Q3 2023 European Wax Center Inc Earnings Call
Yeah.
Good morning, ladies and gentlemen, and thank you for standby welcome to European wax in the third quarter of fiscal 2023 earnings call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a Q&A session.
In order to facilitate as many participants as possible. We ask you. Please limit yourself to one question and one follow up during the Q&A session.
If you have additional questions you may rejoin the queue.
At this time I would like to turn the conference over to Bethany Johns director of Investor Relations Ma'am.
You may begin.
Yeah.
Okay.
Thank you and welcome to European WAC Centers' third quarter fiscal 2023 earnings call with me today are David Willis, Chief Executive Officer, and Stacie, Shirley Chief Financial Officer.
For today's call David will it will provide a brief review of our third quarter performance and discuss our priorities for fiscal 2023.
Stacy will provide additional details regarding our third quarter financial performance and our fiscal 2023 outlook.
Following the prepared remarks, David and Stacy 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 opinion 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, a live broadcast of this call is also available on the Investor Relations section of our website at Investor.
<unk> Dot wax center Dot Com I will now turn the call over to David Willis.
Thank you Beth and good morning, everyone.
Pleasure to be speaking to you all for the first time in my new role as European WAC centers, Chief Executive Officer.
I want to thank you for joining us today.
As we shared in our press release. This morning, we delivered another quarter of new unit topline and bottom line growth in Q3 or.
Our strong and committed franchisees drove more than 12% unit growth through 'twenty, three net new center openings and continue to add to our pipeline of future new units with.
We generated $241 million in system wide sales $56 million in total revenue.
$19 million and adjusted EBITDA, each representing growth over the third quarter of fiscal 2022, despite a challenging macro environment.
Furthermore, we delivered a three 4% same store sales increase driven by positive comps in both ramping and mature centers.
We're grateful to our associates franchisees and in center partners for their relentless commitment to excellence.
While we delivered organic growth in each of these metrics our third quarter did not materialize as we expected.
Take a minute to talk about how business trends evolved as the quarter progressed.
I am pleased to say that throughout Q3, our wax pass holders and routine guests remain committed to their waxing routines.
Having consistent visit frequency and spend.
Just as they have in previous quarters.
Both of these groups demonstrates strong brand loyalty and represent predictable recurring revenue.
We remain focused on continuing to grow these loyal guests cohorts, who together comprise about 75% of network sales and increased share of wallet from them.
We also remain focused on engaging our episodic guests who contribute a smaller portion of network sales, but whose behavior has been less predictable amid a difficult macro environment.
During the second quarter, we deployed several initiatives through our CRM and data warehouse tools to Reengage episodic guests which were effective.
As we noted in our earnings call in August we were pleased with their performance as we exited Q2. Additionally.
Additionally, solid sales trends entering Q3 gave us confidence in reiterating our fiscal year outlook, which assumed continued momentum.
However, third quarter survey work confirmed that while substantially all guests continue to be pleased with their experience at European WAC Center and plan to return a portion of them report that economic concerns are impacting their waxing frequency and spend.
In particular episodic guest behavior has been more impacted.
As planned in the third quarter, we increased our digital AD spend focused on driving reservations across all gas cohorts in lieu of broad or unnatural promotional activity that could impact four wall margins. However, these media efforts proved less effective than planned leading to.
Top line trends below our expectations.
As a result, we are updating our guidance for the remainder of the year to reflect current transactional run rates.
We have also retained our new media agency that is implementing new strategies, which we believe have the potential to favorably impact reservation trends over time.
However, our revised guidance for fiscal 2023 has prudently not assumed a near term change in trend from Q3 and Q4 to date.
Stacy will provide more color on our outlook momentarily.
We are very encouraged that our wax pass in routine guests remain committed to our brand and underscore the strength and consistency of the European WAC Center model.
We recognize that we have an opportunity to not only better engage existing episodic guests, but also drive new customers to our brand, which I'll dive into shortly.
To that end, we are more focused than ever on our two growth vectors expanding our footprint through new center growth and driving in center sales to benefit both system wide and same store sales growth.
Turning first to unit growth, our consistent execution of New center openings remains unchanged, we believe that both our pipeline of new locations and the health of our franchisees remained strong and demand from franchisees of all sizes remains robust.
