Q2 2023 European Wax Center Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, thank you for standing by while commentary.
On our second quarter fiscal 2023 earnings conference call. At this time, all participants are in a listen only mode.
So to speak of his presentation, there will be a Q&A session in order to facilitate as many participants as possible. We ask that you. Please limit yourself to one question and one follow up joined the Q&A session. If you have it.
No questions you may rejoin the queue.
At this time I would now like to turn the conference over to Bethany Johns Director of Investor Relations Ma'am you may begin.
Thank you and welcome to European Wax Centers' second quarter fiscal 2023 earnings call with me today are David Burke, Chief Executive Officer, David Willis, President and Chief operating Officer, and Stacie, Shirley Chief Financial Officer.
For today's call, David Burke, and David Willetts will provide a brief overview of our second quarter performance and discuss our priorities for fiscal 2023.
Stacy will provide additional details regarding our second quarter financial performance and our fiscal 2023 outlook. Following the prepared remarks, David thinks he and David will be available to take questions.
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 securities laws, including statements about the outlook of our business and other matters referenced in our earnings release issued 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 issued 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 release the results of any revision to our forward looking statements in light of new information or future events.
Also during this call, we will discuss non-GAAP financial measures, which adjust 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 in our earnings release our.
A live broadcast of this call is also available on the Investor Relations section of our website at investors that wax centric dot com.
I will now turn the call over to David Burke.
Thanks, Bethany and good morning, everyone. Thank you all for joining us today before discussing our Q2 results. Let me say a few words about this morning's news.
As I'm sure. Most of you have seen by now we issued a press release earlier today announcing that after nearly five years as CEO of European WAC Center I am excited to transition to the newly created executive Chair rule.
I couldnt be more thrilled to share that David Willis, our current president and Chief operating officer will become our next CEO effective September 32023.
David will join European WAC Center, seven years ago, and has worn many hats, including president COO and CFO over his tenure.
He has been an integral part of our unit growth and development story and my key partner in designing and executing our strategic roadmap.
Most importantly, David embodies the core values that drive European WAC centers best in class culture by ensuring associates have the opportunities and resources to achieve their goals I could not be more confident and his experience franchisee relationships deep knowledge of our business model and robust leadership.
Skills, all of which make him perfectly suited to become our next CEO .
In addition, we announced that Gavin O'connor, our chief legal and human resources Officer will transition to the newly formed leadership position of Chief administrative officer, Gavin will assume responsibility for our supply chain and technology functions. In addition to his current responsibilities of legal talent ESG and <unk>.
Risk management.
This transition is the culmination of a thoughtful succession planning process developed by the board and me over the last year, which is also involve the evolution and strengthening of our full executive leadership team.
This team now includes Stacie Shirley.
<unk> and retail executive and long term public company, CFO and Chief Commercial officer, Andrea Wasserman responsible for driving network sales through our attract more buy more and visit more pillars.
Along with veteran team members draw working leading our unit growth initiative as Chief Development Officer, and Julie Hauser bladder supporting the field as Chief franchise Officer.
Board and I are confident we have the right executive team in place for our next phase of growth.
Given European wax on our strong foundation and are clear and demonstrated growth trajectory. It is the right time for me to complete this transition and I look forward to extending my tenure at EWC through my role as executive Chairman.
It has been an incredible honor to serve as European Whacked Center's CEO and I am so proud of our many accomplishments that have positioned us for continued growth.
Our founders envisioned a professional consistent hygienic and efficient experience for guests across the country. Almost 20 years later and despite navigating a global pandemic and an uncertain macroeconomic environment, we have expanded our presence as the undisputed leader in out of home waxing.
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Since 2018, we have significantly grown both our top and bottom lines and expanded our footprint as the dominant industry player.
And since our successful IPO exactly two years ago, our sales consistently match, our dues and we have been able to return over $200 million to.
We are well positioned to take more share in this highly fragmented industry and I'm confident that under David Willis the best is yet to come.
Most importantly, I am thankful for the best in class culture, We've created where our associates live our values can be their authentic selves and are able to do their best work.
Now diving into our Q2 results. We are pleased to deliver strong Q2 performance as continued franchisee demand drove robust new center openings and our strategic initiatives performed in line with our expectations.
In the second quarter, we generated $254 million in system wide sales $59 million in total revenue and $21 million and adjusted EBITDA, representing 10%, 11% and 14% growth respectively. We delivered two 6% same store sales growth.
And opened 25 net new centers building on momentum from Q1 during which we set the record for the number of European WAC centers opened in a single quarter.
We also drove more than 10% growth in wax pass sales during our May June promo period, which symbolizes a deepened relationship between European Whacked Center and our most valuable guests.
Guests can purchase WAC, Pat wax passes year round, we run enhanced promotions twice a year to drive outsized sign ups and renewals.
As a reminder, wax passes engender brand loyalty and drive repeat visits by rewarding guests with a discount on prepaid body parts specific packages.
<unk> like a membership program the wax past supports predictable guest engagement.
