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

Okay, got it. So within your comp expectations for this year, is there any price that you expect to realize or mix from that?

We -- the guidance for this year would assume most of the comp is coming from an increase in transactions and tickets. We had talked a bit that we expect the comp to build throughout the year, so we think Q1 will be the low point. But we think the lion's share of the comp this year should come from initiatives where we're driving more transactions through the system, more so than price.

And then unit growth is a key tenet of the European Wax story. Can you talk about the new center economics, what's the cost to open, the breakeven, the maturity and then how consistent these centers have been to ramp?

Yes, so historically, they've ramped very consistently, really, across geography. So if you think about the upfront cost, this is a 1,400 to 1,500 square foot box. The standard configuration has 5 or 6 wax suites. It's about $400,000 to $450,000 to open a European Wax Center. Those costs obviously vary a bit market by market, based on GC labor costs. Historically, over the brand, year 1 revenues have been kind of $450,000. Franchisees, to get to 4-wall break even, typically by month 14, it generally follows a 4 to 5-year ramp. We consider a mature center around year 5, and historically, those have been throwing off $1 million in AUV and around 20% 4-wall EBITDA. The $400,000 to $450,000 has increased from -- used to be $350,000 a few years ago. So what we're really focused on is driving faster year 1 AUV ramps. We had our franchise conference a couple of weeks ago in Vegas, and we introduced what we call a new and improved NCO playbook. And all we've really done is we've studied in any given year, what I say, $450,000 is the average year 1 AUVs, we have centers that open far north of that every year. So we've studied our best performing centers that have opened over the last couple of years and just making recommendations, in fact, prerequisites for the network, for them to open their centers. We've studied the amount of money they spend before they open, the number of guests they have in their file on day 1. Candidly, our best operators are spending more money in months 2, 3, and 4. So we're being a bit more prescriptive to our network to say, hey, here's how many guests you need the day you open. Here's what you need to do in the month after you open. And also in terms of headcount, the number of staff you need to have and the requisite training. We saw -- in some instances over the last couple of years, we allowed centers to open, didn't have enough new guests in their file, or maybe they weren't properly staffed. And perhaps no surprise, they did not perform as well as those folks that spent the right amount of money, had the right number of guests on day 1, and were properly staffed from both a headcount perspective and an experienced set. We've seen our best centers open with more experienced waxers out of the gate and a bit more experienced center managers. So we're very excited about this playbook and we think the whole goal of this is to help our centers open with a steeper ramp in year 1, if you will.

And the pipeline is steep, I think over 370 licenses. Can you talk about center opening plans for this year, how many and what types of markets?

Yes, so our guide was 75 to 80 new centers in fiscal 2024, which is in line with our long-term growth algorithm. We have -- this is on the backside, the last 2 years in a row we've opened 10 % to 11% new units in each of the last 2 years. So we feel really good about our ability to deliver 75 to 80 on the backside of low double-digit 2 years in a row. We have been very active in California, Texas, Florida, New York, New Jersey over the last couple years. I expect us to remain active in those markets, but probably different DMAs. For example, we had a great franchise brand ambassador that was very active in the San Diego market the last couple of years. We probably won't stand up a lot of units in that particular market this year. We want to give those markets time to absorb what has been developed over the last couple of years. But we've got another great growth partner in Northern California that hasn't been quite as active that we would expect to pick up some activity this year. So the 370 licenses in our pipeline, we feel good about our visibility, not just for 2024, but our ability to deliver high single-digit unit growth in 2025 and beyond.

And who's opening these? What kinds of franchisees are you focused on?

Well, we're fortunate to receive commitments from franchise owners of all sizes. When I look at the pipeline of 370, about 70% of that represent commitments from our larger growth partners. These are either private equity backed operators or self-funded multi-unit developers. So they've got their own source of capital. We've got about 14 of these groups now that are active in the network, so we refer to them as our growth partners. These folks represent about 50% of all the open centers in the country, and about 70% of our commitments going forward. They are -- we talk about them more, Lorraine, because they're the ones that kind of make outsized commitments in terms of total license counts. But we're equally excited about the smaller folks that might own 2 centers that are still signing up to develop another 1 or 2 units in their respective markets. So we welcome growth from everyone in our network. We've seen over the last couple of years, over 90% of all new centers are coming from existing franchisees. That's important to us. It tells us they are generating sufficient returns on their capital if they're willing to reinvest with the brand. So we hope to keep supporting that group and see continued reinvestment from our existing operators.

And a question I hear a lot is how rates -- the rate environment changes things. Your rates are higher than they were when you laid out your initial plan at IPO. So how does that change the appetite or the profitability of your franchisees?

Well, certainly the higher rates for those that have put leverage on their balance sheets, it's impacting their bottom lines more than it did a couple of years ago, and we're sensitive to that, Lorraine. We -- I think, by and large, the visibility we have into our franchisees' balance sheets would say the leverage that's there is at responsible levels. Thus far, we really haven't seen the elevated interest rates put a dent in demand for additional licenses or developments. But we are sensitive to the fact that at a higher interest rate, these guys are making less net income than they were in a lower rate environment. We're doing our best to support our network to ensure that the 4-wall cash flows are still very positive that will support further development.