In the third quarter, we opened 23 net new centers across 12 different states all of which were in existing markets.
Through Q3, we have already opened more than 80% of our expected fiscal 'twenty three new centers.
We are not seeing our franchisees slowed their interest or new unit development.
As a result, we continue to feel confident in our outlook of more than 10% unit growth. This year are multi year pipeline and our long term unit growth algorithm.
Given the relatively modest initial investment for our centers, our franchisees have sufficient access to capital to fund their growth even in an elevated interest rate environment.
We believe our franchisee base is well capitalized with access to lenders, who recognize our models strong cash on cash returns and are committed to supporting network expansion.
Additionally, our development team has worked tirelessly to offset industry wide inflation in the construction process.
Both through value engineering, and by leveraging our scale to drive savings with vendors.
We are incredibly focused on managing franchisee upfront costs and ultimately return on capital, which has encouraged continued reinvestment from our existing franchisees who are driving nearly all of our new center openings this year and comprise more than 90% of our forward looking.
Pipeline.
With these franchisees in mind, our teams are hyper focused on driving top line and four wall performance through various initiatives.
Including staffing pipeline efforts.
Facilitating network best practices advising franchisees on how to address controllable costs.
Implementing grassroots marketing efforts and identifying centers specific sales benchmarks to drive incremental revenue opportunities.
And as always the team continues to build our pipeline of wax specialists to support near term and long term growth.
During Q3, we hosted a gathering of more than 100 franchisees, which featured several helpful sessions on associate recruitment and retention.
Wax specialists utilization in centers has improved year over year and third quarter staffing levels were in line with targets were.
We are also making progress towards the brand's optimal mix of more experienced wax specialists.
We remain confident in our ability to support both the existing centers and new center growth through our wax specialist initiatives for years to come.
Turning to our second growth vector increasing both system wide and same store sales by driving in center sales.
As I mentioned last quarter, we were pleased to welcome Andrea Wasserman to our executive team earlier this summer as our first ever Chief commercial officer.
While our marketing pillars remain attract more buy more and visit more under <unk> leadership, we are evolving our approach to marketing and media with an even greater discipline around driving visits from both new and existing guests as well as attracting more guests to the brand.
We recently engaged a new media agency focused on implementing a streamlined media strategy across all our paid digital channels and search efforts.
Our revised approach launched this month with a singular focus.
Driving more guest reservations in sensors.
We continue to leverage enhanced guest insights to better refine the audiences, we target deliver the right creative at the right frequency.
And drive high conversion rates.
To drive more visits from existing guests, we have already implemented additional action messaging to target guests that are at risk of lapsing.
We are also testing additional channels in Q4 to learn even more about the most effective method of driving reservations.
Both new and existing guests regardless of cohort.
As I've shared before wax pass holders visit more than twice as often as episodic guests, making the wax past our most powerful frequency driver.
With that in mind, we have recently developed key communication flows to encourage wax past consideration and purchase through our marketing channels not just in centers.
In fact, <unk> passes and gift cards are now available online for the first time in our brand's history, just in time for the holidays, and our semiannual wax past promotional period.
Lastly, as we mentioned last quarter, we believe that offering additional hair removal modalities could be an effective method of attracting more guests to the brand encouraging more visits and getting guests to buy more products and services over the long term.
Our belief is that laser hair removal has the potential to both capture an incremental customer demographic and increased share of wallet from existing wax guests in turn enhancing already robust four wall economics over time.
We're in the very early stages of this effort and officially launched our laser test and six New York area centers about one month ago.
While we plan to share initial test results further in 2024, we're pleased with the enthusiasm from both franchisees and guests during these early days.
As we think about our longer term opportunities and corporate responsibilities I also want to highlight the third quarter release of our inaugural ESG report detailing our efforts to build a more confident inclusive and sustainable community as well as our first brand wide fundraising campaign supporting the national.
Domestic violence hotline.
Both of these efforts underscore our commitment to sustainability and living our values as a company every day.
With that I'd like to hand, the call over to Stacie Shirley to review, our financial performance and updated guidance for the balance of fiscal 2023 states.
Stacy.
