Q2 2023 Mister Car Wash Inc Earnings Call
[music].
Good afternoon, and welcome to Mister car Wash as conference call to discuss financial results for the second quarter ending June 30.
23.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
Please note that this call is being recorded and the reproduction of this call in whole or in part is not permitted without written authorization from the company.
Speaking from management on today's call are John Lie chairperson, and Chief Executive Officer, and jet Gold Chief Financial Officer.
John and Chad have made their formal remarks, we will open the call to your questions.
During this conference call references to non-GAAP financial measures will be made.
Please pray conciliation of these measures to the most comparable GAAP measures have been included in the company's earnings press release issued earlier today and posted to the Investor Relations section of the company's website at Mister car wash Dot com.
As a reminder comments made on today's call may include forward looking statements, which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from management's current expectations.
Please be advised that the statements made today are current only as of this call and are based on the companys present understanding of the market and industry conditions.
While the company may choose to update these statements in the future. They are under no obligation to do so unless required by applicable law or regulations.
Please review the forward looking statements disclaimer contained in the company's latest annual 10-K, and 10-Q reports as such factors may be updated from time to time in other filings with the Securities and Exchange Commission.
I will now turn the call over to Mr. John Lai. Please go ahead Sir.
Good afternoon, everyone and thank you for joining our 2023 Q2 earnings call.
We had a solid second quarter, where comp store sales accelerated into positive territory.
Operating margins improved quarter over quarter.
Our unlimited wash program remained incredibly resilient and.
And we officially began the rollout of our titanium program.
For the quarter sales grew 5% to $237 million adjusted EBITDA came in at $74 million.
Comp store sales were up fractionally, we opened nine new Greenfield stores and acquired one location.
And in July we closed on a five store acquisition in Los Angeles, bringing our total store count to 454 stores in 21 states.
Our unlimited watch club program continues to perform well with strong member retention and new member capture rates.
We added 181000 UW see members in the first half of the year and are approaching a $2 1 million member Mark underscoring the strength and resilience of our business.
Subscription accounted for nearly 70% of revenue in the second quarter and this continues to provide a predictable recurring revenue stream and cash flow.
Q2 marked the official beginning of our titanium rollout.
And as of today, we've launched in over 100 stores across eight regions and the early stage results have been encouraging.
For those that haven't had the opportunity to experience titanium allow me to start with the efficacy of this product.
Our proprietary titanium formula is three times more active than anything we've seen in the market, which not only improves protection against corrosion, but produces a mirror like finish on the pain.
The best way to describe the effect titanium has on your vehicle is to imagine that youre looking at the side panel of your car and the finishes. So brilliant that can be used as a mirror to see your faces a reflection.
Shiny.
In fact true story last weekend, our yellow lab named Macy's was in the garage parking and my wife's car.
Macey rarely barks, so I really thought something was wrong when I.
Went to investigate a foundry going crazy over the reflection of herself in the side door panel.
So for what it's worth titanium pass one of the harder bars, the Macy's test.
But I digress.
Back to the show element of titanium to make it even more immersive we developed a unique and visually pleasing application arch with interactive lights color and signage, which takes the tunnel experience to a whole new level makes you feel like youre in an IMAX movie.
But unlike an IMAX movie our customers arent just watching the show there in the show riding through the tunnel feeling it firsthand.
Thoroughly entertained in the three minutes it takes to get your car washed.
With this launch we've also repositioned our menu and introduced a new premium topside acre package to provide members with more choice and value, which we believe will have a lifting effect to our revenues and earnings.
While it's still early.
We're going to go out in the limb and say that over time, we expect to have at least 10% of our members in the titanium plan.
Before I move on I'd like to give a big shout out to one of the unsung hero groups inside of our company are amazing facility maintenance teams who've been working overtime getting titanium installed cheers to you guys.
Switching to new unit growth our foot is firmly on the pedal a greenfield expansion as we've opened 13, new stores year to date and remain comfortable with our full year target of approximately 35.
