Q3 2024 European Wax Center Inc Earnings Call
Right.
Good morning, ladies and gentlemen, and thank you for standing by welcome to European Wax Center's third quarter earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session. Please press star one one.
In order to facilitate as many participants as possible. We ask that you. Please limit yourself to one question and one follow up question during the Q&A session.
If you have additional questions you may rejoin the queue.
On the call today are David Burke, Chief Executive Officer, and Stacie, Shirley Chief Financial Officer.
I'd now like to turn the conference over to Bethany Johns.
Director of Investor Relations Ma'am, you may begin.
Good morning, everyone. Thank you and welcome to European Wax Centers' third quarter fiscal 'twenty 'twenty four earnings call on today's call. David Burke will begin with a brief review of our third quarter performance and discuss our strategic priorities. Then Stacey will provide additional details regarding our financial performance and updates to our fiscal 'twenty two.
For outlook.
Following the prepared remarks, the team 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.
Billings 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 either.
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 investors Dot wax center Dot com.
I will now turn the call over to David Burke.
Thanks, Bethany and good morning, everyone. Thank you for joining us today when I last spoke with you all three months ago I just resumed the CEO role and I shared my excitement and optimism for European WAC Center, a one of a kind brand celebrating 20 years of loyal guests and asset light and recurring revenue model that generates strong cash flow and then under.
<unk> leadership position in a highly fragmented industry.
As a mark 90 days back in this role we have sharpened our focus and my enthusiasm for the brand continues I'm also pleased our third quarter financial results were in line with our expectations.
I would like to begin today's call by sharing my assessment of European WAC centers current state or evolved priorities and recent actions taken towards unlocking the full potential of this iconic brand.
Over the last three months I've spent significant time diving deeper into the business and meeting with franchisees and corporate team members in center associates and external stakeholders, including our shareholders.
Most importantly, I am regularly meeting with our franchisee leadership.
We're in close alignment with them on both the challenges and opportunities we have.
As I've engaged with these key partners three things remain clear to me.
First our loyal guests have an enduring passion for and commitment to this brand.
Even in a challenging macroeconomic environment, our core guests continue to love This brand and the services they receive.
Second we have exceptional team members, who are guided by our core values and deliver unparalleled experiences for our guests and third we are collaborating and aligning on key priorities to drive success for our franchise partners and the network.
As I mentioned on last quarter's call. We recognize that we have a significant opportunity to drive new guests into the brand and increased ticket growth, which are inextricably linked to improving unit economics and financial returns for our franchise partners Ulf.
Ultimately this will enable us to deliver thoughtful growth for European WAC center, thereby creating long term value for both our franchisees and stakeholders.
To this end during Q3, we narrowed our focus deliberately pausing the expansion of our laser hair removal pilot and reallocating resources to our core auto home waxing business. We continue to be excited about lasers potential to further enhance four wall economics, and we're taking this opportunity to reflect.
Refine and improve our laser test in New York, as we evaluate when and how to roll it out more broadly.
In addition, we've made personnel changes to better align our teams with our priorities.
Now have direct responsibility for our development and operations functions, we reorganized our commercial and operations departments and we elevated team members with extensive center level experience into critical operational roles are restructured organization prioritizes our attention on our core business.
Drive performance improvements in our key focus areas.
Briefly introduce these areas during our last earnings call. As a reminder, they are first attracting new guests.
Increasing tickets by retaining and reactivating existing guests and third improving the productivity of underperforming centers.
Today I would like to take you through more details on the action plans that we've put in place for each.
I'll start with attracting new guests, we recently announced our partnership with the Libra digital who was beginning to overhaul our guest acquisition and engagement strategies through a pay for performance structure. We are closely aligned their financial outcomes with our own the <unk> team in concert with our internal resources has hit the.
The ground running and will assist us in two primary ways over the coming months.
First helping us in source many of our marketing activities that are currently performed by third parties, which we will expect will make us more efficient we are in the process of streamlining our vendor partnerships and retained relationships to bring that work in house, which should enable us to redeploy more of our market.