Blacks pass holders generate two thirds of our visits and network sales are routine gas cohort behaves similarly, and contributes an additional 10% of sales and visits and we're pleased that both groups remain consistent in their waxing frequency and spend we continue to focus on driving bigger share.
Wallet and increase frequency with these loyal guests, who together make up over 75% of our recurring revenue stream.
As we discussed last quarter. We also deployed several initiatives in Q2 to engage episodic guests and we are happy to share that we observed some recovery. Among this group as we exited the quarter, David Willis will touch on guest trends in depth later on.
As a result, we are pleased with how the second quarter unfolded and are saved in dos match. Once again, we believe our results reinforce the strength and consistency of our business model anchored by our growth vectors unit growth and in center sales growth.
The predictable nature of our most loyal guests and the organic unit growth driven by our robust pipeline give us confidence in reiterating our full year financial expectations for 2023 with that I'd like to turn the call over to David Willis to discuss our recent trends and growth vectors David over to you.
Thank you David and good morning, everyone.
Before I begin my remarks, I wanted to say a few words about this morning's announcement.
I am both humbled and honored to have been selected as European WAC centers next CEO .
And I want to express my sincere appreciation to all of our associates and franchise partners for their continued support.
We've been on a transformational journey since I became involved with the company seven years ago, and I could not be more excited about our future and the growth opportunities ahead for all of Us <unk>.
Importantly, I also want to thank David for his exceptional leadership and for the contributions he's made to European wax centers success.
During his tenure, we've expanded from nearly 700 centers to more than 1000 centers today.
Grown network sales at double digit rates.
<unk> doubled bottom line performance and successfully became a public company.
All while creating a world class culture for our associates.
I look forward to continuing to partner with David in his new role as we continue our growth and deepen the brand unparalleled relationships with our guests.
Turning to the second quarter as David mentioned, our focus on our two key growth vectors remains unchanged.
Terms of our first priority unit growth.
With our pipeline of new locations and the health of our franchisees remained strong.
As a result, we continue to feel confident in targeting over 10% unit growth this year.
In Q2, we opened 25 net new centers across 19 different states.
We also reached an incredible milestone for the brand.
Opening our one center in Louisville, Kentucky.
Means a lot to our team to celebrate this achievement in the Heartland of America.
While the top five states with the most licenses yet to be developed California, Florida, Pennsylvania, Texas, and New York are along the coasts and comprised approximately 40% of our pipeline, we still have a lot of white space in the middle of the country.
Through over 1000 locations in 45 states, we have demonstrated that our concept translates across all geographies.
We're also proud that this milestone location was opened by a smaller franchisee Mark MC who despite a multiyear pandemic was able to grow from 1% to five centers with us.
Mark also has plans to continue densify his local markets and he exemplifies the partnership with franchisees that are just as important to us is our relationships with the institutionally backed operators, who already comprised one third of our pipeline.
We expect that over the next few years smaller independent operators self funded multi unit developers and private equity backed operators will each operate approximately one third of our centers.
Last month, we gathered more than 100 of our franchisees together to collaborate and share best practices.
This was a high energy environment.
The enthusiasm for both our brand and our future was truly palpable.
It's easy to see why demand from franchisees of all sizes remains robust.
Given the relatively modest initial investment for our centers, our franchisees have sufficient access to capital to fund our growth even in a high interest rate environment.
They have access to several lenders, who understand our model and its robust financial returns and who are committed to supporting the network as it expands.
We also continue to find ways to maximize franchisees' capital investments by improving the build efficiencies and our new design elements and leveraging our scale to drive savings with our vendors.
Operationally, we are focused on driving faster breakeven preparing new centers for opening and building our pipeline of wax specialists to support near term and long term growth.
We recently rolled out a new market playbook for franchisees featuring recommendations on where to find talent and attract them to our best in class brand.
Our beauty School partnership program continues to expand now at 27 schools in six states, including our top markets.
Scheduling efficiencies have improved labor utilization rates year over year.
This drives throughput and profitability for the centers.
As a result of our efforts Q2 whacks specialist staffing levels were in line with our targets.
We are confident in our ability to provide excellent service and our existing centers and to support New center growth through our wax specialist pipeline initiatives for years to come.
Now turning to our second growth vector driving in center sales.
This benefits both system wide and same store sales growth.
During the second quarter, we deepened our executive team by adding Andrea Wasserman as our first ever Chief commercial officer.
As Andrea digs in she will work to identify areas for optimization and leverage data insights to drive sales through actionable marketing and merchandising initiatives.
Within marketing, we remain focused on our three pillared attract more buy more and visit more strategies to engage new and existing guests.
Our attract more pillar is designed to drive new guest acquisition and its cornerstone is the new every body smooth campaign, we launched in May.
And the campaigns first two months it generated significant year over year increases in AD awareness consumer consideration and paid media performance.
We are more than pleased with the results so far and we'll continue to monitor its performance as we evolve and build upon the campaign in the back half of the year.
Consistent with Q2, we also intend to optimize our marketing spend in the back half to lean into action driven performance media designed to support our near term guest acquisition and transaction goals.
