Q3 2023 Mister Car Wash Inc Earnings Call
Good afternoon, and welcome to Mister car Wash as conference call to discuss financial results for the third quarter ending September 32023.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
Please note 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 Jed God Chief Financial Officer.
After John and jet have made their formal remarks, we will open the call to questions.
Finally, this conference call references to non-GAAP financial measures will be made a complete reconciliation of these measures to the most comparable GAAP measures are 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 the companys current expectations.
She advised statements made today are current as of this call are based on the company's present understanding of the market and industry conditions.
You may choose to update these statements in the future. They are under no obligation to do so unless required by applicable law or regulations.
The forward looking statements disclaimer contained in the company's latest annual 10-K, and 10-Q reports such factors may be updated from time to time in other filings with the Securities Exchange Commission and.
Now I'll turn the call over to Mr. John <unk>. Please go ahead Sir.
Good afternoon, everyone and thank you for joining our Q3 earnings call, we had a solid third quarter and feel good about the upward momentum in our business.
Comp store sales were positive.
You need to grow quarter over quarter.
Newbuild openings are on schedule and performing nicely.
Any launch is moving full steam ahead, and we're encouraged by the early results.
I remembered one club members, who represent over 70% of our revenues continue to remain our most loyal and steadfast customers.
We continue to manage our expenses, while simultaneously investing for the future.
But for the quarter sales grew 8% to $234 million.
Adjusted EBITDA increased 8% to $72 million.
Comp store sales increased one 7%.
We opened eight new Greenfield stores and are on track to hit our full year target of approximately 30 products that.
We ended the quarter with 462 locations.
As we continue to build a company that has enduring value at the end of the day. It's all about the people that you surround yourself with.
From our field operations to our Tucson headquarter staff the truth, Jason the army and the strength of Mister car wash is due to the strength of our team.
Our titanium launches a perfect example of how awesome our teams are.
I want to recognize two groups in particular, our facility maintenance group in our Tucson distribution Center, who worked around the clock building reconfiguring and installing a new rents improving floater rig configuration and titanium solution.
When it comes to differentiation.
<unk> is just the latest in a long list of proprietary innovations that we have developed in house.
Over the last several decades, our research and development team staffed with very talented engineers in tennis.
We have developed truly unique products like hot Shine, we'll Polish with Carl Shield and now titanium.
Which offer exceptional performance a tremendous value.
At the very core we are operators, who take great pride in putting out a clean dry shiny car at pace.
The efficiency of our stores starts with technology, and our ability to leverage mechanisation chemistry in water quality.
We not only scientifically balance or in house chemical program, but we're able to process cars in a speedy fashion, which our customers have come to expect.
Part of the Mr experience is not just the efficiency in which we operate but the level of customer service, we provide to our frontline staff.
This is where we really excel and it's what we hear about most often.
Last week, we hosted our National leadership Conference, where we brought in over 200 leaders from around the country to discuss our vision.
Deepen our strategy and drill down into how we're going to execute and win the war in an increasingly competitive environment.
The depth of talent in the room and the energy throughout the conference was impressive and contagious.
As we round the bend on the fourth quarter and look ahead to 2020 for this team is laser focused on growing and continuously improving our business to further our competitive advantage.
This has been a lot of talk recently about competition and as we mentioned on our last call competition is nothing new to us and something we've been facing for many years.
We believe that when customers are given a choice the best operators will ultimately prevail and to that end. We are keenly intent on managing what we can control, which is the customer experience.
We still believe the market is underpenetrated with additional white space in every market. We're in we also believe there's more tailwind to our category is doing users adopt the express carwash format and join our alumina Wash club plan.
Well the car wash landscape remains dynamic and continues to evolve.
The battle for regional dominance continues, albeit at a more rational and thoughtful pace, which we believe is healthy and good for our industry.
When we were asked questions about how consumers are currently behaving our answer is that we feel very fortunate to be in this space. It acts more like a staple than a discretionary with demand for our service remained steady and strong.
As we continue to densify in existing markets and look for new markets to move into we will stay disciplined in our approach to scaling at a pace that's manageable.
We will deploy capital, where we think we can generate the highest and best return while managing expenses thoughtfully.
We currently are focused on building out greenfield locations, but we'll continue to evaluate acquisitions and other uses of capital.