<unk> funds towards working media in 2025, with the goal of reaching more guests and driving them into our centers.
Second the Libra plans to enhance our technology capabilities elevate our data utilization and refine our measurement practices to make us significantly more effective.
In the near term, we are working closely with the Libra to evaluate test and improve everything from creative assets to email execution SMS delivery to Kpis reporting.
Going forward, we expect to improve media buying and performance measurement using revamped creative and dynamic content across channels to drive engagement from both new and existing guests. We're also evaluating other new guest drivers, including our referral programs and Influencer partnerships given the team at <unk>.
Rack record of delivering significant improvements at other customer facing organizations, we look forward to implementing their solutions and providing an update in the coming quarters.
In terms of our second focus area, increasing tickets <unk> expertise in CRM guest segmentation and predictive insights should help us reactivate guests who have lapsed over time, we plan to better leverage our data to both tailored content recommendations and promotions based on customer preferences and.
Once these messages are fully architected, we will have the ability to deliver highly personalized iterations across E Mail direct mail mobile web and SMS channels analyzing their effectiveness and optimizing as we go. This is an area of opportunity that I'm incredibly excited about and I have.
Confidence that we have found the right partner to help us execute on it.
To retain guests and keep them coming back our field training teams in concert with our franchisee partners are intent on delivering a consistently phenomenal guest experience. Each guest interaction is an opportunity to create lasting impressions and foster brand loyalty.
Through revamped guest journey mapping, we have identified the touch points that matter most to the guests and supply. These insights to the network to create additional value for both the center and the guest.
Our field operations team also continues to provide hands on support with the goal of elevating four wall performance I am spending time in centers and have been an active listener on center manager calls where they share best practices ensure focus on key deliverables and align on how best to delight our guests.
Listening to our Amazing center managers reinforces the love commitment and energy. These leaders have for the EWC brand.
As we move forward field operations will continue their efforts to drive improved dollars per ticket wax pass sales product purchases and other kpis evolving as needed to ensure we best support our franchisees and four wall profitability.
Turning to our third focus area, improving the productivity of underperforming centers.
We know there are some lagging centers in the network that could benefit from hands on operational and marketing assistance.
As part of our organizational restructure we established a dedicated cross functional team to diagnose and support these centers with operating procedures and local marketing strategies designed to drive tickets increased productivity and ultimately mitigate potential closures were also in the early stages of deploying.
Earnings from our New center opening playbook in these centers, which.
Which we believe can drive topline and accelerate their ramp to maturity.
As a reminder, we rolled out the new playbook earlier this year and we are encouraged that recent 2024, new centers are outperforming previous cohorts.
Ultimately we believe these are the right key focus areas and near term actions that will best position us to enhance ticket growth and franchisee economics in existing centers and therefore paved the way for us to return to consistent New center openings.
Turning now to my assessment of New unit growth as I mentioned earlier I assumed responsibility for the development function during the fourth quarter as I've dug into the business. Further we have intensified a comprehensive review of both our existing network and our pipeline and in the process identified additional centers at risk of closing we.
Continue to work closely with franchisee partners as they consider closures for a variety of reasons ongoing macro challenges impacting new guest acquisition and topline performance higher than expected cost pressures portfolio optimization or exploration of lease terms or licenses with increased visibility strong leadership and an <unk>.
Expanding team now in place we are taking decisive action. The team is currently implementing more rigorous processes to manage the portfolio such as proactively tracking upcoming license explorations and renewals better monitoring franchisee financial health and reevaluating market planning.
They are also assessing near term development plans, including renegotiating certain multi unit development agreements.
Lastly, we expect to recruit qualified new franchisees, who are attracted to our model and it's solid returns relative to other concepts taken.
Taken together, we believe these efforts will ensure we have the strongest operators to support our future growth, while mitigating long term closure risk.
For fiscal 2024, we continue to have full confidence in opening 43, gross new centers, which was the basis for our previous guidance from a net opening standpoint, there have been 16 center closures year to date, and we expect an additional five to 10 closures by end of year translating.