Our second pillar <unk> is designed to increase the average spend per ticket primarily by one adding.
Adding on services per transaction or SPT and to attaching more retail products.
As I mentioned last quarter, we believe that bundling services or services and products has meaningful potential for us.
We began testing bundles in our corporate owned centers this summer.
And more recently expanded the pilot to more than 100 centers across the network.
While it's too early to measure the learnings anecdotally, we are hearing positive feedback from WAC specialists.
In terms of retail product, we anticipate rolling out in suite merchandising tools that empower wax specialists to leverage their trusted guest relationships to suggest their favorite products.
We expect this to drive retail attachment and increase spend per ticket.
Our third pillar visit more is designed to increase frequency among existing guests.
Wax pass holders in routine guests have maintained their frequency, while generating over 75% of annual system wide sales.
While we began to see softening frequency during Q1, among a portion of our more episodic guests. We deployed several initiatives in Q2 and have been pleased to see some recovery among this cohort recently.
We remain focused on growing episodic engagement and converting them into wax pass holders and routine guest through our ever evolving CRM tools.
Ultimately with wax pass holders visiting more than twice as often as episodic guests. The wax pass remains our most powerful frequency driver.
I'd like to thank our operations associates and franchisees teams in center, who drove more than 10% growth in wax pass sales. During the Q2 promo period. This helped us deliver a strong second quarter and gives us confidence in our outlook for the remainder of the year.
Lastly, as the dominant player in our category with a strong and resilient core service offering we are always looking at opportunities to expand our brand and the model.
Just on our established leadership position and the trust that guests place and European Wax center to remove unwanted hair, we believe that offering another modality could capture an incremental customer demographic and enhance already robust four wall economics.
Therefore in the coming months, we will launch a small laser hair removal test in a handful of New York centers to help us evaluate this potential over time.
With that I'd like to hand, the call over to Stacie Shirley to review, our financial performance and guidance for fiscal 2023, Stacy Thanks, David and good morning, everyone.
Before I begin my remarks, I'd like to remind everyone that in some instances I will speak to adjusted metrics on this call you can find reconciliation tables to the most comparable GAAP figures in our press release and 8-K filed with the SEC today.
Turning to our financial performance, our second quarter played out largely as expected Q2 system wide sales increased 10% to $254 2 million and total revenue increased 10, 7% to $59 1 million.
Overall top line growth was driven by our two growth vectors, including 12, 3% unit growth over the second quarter of last year.
We also delivered a two 6% same store sales increase in line with expectations driven by both our ramping and mature centers.
Consistent with Q1 higher average tickets were the primary driver of our comp growth.
From a profit standpoint second quarter gross margin of 71, 4% was in line with our full year guidance.
Second quarter, SG&A was $14 $1 million and the margin of 23, 9% with a 460 basis point improvement from Q2 last year.
This improvement was primarily driven by two factors.
The non recurrence of $1 4 million in professional fees related to the secondary offering and our whole business securitization that was completed in the second quarter last year.
And to a lesser extent the timing of certain professional fees and travel expenses. This year than we had expected to occur in Q2, but now expect to occur in Q3.
Q2, adjusted EBITDA, which excludes transaction related expenses increased 13, 8% to $21 2 million adjust.
Adjusted EBITDA margin was 35, 9%, representing a 100 basis point improvement year over year.
Below the line adjusted net income was $5 8 million.
This differs from adjusted EBITDA that I just mentioned due to three primary reasons first interest expense was $6 8 million. This is a decrease from $8 1 million last year, primarily due to $2 million of debt extinguishment charges incurred last year, when we refinanced our long term debt and locked in a fixed five five.
Percent rate.
Second Q2, depreciation and amortization were $5 1 million.
As always the vast majority of this line item relates to the noncash amortization of intangible assets, such as franchisee relationships and area representative rights that were established prior to our IPO.
And third the income tax component.
We released our valuation allowance on deferred tax assets at the end of 2022 as.
As a result, we expect to recognize annual income tax expense compared to very negligible expense incurred during the periods covered by the valuation allowance.
Our Q2 GAAP net income reflects $2 8 million of tax expense and adjusted net income reflects $3 6 million of adjusted tax expense.
Q2 tax expense was higher than initially expected due to changes in state tax rates that impacted our deferred tax assets during the period.
In terms of the balance sheet, we ended the quarter with $54 4 million in cash $396 million outstanding under our senior secured notes and nothing drawn on our $40 million revolver.
Net leverage continues to decrease ending Q2 at four five times adjusted EBITDA compared to four eight times in Q1 and five six times in Q2 last year.
We continue to expect to Delever approximately a full turn from 2022 to 2023.
Operating activities generated $17 million in cash during the second quarter compared to investing outflows of approximately 250000.
We repurchased less than $1 million of stock during the quarter and still have approximately $29 million remaining under our current buyback authorization.
Our ability to generate strong free cash flows gives us the optionality to deploy cash over time to continue to create value for our model our network and our shareholders.
Turning now to our outlook for 2023 and.
As David mentioned, the wax path and routine gas driving more than 75% of our system wide sales have continued to show resilience and consistency.