I'd like to end my prepared remarks with a note of gratitude to the men and women of Mr. Who show up every day with smiles on their faces and skip and their step delivering happiness to the millions of customers we serve.
I will now turn the call over to Chad to provide more commentary around our financial results for the quarter.
Thank you John and good afternoon, everyone. Overall, we had a solid third quarter, we continue to manage our expenses and execute against our strategic priorities and move the business forward.
Before I review the financial details of our third quarter results. Let me give you a brief update on our new titanium offering.
We remain optimistic about titanium and the positive impact it is going to have on the business and results.
The early titanium results are encouraging and running in line with our expectations as of today, we have implemented our new titanium offering rents improvement technology, and reconfigured blowers and 317 stores, we continue to pick up momentum and installation, they're slightly ahead of our implementation plan.
We now expect all stores to be reconfigured by mid Q1 next year, we continue to refine and test various promotional offers to help drive titanium trial and adoption.
As we have said previously this is likely to result in slightly higher churn rates. During the implementation period, we expect this to be more than offset by higher early membership levels.
We believe titanium could represent a meaningful portion of our EWC and retail business over time and remain very comfortable with the initial target of at least 10% of EWC subscription mix within a year of implementation.
As previously mentioned the revenue and EBITDA impact will likely be minimal this year due to the timing of the rollouts and the promotional offerings and strategy, but we believe it will be meaningfully accretive to next year and should have a multiyear impact.
Now turning to the third quarter results.
During the quarter.
Total net revenue increased seven 6% and comparable store sales increased one 7% compared to last year.
EWC sales represented nearly 72% of total wash cells and we added 6000 net members in the third quarter on a year over year basis. The number of EWC members increased 11, 3%.
Performance of the subscription business remained very stable in the quarter.
Core churn rates remained in line with historic ranges and we did not see customers trade down to lower priced packages.
Yeah.
On the development side, we opened eight new Greenfield locations and acquired five existing stores in the third 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 approximately 45 person.
Sent in under three years.
On the expense side of the business, we remain focused on managing expenses, where we can and optimizing the investments we are making to support the long term growth and health of the business.
Excluding stock based compensation as a percentage of revenue total operating expenses increased 110 basis points to 78, 9% year over year the.
The main drivers were labor and chemicals decreased 20 basis points to 31%.
Other store operating expense increased 90 basis points to 38, 7%.
G&A expense decreased 30 basis points to nine 6% in.
And gain loss on sale of assets increased 90 basis points to <unk>, 6%.
The cost of labor and chemicals benefited from better labor scheduling and optimizing regional labor infrastructure, which was partially offset by an increase in average hourly wages.
Other store operating expenses increased primarily from <unk>.
The increase in rent expense from the fact that we have 50 more carwash leases compared to the same time last year as a result of the additional sale leasebacks completed during the last year.
In the quarter cash rent expense increased 16% to $27 million.
G&A expenses, excluding stock based compensation expense increased 4% and was driven by continued investments to support growth in areas, such as marketing construction and development and other support functions, which were partially offset by lower corporate insurances and other previous investments.
During the third quarter interest expense increased to $19 $1 million from pinpoint $1 million last year due to higher interest rates and the exploration of our interest rate hedge in October of last year.
Interest expense was slightly favorable compared to plan 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 third quarter was 18, 7% compared with 26, 9% for the third quarter of 2022. The decrease was primarily due to the benefit related to the employee stock awards exercised in the period and the benefit related to a change in our estimated.
Tax expense this year compared to last year.
Adjusted net income and adjusted net income per diluted share, which add back stock based compensation and certain non core operating expenses were $25 5 million and eight cents respectively in the quarter.
Yeah.
Third quarter, adjusted EBITDA was $71 $6 million up from eight 3% from the third quarter last year. Adjusted EBITDA margin was a healthy 36% and increased 20 basis points from the third quarter of last year.
Moving on to some balance sheet and cash flow highlights at the end of the third quarter cash and cash equivalents were approximately $62 $1 million and outstanding long term debt was $897 million and importantly, our balance sheet remains healthy and we continue to self fund our growth and expansion.
By the rising interest rate environment demand for sale leasebacks remains healthy and we completed two sale leaseback transactions in the third quarter for an aggregate consideration of $10 $5 million.