All our new builds are ramping beautifully and are not only profitable in year, one, but copying faster than our existing stores.
When I think about the locations that will be opening over the next six months and what our real estate teams have in the Hopper for 2025, we're really starting to see the benefits of scale and a flywheel effect as we get stronger and better with each successive store we built.
I'd like to give another big shot out to our construction and development teams newbuild install it and operations teams who are all in growth mode. As we continue to increase our greenfield capacity and scale up to help fulfill our vision.
From an M&A standpoint, as we've shared on previous calls we've seen a moderation of multiples with valuations, becoming a bit more reasonable.
And we remain disciplined and opportunistic as we bolster our position in existing markets, while continuing to assess new and adjacent markets to move into.
Our latest acquisition cruisers, a five store express chain in Los Angeles.
A good example of the type of platform acquisition that we tend to like that serves as a beachhead to enter a desirable new market.
California is one of our more productive states and our entry into Los Angeles firmly position us in a way that will allow us to expand through greenfield or M&A in an area that we believe has a ton of upside.
Before I turn it over to Chad I, just want to talk about the heat that we're experiencing across the country. Today. We are speaking to you from Tucson, where even though it's a dry heat.
On track to break the record for the longest consecutive streak of 100 plus degree days in the last decade, and it's not just Tucson June and July have been one of the hottest month on record across the country and August is showing no signs of letting up.
As a people centric company, we have always prioritized the safety of our team members and I want to let everyone know that we are taking extra steps to make sure everyone's properly hydrated that they're educated on the science of heat related illnesses and there were given breaks throughout the day to keep our people safe and fresh.
I want to take this opportunity to thank the men and women of Mr who braved the heat, bringing their smiles to work and work tirelessly to help make us a special company that we are.
I will now turn the call over to Jed <unk> to provide more commentary around our financial results for the quarter.
Thank you John and good afternoon, everyone.
Overall, we had a good second quarter and we remain optimistic about the about what the future holds for Mr.
Before I review the details of our second quarter results. Let me give you an update on our new titanium offering.
We are excited to report that we have implemented titanium and just over 100 stores as of today. This.
This includes the titanium offering along with some rents improvement technology and Reconfiguring blowers to provide an even more superior wash experience for our customers.
We are ahead of our implementation plan and now expect all stores to be offering titanium by March of next year.
We are refining and testing various promotional offers to help drive trial and adoption. We expect that this will result in a slightly higher churn rate after the promotional pricing period expires, but the churn will be offset by higher membership levels post the promotional period.
Based upon our initial analysis, we believe titanium could eventually represent at least 10% of EWC subscription mix longer term.
The revenue and EBITDA impact will likely be minimal this year because of the timing of the rollouts and the promotional offerings and strategy, but we believe it will be meaningfully accretive to next year and could have a multiyear impact.
Now turning to the results of the second quarter.
Total revenue increased five 2% and.
And comparable store sales increased three tenths of a percent.
Pwc sales represented nearly 70% of total watch sales and we added 59000 net members in the second quarter.
On a year over year basis, the number of EWC members increased 12, 2% and we finished the quarter with approximately $2 1 million members. The performance of the subscription business remained very stable in the quarter core churn rates and the split between premium and base memberships remained within the historic ranges.
On the development side, we opened nine new Greenfield locations and acquired one existing store in the second quarter. The performance of our Greenfields remains strong ramping toward our mature express exterior average unit volumes of approximately $2 1 million and four wall EBITDA margins of 45% to 50%.
In under three years.
On the expense side of the business, we remain focused on better managing expenses and optimizing the investments we are making.
While we continue to experience some increases were partially offsetting some of these with productivity improvements.
Excluding stock based compensation as a percentage of revenue total operating expenses increased 210 basis points to 75, 3%.
The main drivers are labor and chemicals decreased 90 basis points to 29%.
Other store operating expense increased 300 basis points to 38, 1%.
And G&A expense increased 50 basis points to 10, 1%.