The 17% to 22 net new center openings in 2024 overall, while we do foresee an above average closure for this year, we expect the rate to be less than 3% of our existing footprint of 1064 centers.
While it is too early to give guidance for 2025 at this time, we do expect to have positive new openings on a gross basis for next year, we remain in active dialogue with our franchisee partners as we work to address near term macro related constraints grow tickets and realign the business to its full potential.
As a result, we believe closures may have the potential to more than offset unit growth on a net basis in 2025, and we expect to provide further details during our fourth quarter earnings call in March.
I want to emphasize that we remain committed to long term sustainable reliable and consistent net unit growth. We believe that the review of our network will leave us best positioned to capitalize on the significant white space available for European WAC centers continued expansion.
As we look ahead, one thing is certain our franchisees have helped make us the undisputed leader in out of home waxing.
We recognize the value of maintaining a close connection with them and we are taking action to drive ticket growth best support our network and achieve our collective priorities.
As I wrap up my prepared remarks, I want to summarize my first three months back in the CEOC I've.
I've listened intently to our teams and our franchise partners do deep into the business to evaluate our strengths and opportunities define our key focus areas and updated our teams and external partners to align with those priorities.
During this time, we also delivered on our financial expectations for the third quarter.
We look forward to beginning to implement marketing and technology solutions designed to attract new guests and deepen guest engagement further refine field operations to support guest retention and deploy focused actions expected to improve the performance of our underperforming centers. We believe these initiatives will be instrumental in improving <unk>.
<unk> center productivity and unit economics, and ultimately to resuming thoughtful unit growth.
This is both a transitional and pivotal time for European WAC Center, and I'm excited for what's to come as we build upon a deep love for this brand shared by our guests franchisees and associates. It is our commitment to you that above all we will remain guided by our values and relentlessly focused on driving new guests reactivating and retaining exist.
Guests and converting them to brand loyalists, improving our financial performance and expanding our leadership position.
It will take us time to do so and achieve our goals, we will not stop we will keep accelerating forward and we remain confident in the European WAC Center brand and its long term growth potential.
With that I'd like to turn the call over to Stacy Shirley to discuss our Q3 financial performance and guidance for the rest of the year Stacy.
Thank you David 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 10-Q filed with the SEC today.
Note that our third quarter reflects an out of period balance sheet adjustment related to intangible assets. Further details are contained in our 10-Q.
As a reminder, both fiscal years 2022, and 2023 included a 50 <unk> week that fiscal 2020 for returns to a 52 week year.
Now, let's begin with our third quarter results.
Speaker Change: David noted our financial performance was in line with the revised expectations. We provided on our earnings call in August.
We ended Q3 with 1064 centers, representing a three 7% growth year over year.
We had 12 gross openings during the quarter offset by seven closures, resulting in a net add of five new centers.
<unk> sales were relatively flat at $240 2 million compared to $240 7 million in the same quarter last year.
Total revenue of $55 4 million decreased half a percentage point, primarily due to guess pulling back on retail products in a challenged macro environment.
Same store sales also decreased half a percentage point compared to a three 4% increase in the same quarter last year and year to date same store sales are flat.
As expected cost savings continue to drive gross margin, which increased 110 basis points versus the same quarter last year to 72, 9%.
SG&A expenses, including approximately $3 million of non routine expenses related to executive severance reorganization and returned to office efforts and prospective debt offering that we decided not to pursue in the third quarter.
These non routine expenses were the primary driver at a 21, 6% year over year increase to $17 5 million.
Advertising expenses increased $300000 or 70 basis points to $8 $4 million due to our planned efforts to drive traffic and the timing of seasonal campaign costs.
Adjusted EBITDA of $18 4 million decreased four 4% from $19 3 million in the prior year period.
And adjusted EBITDA margin decreased to 33, 2% from 34, 6%.
With continued favorability from interest income net interest expense decreased to $6 3 million from $6 5 million last year.
Income tax expense decreased to $800000 from $1 $8 million last year as our effective tax rate improved to 28, 7% from 30%.
And adjusted net income decreased to $5 $5 million.