Leaseback market continues to remain open for us and we are seeing favorable rates.
Yeah.
Lastly, let me make a few comments around guidance and how we are thinking about the rest of the year.
Our third quarter results were ahead of our expectations and we are pleased with the directional trends in our business.
Early titanium results are in line with our plan and we continue to tightly manage expenses and execute the business.
The macro environment for the consumer remains challenging and we think that dictates a certain level of cautiousness for the remainder of the year. As a result, we are leaving our full year guidance unchanged and are reiterating our previously provided net revenue and adjusted EBITDA ranges of $913 million to $936 million.
$270 million to $283 million respectively.
In closing we are pleased with our third quarter results and we remain focused on delivering our growth strategies I'm very proud of the team's best in class execution as well as their enthusiasm for capitalizing on the opportunity ahead of us as we continue to position ourselves to win the long game.
With that we're happy to take your questions.
Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
And the first question comes from Simeon Gutman with Morgan Stanley.
Hey, guys. This is actually Michael Kessler on for Simeon Thanks for taking our question.
First guys I wanted to ask about you know how retail customers behaved through Q3, if you noticed anything relative to Q2 earlier in the year as far as.
You know some of the weakness that we've seen last year or so and then any differences in how that customer behaves versus how your core <unk>.
UC member behaved.
Yeah, I'll kick it off so retail volume and revenues are moderating quarter over quarter, and we're seeing improvements in a nice healthy growth in our ticket averages as well without having to resort to price increases.
And so we've been very careful as an organization not to be overly promotional spin.
Specifically from a discount standpoint, and so we believe that the trends that we're currently seeing a healthy and with all the knock on wood sustainable.
But we're also staying on soft ground, yeah, and Michael just to put a little bit finer point on that so going back last call we talked about a.
Retail being down double digits in Q1 moderating to a high single digit negative in Q2. It further moderated during Q3 still a kind of that high mid single digit but it was it was Q3 was an improvement on a year over year basis compared to Q3. So encouraged by the trends that we're seeing here on the on the retail side.
And Jed you're famous line is up is good right.
We'll take it.
Maybe one follow up Chad on on Capex guidance, which is coming up a bit I think about 50 and $55 million or 20%. So it's a pretty notable step up given that I guess unit growth is still on track for how you're thinking about it but any color on what's changing there in any way.
You're maybe seeing some inflation in them.
Capex line.
Yeah, there's really three factors there Michael so the first as we shared in the prepared remarks, we've been accelerating the rollout of titanium what was.
A full rollout as of the end of Q1, where we're now targeting to have it all done by the middle of Q1. So so getting more of these these stores equipped with titanium at a faster rate than what we had originally projected also a little bit of a timing with just the spend against our 'twenty 'twenty four 'twenty twenty-five pipeline as we.
We've talked about it it's an 18 to 20 months to build out for one of these car washes and when the spend starts.
While most of that spend is in the last eight months of the construction cycle.
There's a little bit of a tiny piece there and then we are seeing some construction inflationary pressure construction costs are up just a little bit.
But also our ability to get more in proceeds on a sale leaseback is also up so the net investment on that construction.
And development is still approximately $2 million keeping our cash on cash for year, two cash on cash returns at about 50% and under a three year payback.
Yeah.
Great. Thanks, guys.
Yeah.
Thank you and the next question comes from Justin Klaver with Baird.
Yeah. Good afternoon, everyone. Thanks for taking the questions just wanted to start on the guidance.
Holding a four years the full year implies a pretty wide range for <unk> just any color on maybe how you know the business is tracking here quarter to date and whether you would anticipate.
Some acceleration as I believe the comparisons ease quite notably in November and December versus versus October.
Yeah as we've as we've talked about it earlier in the year, we expect the the laugh just to get a little bit.
Easier in Q4 also as the Greenfields that we opened in 2022 come online that will provide a little bit of a tailwind as they move into the sophomore year and then also with with titanium picking up a little bit faster that'll be a nice tailwind. So in order to hit the full year. The high end of the range the plus one it will.
It require a little bit of an acceleration compared to our <unk>.
Impaired to Q3, when we look at October October September and October last year, where.
Some of our strongest months October we're lapping a plus 9.3, and so really looking at the two year stack and we saw slight improvement in October on a two year stack compared to Q3 on a on a two year stack.
