10-Q: European Wax Center Reports First Quarter 2024 Results, Revenue Up 4.0%

European Wax Center's first quarter 2024 results show a 4.0% increase in total revenue compared to the same period last year, driven by new center openings.

Summary

• European Wax Center reported a total revenue of $51.9 million for the 13 weeks ended April 6, 2024, a 4.0% increase compared to $49.9 million for the same period in 2023.
• The company's product sales increased by 5.9% to $29.5 million, while royalty fees saw a modest increase of 0.7% to $12.4 million.
• Marketing fees rose by 2.8% to $7.1 million, and other revenue increased by 1.7% to $2.8 million.
• Net income attributable to European Wax Center, Inc. was $2.8 million, a significant improvement from a net loss of $0.5 million in the same period last year.
• The company's system-wide sales reached $221.4 million, compared to $218.4 million in the prior year.
• Same-store sales decreased by 1.2%, while the number of system-wide centers increased to 1,051 from 978 year-over-year.
• The company opened 10 new centers and closed 3, resulting in 7 net new center openings during the quarter.
• EBITDA was $16.3 million and Adjusted EBITDA was $17.5 million for the quarter.

Sentiment

Score: 7

Explanation: The document shows positive financial results with increased revenue and a move to profitability, but there are some concerns about same-store sales and the tax rate. The company's growth strategy and market position are strong, but there are some risks to consider.

Positives

• The company experienced a significant increase in net income, moving from a loss to a profit year-over-year.
• Total revenue, product sales, marketing fees, and other revenue all saw increases.
• The company continues to expand its footprint with new center openings.
• Selling, general and administrative expenses decreased significantly, indicating improved cost management.
• The company's EBITDA and Adjusted EBITDA both showed positive results.
• Interest expense decreased due to increased interest income from short-term investments.

Negatives

• Same-store sales decreased by 1.2%, indicating a potential challenge in maintaining growth at existing locations.
• Cost of revenue decreased by 6.5%, but this was partially offset by higher product sales.
• The company's effective tax rate was 24.8%, which is higher than the estimated blended statutory tax rate of 20%.

Risks

• The company is exposed to interest rate risk, particularly with its variable funding notes, although these were undrawn as of April 6, 2024.
• The company is exposed to commodity price risk, particularly with the pricing of wax from its suppliers.
• The company depends on two key suppliers for Comfort Wax and one key supplier for branded retail products, exposing it to supplier concentration risk.
• The company's ability to recruit and retain qualified licensed wax specialists is critical to its success.
• The company's results are subject to seasonality, with higher demand typically in the second and fourth quarters.
• The company is subject to various legal proceedings, although they are not expected to have a material impact.
• The company's tax receivable agreement could result in significant future payments.

Future Outlook

The company plans to grow by opening new franchised centers and increasing system-wide sales in existing centers, while leveraging its corporate infrastructure to expand profit margins and generate free cash flow. The company believes it has a significant whitespace opportunity of more than 3,000 locations for its standard center format across the United States.

Management Comments

• The company has prioritized building a culture of performance, success, and inclusivity.
• The company has intensified its focus on enhancing the guest experience and has invested significantly in its corporate infrastructure and marketing capabilities to continue its track record of sustainable growth.
• The foundation for the company's next chapter of growth is firmly in place.

Industry Context

European Wax Center is the largest and fastest-growing franchisor and operator of out-of-home waxing services in the United States. The out-of-home waxing market is the fastest-growing hair removal solution in the United States, with an estimated total addressable market of over $18 billion. The company is approximately six times larger than the next largest waxing-focused competitor by center count and approximately 11 times larger by system-wide sales.

Comparison to Industry Standards

• European Wax Center's same-store sales decrease of 1.2% contrasts with the broader trend of growth in the out-of-home waxing market, suggesting potential challenges in maintaining growth at existing locations compared to competitors.
• The company's system-wide sales of $221.4 million and 1,051 locations significantly outpace smaller competitors in the waxing industry, highlighting its dominant market position.
• The company's focus on a franchise model with mature centers generating annual cash-on-cash returns in excess of 50% is a strong indicator of its financial health and operational efficiency compared to other franchise businesses.
• The company's investment in technology-enabled guest interface and the Wax Pass program are differentiators that contribute to a superior guest experience compared to independent salons and smaller chains.

Legal Proceedings

• The company is subject to various legal proceedings in the ordinary course of business, but they are not expected to have a material impact on its financial position, results of operations, or cash flow.

Stakeholder Impact

• Shareholders will benefit from the company's improved profitability and potential share repurchase program.
• Franchisees will benefit from the company's continued growth and support.
• Customers will benefit from the company's focus on enhancing the guest experience.
• Employees will benefit from the company's culture of performance, success, and inclusivity.

Next Steps

• The company will continue to focus on opening new franchised centers.
• The company will continue to focus on increasing system-wide sales in existing centers.
• The company will continue to leverage its corporate infrastructure to expand profit margins and generate free cash flow.
• The company may repurchase up to $50,000 of its shares of Class A common stock.

Key Dates

Keywords

waxing services, franchise, system-wide sales, same-store sales, EBITDA, revenue, net income, center openings, product sales, marketing fees