The labor and chemicals line, primarily benefited from better labor scheduling and optimizing regional labor infrastructure and.
And offset average hourly labor wage increases of 5%.
Other store operating expenses increased primarily from the fact that we have 54 more carwash leases compared to the same time last year due to the additional sale leasebacks completed during the last year.
As a result cash rent expense increased 15, 5% to $24 8 million for the quarter, Utah.
Utility rates and maintenance service costs also continue to experience some inflationary pressure.
G&A expenses, excluding stock based compensation expense increased 10, 5% and was driven by both continued investments to support growth in areas, such as marketing construction and development.
Partially offset by lower corporate insurances and other previous investments.
During the second quarter interest expense increased to $18 3 million from $8 $8 million last year due to higher interest rates and the exploration of our interest rate hedge last year. It.
It was slightly favorable compared to expectations due to the higher cash balance, resulting from the faster pace of closing on sale leasebacks and the timing of reinvesting the proceeds back into the business.
Our GAAP reported effective tax rate for the second quarter was 21% compared with 21, 7% for the second quarter of 2022.
The decrease was primarily due to the benefit related to the employee stock awards exercised and the benefit related to a change in our estimated state tax expense this year compared to last year.
Adjusted net income and adjusted net income per diluted share, which add back stock based compensation of certain non core operating expenses were $29 million and nine respectively.
Actively in the quarter.
Second quarter, adjusted EBITDA was $73 $9 million up four 1% sequentially from the first quarter.
Adjusted EBITDA margin remained high at 31, 2%.
Moving on to some balance sheet and cash flow highlights at the end of the second quarter cash.
Cash equivalents were approximately $136 2 million and outstanding long term debt was $896 6 million.
Importantly, our balance sheet remains strong and we continue to self fund our growth and expansion.
Demand for the sale leasebacks remains strong despite the rising interest rate environment, we completed a record 10 sale leaseback transactions in the second quarter involving a total of 18 carwash locations for aggregate consideration of $80 million.
Lastly, let.
Let me make a few comments around guidance and how we are thinking about the year.
Our first half performance was in line with the low end of our expectations. Our subscription business performed well. However, the retail side of the business remained relatively soft, causing us to take a slightly more cautious stance on our outlook for the back half of the year.
At the same time, we are now starting to factor in some basic assumptions for titanium into our forecast, but these remain minimal given the discuss timing and promotional strategy net.
Net net we are updating our full year 2023 guidance by shifting our range is down slightly and tightening the possible range of outcomes.
Summary of the changes can be found in the earnings release.
In closing, we had a solid second quarter and continue to make good progress against our strategic initiatives I want to thank the entire Mister Carwash team for their hard work and commitment to our customers and business day in and day out.
With that we're happy to take your questions.
Thank you.
Ladies and gentlemen, we will now begin the question and answer session. So do you have a question. Please press star followed by the number one on your Touchtone Si again, Thats Star followed by the number one if you would like to with via request. Please press star followed by the number to you.
Your first question comes from the line of John Baugh from Guggenheim Securities. Please go ahead.
Hey, guys John wanted to start with.
Just your thoughts on real estate and clustering because it looks like Youre doing a lot of work in California and Florida.
Just sort of thoughts on prioritization and then I would guess right. There is a correlation as you referenced members per location right, where you've really achieved.
Densification versus where you havent.
You talked to that.
Yeah, so when we assess our position in each one of the retail trade areas and we have roughly 20% market share on average.
But we enjoy certain select markets north of a 50% share in those markets. We also see elevated.
We believe that supports our hypothesis that there is a network effect that happens with our unlimited Wash club program, where the more options and the more convenient that program is.
You have a store within a 10 minute drive anywhere you are.
It just makes it.
Each one of our business is stronger and so this is an all boats rise with sky.
So to that end thats kind of supporting our strategy around taking are on average 20% share to 50%.
In each of the Msas Rins. So we look at the markets and we kind of combine them into.
