Q3 2021 European Wax Center Inc Earnings Call
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At this time I would like to turn the conference over to a mirror Jaeger not you <unk>.
This president a financial planning and Investor Relations, Sir you may begin.
Thank you and welcome to European Wax centers third quarter of fiscal year 21 earnings call with me today are David Burke, Chief Executive Officer, David Willis, Chief operating Officer, and Jennifer Vandervelde Chief.
Financial officer for todays call, David Berg will begin with a review of our third quarter performance and highlight the accomplishments toward our strategy than Jennifer will provide additional details regarding our financial performance and guidance. Following our prepared remarks, David Burke, David Willis never roundabout and I will be available to take questions you have for us today.
Before we start I would like to remind you of our legal disclaimer, we will make certain statements today, which are forward looking within the meaning of the federal security laws, including statements about the outlook of our business and other matters reference in our earnings release issue. Today. These forward looking statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Please refer to our SEC filings as well as our earnings release issue today for a more detailed description of the risk factors that may affect our results. Please also note that these forward looking statements reflect our opinions only as of the date of this call and we take no obligation to revise or publicly released the results of any revision to our forward looking statements in light of new information.
<unk> our future events also during this call we will discuss non-GAAP financial measures, which is just our GAAP results to eliminate the impact of certain items you will find additional information regarding these non-GAAP financial measures and a reconciliation of these non-GAAP to GAAP measures and our earnings release, a live broadcast of this call is also available on the Investor Relations section of our website.
At investors Dot <unk> Dot Com I will now turn the call over to David Burke.
Thank you mayor and good afternoon, everyone. Thank you for joining us today I'm excited to speak with you and share a strong third quarter performance. It is clear from our results. Both this quarter and year to date that are long term business strategy is delivering our brand, which is synonymous with trust accessibility and best in class Cussed.
For net openings to 57 from 52 due to favourable development timing.
During the third quarter, we continued to build out our new center pipeline. Our franchise network has incredible brand loyalty in fact, nearly all of our licenses for centers to be developed our with our existing franchise partners and over half are associated with multi unit development agreements the.
The depth of our multiyear pipeline, coupled with the overwhelming interest from existing franchisees sophisticated multi unit operators and well capitalised mid market private equity firms gives us confidence in addressing or white space as we work towards our long term goal of 3000 centers across the United States.
Finally in Q3, we grew adjusted EBITDA by 39% versus 2019 to $16 $5 million and generated strong operating cash flow.
Let me spend a minute and turned to the drivers of our sales and profit performance European Whack Center continues to benefit from increased loyalty and heightened awareness, which was fueled by more than a 30% increase in new guests versus the third quarter of 2019.
These new guests are purchasing wax passes at a healthy rate in fact, Q3 whacks past sales less redemptions more than doubled versus the third quarter of 2019 at.
As a reminder, approximately 60% of our service transactions include a wax past redemption. Therefore, we view wax past sales as a leading indicator of the future strength of our business and our very encouraged about our current momentum retention rates accelerated in Q3, as well, which also speak.
To the quality of guests we are acquiring we believe strong acquisition and retention reflect the trust we have built with guests for providing a consistent positive experience through our expertly trained whack specialists.
And the utilization of our proprietary comfort wax and a clean safe environment across our 800 plus centers in the United States.
Our same store sales increased continued to be driven by higher transaction values, primarily due to service mix and an increase in service prices implemented earlier in 2021, we.
As a whack specialist most of our California based franchisees have begun to see traction in our hiring efforts and we will continue to monitor and report out until California's performance catches up with the balance of our network.
Product sales were also strong for the quarter rising 25% relative to the third quarter of 2019, you will recall that product sales are comprised of selling both our comfort wax and our proprietary retail products into our growing franchise base. Therefore, our product sales like our royalty fees.
Our recurring stream of revenue.
We have enhanced our operational playbook to focus on consultative selling that makes it easier for a lack specialists and guest service associates to attach retail products to our guest service visit we remain pleased with the strong launch of our new retail product.
That launch in April of this year and we recently released two new products at the beginning of this quarter fourth quarter that we are really excited about these products treat some of our guests biggest concerns the appearance of discoloration in irritation, and an ingrown hair serum formula They know and love.