Thanks, David and good morning, before I begin my remarks, I would like to remind everyone that in some instances I will speak to adjusted metrics on this call.
Can find reconciliation tables to the most comparable GAAP figures in our press release and 8-K filed with the SEC today.
Let's begin with our third quarter financial results. We were pleased with how we exited Q2 and entered Q3, which began largely as we expected.
However, as David described a challenged macro environment impacted transactions and our media efforts were less effective than planned.
Topline trends to trail, our expectations as we move through the quarter.
Nonetheless, we still delivered continued growth over the prior year period Q.
Q3 system wide sales increased two 4% to $247 million.
Total revenue increased one 2% to $55 7 million.
Year over year growth rates reflect the impact of a reporting calendar that shifted some of our largest wax past promotional days into Q2. This year instead of Q3 and.
And as a reminder, payments for wax passes are a component of system wide sales and trigger royalty revenue for us as a franchisor.
Overall top line growth was driven by our two growth vectors, including 12, 6% unit growth over the third quarter of last year.
Same store sales also increased three 4% driven by both our ramping and mature centers.
<unk> with the first half of this year higher average tickets for the primary comp driver.
From a profit standpoint third quarter gross margin of 71, 8% was largely in line with our expectations.
Third quarter, SG&A was $14 4 million and as a percent of revenue was 25, 8% 100 basis points higher than Q3 last year, driven by an increase in corporate funded marketing.
Q3, adjusted EBITDA increased three 4% to $19 3 million.
Adjusted EBITDA margin was 34, 6%, representing an 80 basis point improvement year over year and exceeding our low thirty's expectations, primarily due to the timing of advertising and professional fees that shifted into the fourth quarter.
Below the line adjusted net income was $6 $1 million.
This differs from $19 3 million and adjusted EBITDA due to three primary factors.
First interest expense was $6 5 million a slight decrease from $6 8 million in Q3 2022 due to additional short term interest income this year.
Second Q3, depreciation and amortization expenses were $5 million.
Consistent with prior quarters. 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 income taxes.
We released our valuation allowance on deferred tax assets at the end of 2022 as a result, we expect to recognize annual income tax expense compared to nature of negligible expense incurred during the period covered by the valuation allowance.
Our Q3 GAAP net income reflects $1 $8 million of tax expense and adjusted net income reflects $1 7 million of adjusted tax expense.
And now to our cash flows and liquidity, which reflect the significant strength of our asset light model.
Even in a tough environment, we continue to generate strong free cash flows for the benefit of both our network and our shareholders from.
From Q2 to Q3, our cash position increased by roughly $10 million to $64 million.
We had $395 million outstanding under our senior secured notes and nothing drawn on our $40 million revolver.
Net leverage continued to decrease sequentially ending Q3 at four four times adjusted EBITDA compared to five three times in Q3 last year.
Based on our outlook, we expect to further delever in the fourth quarter.
Operating activities generated $17 6 million in cash during the third quarter compared to investing outflows of approximately 150000.
We purchased approximately $5 $5 million of stock during the quarter and still have approximately $23 $5 million remaining under our current buyback authorization.
Ultimately our asset light capital light business model enables us to determine the best way to deliver long term shareholder value as we continue to monitor our environment.
Turning now to our updated outlook for 2023.
With strong franchisee confidence in demand, we remain confident in delivering more than 10% unit growth for fiscal 2023.
We have clear visibility and now expect to open 98 to 100 net new centers this year, which is towards the high end of our previous outlook.
In terms of the topline as David mentioned earlier, our previous guidance incorporated a solid start to the quarter and assumed that our strategic initiatives and media efforts will drive continued improvement through the back half of this year.
While lastpass and routine guests continued to show resilience and consistency trends among our less frequent guests did not sustain the momentum we expected.
As a result, we are updating our financial outlook for the balance of the year to reflect the current trends we observed in Q3 and Q4 to date.
Our 2023 system wide sales expectations are now between $945 $955 million with.
With total revenue expected between 217 in $219 million.
Our full year same store sales expectations moved to a range of one 5% to two 5%.
Our adjusted EBITDA outlook is 74, 5% to $76 million.
Reflecting the impact of a lower top line.