No.
50 different msas.
We're looking at the ones that are under penetrated right now and pushing hard.
To get them up to a level that we think is appropriate.
Yes.
Okay.
As a follow up.
The retail part of the business has been weak right now I think we probably cycle that we're into year two.
How do you gauge you sort of think about the lesson the less engaged consumer falls out first.
When you look at that.
I'm just curious how you think about that business at least starting to get a little bit less challenged.
I guess, there is still no magic bullet on promotion.
Promotion that that will work well right to bring them in in this environment.
Yes, you're absolutely right so.
I think we're very thankful that we've built this business up to close to 70% of our revenues that are subscription.
But to your point the retail side in previous months has seen some softness.
And we have attempted to try and stimulate demand with various promotional offers but we're also very conservative in our approach to discounting and don't want to unnecessarily dilute our revenues and the question Chase to try and drive traffic to our stores and the challenge I think for any retailer, particularly at retailer.
<unk> is in a fast paced environment, where the bulk of our customers are anonymous to US is that you can unnecessarily discount or an existing customer and trade them down.
In that quest to try and get that incremental customer. So we're very cautious we're very measured.
And ensuring that we don't give away the farm.
Interlude revenues, but do it in a way that is actually focused on that incremental visit and to date, we haven't cracked the code.
We continue to experiment.
And I think the one thing that we have seen that has been effective is that some of our branding and non discount related messaging actually outperforms some of the discounts, which kind of defies logic, but it does support the fact that at the end of the day.
Built this business not through promotions and not through discounts, we built it the good old fashion way and so as a result, we're not dependent upon promotional activity.
Which again is it can be a slippery slope, if you get into that treadmill of having a really.
Discount.
Quarter over quarter year over year to drive traffic do you think is there.
And linked to that debt discount offer yes, John just to add to that a little bit as you look at the Q2 retail trends relative to Q1, we did see on a year over year basis, we did see improvement in those retail trends, we were double digits down in Q1.
And then down high single digits in Q2.
Okay. Thank you.
Your next question comes from the line of Simeon Gutman from Morgan Stanley . Please go ahead.
Hey, good morning, John and jet or sorry, good afternoon.
You mentioned the heat.
And I don't think you blamed any of the weakness on weather so.
Curious if there was anything to talk about in the <unk>.
Second quarter.
And then I would I don't know if the heat.
<unk> and the rest of the country as a whole back.
If you could talk about it in the context of any other broader headwinds that you faced during the quarter.
Yes Simeon.
I'll take the first part of the question there on the weather net net.
During the quarter no impact to results from from the weather. This is this is where the benefit of being geographically diverse we have got good weather in some markets that offset bad weather in other markets and then 70% of ourselves being subscription further insulates us from from those weather patterns Q1, Q1 was an anomaly.
With the weather impact, which is why we called it out but.
Net net neutral on Q2.
Okay, and then on sale leasebacks can.
Can you talk about the rates at which Youre paying your rent and then how those look and then the terms and those evolving it just we're hearing about more and more sale leasebacks curious if.
Is it the buyer and seller thats ending out with.
The better shape relative to your existing sale leasebacks.
Yes. So recently, there's there continues to be continued demand for for our sale leasebacks. Good bid. We found the 10 31 market to be particularly.
Strong for us.
And as we reported $80 million in proceeds from sale leasebacks during the quarter.
A record number of sale leaseback transactions and we are seeing in that.
Low six kind of that 6% cap rate range.
And the way, we think about those as we really look at the gross build of our of our Newbuild and looking to do a sale leaseback on the building and construction and the land.
And we have some internal targeted coverage ratios just to make sure we're giving ourselves ample cushion. But then we also are tracking on an overall basis are.
Lease adjusted leverage to make sure that we're keeping that relatively consistent with time as well and not over levering the business are burdening the business with excess rent.
Thank you okay. Good luck.
Okay.
Thank you. Your next question comes from the line of Michael Lasser from UBS. Please go ahead.