Demonstrating that European Wax center provides a non discretionary part of their personal care routine.
Given stable trends for these core guests and the improvement we've seen with episodic guests since implementing several initiatives in Q2, we are pleased with how we enter Q3 and continue to feel good about our existing full year guidance.
In terms of new centers franchisee demand and unit growth remained strong as a reminder, we delivered more than 10% unit growth in 2022 and expected to deliver another 10% in 2023.
A handful of Q3, new centers opened a few weeks early at the end of the second quarter, enabling us to reach 59 net new centers in the first half of the year.
We had a clean line of sight to the balance of our fiscal 2023 openings and we remain confident in our existing full year outlook of 95 to 100 net new centers.
Our expectations remain unchanged for 2023 system wide sales of between 965000 $990 million and total revenue between 222 and $229 million.
Applying 7% to 10% growth for both metrics.
We continue to expect a mid single digit same store sales increase for the full year and mid single digit comps in Q3, and Q4, driven by ramping centers solid wax pass sales and the tactics underlying or attract more buy more visit more strategy that David covered earlier.
Okay.
We are also reiterating our existing adjusted EBITDA outlook of $77 million to $80 million as David just shared we anticipate launching a laser hair removal test and six New York centers in the coming months.
We estimate that we could incur up to $1 million of SG&A expense to support this test primarily driven by sound foundational guest research and marketing to build awareness and test market.
While this investment was not contemplated in our original guidance for fiscal 2023, we still expect our full year adjusted EBITDA to be within our existing range.
As it relates to the cadence of the year the timing of products sell into the network and SG&A expenses, including advertising certain professional fees payroll and travel has shifted since we provided our initial expectations for fiscal 2023.
As a result of this inter quarter timing and incremental laser related costs. We now expect adjusted EBITDA margins to be in the low <unk> in Q3 before peaking in Q4 and.
And we continue to expect mid <unk> adjusted EBITDA margins for the full year.
Our 2023 interest expense outlook remains approximately $28 million slightly weighted to Q4, given a 50 <unk> week in 2023.
Continue to expect our 2023 blended statutory tax rate to approximate 20%, which is based on known year to date exchanges from class B to class a shares.
All in we expect adjusted net income within our existing range of 22 to $24 5 million.
In conclusion, we believe our business remains on solid ground delighting guests with an unparalleled experience and generating strong free cash flow we.
We are pleased with the progress we have made in our guest trends, which enabled us to deliver on our expectations to date and to reiterate our outlook for the balance of fiscal 2023 as.
As we look ahead, we expect our continued efforts to generate strong topline growth and EBITDA margin expansion in fiscal 2024 and beyond.
With that I'd like to turn the call back to David Berg to wrap up our prepared remarks and open it up for Q&A David.
Thank you Stacy we are the undisputed leader in a highly fragmented industry delighting guests and more than 1000 centers across 45 States are best in class business model is generating continued enthusiasm and reinvestment from our franchisees who enjoy average cash on cash return of <unk>.
60% at maturity.
And only one third of our unit growth target of 3000 centers. We believe we have incredible runway within our existing model to continue drawing for years to come.
We expect our focus on our two key growth vectors will enable us to generate long term revenue growth leverage our fixed cost profile for EBITDA margin expansion and generate significant free cash flow over time.
In turn creating significant value for European WAC centers franchisees.
And shareholders.
I look forward to working with David Willis and the leadership team as we continue to grow our leadership position.
We'd now like to open up the call for questions operator.
Certainly ladies and gentlemen to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
As a reminder, in order to fulfill gene as many participants as possible. We ask that you. Please limit yourself to one question and one follow up if you have any additional questions. You may rejoin the queue. If time permits please compile the Q&A roster.
Yes.
First question coming from the line of Randy <unk> with Jefferies. Your line is now open.
Hey, good morning, everybody, David Congratulations and David Congratulations so thanks everybody.
Great.
Look forward to working with David and David Thanks for everything for the last five years and still look forward to working with you.
You guys had a lot of good things to talk about on the call.
Maybe give us some perspective on.
The episodic guests because I think that's showing a real good signals of improvement there.
Any other kind of items you would call out that are kind of.
Important for us to kind of take away and as you think about the dynamic of ticket versus traffic you did talk about ticket driving a lot of the time, but it sounds like we should be expecting a little bit more balance and ticket versus traffic going forward just wanted to get your thoughts there and then I have a follow up thanks.
Hey, Randy Thanks.
Listen let me just start with the Great News is our wax pass holders in our routine yes have behaved consistently continue to come on the same frequency spending the same amount of money. So thats that ring fence of 75% of our revenue stream has been absolutely consistent to your point, we were pleased to see some recovery in our episodic.
As we talked about in our Q1 announcement, we did some specific things.
First and foremost with Andrew Ross from coming on as our Chief commercial officer, and as we mature our data warehouse really have dug in to say hey, what's going on with that episodic guest who issue how do we go out and reach her.
And we did a couple of specific things one was we were able to find that episodic guests with some real targeted emails.
