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

Okay. Thank you. Welcome. Thanks, everybody, for coming today. We're really excited to announce Chris Morris, the new CEO of European Wax; and Stacie Shirley, the CFO. Thank you guys both for coming to Miami.

Yes. Thank you.

Busy time for you. European Wax reported earnings yesterday, so before we dive into the results of the quarter, I just wanted to start by asking you to give a quick overview of European Wax.

Yes, yes, sure, absolutely. So we operate in the out-of-home wax services industry. We are the clear, dominant leader. This is arguably a category that we created 20 years ago. There is really no one doing what we're doing on such a specialized level until we started doing it. And so, as a result, it's a very fragmented industry. And the reason I said we're the clear dominant leader is we're 11x larger than our next closest competitor. There's still, you know, ample white space for this brand to continue to grow. It's about a $7 billion industry and our system-wide sales last year was about $950 million. And so we're still a relatively small piece of this industry. And we've got a very loyal guest base, about 95% of our guests are female, 5% are male. So our core guest, she visits us about 7 times a year. It's a very important component to her daily routine, or to her personal care routine, rather. And so as a result it's that loyalty just results in a very resilient revenue base. So I'm excited to be here, 60 days on the job and really happy to be here in front of all of you.

Thanks. And what does the competitive landscape look like for the industry?

So you have -- again, it's very fragmented. You have a bunch of mom-and-pops. So our biggest competitor across the country is mom-and-pops for the most part. And then you have some regional players out there that typically have 30 to 40, the largest has about close to 100 locations and then you have med spas.

Okay. So, Chris, you've been at European Wax 60 days total.

Yes. Yes.

Any early observations you want to share? Has anything surprised you since you joined?

Yes. Yes. So great question. We are -- I'd say first I knew this coming in, but I think having spent the last 60 days and immersing myself in the business, meeting directly with our franchisees, our management team, I've been doing a tremendous amount of field visits over the last 60 days. I'm typically out in the market a couple of days a week. And the first thing I'll say is that we are starting from such a strong position of strength. This is an incredible brand with so much potential. The fact that we are the leading operator in this industry and there's such a loyal guest base with so much white space still in front of us, it's a great place to be. Our franchisees -- we're largely franchise operated, so we have about over 1,000 units. We own 5, the rest are franchise locations. And our franchisees are incredibly passionate about what we do. They care about the services that we provide and they believe in the future. And so I think that is the first observation is just how much potential that this brand has. The second observation is while we have all that potential and we've been very successful to date, we do have some work to do in 2025. So yesterday in our earnings call, we characterized the 2025 year as a reset year. And the reason for that is, since I'm new on the job, I had the benefit of looking back and hindsight is always 2020, I can tell you that I wouldn't be here had it not been for my predecessor, David Berg. So I have tremendous respect for David and what he built over the last several years. When we look back, it's very clear that we were very focused on new unit expansion. And we didn't really take the time to put the building blocks in place to support that growth. And so with the benefit of hindsight, it's clear to us that our growth just simply outpaced our core capabilities around some important blocking and tackling functions, things like marketing analytics. We don't have a marketing engine today that you would expect to -- a company with 1,000 units to have. We're in the process of building that. With our approach on real estate and site selection was more of a bottoms-up approach working directly with our franchisees to activate their MUD agreements, as opposed to taking more of a strategic overlay and a top-down approach in identifying areas of opportunity to grow. On our ops side of the business, we see a tremendous opportunity to enhance our analytical rigor around how we partner with our operations to drive performance, and that's both in top line and bottom line. So when I look at this, the observation is a tremendous amount of upside, but a year where we have some work to do. But the good news is when we get through this work this year, we are going to be in a -- very well positioned to be able to get back to growth and get back to growth in a very consistent and methodical way. So I'm excited about that.

Okay. And then reset year, where were the most important or most impactful things that you plan to start with during this reset year?

So I'd say the first thing is obviously working on the marketing engine. So that work was kicked off by David Berg before I started and we're continuing that journey. So we just hired a Chief Commercial Officer. We've been partnering with a group that we've talked about publicly named dolabra digital. And so that is one of our very top priorities because getting that built out is going to allow us to be a much better -- do a much better job of being able to drive traffic into our centers in a very personalized way. And so that is kind of first and foremost. The second is just building a very strong relationship with our franchisees to drive performance at the center level across all areas of the business. I have the benefit -- in my career, I've been both a franchisor and a franchisee and it uniquely positions me to partner with our franchisees and build a strong partnership all around execution. So that partnership will be fundamental to our ability to return to growth because as we return to growth, we've got a system of franchisees who are very capable operators and are going to work with us to get back to that.