And are there any constraints on unit growth, finding labor, materials, the right markets?

I think a practical governor on unit growth would probably be access to labor. Now, as we exited the year, all of our centers had the target number of wax specialists on their payrolls. And actually, we're making very good progress on driving the mix of our most experienced waxers to have a higher mix of what we call our red and orange-level waxers. Our industry relations team has been very active in supporting our franchisees in terms of recruitment and making sure those centers are properly staffed. We have beauty school partnerships now in 8 different states with, I think, 38 different beauty schools. So while that's the practical governor, it has not put a constraint on our ability to grow. But I think at some point, that could be the practical governor on our unit growth.

I wanted to spend a little bit of time on laser, which is a trial that's underway. Can you talk about the rationale behind moving into laser and what the opportunities look like there?

Yes. So we saw laser really as an opportunity to drive incremental 4-wall revenue and EBITDA for our franchisees. As we polled our guests, we learned that guests basically would give us permission to try other forms of hair removal beyond just our core service, which is waxing. So we started this pilot in 6 centers in New York, and we wanted to prove a couple of things to ourselves. One, could we use laser to attract new guests to the brand? 20 weeks of data would suggest yes, we can do that. We wanted to evaluate whether we could drive a greater share of wallets. So could we get a guest that's waxing one body part to laser another body part? Thus far, the pilot has proven we can do that. And can we contain cannibalization to within acceptable levels? This cannibalization I'm referring to is within our core services. And we found through 20 weeks of data at these 6 centers, we've been able to do that. The ultimate driver and litmus test for this to prove successful for the brand is can we drive incremental 4-wall revenue in EBITDA? 20 weeks of data would say this has significant potential for the brand. So on our most recent earnings call, we decided and discussed that we want to expand the pilot, the current franchisee, the [ TEN ] pilot, has seen enough data that he's going to expand the number of centers in New York where he's offering laser services. And as you may know, the regulatory environment varies a little bit by state. So we want to get smarter in other states that have different regulatory environments than the state of New York. So 20 weeks of data, we're very encouraged. It's still very early days, but we think an expansion of the pilot could inform ultimately how big and how broad laser could become within European Wax Center.

And I think it's a very different business because you have to attract, it's not as much of an evergreen customer, but it's a much higher price point. So how do your franchisees balance those 2 factors?

It is. So if you think about -- our approach on pricing has been a little bit different than the market. We've tried to be very transparent about, here's the cost for this body part or that body part. And the price of laser is quite a bit higher. If you think about laser pricing relative to wax pricing, to laser 1 body part, that represents kind of 2 to 3 years' worth of waxing revenue. And so thus far, what we've really -- when you look at our #1 core service, the Brazilian bikini service is our #1 core service, we're seeing thus far a lot of interest in lasering other body parts beyond Brazilian bikini service. So we do want to strike that balance. And 20 weeks of data thus far would say we've been able to do that. But I still think we have quite a bit to learn, Lorraine, on how big and broad laser could go.

Okay. And then moving on to another opportunity that you had tested, and now you're rolling out, which is brow tinting. Can you talk -- well, maybe just define for the audience first, what is brow tinting? You might not have a lot of brow tinters in the audience. What is it, the success of the trial, and then what made you want to expand it?

So very briefly, it's putting color into the brow as opposed to just removing hair from it. And the reason that we wanted to test this is because we knew that our guests were coming to us for waxing, brow waxing being our second most popular waxing service that we offer, and then yet going somewhere else for their brow tinting, which is not convenient for them. It's a missed share of wallet opportunity for us. And brow tinting happens to be a really quick service that can fit very nicely into the 15-minute reservation booking window that we're using for the brow waxing anyway. So from a labor and margin standpoint, very opportunistic in that way as well. We did test it in a subset of centers, got a really positive reaction from franchisees, from their teams, from guests. We actually saw that guests coming in for brow tint in a lot of cases were new guests to our brand who found this a good entry point for them, and also that a good proportion of these guests were coming back in quick order for more brow tinting. So some nice repeat behavior there as well. And because of that, we are rolling it out almost network-wide this spring. I say almost because there are a couple of states that prohibit it, at least prohibit most formulas for it, the ones that we would be comfortable using, but most of the country will get it this spring.

All right, and then men represent a small portion of the customer file. [ You highlighted ] first wax free for the audience, but talk a little bit about the market size and the opportunity there.

We do know that it's an opportunity. As you pointed out, it is a small portion of our guest file today. We talked with -- a couple of times today about differing costs of guest acquisition, laser being more, different channels being less, efficiency. It turns out that the male guest in this category is more expensive to acquire. And so when we think about our most efficient opportunities to drive in-center reservations, which we said is the goal of all of our media, we want to be really measured in how we are reaching out to this target audience, to this demographic. But it is -- we know that for every point of market share that we can gain there, there is some nice upside. And so the way that we're approaching it is taking a hard look at our website, at our digital experiences, making sure that they're well optimized for anybody who is searching digitally for male waxing, for men's waxing services, things like that. And then also once guests get to our website, that it's very easy to find and book the services that are most popular and most in demand from men or from people who may be making reservations for men.