And drive that episodic guests back into the into our centers during the second quarter, we did offer some incentives for them to come in and get a.
The value of a reduction in their next service to help drive them back into the into our centers. So we're very pleased to see that recovery with our with our episodic guest again, Randy you know thats for context, Thats kind of 5% to 10% of our of our guest profile. So the tail doesn't wag the dog here.
It's really us making sure that our most loyal guests continue to come but we were very pleased with the work that we did around driving it up sort of guessed. The other the other key thing. We've done is really moved our media or media spend to lower funnel to really some action driven media that so we're pleased with the initial results of that and that will continue in the second half of the year or so.
We continue to feel good.
We started the quarter obviously, the consumer is still something we keep an eye on in the macroeconomic situation we're in but.
Probably what we're most pleased with is that we delivered Q2 in line with our expectations.
And Randy this is Dave.
I'll just touch on your ticket versus traffic. The positive news is all of our cohorts continue to comp positive. So that's another quarter, where we feel good about that.
Is a similar story that we've had in prior quarters, where we're getting there more from ticket value.
More so than traffic volume.
Done it across the board price increase we are seeing some of our guests.
Purchase the higher dollar value body services, and we've seen a handful of our franchisees take price that are operating in markets that had elevated minimum wage rates. So.
Still positive for between the ramping and the mature centers.
Still getting there more from ticket value then from traffic.
One thing I would add to that Randy is we also saw a slight increase in our services per ticket.
Our WAC specialists are doing an even better job of driving those sales and driving those guests for additional services, so that helped slightly as well.
Thank you and David Willis one other thing that really kind of caught my attention in your prepared remarks, where you talked about the partnering with the franchisees talking through.
Some additional build efficiencies helping to focus on that that breakeven pace, maybe elaborate a little bit on that because I think thats super important where kind of continues to kind of underpin the strength that youre seeing from franchisees to open. So so maybe a little bit more elaboration on what you talked about earlier in the prepared remarks.
ARX would be Super helpful. Thanks, you bet. So while we already view kind of our upfront capital investment as a relatively modest investment compared to some other concepts. We do view it our responsibility to continue focus on value engineering cost out of the fixtures, we have great partners that we work with our franchisees.
In that respect and so that's that will be an ongoing initiative that.
We work with both our vendors and our franchisees while we got the spec book is established we will continue to look at opportunities to value engineer cost out of the upfront capital investment, we're asking our franchisees to Mike.
Great. Thanks, guys.
Thanks Randy.
Thank you and our next question coming from the line of Dana Telsey with Telsey Advisory Group. Your line is open.
Hi, good morning, everyone.
As you think about regional trends and what Youre seeing in terms of availability of statistics. What did you see in California were there any regional trends to note and the cadence and with the promotion any different insights. This year from the promotion than you've had in years past and then I have a follow up thank you.
Hi, Dana this is David.
As you May recall, we really focused.
Extensively in California is that state came back online last night to come back online post pandemic.
And some of the best practices that we learned with the successes that we had in California. We've now applied those in other markets, where we have a need to define a statistic.
I would say there is no specific region that we are doing better or worse I think when I look at our targeted staffing levels across the country that we are in line with our targets across the country. We feel pretty good of course, there are always opportunities in certain markets, where we need to.
Focus our Waxer pipeline initiative efforts and our outreach to beauty schools, but overall I don't think that were seeing a given state or a given region is trending below.
Where our targets are on overall in terms of.
Dana in terms of promotions. We are we are using targeted promotions through our CRM efforts.
To reach certain guests cohorts. So it's not so much that we are using a certain promotion in a given geographic reach and if I understood. Your question specifically.
And Dana specifically on sort of as you know we run a wax pass promotion two times a year, we were very pleased with the <unk>.
The lift that we saw in wax sales during our May June promotion that we just came out of.
And as I think everybody on the call understand that wax past guests visit us more often and spend more money stays with us longer refers more guests. So it continues to be a key driver for our field team to have higher conversion rates on wax fast, particularly during the.
The promotional periods, where we outside in terms of the sale of our wax passes and we were very pleased with how that came out in the quarter.
Got it and then just on the laser test is it did I hear that it's going in five stores, how you price how you're pricing it.
And frequency of laser versus frequency of waxing, and how you're going to market it and what what measures.
What is the sign of success, how long do you expect to test it for before you move on thanks, Dana that was a six part.
Thanks, Jonathan.
Youre combo question VW.
Dana as you probably are.
Curtis talked in prior quarters. So we're going to focus on those things that what does the brand gives us permission to do and what does the guest gives us permission to do from from survey work that we have conducted we feel confident the guests would give us permission to remove hair. It through other modalities I'll start with our core business performance.
<unk> is so solid thats, whats really giving us permission to launch this pilot.
Later in the year, we are talking to you guys today, because we will be in the market talking to guests here over the next few weeks and we didn't want to catch our analysts and our investors off guard by discovering we're exploring pilot at we're exploring laser through.
Website marketing so.