I think as an analyst, the thing I always worry about is a reset year turns into reset years. So just describe to us that you'll do the analytics, you'll drive the customer growth and then are there specific metrics that your franchisees want to see before they really reinvigorate their store opening engine?

Yes. I mean we're really -- our entire organization is focused on stimulating traffic growth or ticket growth at our locations. And so the work that we're doing, building out this marketing engine, we're doing it directly related -- directly in partnership with the franchisees. So the green shoots that we're all looking for is around activating transaction growth. And the way where we see that opportunity is it's a partnership between marketing and operations. So there's -- we will be doing a much better job of driving traffic into the top of the funnel, but so much of our ability to grow sales depends on the experience that happens in the center. And so there's -- at least half of that opportunity is at the center level. And so we are working directly with them to be able to attack both sides of this. We're attacking the top of the funnel, driving transactions and then executing at an improved level. And so as we're building out all those capabilities, we're looking for the right KPIs, the right leading indicators that that's starting to gain traction.

Okay. You also announced some management changes yesterday. Can you speak a little bit about the new executive you announced and what you've been looking for? And should we expect any additional changes?

Yes, sure. So having the right team, so we have -- obviously, we have a lot of work to do this year. We have a lot of upside and getting the right team in place to be able to execute on these strategies is fundamental. We had some -- when I stepped foot in the door 60 days ago, there were some very significant gaps. We did not have a Chief Operating Officer and we did not have a Chief Commercial Officer, so those are 2 fundamental positions. We have a nationwide search going on right now for a Chief Operating Officer that's well underway. Chief Commercial Officer, we brought in an individual, extremely capable individual named Katie Mullen. She was -- spent about 10 years with BCG on doing marketing transformations for companies and then was the Chief Digital Officer at Neiman Marcus and the Chief Customer Officer at JCPenney's. She has been a phenomenal addition to the team. When I started 60 days ago, Stacie and I had a lot of conversations around where she is in her career journey and where she wants to go. And it was clear that she was going to be transitioning out of the organization and I needed to find a CFO to take -- carry the torch forward. And we've done that. So we've hired a CFO named Tom Kim. He starts April 7th. Very talented individual, has significant franchise experience and I believe he is going to do -- be just a terrific partner to our team as we build out the analytical rigor in those areas that I mentioned. And then last is on technology. So we're investing heavily in building out a data analytics platform that's going to drive so much of our business, starting with the marketing engine. I felt it was really important to have a strategic thought partner on the executive team helping us think through that. So we created a position, Chief Information and Digital Officer, and we hired a very capable individual named Chris Andrews. He starts March 31st. And he not only has the right technical background, but also has significant experience in franchise. So very excited about that.

Great. So let me shift to unit growth, which has always been a really huge part of the European Wax story. Your guidance calls for net 28 to 50 closures this year. Can you talk a little bit about what led to that? And if there's any commonalities, be it location, type of owner, how long the center has been open that you could point to on these closures?

Yes, sure. So my very first -- when I set foot in the door, the very first thing that I did with the rest of our team is just to get our arms around just the health of the business to really dig in, work directly with our franchisees to understand kind of what we were dealing with. And through that exercise is how we arrived at the range of 40 to 60 closures. I want to be clear, we don't have a list of 40 to 60 -- I mean we don't have franchisees raising their hand and saying, "I'm going to close." This is a situation where we partnered directly with them. And we've looked at the fundamental trends of the business, we looked at lease renewals, we talked to them about their intentions and we're very comfortable living within that range of 40 to 60. At the same time, we are actively partnering with them and managing -- we want to be on the low end of that range, we don't want to be on the high end. And so that's work that's well underway that we will be focused on through the remainder of this year. There's not really a -- I would love to be able to just say there's one common link across all of these and it's really not that type of situation. It's a variety of different reasons why this is a year where we're going to have some net closures. So the important thing to us is managing this in the most effective way and as I said, when we're done with all of this work by the time -- when we close out 2025, our -- every step we're taking is to return the business to growth in 2026 again. And so I believe strongly when we execute on all of our initiatives, we will go into the 2026 year better positioned, better poised and with a team of people who are ready to execute and get back to growth going forward.