As a reminder, and consistent with our remarks last quarter. This range includes up to $1 million of SG&A, primarily in the fourth quarter to support our laser hair removal test.
Despite a challenged environment, we are committed to our promotional discipline and preserving four wall economics as a result, our full year gross margin expectations remain approximately 71% unchanged from our previous outlook.
Our 2023 interest expense outlook remains approximately $28 million.
Slightly weighted to Q4, given a 50 <unk> week in 2023.
As a reminder, both fiscal years 2022, and 2023 included a 50 <unk> week that we will return to a 52 week year in fiscal 2024.
We 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 between 25 and $21 5 million.
Transaction trends have been relatively stable exiting Q3 and into Q4 to date.
Our revised guidance incorporates a range of outcomes for the balance of the year, including continued stability or moderate deceleration from the current run rate.
At the midpoint, our updated full year outlook translates to more than 10% unit growth alongside mid single digit system wide sales total revenue and adjusted EBITDA increases.
Even in an uncertain environment, we are proud to expect meaningful organic top line growth and stable adjusted EBITDA margins year over year.
Most importantly, our existing franchisee network continues to reinvest in the brand and we feel confident in our long term unit growth algorithm.
In conclusion, we remain the undisputed leader in our category delighting guests and more than 1000 centers across 45 states.
Vinci and spend among our core guests are solid and consistent however, the macro environment has been a headwind this year among our less frequent guests.
We believe our best in class business model remains lucrative for franchisees, who enjoy robust cash on cash returns at maturity.
Those compelling unit economics in turn drive sustained reinvestment from existing franchisees.
We expect our continued focus on unit growth and in center sales growth will enable us over the long term to grow both network and corporate revenue leverage our fixed cost profile or EBITDA margin expansion and continue generating significant free cash flow in turn creating further value for European wax Center our.
<unk> and our shareholders with that I'd like to turn the call back to David to wrap up our prepared remarks and open it up for Q&A, David. Thank you Stacey as I laid out at the top of the call. We are focused on driving reservations and topline growth amid the near term challenges presented by this macro environment.
We're also maintaining our promotional discipline and margin profile.
Despite these challenges we remain confident in our long term growth potential.
We believe we have a resilient service offering with loyal core guests and continued opportunities to expand our brand in the model.
As the dominant player in a highly fragmented category, we are well positioned to leverage our scale and take market share in a period of disruption.
At only one third of our long term unit target of 3000 centers are white space is significant and we benefit from continued reinvestment from committed franchisees to support our growth trajectory.
With so much potential yet to be realized we remain as excited as ever about our future and the growth opportunities ahead for all of our stakeholders. We would now like to open up the call for questions operator.
Thank you if you'd like to ask a question. Please press star one one.
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First question comes from Randall <unk> with Jefferies. Your line is open.
Hey, Thanks, and good morning, everybody.
I guess maybe David.
Maybe a little bit more color.
On.
The pad early differential from the episodic guests, maybe changes that youre seeing frequency and spend maybe a little more flavor there would be very helpful and how thats potentially how much that has changed versus.
Let's see the second quarter.
90 days ago, or 90 days, but I just wanted to just get a little more color that'd be very helpful. Thank you.
You bet Randy.
So our transaction trends exiting our second quarter and entering the third quarter were solid Randy and that what that is what gave us confidence in reiterating our full year guide on our last earnings call Theres really two things that happened in the quarter. The less frequent guests began to pull back in later.
August and into September we saw no disruption or change in frequency or spend with our wax guys guess or a routine guest.
Less frequent guests began to pull back during that time.
As we saw signals that the macro could be impacting this cohort we increased our digital AD spend to try to drive additional reservations from all guests cohorts. So as we kind of saw movement through the quarter. Randy It was really back half of August and through September.
So what are we doing about it is probably more important while we continue to leverage data to more effectively acquire and retain our most valuable guests.
And we're driving reservations through new channels with more value oriented messaging, we're trying to target our guests with the messaging that resonates with them those elements of our brands that are most valuable to them.
And as I touched on just briefly in our in our prepared remarks. We also recently launched online wax passes and gift cards within the last couple of weeks to allow our guests to transact with the brand where they want.
So hopefully that gives you a bit more color in terms of the movement through the quarter in terms of what we saw.