What we want to do we think Theres a couple of hypothesis here. One we think we can attract more new guests to the brand that our lasers with somebody else. So thats one objective that we want to measure and evaluate two we want to increase share of wallet. So we think there is an opportunity with our existing guests that are <unk>.
<unk> certain body parts that may have a propensity to laser other body parts.
And we really want to leverage our unique value proposition, if you think about that industry.
As European WAC center can be agnostic as to the form of hair removal for those types of guests and then finally, we want to make sure that we can operationally execute this and provide an amazing guests journey like we do with our with our core waxing gas so.
It's months in the making in terms of pricing marketing all of those logistics those are.
We have ideas there we have formulas, we have approaches and strategies, but we will be in market. Later this year and happy to report how things are progressing once we get a few a few weeks if not months I would say this Dana final comment we're going to be very deliberate in terms of measuring results. So in terms of whether there.
This goes beyond six centers thats likely going to that will be informed with data performance and a decision that's likely going to be a 2024 decision.
Thank you and congratulations both David Thank you. Thank you Dan Thanks Dana.
Yes.
Thank you and our next question coming from the line of Scot Ciccarelli with <unk> Securities. Your line is open.
Hey, Good morning, this is Josh on for Scott.
So you mentioned last quarter that the petition turnover rate in the first 90 days, we are starting to improve so curious if that's continued and what your outlook is there and then how do you feel about the pipeline for new wax specialists, where do you think about the higher and keeping pace with your new center targets. Thanks.
Hey, Sean. Thank you so in terms of turnover rate no no material trends.
Positive or negative.
When I talked in our prepared remarks about our targeted level of whack specialist per center, we are in line with those targets.
Throughout the country. So all in we're feeling good in terms of our confidence in the pipeline and our ability for our franchisees to recruit whack specialists I think the best kind of bellwether is our franchisees continue to open centers and we continue to support them and staffing those centers. So as of today, we feel great about the staffing level.
<unk> to support our guests within our existing centers and we feel very confident that.
The Waxer pipeline initiatives, we have in place working.
Concert with our franchisees should enable them to continue to recruit and staff their centers new centers that come online.
Got it okay. Thank you and then one quick follow up it sounds like wax pass sales were strong during the quarter. So was that primarily just a function of the promotions you are running during the period or is there anything else you'd call out there thats, helping to drive that strength.
Yes, I think Sean it's David.
As we've talked about May June and November December are too promotional <unk>, we put a lot of focus on it our franchisees are phenomenal in terms of executing because they know the value that our wax pass holders bring to the brand.
And bring into the four wall contribution to their centers. So it's just it's just super focused and again, we're really pleased with the kind of year over year lift that we saw during the May June timeframe.
Got it okay. Thank you thanks.
Thanks, Sean.
Thank you and our next question coming from the line of Jonathan Komp with Baird. Your line is open.
Hi, good morning.
I wanted to ask about the same store sales outlook you maintain the full year outlook for mid single digit. So would you expect both third and fourth quarter to be in that range and can you maybe just highlight some of the key factors driving some acceleration from the Q2 trend and then Stacy can I can I ask on the system sales what are your what are you.
Roughly similar system sales Q3, and Q4 or are there other factors to think about seasonality between the quarters.
Sure sure so on the on the call.
So we didn't give any further guidance other than mid single digits for the year. So you can take that to mean.
We expect similar comp Q3, and Q4 and what we see is driving that is just to continue on the.
Strengthen our waxed ourselves and some of that kind of bleeds over into Q3, and then again the promotional period that we'll have once again in Q4 and then also just the strategy that we have been talking about.
As it relates to our the buy more attract more and visit more and those marketing efforts as a result of Android coming on and looking at everything.
With a slightly different lens into the strength of those kind of will continue which is what gives us confidence in that guidance.
As it relates to just the overall cadence of the quarter and reiterating our guidance for the full year a couple of things I would note and so on a topline basis. If we think about on system wide sales again, we'd expect those to be roughly even between those two quarters and there will be a little bit of shifting as it relates to EWC revenue.
Because as you and as you know as a franchise or some of that product revenue for us it hits, our P&L differently than it does the franchisees.
We're doing the sell in of that product. So a couple of things have happened.
We had some projects in LTE product that shifted to a couple of weeks early in Q2, and then Theres also a couple of retail launches the timing of that might shift into Q4. So just think about that as you're looking at your model specifically to our revenue line.
As it relates to expenses, we talked about the shifting of some expenses this quarter and it was really just some timing from professional fees and marketing shifting into Q3. We had also if you recall on our Q1 call had discussed there was about $1 million of expenses the same categories and <unk>.
<unk> payroll that we expected to shift into Q3, and then the last piece that we called out this quarter was the investment in laser and in that pilot.
$10 million, which is a number of things are foundational investment that we're making.
Consultant surveys those sorts of things as well as marketing around the island and so as you think about that piece is going to be a little heavier in Q4.
So all in all and we also gave the guidance for the year and we still expect to hit the mid Thirty's on our EBITDA adjusted EBITDA margin.
With some additional guidance for Q3 being in the lower and the lower thirties.