Okay. And then what's being done to support some of the underperforming franchises or stores to prevent further closures?

So I mean the biggest thing that we're doing -- well, there's -- it's back to that strong partnership with franchisees and having the -- building the analytical rigor to assist. So we have our entire network of op support focused on these underperforming centers and we are working directly with them to identify where they have opportunities. So it's nothing profound, it's just really blocking and tackling. It's let's understand where those opportunities are, let's understand where the gaps are in the execution, let's share best practices, let's develop the reporting to track the progress we're making, celebrate the individuals who are making progress, coach the individuals who aren't. It's just really bringing that laser focus to that ops side of the business is where we're focused first. The second is on this data analytics platform that we're building. We've already made considerable progress on -- and we're in a better position today than we were just 3 or 4 months ago. So we've improved the pipe. So basically, we now have -- we're now able to draw a link from the marketing impression to the guest behavior and that's something that didn't exist before. That's huge for us. We're out testing a number of different creative approaches so we can go through a test and learn, so we know exactly what piece of creative, what type of messaging works with which audience. That's work that we weren't able to do before that we're now doing. And we're far more efficient in our media buying than we were before. So we're getting more bang for our buck, so to speak. So we're getting -- our dollars are going towards working media at a greater rate than they were before. So as we're building all that out, we're keeping a very sharp focus on where do we have opportunities with our underperforming units to provide some additional assistance? So it's a combination of the marketing approach and the ops focus.

Great. And then what about the economics as it relates to cost of opening a center, breakeven maturity? Have those changed or are you looking to try to change those?

Yes. I'll let Stacie...

Yes. So as we look at that, the unit economics have certainly become more constrained. But we still feel like that overall, we're very strong. And if you look at our AUV for our mature centers, which we define as something over 5 years, we're about a $1.1 million AUV. The cash-on-cash returns are around 40%, which has come down from prior years, but that's not surprising, right, as a result of the compression on the top line. And we have seen some inflation on the build-out cost, so that's something we're focused on as well to see how can we mitigate that and bring that down. But having said all of that, we still feel like we're -- compared to other franchise operators, we still feel like we're in a good position, but work to be done, all of the things that Chris has just walked through to really try to reignite the top line to get us back to where we have been in the past.

Okay. Moving on to your core customer. What's the target age, the target income demographic? And can you elaborate on how that consumer is doing in this environment?

Yes, sure. I'll start, and then I'll let Stacie kind of fill in some gaps. So as I mentioned earlier, we're 95% female, 5% male. We -- and as we're developing this marketing engine, it's going to allow us to reach various demographic profiles in a more impactful way and so as opposed to just having one core. But the core guest is 35 to 45 SKUs, higher income. And as we said, this is a very -- our core guest is a very loyal guest, visits us 7 times a year. They view this experience largely as a nondiscretionary spend because it's such an important component to their personal care routine. And so our core guest is fairly resilient. And that core guest represents the majority of our sales. And so it puts us in a unique position to -- as we're navigating these difficult waters in a complex consumer environment. This is not a situation where we're losing our core guests at a rapid pace. Our core guest is hanging in there. And so for us, it's more about managing the edges of that customer profile. But I'll let Stacie...

No, I think you hit on most of it. I think the only thing I would add is, as we've talked about in prior quarters that our opportunity is that noncore guest, right, primarily so that we can get them in, drive the traffic so that we can then convert them and make them more of a core guests. And so it's really around that new guests and getting them to change their behavior. And obviously, in this backdrop of this consumer environment, macro environment, it's been more challenging. And so that's something that we're obviously very focused on.

So what proportion of sales comes from that core guest? And then how has the behavior looked differently for the noncore?

So the combination of our core guests and our Wax Pass sales, it's about 70% of our total sales.

And then the other 30% that's been a lot more volatile, maybe talk a little bit about why or what they're feeling or seeing or what you're hearing from them?

I think what they're feeling is no different than what everybody else is feeling. It's just been -- it's been a very complex consumer environment. It's been choppy, and there's been a lot of pressure on spending. And so they're just feeling that ongoing pressure. And as a result, it has made it more difficult for us to be able to generate sustainable sales within that 30% growth. It's just been more challenging. And...