That's very helpful color. Thank you and then just on the <unk>.
Much of the cost with titanium.
Flowing through Capex, just wondering if there's been some I.
I guess excess operating expenses the business is absorbing this year that.
Obviously won't repeat next year as you finished the rollout early in <unk>.
Yeah, certainly I think.
Particularly the first half of the year a lot of pressure on the labor front. When you look at last for the quarter labor rates were up just over 3% compared to I believe it was last quarter, we were about 5% labor rates up.
So we're starting to see just a little bit of relief on that side utilities were also here. We're also seeing some favorability during Q3 and expect that to continue into Q4, whereas those you. There was a lot of pressure on utilities, particularly in the first half of the year and then also finally.
Uh huh.
<unk> called this out in the prepared remarks, our corporate insurance.
We're seeing some favorability on the on our insurance in the second half compared to where we were in the first half Jedi I would just add when we take on a project of this magnitude and it really is what I describe as a fundamental transformation of our tunnel.
And the tunnel experience and be added as we've noted before this blower reconfiguration of its improvement.
And this is not scope creep, but there's other things that come with these projects and so you know when I look at our repairs and maintenance line.
And the things that we have to expense upfront. That's also I think come at a certain cost.
But we're happy to make those investments because again, we're setting up our stores for the long haul.
Hmm.
Alright, Thank you both.
Yes.
Thank you and then last question comes from John Heimbach home with Guggenheim.
Yeah, Let me start John sort of two parts.
Your thoughts on pricing of membership architecture.
So I think in some markets there might be a $7 gap between premium titanium and others, maybe $10 yeah.
And then how that impacts membership qualities was there a thought that maybe you want more of a $7 gap.
And encourage people to move toward titanium so a little less membership.
But a little higher price little little higher quality.
How do you think about that.
Yeah, I think youre spot on John and so Directionally as we look to kind of compressed that delta between our platinum in our titanium to make it more within reach and easier for folks to upgrade that's going to be part of our overall design again, we want to be very.
Very clear and how we transition.
<unk> existing members into a new price point and there are certain rules and things that we need to do from a communication standpoint.
So that they are given ample notice.
So we're working through the mechanics of that as we speak but you nailed. It you know at the end of the day.
As we're settling in on what we believe that the titanium price to be anything we can do to make that more attractive and.
And more within reach that.
That would help us achieve our goals, but we are balancing to your comment.
Mutual objectives behind them.
Increasing the number of members in each of our premium packages, while maximizing profitability.
Alright, and then I guess second topic right the idea of a buy versus build.
And how close the cost of our buy has to be to build.
To make that more attractive to you or are we sort of looked at it seems like we're getting closer.
Your thought on that and you know where are we within reach where the economics are more compelling or.
Competitive on the buy side.
Yes.
We're getting there so prices on M&A are definitely coming down the cost of build is going up and so there will be a point, where both become equally attractive I think it's important to note that as a company. We're agnostic at the end of the day between Greenfield and acquisitions, and we will deploy capital where we can generate the highest return.
This pros and cons to both sides of that equation.
Greenfields we can.
Like I say control, our own destiny, but really set up the stores to our specifications.
And design and the way we want.
But M&A is also an attractive path for us, particularly as we look to move into new markets.
And.
Salary that path into a new market, so that coupled with bolt ons, which will always be part of the equation. So.
We're not quite there yet in terms of that equilibrium point, but its moving in that direction.
Okay. Thank you.
Okay.
Thank you and once again. Please press Star then one if you would like to ask a question.
And the next question comes from Michael Lasser with UBS.
Good evening. Thanks, a lot. Thanks, a lot for taking my question John at the outset of your remarks, you mentioned, an increasingly competitive environment, while Mister car wash is operated in a competitive environment for a long time are the dynamics changing where it's just more difficult to attract.
New members to your club given that the 6000 net additions is one of the smallest increases that you've reported since you've been a publicly traded company.
Wow, so there's there's kind of three questions inside that question Michael.
Yeah, which you're famous for so.
To answer the middle part of your question, we haven't seen a slowdown in <unk>.
Member growth through our Greenfield locations.