Good evening. Thanks, a lot for taking my question one of your competitors noted that their view is.
Car wash sector is becoming more competitive which is weighing on retail trend is that your view as well.
Yes, Hey, Michael.
First of all competition is nothing new to us if you remember back when you were a kid Jim play King of the Hill.
And that game will you try to knock off the guy that was on top of that amount.
So that does play in that.
This data.
Okay.
In our world for the last several years, where everyone is targeting Mr. At one is.
Attempted to try and steal share so listen competition is nothing new to us.
We estimate we look at our portfolio that over 50% of our stores have a competitor within a three mile radius.
And many of them are formidable competitors that we have the utmost respect for so we've been duking it out on the street and delivering an exceptional customer experience and I think at the end of the day.
Our numbers speak for themselves right, we're performing in a highly competitive market and where.
Winning share and we're maintaining over retaining customers and what we've built is a very very.
Very loyal customer base.
If I could just follow up on that is there a qishan ware.
As more players in the market annually.
The membership model it means that those consumers who would be interested in a car wash are probably going to be more loyal to a particular.
To a particular organization, which will mean that it's just going to be more difficult.
Track retail business.
As members are are tied up and they're going to remain more loyal is there any evidence of that.
Whats happening and how would you respond as that happens in the car wash industry become more consolidated.
Yes, so I think we're years away from that and I think the membership model is materially underpenetrated with respect to the use car park and how many total members. The industry. Currently enjoys so we collectively as an industry have this massive opportunity to change the way people care for their vehicles, taking <unk>.
Washington from a once in a while.
Treat if you will to part of their regular routine and thats happening today.
But you did touch on something that's really really important and that is I think there is a goal in this single share by almost everybody and that is.
How quickly you can convert somebody into membership.
There's a switching cost or I guess, a hassle factor of having to switch plans over to a competitor.
So it's a quest to try and get as many members as quickly as possible.
But you have to deliver upon our brand promise and so if you are not putting out a clean car as basic as this sounds Michael.
And doing it in a speedy fashion and doing a consistently great customer service.
Folks will over time go to the superior operator.
And the reality is the switching costs are not that prohibitive theres no upfront membership fees as no cancellation fees and so people can get in and out of programs relatively quickly.
Everyone is kind of emulating our low power low threshold model.
Unlike I'll pick on the gym space, where they make you jump through hoops to cancel.
That's not our approach.
At the end of the day, we have to earn that members business month in month out.
And that's why we're very very thankful that our retention rates have remained stable.
Because we've earned their business and we continue to do so.
Let me just add one quick follow up question and this is for Jay.
There's been a lot of focus on the impact of titanium you said that it's rolled out in 100 locations you've now factored it in but you've also indicated that you are having to be a little more promotional or saw it sounds like in order to drive that so can you just give us what sales and earnings lift you are.
<unk> as you rollout these titanium titanium offer in these locations. Thank you.
Yes.
Just one clarification it isn't a surprise I mean, what we've seen is as we offer an introduction I'm kind of a promotional introductory offer to incent that trade up we're able to grow that overall membership mix at a faster rate and just trying to do it organically at regular prices. So it's really not a not a <unk>.
Price.
Being a subscription business these customers tend to be sticky and it takes you've got to educate them on the benefits of titanium and that doesn't just happen overnight. So if you think about the sales and earnings lift what we've built in is 30% to 30 to 50 basis points.
From a comp perspective, and titanium will continue to build towards.
The tail end of this year, where we see the real benefit of titanium is in 2024 as we build this.
Titanium membership base, and we roll them to the regular titanium price.
Thank you.
Our next question comes from the line of Peter Keith from Piper Sandler. Please go ahead.
Hey, good afternoon, everyone. Thanks for taking my questions.
John will start off with you.
On this competitive fronts, there clearly have been quite a number of greenfield openings.
The last two years as the market has kind of moved away from acquisitions.