Got it. So let's open it up and see if there's any questions.

A couple of questions. I guess the first one, just getting back to the brow, isn't there -- is there eyeliner tinting also? Like, if someone's coming to do the brow, can you also do the -- it's probably be a dumb question, but isn't -- don't people do both?

I think you're talking about permanent makeup, which is a little bit different and would go a step further. Our -- the way that we think about the expansion of services is what is kind of very adjacent or within that hair removal space. So obviously, we're known for waxing. Laser is another modality of hair removal. Tinting is often something that goes along with brow waxing. I think that beyond that, other forms of permanent or semi-permanent makeup are probably a little bit different and not something that we have plans to do right now.

Okay. And then when you think about the customer base, beyond trying to expand in the male, just what's happening with the age demographics? We've seen teens, pre-teens, even very interested in skincare. Right? I guess it's the [ sephora ] teens. Right? So is your customer base beginning to age, or are people coming into the door maybe at a younger age? And just is there a way to sort of take advantage of that?

Overall, we've seen a lot of stability in the broad age range that we serve as a brand. Over time, those endpoints really have not changed very much. In terms of the distribution within them, anecdotally, yes, we do know that people are starting their hair removal journeys, be it laser or wax, at an earlier age. So far, that's not registering heavily in the data I think in part because of the way that we're able to collect data and who's actually making the reservation and some nuances like that. But certainly would agree with the trend that you're pointing to. We are hearing a lot about spring break this month in particular. We're seeing nice -- yes, exactly. Yes, yes, we are seeing that trend specifically in centers that are near universities that's been prevalent specifically over the past week. We were talking about this data yesterday, and that is, again, a bit of a younger customer, perhaps not as young as you're talking about, but overall, yes, it is a trend. And we are thinking about at what age we want to be marketing to guests and how to go about doing that.

And then when you think about the wallet, I guess, for self-care and beauty care, how much of it -- do you compete more directly with nail salons or just thinking about how people are allocating, what they're going to spend on their beauty, basically. Like just where do you find you're sort of competing against most?

Well, I think, as Lorraine said, for our core guest, which again, between Wax Pass and routine is making up over 75% of our revenue. They don't see waxing as a trade-off with anything else. So they are routinely coming in every 4-ish weeks. They are not going to say, I'm going to get my nails done this month or I'm going to get a facial this month or anything else instead of getting waxed. This is a priority and it's something that they will continue to do. So we don't hear as much about the trade-offs. This really does seem, in a lot of ways, to be a category unto itself that people are evaluating in that box, if you will. That said, of course, we know the reality is that people have all kinds of expenses in their lives. And so if they really need to do something else, then for that minority of our guest file, they may be trading off.

The last one. Just in terms of approaching males, right, men. We've seen in like the alcohol industry, right, the growth in hard seltzers was really started with women and then women -- male -- men following what women were doing. Right? And it ended up being a category that was like 50% male, 50% female, so far different than the beer industry. So is the door to males, their partners, whether it's a female or a male, and I don't know, couples day or, I don't know, something like that.

We've talked about that. [ Would you ] like a role on our marketing team? No, we've definitely talked about things like that. It certainly is one of the doors in. I would say that the nice thing about this target audience is that there is more than 1 door. We know that there are entire populations that really are for themselves, just like we say, generally that you can wax for yourself, not for anybody else. It's all about revealing beautiful skin. That applies to men as well. And so we definitely do seek self-interest. And then, yes, all of the time we hear about partners who would like to be making reservations for men in their lives.

I guess maybe one more quick question. Retail products, we haven't spoken about that at all. It's not a huge part of your business, but it is a nice adjacency. Where are you in terms of how happy are you with the product at this point? What percentage of the business is it, and do you expect it to grow?

The product, I'm very happy with. I mean, as I've come in and gotten up to speed on the efficacy of it, the ingredients, the clinical testing that it goes through, it does not exist elsewhere in the market. And the vision for the portfolio has been and will continue to be what really enhances and extends our services. And so it's meant to really be sold as part of a reservation. Like your reservation is not really -- your visit with us is not really over until you have taken care of your in-between visit care needs. And so when you asked about what wax specialists are accountable for, part of that is making sure that they're walking guests to the wall and introducing them to this product and making really specific recommendations about what they need. We do see that when guests, at their first visit, buy retail products, they are quite significantly more likely to return because it makes their whole experience better.

And in terms of overall contribution to the business, the $1 million AUVs I was referring to, about 6% to 7% of that is going to be retail product. The balance will be services. Now, our best retailers in the network are pushing 15% to 20% of their sales in terms of retail products. So I think we have opportunity to drive more retail product to the system.

Great. Well, thank you both for being here today.

Thank you so much.

Appreciate your time.

Thank you for hosting, Lorraine.