Q3, though was relatively flat from a UW seed net member growth standpoint, and that was somewhat intentional we prioritized converting existing members into our titanium program in Q3, as we're launching and rolling this out and it's really hard when you get down to the store level to have multiple objectives happening simultaneously. So.
We erred on the side of us taking existing members and introduce them to titanium.
Rather than focusing what had been our primary focus which is on converting retail customers into membership.
And so that that will be we're in execution mode on titanium right now and that's going to be a primary focus over the next several quarters.
But equally both sides of that are equally important to us over time.
So with respect to your question about competition, we have not felt any.
A meaningful impact to us.
The trajectory due to the current competitive environment.
Hey, Michael one other point I think worth highlighting when you look at the seasonality of UW see growth at <unk>.
5% to 70% of our EWC sign ups have typically been in the first half of the year and when you look at the more recent years.
And even more pronounced but that's to John's point, that's why we're really optimistic and excited about titanium is because we now have these $2 1 million existing EWC members that are at bats, and driving the top line through trading them into into titanium.
And getting in your comments you had.
Noted that core churn.
Is it stable.
Does that mean.
You alluded to experiencing some higher churn, which would be consistent with John's comment around focusing on the conversions rather than the new customers can you explain and frame how we should think about churn into 'twenty 'twenty four and then how does that impact over.
We're all membership growth in the next year, especially on the heels of the retail business being a softer for the last several quarters and that being a source of new member growth.
Yeah, So when we talk about core churn.
Previous calls we've shared that we'd been testing of various marketing initiatives promotions and what we've found that that really works as introductory and trial price offers where we're trying to get new customers to try titanium and really accelerate that that that trial and drive mix.
Two of those more premium packages.
What happens is it comes at the price of slightly higher churn and we've talked about it in the prepared remarks in Q2 also talked about it in Q3, where when we roll to the regular pricing, we see a slight uptick in churn for Q3. It was about two tenths of an uptick in our in our churn.
With promotional.
WC members rolling back to to regular so it's not.
Outsized or anything to be overly concerned about at this point, but something that we're keeping a close eye on and making sure that the end objective, though is to drive that that mix in and get as many members in our.
Premium package as as we can at jet if I could just add too I think we've been very responsible and smart quite frankly, and not getting too aggressive in some of those introductory trial offers and we've seen some silly stuff out there where folks are I call. It giving away. The farm at 99 cents offers Penney offers for the first month and.
That could be a slippery slope and there's an old adage you know the way in which you acquire our members the way in which you need to keep a member, but if you're leaning really heavily in on the price side of the equation, which we haven't.
That debt is going to have it's going to come in at a cost and that causes a higher churn.
One other point, Michael I think it's really important for folks to here and kind of the proverbial yellow Canary is UW see usage, obviously your customers more inclined to cancel out of a subscription that they're not using when we look at usage of UW see during the quarter, we did not see any any downtick there customers sure EWC customers or <unk>.
As much as they have in past quarters.
Got you. Thank you so much good luck.
Okay.
Thank you and the next question comes from Randy <unk> with Jefferies.
Yeah. Good afternoon. Thanks, a lot I guess a question for you Jed.
You know you talked about the back to the retail side of the business I think you said double digit negative comps in the first quarter down high single in the second quarter in the third quarter was a little bit better.
Based on what you're seeing across you know across the.
Different regions.
Thank you.
Based on the business and as it stands today in retail I'm actually kind of get towards the first quarter and go up against that negative double digit type compare is that can we kind of think through that the retail side of the ledger should start to kind of get towards flattish or slightly positive as we go up against that comparison based on what Youre seeing right.
I just wanted to just get a feel for that trend line.
Yeah, Randy when we look at the last when you go back and you look at this over the last five even 10 years. Our goal is to trade our retail customers into the unlimited Wash club program and so historically that has run negative mid single digits retail has run negative mid single digits and perhaps.
We really haven't been framing this like we should but essentially it's mix shift trading that retail customer into the higher priced.
Predictive reoccurring.
WC offering, but it is the price of that and were willingly accepting of it is as you lose a retail customer.
So it's it's been historically, it's been down about mid single digits and I think that's a fair assumption as we think about a baseline for go forward.
Understood and then just how should we be thinking about.
In the next couple of years, when Youre thinking about titanium mixing in and and just how you're thinking about core pricing.