Yes, It does and then I guess one.
One final question for me would be early early impressions are early learnings I know, it's very early on some of the laser tests that you've done so far anything standout.
You can share with us.
Sure so our.
Our hypothesis as we discussed on the last call. We had kind of three things we wanted to understand could we capture an incremental customer to the brand and incremental demographic to EWC by offering laser could.
Could we expand the share of wallet from our existing wax guests with laser and overall because we enhanced what we think are already very robust four wall economics.
Four weeks into the test as mentioned Randy we're in six centers in the New York City area. The early reads on all of those fronts are encouraging.
We plan to share more details of this pilot. This pilot results in 2024, but at least initial reads would suggest our hypothesis. We are encouraged by the rates on all three hypothesis.
Understood.
Guys.
Thank you.
Thank you. Our next question comes from Lorraine Hutchinson with Bank of America. Your line is open.
Thank you good morning it.
It seems like the episodic guests have been really choppy quarter by quarter I wanted to just zoom out and ask if youre seeing anything that would cause you to change your new store ramp expectations. Your sales at maturity or anything that you think would change the franchise model.
Well Ryan Thanks for the question.
<unk>.
Youre exactly right. It has been choppy. This is now kind of the six quarters that I think the macros had an impact on that part of our on that part of our guest file.
We remain very bullish on.
Our new unit development not just in terms of Ncos delivered but the pipeline are forthcoming.
<unk>.
Our management team is really supporting our franchisees every way that we can because opening a center is certainly helpful to the brand, but if that center doesn't drive tickets and is not ramping properly and ultimately profitable we're not going to see those reinvestment rates. So our teams are hyper focused on making sure.
Not only do we deliver additional new centers into the system that we're supporting franchisees to ensure that those are those are ramping properly and profitably. So nothing right now the range would suggest that we're seeing.
A slowdown in demand.
Franchisees.
And larger well capitalized we have a very supportive lender group is familiar with our model that continues to support our franchisees further development, but we.
We're not taking this macro environment lightly.
We touched on I think on our last call that.
In Seo disciplines that we're putting in place to ensure that those preopening marketing efforts are effective so our franchisees can build an adequate number of guests in their file to market to the day. They open. We also want to ensure that those centers are properly staffed.
To support the reservations of tickets both of those things are very very important to ensure that new centers get off the ground.
Efficiently I would add one last thing and making sure that we're balanced as it relates to our most importantly, we're trying to drive more reservations in in center transactions and so making sure. We're balanced from a standpoint of how we're doing that and not just overly discounting on a broad based perspective, so that we're protecting margin.
Thank you.
Thank you. Our next question comes from Dana Telsey with Telsey Advisory Group. Your line is open.
Okay.
Hi, Good morning, everyone. As you think about the cadence of sales and what Youre seeing are you seeing it in all regions around the country is there anything different from one region to another.
And as you speak with the franchisees how are they managing the expense structure or the <unk>. How are you. How are you looking to continue to grow after petitions or grows grow that that frequency are there any survey work that you've done in terms of.
Determining if it is.
There is adjustments in pricing wax pass events do you need to do more of or less of in terms of managing the business as we go forward in this macro environment. Thank you.
Thanks, Dana and I appreciate the question from a geography standpoint, not really seeing much there and there is obviously going to be spots here and there and some of that is going to be generated based on <unk> and where that's that's occurring but nothing really to call out.
As far as the wax specialists I'll say, a couple of things I'm sure David might have some comments as well, but we continue to deepen that pipeline and we've talked about the relationships that we have with beauty schools and that's a really important piece and we've been I'd say successful we're meeting our goals as it relates to not only the number of our WAC specialists, but also the level.
Kind of at their red or Orange and looking at that on a center by center basis, Yes.
Yes, I would say Dana just to add to that Stacy is spot on.
Real comfortable that the average center has the requisite targeted number of wax specialists, we continue to work with our franchisees on level, what we call leveling up in retention, we would we've got a solid mix in terms of our most experienced waxes for the average centers, we're not exactly where we want to be in terms of.
The optimal mix, but we're working our way towards that.
Kind of back to your question on the elevated labor rates you.