Turning to the balance sheet, we ended Q3 with $48 million in cash net cash provided by operating activities was $14 $8 million compared to approximately $60000 and investing outflows, which highlights one of our biggest strengths.
Ability to generate strong free cash flow through our asset light capital light model, even in a softer consumer environment.
During the quarter, we deployed $21 million of that cash flow to repurchase class a shares once again, demonstrating our conviction and the underlying value of our business and its long term potential.
At quarter end, we had approximately $20 million remaining under our $50 million share repurchase authorization.
Our fully undrawn $40 million revolver, and $391 million outstanding under our senior secured notes.
Net debt was four five times trailing 12 months adjusted EBITDA.
Our strong liquidity position gives us the continued flexibility to consider share repurchases dividends and debt paydown on an ongoing basis.
We are also evaluating the potential to use our balance sheet to purchase select units from franchisees as.
As always we remain committed to financial discipline and stewardship as we consider these opportunities.
Turning now to our outlook for the balance of 2024.
As David mentioned, our financial performance continues to trend in line with our latest expectations and as a result, we are reiterating our financial outlook for fiscal 2024.
We expect system wide sales $930 million to $950 million.
Revenue of $216 million to $221 million and same store sales of negative one 5% to positive <unk>, 5%.
From a guest standpoint, we are encouraged that our core guests remain committed to our brand and continue to represent approximately 75% of network sales.
We are less than halfway through our semiannual wax past promotional period, but we are pleased with the growth in wax cross sell so far which is a positive indicator of future guest loyalty and frequency.
In contrast, the challenging macro environment has had a notable impact on our ability to attract new guests and increase ticket.
David outlined our key focus areas any action plans, we have in place to enable stronger ticket growth and we look forward to implementing our new strategies in the coming quarters.
From a profit standpoint, we continue to expect gross margin will improve to approximately 73% for fiscal 2024.
And our full year outlook remains 70% to $74 million of adjusted EBITDA and $19 million to $22 million of adjusted net income.
Keep in mind. These adjusted metrics exclude approximately $3 million in third quarter SG&A expenses related to the executive transitions returned to office efforts and the debt refinancing that we elected to terminate.
However, these metrics do include up to $4 million of expenses related to our laser hair removal pilot.
There is no change to our expectations for interest expense of $26 $5 million and an effective tax rate of 25% before discrete items.
Finally in terms of new centers as David mentioned, we continue to expect 43 gross new openings. This year of which 35 are already open.
As we continue to manage a dynamic closure environment and review our network portfolio. We expect 17 to 22 net new center openings in fiscal 2024.
Before we open the call for Q&A I'd like to take a moment to focus on the long term opportunity that remain central to European WAC Center.
Our commitment to driving new guests supporting our franchise partners and generating long term shareholder returns is unwavering.
In a challenging environment, our business generates significant cash flow and our asset light model gives us the flexibility to consider various opportunities to drive value for guests franchisees and shareholders.
We continue to have a long runway of growth in front of us and an unmatched leadership position in a highly fragmented industry.
And as David noted, we have taken decisive action towards fulfilling our clear vision for the future of this enduring brand.
We look forward to executing on our focus areas and updating you on our progress in the coming months, we'd now like to turn the call over for questions operator.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question Press Star one again due to time restraints. We ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
Yes.
Our first question will come from the line of Randy <unk> with Jefferies. Your line is open.
Yes, good morning, and thank you for taking the questions and David I appreciate.
The approach here, it's kind of you're kind of being thoughtful youre, taking a step back.
Collecting on the strategies and involving them.
Bruce.
Okay.
That function.
Obviously it feels like there is some kind of units that are at risk is there anything that is common that youre seeing in those units that.
It's different than perhaps the way units were opened or that or the real estate locations were chosen in the most in the last couple of years versus.
Five years ago or something like that what are you seeing that is different in that.
Is that that's causing that underperformance.
And maybe location or something else that you could give us some more.
Color on thanks.
Hi, Randy good morning, Thanks for the question.
I don't I don't think this is a real estate issue, there's probably of the 16 closures that we've had year to date.