On the marketing front, we are excited to have launched our new EWC loyalty program known as EWC rewards in the latter half of October the program enables guests to earn reward points for spending on European WAC centers products and services for referring a friend for Rebooking in person at a center and then allows them to redeem those points for discounts on future <unk>.
Compared to our previous program.
<unk> can earn reward points faster and enjoy an enhanced app and digital experience EWC rewards is a more aspirational program that will create a higher reward visibility and therefore guest engagement over time, we will develop a more robust guest profile, which should in turn facilitate a more personalized guest.
And drive increased guest visits and transaction value <unk>.
Finally on the technology front, we remain focused on providing our franchise operators with the tools to connect more closely with guests and ensure a seamless experience in October we launched a new app that provides guests more visibility to reward points convenience added features like quickbooks for frequent services self check in.
Haitian of our focus and proven strategy to lead to increased value for all stakeholders and now I'd like to turn the call over to Jennifer to review, our third quarter performance and outlook in more detail Jen over to you.
Thanks, David and good afternoon, everyone I am delighted to speak with you about our strong third quarter results.
While discussing our financial performance I will compare our third quarter of fiscal 2001 results to both fiscal year 20, which was significantly impacted by temporary pandemic related central closures and fiscal 19, which represented a more normalised year of operations for us.
My remarks will focus on our adjusted results, which exclude one time costs related to our initial public offerings.
Finally, I will cover are updated fiscal 21 outlook before opening the call for Q&A.
You can find reconciliation tables to the most comparable gap figures and our press release and 8-K filed with the SEC today.
Let me start with a review of our third quarter results. We are pleased to report strong performance highlighted by significant growth in sales and adjusted EBITDA compared to the third quarters of both fiscal year 2019.
As I will discuss later in my remarks, we're raising our fiscal 21 outlook to reflect that momentum and the back half of this year.
We successfully open 18 net new centers during the third quarter of 21 and are now raising our fiscal 21 target 257, net new center openings up from our previous guidance of 52 net openings.
Q3 system wide sales were $219 1 million, increasing 60% from $136 $9 million in 2020, and 21% from $186 million in 2019.
System wide sales growth accelerated from Q2 and was up 15% versus 2019.
Our new central growth, coupled with a 10.6% same store sales increase drove the revenue increase relative to 2019.
Share based compensation expense and $4 1 million of IPO related charges, both of which are added back to adjusted net income as we do not consider them in the evaluation of our core operating performance.
Third quarter, adjusted net income improved to $8 $5 million from an adjusted net loss of $6.0 million in 2020, and adjusted net income of $3 7 million in 2019.
We have not incurred income tax expense in Q3 year to date and do not expect to have income tax expense for the fourth quarter and full year fiscal 2021.
Going forward and given our up sea structure, we expect an annual effective rate of approximately 13% before discrete items.
Adjusted EBITDA, which also excludes the impact of certain noncash and other items such as onetime costs related to our initial public offering that are not considered in the evaluation of ongoing operating performance increased by $12 $9 million year over year in the third quarter of fiscal 'twenty one to six.
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Our adjusted EBITDA margin was 33, 8% in this quarter.
460 basis points versus 2019, adjusted EBITDA margin of 29, 2%.
Sequentially adjusted EBITDA margins declined from the second quarter of 2021 due to the introduction of public company costs and the timing of advertising expense within the year.
We continue to expect full year 2021, adjusted EBITDA margins to be in the mid <unk>.
And over time, we expect to deliver mid to high <unk> adjusted EBITDA margins driven by continued topline growth.
Turning to the balance sheet.
At the end of Q3, we had cash and cash equivalents of $25 4 million and $180 million in borrowings outstanding under our credit facilities.
In conjunction with our initial public offering in August 2021, we entered into a new five year credit agreement comprised of a $40 million undrawn revolver, and a $180 million term loan.
We were also able to secure better rates on our new credit agreement and we expect interest expense to decrease by approximately $11 million on an annualized basis beginning in Q4.
Proceeds from the new term loan and the company's initial public offering were used to repay and terminate our previous credit agreement.