You may recall, we did not do or recommend an across the board price increase in fiscal 2023 for a network. We certainly have franchisees operating in certain markets with elevated labor costs and in many cases, those franchisees have taken pricing at the local level to protect their four wall profitability, but we didn't do it across the <unk>.
<unk> peanut butter spread price increase this year.
Thank you.
Okay.
Thank you.
Our next question comes from Scot Ciccarelli with tourists Securities. Your line is open.
Hey, guys. This is Joe on for Scott. Thanks for taking my question.
I know you mentioned that you stayed away from broader unnatural promotional activity in the quarter do you have any insight into whether nearby peers are maybe getting more aggressive in drawing away those episodic yes.
Typically yet.
You know Joe good question.
The survey that we have completed which suggests this episodic guests, we're not losing her to a competitor.
She is not waxing out in many cases, she is an event driven waxes sushi waxes before she takes.
I have given vacation before she she makes a trip she is not taking that trip. So she is not doing the other things leading up to that trip. The best intelligence. We have from our guests would suggest we haven't loss or to a competitor she still values European WAC Center.
Unlike the wax past guests and the routine guests that the U S. As non discretionary some of our episodic guest view us as more of a luxury and she's simply pulling back given the macro environment.
Got it that makes sense and then just one quick follow up can you talk about how blacks past sales are trending for the quarter maybe versus your expectations.
Yes, Joe Good question. So we are in our semi annual promotional period, we launched a couple of weeks ago.
We feel good about where we're.
<unk> sales are trending in fact that.
The current transaction trends in the wax pass conversion rates all of those are factored into our revised guidance for the year.
Got it thanks, so much.
Of course.
Yes.
Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Your line is open.
Hey, guys. This is Jackie Hoffman on for Simeon. Thanks, So much for taking our question.
Just in terms of the Q4 implied guide could you talk about the assumptions within that on the transactions versus ticket side. I know you guys called out lower quarter to date transactions, but just any more color there in light of the environment, you're seeing thanks, so much.
Yes, so we didn't break that out kind of between transactions and pricing if thats, what youre speaking to.
What I can tell you is that first two quarters, we certainly had that tailwind of the pricing increase that David mentioned, just a minute ago and that we took in Q1 of 'twenty, two and still a little bit of that in Q3.
So our comp has been heavily driven by pricing. This year. So we'd expect that there'll still be some of that going on in Q4 as it relates to some of the additional pricing that our centers are franchisees took on their own.
Great. Thank you so much.
Okay. Thank you.
Thank you. Our next question comes from Karen <unk> with Piper Sandler Your line is open.
Yes.
Koranda if your telephone is muted please on mute.
If you still have any issues. Please dial back in with the call me feature.
Okay. Our next question comes from John <unk> with Guggenheim Guggenheim Partners. Your line is open.
Okay.
David I'm curious.
Is the idea now maybe lean more into the.
Loyal the more loyal consumer as opposed to episodic.
And within that.
How is the bundling test going.
That's showing the ability to move the needle.
Yes, John Great question.
Candidly wanted to do both and I apologize if I wasn't clear in my prepared remarks, we are wanting to drive tickets in general part of that as well.
Re engaging episodic guests attracting new guests to the brand, but absolutely increasing share of wallet with our existing guests as a primary focus of our commercial and marketing teams.
In terms of the bundling test we talked on this a couple of calls ago. We did kind of started with the sixth center pilot to work through the operational Kinks expanded that to 100 center pilot.
And now we've got a couple of months of data to get a solid read on that and we're encouraged by.
By our ability to drive greater ticket the longer term goal with bundles near term benefit would be to increase the average ticket the longer term benefit would be the influence guest behavior. So against that might've only purchased one service from us per visit would commit to purchasing two or more <unk>.
<unk> from us per visit.
We have extended that.
We extended the number of centers that now have the service bundles to over 200.
We're going to continue to monitor and measure, but we're encouraged enough that I anticipate we will we will further rollout bundles throughout the network.
And one thing I'd add John as your question as far as leaning more into episodic, it's really more leaning into just attracting more guests to the center and a lot of that is going to come with him. We talked about the change to our media agency and we feel very good about and the strategies that they are putting in place, but it's more broad based I'd say.