I'm just trying to get a sense of how you how we should be thinking about over a multiyear period of how pricing should shift.
What should it actually grow out on a multiyear basis for the next few years like should we be thinking low single digit price growth because of mix plus and taking up the core up just to just give us a little sense of how we should be how we should be thinking about that from a framing it up thanks.
Yeah, Randy that's that's a that's a trickier one it's it's still what I would consider relatively early days as we look at titanium and how it's testing.
We are very encouraged and optimistic in being able to.
And put emphasis on that at least 10% mix and so.
By the end of year one.
But it's it's it's really hard to say how that plays out in 2024 and then.
Into 2025, as well, but we believe internally that it's going to continue to provide a natural tailwind because of just the the consumer educating the consumer on the benefits of titanium, but it's not just going to happen on our first visit this is going to continue to happen over time, I do think and it's worth pointing out is.
You've got the EWC side of it what that we talk about and they at least 10%, but also the titanium retail side as well, which we're seeing encouraging results.
We're not doing any discounting or promotions that are just natural.
Customers wanting to try out a retail basis and saying.
The retail tick.
Ticket mix and in the mid teens.
From a mixed perspective, yeah, Randy I'd, just add what gives us.
Great confidence and why we're so excited about titanium is Ed.
When we look at pre titanium what are our member mix look like.
Where we were more heavily weighted towards our premium platinum package naturally without a concerted effort internally to drive premium membership it.
It was really a natural customers gravitating towards the value that we had had put into that program and now with this additional value stack. That's in the titanium program. We're very optimistic that we're going to continue to enjoy a stronger premium member mix over time, but we're going to do it again in a way that is not trying to.
Spike member mix, we want folks to naturally gravitate towards it because they see the value in it.
And that's how we've had such a sticky and strong.
Member base threat throughout the years.
Very helpful. Thanks, guys.
Thank you and once again. Please press Star then one if you would like to ask a question.
And then last question constant Chris I'll call of Stifel.
Yeah, Hey, good afternoon guys.
I was I was wondering how the company is thinking about capital allocation for next year is the plan to develop a kind of a similar number of washes or do you think theres opportunities for more acquisitions and I'm. Just wondering if is there a similar level of gross capex is that a reasonable expectation for next year as you have this year.
Yeah, right now I mean, what will provide more specifics on 2024 as we get into our next call, but what I would say kind of at a high level from a capital allocation perspective.
The current plan right now is to self fund our growth into and they are investments that we plan to make next year.
But it's really.
Four main variables as we think about that capital allocation, just what happens on the acquisition front.
What happens in the broader interest rate environment, where our existing debt load is is 100% floating at this point.
That's a variable in the capital allocation strategy.
Sale leasebacks and cap rates and what happens there, but then also just the existing human capital within that this team and what we're able to bite off.
I would say that as we think about 2024 greenfields. So this year, we feel good about the approximate 35 that will will develop more greenfields in 2024, and what we plan to do here in 2023.
Yeah, Hey, Chris if I can add to that.
We are committed to not.
Sweating the assets, if you will and when we look at our core portfolio again, we're very proud of the year over year investments that we've been making in those stores that said you know given the size of our portfolio. There are a number of stores that we've identified that are in need of.
Some additional love, if you will and reinvestment and so we're gonna be chipping away at that pile too. So while jet is famous he has the capital allocations are internally.
We'll do a lot of power as a result.
But if we use as our sole measure the highest return of invested capital obviously greenfields isn't really strong case that said if we neglect some of those older stores over time, that's going to ultimately show up in.
Uh huh.
Reduced evs, so we're gonna be chipping away at that pilot as well.
Again at a pace that we can handle.
But I am happy to report that it's a very small sliver of our overall store count because the bulk of our stores are in great shape.
That's helpful Jed.
Are you seeing any changes in the cap rate given the falloff in bonus depreciation and just.
Overall the yield environment.
Not not at this point, Chris I mean, we're still we're still getting deals done. We've got another number of stores that are at market that are out to market right now and where we're signing otherwise and getting good.
Favorable cap rates on those part of the analysis that we do when we're looking at sale leaseback versus funding through external debt is we'll look at what is what is most accretive to EPS.
Calculating cap breakeven.
