10-Q: European Wax Center Reports Modest Revenue Growth in Second Quarter, CEO Departs

European Wax Center saw a slight increase in revenue and net income for the second quarter of 2024, while also announcing a change in CEO.

Summary

• European Wax Center's total revenue increased by 1.3% to $59.9 million for the 13 weeks ended July 6, 2024, compared to $59.1 million for the same period in 2023.
• Net income attributable to European Wax Center, Inc. rose by 7.3% to $4.3 million for the quarter.
• System-wide sales grew to $260.2 million, a 2.3% increase year-over-year.
• Same-store sales increased by 1.6% for the quarter.
• The company opened 11 new centers and closed 3, resulting in a net increase of 8 centers during the quarter.
• For the 26 weeks ended July 6, 2024, total revenue increased by 2.5% to $111.7 million, and net income attributable to European Wax Center, Inc. increased by 103.4% to $7.1 million.
• The company repurchased 919,551 shares of Class A common stock for $10 million during the quarter.
• The company's CEO, David Willis, departed on August 12, 2024, and was replaced by David Berg, the Executive Chair.

Sentiment

Score: 5

Explanation: The document presents mixed results with modest revenue growth but a slowdown in same-store sales and new center openings. The CEO change adds uncertainty, while the company's financial position remains stable. The increase in advertising expenses is a concern.

Positives

• The company experienced a modest increase in revenue and net income for both the quarter and the first half of the year.
• System-wide sales and same-store sales showed positive growth.
• The company continued to expand its network with new center openings.
• Cost of revenue decreased by 5.2% for the quarter and 5.8% for the 26 week period due to negotiated cost savings.
• Selling, general and administrative expenses decreased by 8.7% for the quarter and 16.0% for the 26 week period due to a decrease in payroll and benefits expense as well as the collection of cash proceeds from a legal judgment.
• The company repurchased shares of its stock, indicating confidence in its value.

Negatives

• Advertising expenses increased significantly, by 33.3% for the quarter and 22.9% for the 26 week period.
• The company experienced a change in CEO, which could create uncertainty.
• The company's effective tax rate for the 13 and 26 weeks ended July 6, 2024 differs from the U.S. federal statutory rate primarily due to non-taxable income attributable to noncontrolling interest, state taxes and the tax effects of stock compensation.

Risks

• The company's performance is subject to seasonality, with higher demand typically in the second and fourth quarters.
• The company depends on two key suppliers for its Comfort Wax and one key supplier for its branded retail products, creating a concentration of supplier risk.
• The company's franchisees' ability to operate their centers depends on their ability to attract and retain qualified, licensed wax specialists.
• Macroeconomic factors could affect guest spending patterns.
• The company's future payments under the Tax Receivable Agreement (TRA) are expected to be $200.8 million, which could impact future cash flow.
• The company's debt is subject to covenants and restrictions, including maintaining specified reserve accounts and debt service coverage ratios.
• The company may be required to make payments to the EWC Ventures pre-IPO members in amounts equal to the present value of future payments we are obligated to make under the TRA in the event of a change of control.

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

The OOH waxing market is the fastest-growing hair removal solution in the United States, with an estimated total addressable market of over $18 billion. European Wax Center is the category-defining brand within this market, being 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 growth of 1.6% for the quarter is a positive sign, but it is lower than the 2.6% growth in the same quarter of the previous year, indicating a potential slowdown in existing store performance.
• The company's system-wide sales growth of 2.3% for the quarter is also a positive sign, but it is lower than the 3.4% growth in the same quarter of the previous year, indicating a potential slowdown in overall sales growth.
• The company's net new center openings of 8 for the quarter is lower than the 25 openings in the same quarter of the previous year, indicating a potential slowdown in expansion.
• The company's adjusted EBITDA margin of 34.2% for the quarter is a positive sign, but it is lower than the 35.9% margin in the same quarter of the previous year, indicating a potential decrease in profitability.
• The company's advertising expenses increased significantly, by 33.3% for the quarter, which could be a concern if it does not translate into higher sales growth.
• The company's CEO change could create uncertainty, but the appointment of David Berg, who previously served as CEO, could provide stability.

Management Changes

Legal Proceedings

• The company is exposed to various asserted and unasserted potential claims encountered in the normal course of business.
• The company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings.
• The company does not expect the resolution of these occasional legal proceedings to have a material effect on its financial position, results of operations, or cash flow.

Stakeholder Impact

• Shareholders may be concerned about the CEO change and the slowdown in same-store sales and new center openings.
• Employees may experience uncertainty due to the CEO change.
• Franchisees may be impacted by the company's performance and growth strategy.
• Customers may be impacted by the company's service offerings and guest experience.

Next Steps

• The company plans to continue opening new franchised centers.
• The company plans to increase system-wide sales in existing centers.
• The company plans to leverage its corporate infrastructure to expand profit margins and generate free cash flow.

Key Dates

Keywords

waxing services, franchise, system-wide sales, same-store sales, revenue, net income, EBITDA, adjusted EBITDA, share repurchase, CEO change, tax receivable agreement