It's worth reiterating that through our IPO, the underwriters purchased $12 2 million shares of common stock at $17 per share.
Sure sold included two 4 million shares of class a common stock sold by existing stockholders and $9 8 million shares issued and sold by the company in exchange for net proceeds of $155 4 million prior to offering expenses.
Following our IPO our capital structure consists of $63 7 million shares of class, a and class B common stock.
Shares of our class B common stock paired with an equivalent number of EWC ventures common units are exchangeable into shares of our class a common stock on a one for one basis.
Now onto our outlook.
Based on our strong third quarter performance and the continued momentum of our business. We are raising both our top and bottom line guidance for fiscal year 2021. In addition to raising this year's target for net New center openings to 57 net new centers from 52.
Our expectations for 2021 full year results are as follows.
System wide sales between $795 million and $798 million.
A high single digit same store sales increase including a sequential increase in the fourth quarter from 10, 6% in Q3.
Is.
Long term waxing is a repeatable recurring service that we believe our loyal guests consider non discretionary which positions us well.
Above all we are the leader in a large and growing addressable market with an asset light business model and a strong pipeline for growth.
We look forward to continuing to serve guests and drive stakeholder value for years to come I will now turn the call back over to the operator for questions operator.
Yeah.
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Our first question or comment comes from the line of Randy <unk> from Jefferies. Your line is open.
Yeah. Thanks, guys good evening.
Two questions first question is that.
I wanted to kind of explore some of the comments you made.
On the WAC path and how that's been growing and it seems like it's accelerating actually.
On.
How much more features are they selling and then.
Driving new interest from.
Same size potential tech I D that have not.
For now that Republicans, Nebraska more aware.
There in the market just give us some perspective on.
And then you see from non tobacco.
Perfect.
S as well.
So.
Sure.
I'll take that question.
You continue to see significant interest multi unit.
And which side of private equity groups.
And about half of that part.
Private equity groups that are active in the network today I would also add that the pace with which we are signing these groups are signing multi unit development agreements is accelerating that really advise to the multi unit developers and the cells per hundred franchisees, Andrew private equity groups more than half as David mentioned, we didn't have.
Of our existing pipeline is comprised of months and nearly all of our licenses are held by existing franchisees. So this combination of interest and commitment to develop over multiple years is giving us great confidence in our future pipeline and ready I think just add coming coming out of the pandemic because of the pace with which we rebounded.
The folks that were in other concepts. We had we had operator that had other concepts of sort of doubled down and are committed to European waxing or just because of the way we rebounded as we've always talked about the nondiscretionary nature of the services.
And and so we're incredibly excited clearly as the leader in the industry, becoming public company just again.
Validate why you want to go with European Wax Center. So the answers received from our current franchise ebay.
Wanting to partner with our franchisees continues to be.
To be a real positive for us as we look to our future growth.
Specialty questions.
I appreciate it thanks.
Thank you.
Thank you. Our next question or comment comes from the line Lorraine Hutchinson from Bank of America. Your line is open.
Thanks, Good afternoon everybody.
The extra five centers versus kind of carrying forward. The current top friends is seeing.
Versus California, starting to read back up.
They're all store that maybe is Jennifer.
And anything that you think about the five singers coming online in the fourth quarter of engineer for touched on this this will be reading material to fiscal year 2021, but we will get the full year benefit of these centers in 2022, that's kind of the first observation with respect to how to do center openings have performed.
In fiscal year 2021, we're very encouraged with the rate and pace of revenue build in their first few months. So hopefully that address is Janice. There's other other comments you would made relative to impact on the 21 or 20.
Sure.
David lots of the national rate and make sure that justice.
Timing of an additional five.
We do look at that as being a really by any for funding Sheila.
I will also say.
Instantly called out that really depends on the update of guys portfolio flooding wide.
Lee and talk about the lab at purchases and have certainly seen similar next shift if you think about the next shift playing out in our car and also playing out in the types of last past is being purchased and that that contribution has been.
Real good Guy for us and as part of the guide upward for balance and year on the Ah.
Skill set about that at this point in time.