At the same time now just looking at the 24 it does seem to be some chatter that greenfield growth is going to slow across the industry is higher interest rates and I guess less capital available for sale leaseback. So.
What are you seeing out there with your industry discussions do you think.
In terms of this competitive growth there could be a bit of a slowdown over the next 12 to 18 months.
Yes, so I think youre spot on we expect new unit growth to moderate we're seeing a lot of operators out there that are capital constrained.
And some are actually paring back their growth plans and they've been out seeking incremental capital.
Coupled with to your point higher higher interest rate environment tighter lending standards.
So.
I don't think that this rate of growth that has been the last several years are sustainable.
And it's probably healthy that there's a little bit of a slowdown.
Okay. That's good to hear and then.
One other thing we've heard out in the industry and I'm curious if that's impacting you guys is just the usage with your subscription members. If there has been any change or slowdown in the usage rate.
Yes.
Yes, youre hitting on probably the most important metric that we look at inside our uwp program, which is utilization and we use the term engagement, but we haven't seen any reduction in member utilization and it's Ken.
Ken one of those leading indicators to churn.
So the fact that people are still enjoying it in these hot summer months.
We feel great about above that number so that coupled with looking at and this is all pre titanium our premium mix has remained stable and theres been no trade down.
And again, we've looked at this thing and we slice and dice different individual cohorts.
But the membership program has remained unbelievably resilient.
Okay, great to hear thank you John and Jeff.
Thank you. Your next question comes from the line of Chris <unk> from Stifel. Please go ahead.
Yes, thanks, good afternoon guys.
Jed I had a question about the 10% sales mix target for the new titanium wash.
I was curious if you have an expectation for maybe the platinum membership.
From the base package.
Just trying to understand whether.
You are seeing any kind of mix shift from kind of that base package to the platinum which may be viewed now as the new standard.
Yeah, Chris It's a good question and listen it's still early days.
At this point the focus is on driving that titanium mix, but youre hitting on something that's important and that's we have an opportunity there to take those base members and also trade them into platinum.
We view that as as an opportunity that we're going be able to lean on just a little bit more as we think about the second half of this year and early next year, but the focus right now is driving that titanium member mix.
Are you seeing what are you seeing in terms of the retail mix for titanium.
Okay.
Yes, so so retail uptake, we're seeing a healthy mix there as well.
As.
Customers are coming in and trying which which we view as a win and a good lead indicator to get people to trade into Uw's C. When you look at the retail.
Sales per awash in the markets that have titanium.
Seeing.
About $1 one dollar lift.
Okay. That's great. Thanks, I'll pass it on.
Thank you.
Ladies and gentlemen, just a reminder, should you have a question. Please press star one on your Touchtone phone.
Your next question comes from the line of Simeon Siegel from BMO capital markets. Please go ahead.
Hi, Good afternoon. This is Chris on for Simeon.
Two questions one could you maybe give us a little more insight into how you're thinking of the back half in terms of cadence and kind of in relation to your new same store sales guidance and then also is there anything in terms of what youre thinking about whether it's the economy or how youre pricing kind of just maybe a little more into your thoughts there.
Yes.
So listen when we when we laid out our initial guidance for 2023 in February we accounted for a wide range of outcomes to arrive at that zero to 3% comp.
As you've heard us say within that range.
First half first half comps down.
Flat to slightly down.
We did expect to be toward the low end of the range in the first half of this year.
And then towards the high end of the range in the second half of this this year, we still have factored in the little bit softer lap in the second half and then also the 28 greenfields of last year getting picked up in the comp and just that natural ramp serving as a tailwind to the comp store base.
Sure.
And while first half was at the low end of our expectations, we do continue to see retail.
A little bit softer than what we had expected and with that retail softness we thought it was prudent to modify that second half assumption too to account for what we see is a more likely range of potential outcomes.
Our second half now assumes comps in the low single digits compared to our original expectations in the 2% to 4% range and this this includes now a modest 30 to 50 basis point lift from titanium.