Alright, Thats all very helpful detail. Thank you and then just one follow up going back to the laser test not to ask too many questions about a small test, but I note that the discussion previously highlighted.
Your view of some of the advantages from the consumer side of waxy versus laser. So just wanted to get your current thoughts if they're thinking about their has changed at all and then.
Administering laser in a franchise model could you just talk through some of the operational factors that you're considering to test out here.
Yes, John So I don't think are as we think about.
This pilot we monitored whats.
That form of hair removal modality.
As we step back and really looked at it we said how can we maximize four wall profitability within our existing footprint.
And what the guest gives us permission to do this based on survey work. We think we think they might so that was the catalyst was how do we optimize.
Revenue and EBITDA.
And our what we think are already pretty robust four wall economics is this an opportunity to further enhance that.
In terms of how do we operationalize this across the franchise network, we're going to learn a lot in the six centers and candidly is based on the homework. We've done the regulatory environment varies by state. So we're starting.
In a state where I think operational execution should be.
Easier than another state that will inform our ability to go to other states and execute this where regulations are a bit more and there are certain states that likely we will never go so I don't want to.
I don't want to commit to <unk>, we figured this out in terms of a full network rollout. This was intended to be a small isolated pilot that will inform kind of where we go next with the potential of laser but were incredibly excited at least about its potential.
Okay.
Okay, great. Thanks again.
Thanks, John .
Thank you and our next question coming from the line of John <unk> with Guggenheim. Your line is open.
Congratulations to you guys.
Tony I wanted to start with.
How would you characterize this waxed paths.
Well.
Compared to last.
Alright in terms of not just volume, but sort of composition.
Renewals versus new right and then I guess the other part of that <unk> members what percent of those are renewing the next time.
Package runs out and they are eligible to renew.
John So I'll start with I'll start.
With the last part of your question, we have not cited previously the specific percentage of renewals on wax pass as we continue to evolve our data warehouse, we look forward to being able to share with you. The specific percentage of renewals in terms of overall performance I would say.
One we're very pleased as David said in his prepared remarks, I would say it operated on par with prior with prior spring wax past promos. When you look at the growth in the network the 10% lift year over year, we feel we feel good about that.
As you know John the performance of wax pass.
Those are leading indicators of what we would expect to see future visits in the back half of the year and into <unk>.
2024, so all in I think we feel.
Especially against this macroeconomic environment that it performed in line with expectations performed consistently with where we've seen prior spring promos.
That is in part informing kind of reaffirmation of outlook for fiscal 2023.
Okay.
Separate topic.
I know you want to improve.
Four wall returns right for franchisees now.
Changing the investment helps but the bigger thing right is getting to 1 million Bucks of <unk> faster, So maybe give us.
Sort of updated thoughts right because there was a model that you put out during the IPO right. So.
500000 year, one right is getting up to a $1 million over four years.
Our new cohorts exceeding that and how quickly do you think.
You can get to that.
Kind of a terminal rate.
With a network effect and other other initiatives.
Yes, John So great question.
There's a couple of things we're doing this year, specifically to focus on faster breakeven our operations team recently launched kind of a staffing playbook for Ncos.
<unk> been through leveraging all of the wax or pipeline initiatives.
That are that we support our franchisees and packages. So a new center kind of has a goto playbook for what to do when in their preopening cycle from a staffing and recruiting standpoint.
Andrea <unk> recently launched a marketing playbook for <unk> that includes packaging of some initiatives that we have found to be quite successful plus some local initiatives that are new to the network.
We plan to do by the end of this year is have this pre what we call pre NCO opening playbook and discipline and rigor that says here are the.
Here's the checklist do you need to complete to qualify to open your center and those all of those activities will be informed with data that would say if you step at this level. We know you can hit a certain level of revenue in month, one month three month six.
You build your guests filed to this level prior to opening we know with data that you can achieve revenues of X in month, one why in month, three and month six so the two the staffing playbook and the marketing playbook have been released to the network. There's a few other steps that we continue to work on that we expect to wrap up by end of year.
But the goal of all of this to your point John is to get faster breakeven maximize revenues in year. One we have seen with data when you open with momentum our franchisees tend to maintain that momentum through the maturation curve Hey, John just to build on David's comment.
It is an absolute key initiative cross functionally for US here at EWC with the commercial office marketing team and the ops team a key initiative is how do we get to breakeven faster how do we how do we ramp faster. So it's front and center in terms of our.
Our priority is out in the field I think kind of the proof in the putting the year is that.
We feel incredibly confident about are now close to 10, plus 10% year over year growth in terms of units have feel great about that and it's our it's our current franchisees that are continuing to reinvest in our brands right, that's where our growth is coming from.
And it's all because of that 60% cash on cash returns and we know that where we can move that from four years to three years, it's just going to accelerate that flywheel and helped drive help drive unit counts. So you pick a good topic, one that's front and center for US and we know that can drive continued growth for us from a unit standpoint.
Thank you.
Alright, John Thank you.
Thank you and again, if you would.
I'd like to ask a question. Please press star one one.
And our next question coming from the line of Kelly <unk> with Citi. Your line is open.