From a sale leaseback, a cap rate perspective relative to the what the interest rate is prevailing interest rate is at the time. So we believe there's still a lot of cushion there but.
We continue to see very favorable economics, I think it's a testament to having been doing sale leasebacks for for longer than anybody in this space.
We've got a great track record of paying our rent and our great operations team great relationships with our with our brokers and with our.
But the the national Reits that are out there and that's something that's important to us and we pride ourselves that we continue to invest time to make sure that we're nurturing those relationships.
Keeping that market open for US yeah, Jed, if you're going to underwrite a project you're going to underwrite or project with a company that has a strong track record of great management team.
<unk> long history of doing it right.
And I think we check those boxes.
Yeah, no that makes sense okay.
Just also I mean, the company has seen declining retail traffic for several consecutive quarters now and I'm. Just wondering if you guys have completed any consumer research to try to understand the root causes of the softness and I know that the I believe the industry has been soft as well and I'm. Just wondering if there's any kind of discussion with any other companies.
And just in terms of what's driving or what do you guys think is driving this retail softness.
Yeah. So Chris this is John we do we don't have a consumer study that we can point to there is a lot of theories one of my beliefs is that.
As an industry there has been.
A lot of folks have been pushing the pricing envelope relatively aggressively.
And at a certain point. So this is not a completely inelastic service.
You could at $12 or higher for base wash.
It's going to have an impact on retail frequency.
And again I think we have been very prudent in our approach and relatively conservative and not being overly aggressive in pushing that pricing envelope.
And as a result, we're happy with that.
But I think that has had some effect and that's just my theory.
Okay, great. Thanks, guys.
Thank you and then I just have some kind of a somewhat stressed and Thomas Martin with BMO capital markets.
Hey, good afternoon.
First one on for Simeon just two questions.
There's been a lot of obviously talk about the competitive landscape now more competitive it's gotten but now that people are starting to pull back does that create any specific opportunities for you.
Absolutely, 100%, so I would say that right now people are being much more calculated and measured.
And really focusing on growing their existing footprints than expanding into new markets.
We're definitely seeing less encroaching than we have in the last couple of years.
Is a good and healthy.
So we anticipate new unit growth to moderate and we're actually seeing some platforms pare back on their their growth plans.
There are a variety of reasons, but primarily its access to capital.
So in the end and as we look at multiples that are starting to come down it feels like the market right. Now is reset to about a 10 X number which literally two years ago things were trading at 115 times.
And as also.
More of a focus which has been our focus from the get go on quality versus quantity.
Because for a while during the craziness over the last several years there are certain platforms that were all about scaling just to scale and bind whenever they could.
And the chickens coming home to roost, if you will so.
We like others are being cautious and measured and this will create a number of opportunities for us as an organization.
But we're going to be very disciplined and highly selective in choosing when and where to pull the trigger on M&A.
Okay. Thank you and then just.
You mentioned the macro softer if it continues to get worse, what is the the Mister car wash recession playbook.
Well I'd start with we have Super strong vs right now really healthy margins.
We run a tight ship.
We have a staffing model that we're really proud of but.
But we do err on the side of it and there is a.
Is the idea around right staffing running lean and running too fat.
And higher volume stores.
It's actually easier to operate at a higher volume store than it is a lower volume store.
But what we're doing is making material investments in people and the human capital front, we have over 150.
<unk> in our pipeline that are part of our operating expense line.
And we're happy to make that investment because it's going to be the future for our organization as these high potential future leaders.
Running the stores that we have in our pipeline.
So if <unk>.
Stuff hit the fan and things got really tight we could pull back on some of those levers.
And it.
It may mean, a temporary slowdown for us, but I think we'd be able to weather. The storm. So last thing I'd just add on that we have managed so we've been around for 25 years, we have managed through multiple economic cycles and have emerged.
Stronger quite frankly from from each one and so.
We don't anticipate.
We believe that we'll be able to manage through this one as well as we're managing through it.
We'll go to emerge just fine.
Great. Thank you.
Thank you.
This concludes our question and answer session I would like to turn the photo management for any closing comments.
Well. Thank you everybody is as car wash operators, we love what we do we love, who we serve and we feel very fortunate to be a leader in a space that's growing year over year.
We look forward to checking back with you guys on our next quarterly call. Thanks, everyone for joining.
Thank you. The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.