That's very helpful. Thank you maybe one last quick one you mentioned your ticket has come up in the corner.
Or gravitating towards towards European Waxer, so equally important retention aspect of that when we don't share specific numbers on that we're very pleased with both the attraction and retention numbers that we're seeing if we expect that to continue as we go forward November and December of promotional once for us. So.
We again part of the reason that the guidance upward we feel really positive about the momentum that we have going into it. We're in that we will close the last the last seven weeks of the quarter.
Okay, Great. That's that's really helpful. And then could I ask one more question. If you look at your senior team are there any are there any positions that you expect to fill in I noticed Jean Grossman may have recently left so just any perspective on the.
The state of the team and any any position they expect to fill going forward.
Probably an easy one for me to answer maybe I should let the errors at John.
We got we got racing.
Jean Grossman is phenomenal job in helping us get to where we were in terms of our franchise operations.
Very very.
Mindful that we have an opportunity to the lean out and restructure.
Aligned our development enter operations under David Wilson.
This this senior leadership team is one that I continue to be incredibly proud of is absolutely.
Tremendous faith as we as we think about the chapel that for us.
Okay, great. Thanks.
Thanks again.
The top in our last quarter about.
We were seeing in California, I would say, California, differentially and that was a bit of something we wanted to make sure. This close to the industrial community.
I haven't seen since then.
Been pretty steady state that we will get the business and how we think it's going to take shape for thousands of years.
So this is a follow up on the news.
Have you looked at the labor market for 22.
Is there any.
Pause and ability to grow.
The expansion target just didn't know.
No you have a different sub.
Again.
Thanks, Thanks for taking our question.
I think for all the color on the wax passes.
Can you just remind us what the lifetime value of that block passport customer is versus the non blacks customer and what youre doing to drive higher adoption of the whatsapp, but how does the new loyalty program play into your existing.
Existing wax pass program.
Sure.
We ended up.
Really good question.
We've looked at the WAC pass program is a real differentiator for the brand because of the commitment.
Our guests are making to us and again approximately 50% of all of our services that are delivered are off of that last half purchase and so as we kind of think about ways to move the gas down that path. It's a big area of focus for us and so when we think about lifetime value and if youre not disclosing publicly.
But we're certainly looking.
And when should we expect to see material improvement in in California is that something that you would expect it to get better in 'twenty, two or is it going to be sort of a longer term.
Okay.
Yes.
Those are great questions and honestly those are questions. We continue to watch and monitor with that with great interest, California, while we say, it's kind of like a tale of two cities.
<unk> is not an alien state until we fully expect calibrated all back in line right. Now it is anywhere between 500 that are 470 Bips this quarter on Delta and we believe that that provides upside I think people who heard for both David Berg and David Willis were working in close partnership with our franchisees to kind of make sure the cow.
Before you continue to.
Look at opportunities to drive that to buy that of a lack of decisions and I think we feel like we're off to a good start that being said I cannot pull out my crystal ball and tell you when that will leave us with.
We would expect continuing convergence I would say as we look at the fiscal year 'twenty two.
As it relates to California, specifically on our guidance.
Especially around comp you know I'll I'll continue to emphasize.
They should go to the metric we absolutely watch isn't great.
Driving sort of wax past sales over another geography, we think that's a very encouraging sign.
And we can we continue to make sure that we've got that offering.
Through all of our guests we have seen that we as we've talked about the last couple of quarters. If there is there is a mix shipped.
Primarily that we believe because of the mass mandates that there are more wax passes and more services that are being driven in full body services, so things like black bikini or Brazilian we see that potentially is upside his mask mandate debate that those guests that may be sideline for facial services will come back in once those.
Once those masks Mendes debate, but we feel really really good about the consistency with the.
<unk> purchases across across the country.
Alright.
Atlanta.
Half of that online range fed algorithm analeptic necessarily.
Hello.
And find that all the work that we're doing take ally achieve that grow and mature center that we operate any crime failing efforts, we're going to have to drive that great song.
A year I tell you for sure Saturn from October standpoint, basically you hire in terms.
Okay.
Eric.
At which again convinced me that are operating paybacks are intact, we continue to when the pirates.