Okay. Thank you and then if I could just one more kind of housekeeping the 10% target for titanium did you give a timeline for that expectation.
What we said is at least 10% and at least 10%. It takes it's going to take.
We're seeing about a year to just build that awareness and get people to trade into titanium.
So it's a year after it launches in those particular stores. So this will be a little bit of a tailwind as we were rolling out the launch and introduction of titanium overtime.
And as I said in my prepared remarks, we expect to be done with the implementation by the end of Q1 in 2024.
Okay got it thank you.
Thank you.
Your next question comes from the line of Justin <unk> from Baird. Please go ahead.
Okay.
Sure.
Excuse me Mr. Klauber. Your line is now live. Please go ahead.
Hi, sorry, guys with Pete on for Justin.
Just sticking with the titanium <unk>.
Graham the at least 10% penetration can you give us a sense of why that's the right number just curious kind of how you arrived at that not that it's high or low, but just kind of thinking as to why you think 10% is kind of the right or at least 10% is the right benchmark.
Yes, it's still early days as we think about titanium and.
It's really just a handful of markets that are a great benchmark. We've tried a couple of different things to to hone in on what.
What pricing makes the most sense, how long to run the introductory pricing to make sure that we optimize or grow that titanium membership as quickly as they can without discounting to to people that would have traded up anyways.
So it's based on a limited number of data points that have run the full cycle of introductory pricing and then rolled off of the introductory pricing to to regular titanium pricing, yes, and if I can just add Chad.
To provide a little more texture to this question I mean, it's really a percentage of what price point too right. So as we look to widen this spectrum and offer more choices in this premium plan.
We're still staying on soft ground with respect to what that ultimate price point will be in from a pricing standpoint, we do look at pricing into a market specific basis.
And so nothing is locked in stone just yet so it really does boil down to 10% of what.
<unk>.
Sure.
We can manage that percentage by filling with pricing.
But we're looking to maximize profitability at the end of the day.
While offering our customers a wide variety of choices.
Yes, just to build on that just a little bit more color what is not factored into that 30% to 50 basis points going back to the earlier question right. We've got these $2 1 million UW existing <unk> members.
55% in platinum, 45% in base, it's that huge opportunity to trade those existing members up in addition to new retail customers coming through and being able to trade them at too into it.
Titanium and we really haven't factored much of that trade up and yet just because we haven't put a lot of as much focus behind it as we believe we can.
Got it. Thanks, that's helpful. And then just pivoting over to the cost environment you mentioned.
Some levels of places still out there just curious the key buckets chemicals utilities wages I think you said, 5% just what the outlook is for those buckets as youre thinking about the second half of the year do you think youll get to stabilization or is kind of a little bit of inflation kind of just going to be with us for a while here.
Thank you, yes. So if you think about that labor, we continue to <unk>.
Benefit from the labor optimization, and new staffing models that have been introduced we will start to anniversary those in Q4 of this year.
As you think about the rent expense that will be a headwind to the model. We originally had communicated on the year at $12 million increase in rent expense.
It looks like it's going to be a little bit closer to $13 million just due to the fact that we've accelerated the timing and when we close on some of these sale leasebacks. So.
That will be a little bit more of a headwind.
And then as we think about utilities and maintenance services, we expect those to be as a percentage of sales in line with what we experienced in Q2.
G&A similar we expect it to be in line with what we saw in Q2.
But starting to really focus on how do we flex that G&A and leverage that G&A further as we go into 2024.
Great. Thank you so much.
Thank you there are no further questions at this time I would now like to turn the call back over to Mr. Lai for any closing remarks.
Well, thanks, everyone for joining the call as we dive into the second half of 2023, we are energized and determined to keep on building keep on improving and keep on adding even more value for our customers we have.
Got an amazing foundation in place that starts with our people and we're well positioned to continue to scale to even greater heights, we're very optimistic about the future. Thank you.
Thank you, Sir ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a lovely day.
Okay.
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Thank you.
Okay.
[music].