a European Wax Center. Think of this as a typical kind of 1,300 to 1,400 square foot box in a retail strip center, 6 or 7 wax suites, breakeven at month 14, and at maturity by year 5, earning 60% cash-on-cash returns. Average unit volume at year 5, about $1.1 million, low 20% EBITDA margins at that point. And really, Lorraine, what that does is it that 60% cash-on-cash return allows our franchisees to reinvest and be incented to reinvest in the business. So when we talk about new center growth, and we mentioned this in our earnings call last week that 99% of the 91 new centers we opened last year were done by our current franchisees. So they love this brand. They love to reinvest in it. And the faster we can get them to ramp, the more quickly they'll reinvest and the flywheel just accelerates.

And it seems that some new centers are opening at a higher level than when we had initially started talking about it a few years ago. What's different about those? And is that something that you can scale across more of the new openings?

Yes. D.W., do you want to may just talk about some of the initiatives we're...