Mature.
Other than routine can continue to be able to kind of discuss the economic benefits of the WAC program and for the Guy.
And frankly.
Okay.
What is the new plan.
Introduction.
Yeah.
So we just we just introduce two products here a couple of weeks ago.
We're really thoughtful about our innovated innovation pipeline I think it's a franchise or it's certainly our obligation to make sure that we keep things fresh, but we talk with you all about our products for really an enhancement and the completion of the service. So we're not going to get into shampoo and body wash. It we will always provide products for our our franchisees in our guestroom.
Associated to sell.
That help enhance the efficacy of the waxing service and we've got a regular rhythm with our product development folks are on a brisk holvis's leadership.
That are really thoughtful about bringing on new products that makes sense for our guests.
So that could continue to look for us to innovate and bring new products out.
And in a fashion that makes sense for our network of your guests.
Okay.
Okay. Thanks man.
Thank you our next question or comment comes from the line of.
John Hi, Buckle from Guggenheim Your line is open.
Hey, John.
Hey, how are Ya.
Let's start with you more.
When you think about the initial impact.
Is that likely to be greater to hire some cohort.
Just in terms of where they can probably get three or four.
<unk> services on redemptions.
You think that's the case.
Near the intermediate term in the.
You're basically gave a 5% discount.
Thought on that one.
If you could give a 2% cashback consistent since that so.
Five kind of works economically.
What you're giving back to them.
Yes, John we're really comfortable with the economic model for our guests in Vegas.
Rewarding enough, we think it is going to drive the right kind of behavior Force. We launched the program a couple of weeks ago. So obviously still early days, but I think your premises is accurate that certainly we hope that you are the folks that by more going to get rewarded for her and give her work rewarded faster. We're excited about the opportunity really to improve the visibility for both our guests and our associates and again early date.
I've gotten great Great response, both from our associates in terms of the simplicity of the program and from our guests about or does it really does feel like a reward and untreated.
A special manner, So we think that that.
That helps attract new on last guess, we're seeing that loyalty program and the App that goes along with it for the first time and we're really really excited about the early days and really excited about talking to you about it more in the future as we as we get more more data on it.
No.
Certainly a high frequency user being able to generate a line on this program that the other thing that will help us deal.
Guest profiles to that program.
After that.
Pardon for asthma.
Right after that personalized experience and so we'd David also gonna drive.
And the ZIP code that.
Perhaps another humor, when we think about how to make that a great gap expand around the brand and the next logical thing we have lately and deal I Love. The fact that a pair with a great interface.
Get this game or mobile App, and I think that allows us to kind of think of outlet future innovation around that from animals like down the road.
Then maybe secondly, right when you think about this type of similar to Marcus.
Two.
Sort of benchmark.
You don't want to you don't want to impact.
But if you think about labor productivity right.
We used to benchmark best practices engineer.
More productivity, so maybe you need a little a little less institution labor is there a way to do that without impacting service.
Yes, we continually look at.
If you think about a revenue optimization lines right. So how do we maximize the revenue that can be driven out of the wax.
By individual whack specialist, what's the gross margin return on labor, we're opening a new a new.
New center here in North Dallas, where we're going to have a little bit smaller footprint, we're going to we're an experiment with a a four to five wax.
New center, we're going to see how that certainly as we came out of Covid with restrictions, where there were capacity restrictions. We saw that some senators produced incredibly well with with a smaller and smaller footprint. So those those are things that we continue to look at we obviously look at.
<unk> to make sure that we've got labor labor scheduling at the moment.
No that that we've got through our system the ability to double book and by that we mean that.
Specialist can perform two services in 15 minutes those are allowed to be booked over on top of each other so that they are eight.
<unk> make sure we get a great guest experience, but it drive that efficiency from the the the wax specialist upwards. So can continue to look at how do we optimize that and help our franchisees get to break even faster and get to a higher profitability from Cornwall standpoint as well.
Okay. Thank you.
John Thank you.
Thank you I am sure no additional questions or comments in the queue. At this time I'd like to turn the conference back over to management for any closing remarks, but how thank you. Thank you very much and thank you over for joining us today.