Hi, Thanks for taking my question I just wanted to follow up on an earlier question.
Do you continue to expect ticket to be the main driver of comp growth.
Second half of the year or should we see more of a balance between traffic and ticket that's going to drive the acceleration in Congress.
I think we will start to see more of a balance as we look at the balance of the year the remaining part of the year.
At the different initiatives that we've spoken about right to drive traffic to continue to reengage that episodic guests all of those things will drive higher traffic.
That is the intention of those initiatives and so I think there will be more balance sheet still in this quarter, we still had a little bit of that tailwind of the pricing that we took last year.
Also note that some of our franchisees have taken price, where they thought that it was appropriate but going forward, we would expect it to be more balanced.
Got it.
I'm wondering if you could elaborate on the bundling tests that you've been running what is what are the bundles look like and how has the customer responded are these initiatives that you would eventually deploy as part of your broader promotional strategy.
Hey, Kelly, we certainly hope so.
When we talked last quarter, we had literally I think a few days before had launched the bundles. There are six versions of the bundles. Most of these are service bundles and we offer one that is a Brazilian bikini and our product bundle.
We used the first several weeks of just operationally pressure test our ability to execute these in center, we have since rolled those out more recently two 100 centers all of these bundles. So I think we probably have enough data to say this is definitively going to go to the broader network. What I would say is the early reads anecdotally worked.
Quite pleased with it and most importantly, the WAC specialists are pleased with it. They view that these are easy to execute so we're not putting extra pressure on them to try to sell a second service or another product.
So right now we're in 100 centers will continue to measure that if those.
Continue to perform well then we would ultimately roll those out to the balance of the network based on results.
Thank you and just last one for me.
To follow up on the laser hair test I'm, just curious do you need to hire a certain specialist or can you kind of train your existing.
<unk> expectations.
Later, just curious how that.
Yes, so at least in the at least where we're starting in New York.
We will hire some laser tax has as are the franchise centers that are participating this pilot and we expect to cross train our WAC specialist as well there are other states.
That may not be possible, but at least in New York, where we're starting the goal is to hire experts that are already familiar with this service administered this service as well as cross train our WAC specialists.
Got it thank you.
Thanks Kelly.
Thank you and our next question coming from the line of Damian Gutman with Morgan Stanley . Your line is open.
Hi, guys. Hopefully you can hear me congratulations Dave on laser <unk> question I get the hypothesis on driving revenue I think thats, great and it's good for the franchisees.
Question is are you seeing the market move any more in that direction. That's always spoke a couple of years ago. It was sort of off to the side.
That's something that we really worried about curious how that's evolved.
Yes, I mean, we still feel great about sort of the modality of waxing growing at two five times the rate of the other modalities.
As David commented, both prepared remarks and in the follow up we just this is a test right.
And we wouldn't be doing those of our core business was there was anything but as rock solid as it is but we do think there is an opportunity candidly to get full service, we know that some some guests that get laser service need to augment that with a different modality as the experts and waxing worthy experts in hair removal and we just think this is a good opportunity for us to test and to your point.
To hopefully drive some additional revenue into our <unk>.
Our centers for our franchisees reach and reach a new customer groups. So we continue to feel great about our addressable market probably is continues to be significantly higher than that of the laser category and thats why again I don't want this to be too much of the shiny discuss why we are going to be very prudent in our test in the New York area.
<unk> and figure out if this makes sense for our guests and helping drive additional revenue for our franchisees.
Fair enough and then the follow up.
When we do some field work and speak to customers.
Talk about.
The reason why they continue as they get comfortable with a particular ambition.
So I think you mentioned staffing levels are high.
Maybe can you talk about within that.
Turnover of the most seasoned folks.
Those metrics look and is there any and any change good or bad on those metrics.
So I mean, I think certainly from the outset of the brand right consistency training, ensuring a great guest experience has been at an absolute foundational piece of who we are and that continues today.
Do more training candidly than a lot of us decisions get in beauty school.
If you come in you have your favorite restitution, but she is not available and you can go to somebody else you better get the same exact experience in that center or even for you across the country and another center. So we are very diligent to make sure that there is consistency of service levels across regardless of what centers. You go into we continue to feel great about sort of the <unk>.
<unk>, we have made in staffing as we've talked about before we've got very tenured whack specialist that can make 70 80 $90000 that have been with us for 10 years and that continues.
A place where they can build a book of business kind of all of the back of the house stuff is taken care of for them. So we continue to feel great about our staffing levels and again I keep going back to our franchisees opened new centers with gusto and continue to reinvest in our brands and then also feel great about the ability to continue to deliver that amazing experience to our guests.
Okay.
Thank you.
Thanks, Amit.
Thank you I'm not showing any further questions in the queue. At this time I would now like to turn the call back over to Mr. David Burke for any closing remarks.
Thank you very much thanks, everybody for getting on the call. This morning again very pleased that we delivered our Q2 in line with our expectations and we look forward to speaking with you in the coming days and reporting on Q3 later this year have a great rest of the day. Thank you all.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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