And then maybe as a follow up right. So let me go through a period here right.
<unk> was down slightly because because of the macro.
Yeah.
These centers well you have to invest in.
Specialists right.
I'm curious the levers you have to take some pressure off the first year to 18 months.
P&L right for the franchisees I mean, youre not going to touch the the royalty.
Could you take less.
Less margin on wax, how do you think about those levers.
Yes, John so.
We've got as you said a number of levers if we saw <unk>.
Yes.
Not trending in a direction that was driving the reinvestment rates that we're seeing of course, we would look at.
Opportunities to support our franchisees and if we had to use our P&L, we would evaluate those.
Our focus has been on operational recruitment and marketing support to ensure that these centers can ramp productively in years, one and two and profitably through maturity. So I think you raised an interesting point there is a number of levers we could pull we had been.
Fortunate that the center level performance.
Large has performed in such a way, we haven't had to discount royalties or pull back marketing fund.
But we absolutely want to make sure.
Our franchisees can continue to grow and grow profitably. So that we can continue to enjoy the reinvestment rates that we're seeing.
Okay. Thank you sure. Thank you.
Thank you. Our next question comes from Karen <unk> with Piper Sandler Your line is open.
Hey, good morning, Thanks for taking the question.
First one is to press on the episodic guest trends a little bit more on I think you previously talked about 5% to 10% of gas being affected by macro pressures is that still the case and then.
Added pressure youre seeing.
Stronger magnitude for those guests or has that 5% to 10% started to increase thank you.
Yeah. Thanks for the question if I think about this episodic bucket, let me first start with our wax caused some routine guests that part of our guest file.
Comprises over 75% of system wide sales, so if I kind of lump everyone else into this episodic bucket, it's about 25% of our network sales.
What you've got in this bucket is pretty widespread you've got folks that are event, driven waxes theyre going to come two years or three times a year that are.
When we are going to come in for their waxing before that special event.
And you have some folks that.
This group appears to be more impacted they view us not not as a non discretionary part of their service like our blackspots in routine guests. So it's this part of our guests filed that is we feel more pinched from the macroeconomic environment, we feel theres a part best.
Demographic data, we have available would suggest more of this part of our guest file as a lower income guests on average than our wax pass in a routine guests. So we speculate the macro is having a more.
Bigger impact on this part of our guests file.
Got it very helpful. Thank you and then briefly.
Briefly on some of the marketing and AD spend you talked about I believe you said you maybe.
Maybe increase in spend this quarter, but it proved not as effective but then you also said some AD spend got question to Q4 from Q3, but can you just touch on what exactly is going on there and what we should expect for spending into Q4 and maybe even the early parts of 2024. Thank you.
Yes, maybe let me touch on the first part of your question and Stacey can address kind of anticipated spend.
As I have said.
Earlier, we kind of have two things happened in the quarter. One is this less frequent guests began to pull back late August and into September. So we did increased digital AD spend to try to drive reservations from all of our guests cohort. The second thing that happened is we had an execution. This intermediate portfolio. This was impacted by an isolated technical error.
<unk> that generated fewer reservations than what we had planned for.
Follow up on that so what are we doing about it well we've engaged a new agency that was onboard over the last couple of weeks and we anticipate really positive impact on transactions over time, but I do want to highlight our guidance for this year does not assume a change from our current transaction trends.
If you want to touch on kind of timing of the spend that would be correct. Yes, so two things right the $1 million.
The 100 basis point.
That we called out in SG&A that was market. That's what David just spoke to the timing is the advertising, which is the basically what the what we call. Our <unk> centers are paying into us. It's just a timing difference between Q3 and Q4. So it's not that we're changing what we're doing or anything like that other than obviously, we've changed <unk>.
<unk> and optimizing continuing to optimize that spend but it is related to timing piece on that but there are two different buckets, if that makes sense.
Very helpful. Thank you.
Thank you as a reminder to ask a question. Please press star one one.
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There are no further questions at this time I'd like to turn the call back over to David Lewis for any further remarks.
Alright, Thanks Michelle.
We really appreciate the questions and your participation on today's call.
Really appreciate your time, we look forward to speaking with you in the days and the weeks to come. Thanks, so much for joining us.
Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
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