Maybe the instance, or two where it was just a bad pick on real estate I think this is really much more around the macroeconomic conditions that our franchisees have been facing so some certainly higher higher than expected rent and wage costs in certain areas.
Folks coming up to the expiration of their leases or licenses and they just elected not to renew given kind of elevated costs in a more difficult macroeconomic.
Macroeconomic pressure and just or potentially a desire to relocate to a different trade area.
Sometimes we got multi unit owners are just optimizing our portfolio. So I wouldn't I wouldn't pin it on real estate I think what we're doing Randy Youre sort of just my digging in a lot deeper with the current leadership in the development team to ensure we've got better visibility to what's coming at us looking at the financial health of our franchisees.
When licenses are going to expire and working with Chris.
Crystal clear our strong desire is to work with our existing franchisees to renegotiate multi unit development agreements where that makes sense.
And I think it's still continues to be an attractive model that we're very pleased where we've seen franchisees step in and take on transfers and we also believe that there will be an interest of folks outside of the system given the attractive returns that we have.
At the end of the day. It all comes back to what we've talked about in terms of our priorities, which is we have to drive more new guests and we have to improve tickets for our franchisees and that will drive drive the overall four wall profitability, which is our key focus for our for our franchisees.
Thank you one moment, yeah can you hear me.
Go ahead Randy.
And youre kind of cutting in and out we can't hear you know Randy.
Our next question will come from the line of Dana Telsey with Telsey Advisory group.
Hi, just circling back to the to the units that are being closed as you go through your franchisee network.
Is there.
Are there more that you'd like to close are there any metrics that are defining around those that you won't close and in opening new centers is there any reframing of what you'd like to look for and then secondly, grandchild terms of bench height terms are those at all changing in this landscape and what are you seeing from your <unk>.
<unk> regionally House, California, performing what did you see and wax.
Speaker Change: Blacks pass members versus not how would you calibrate the consumer out there.
Thank you.
Dana: Dana I always love it you get four questions in your one question.
Try to.
Hi.
Let me, let me take it sort of it.
In slightly reverse order from a franchise agreement standpoint, we don't anticipate any material changes in the franchise agreement that we have with our our franchisees today.
Your question around sort of units being closed and would we like units because obviously, we want our preferences that unit say opened and they ramp successfully and they get to the kind of mid.
Mid teens low 20% four wall EBITDA margins.
Since our franchisees to reinvest in the system and we've certainly historically been very fortunate that our growth has come from our current franchisee base. So thats our goal and again back to why we're focused on driving new guests and increase tickets into the into the system.
I think the.
In terms of our behavior of our guests our core guest has behaved the same and this has really been pre COVID-19 post COVID-19 tougher macroeconomic situation.
That core guests still accounts for 75% of our of our revenue in that recurring revenue model is one of the strongest aspects of the business model that we have here regionally I think that California, as we talked about even last quarter that they have seen higher cost there, particularly in rent and labor.
And there has been a so that's been a little bit of a pressure on the production or productivity of the California centers one of the things that I'm sure. We'll get asked about is pricing. We continue to think about are there places where we could take price do that in a way that makes sense via elasticity studies that might help those franchisees.
See a little bit of a little bit of improvement given those the higher costs, particularly in California.
I think the only thing I would add you mentioned wax pass Dana So the only thing there is we as we mentioned on the call we're about halfway through the wax past promo.
And so far we're pleased with what we've seen and again just kind of reiterate that core guests continues to be very very loyal and I think it's an indication of the future and growth as it relates to those wax passes they continue to increase.
Thank you.
Thanks, Dan.
Thank you one moment our next question.
And that will come from the line of Jonathan Komp with Baird. Your line is open.
Yes. Good morning. Thank you David could you, maybe just follow up and share a little bit more of your current thoughts on.
The range of outcomes for net unit growth in 2025, I know you gave you some directional color.
And just as a follow up given that I think it's 98% of your openings in the past few years have come from existing franchisees can.
Can you give any more insight on the infrastructure in place to attract more franchisees.
The success rate, so far or the lead time that you might need to do so.
So John on 2025, what we just wanted to be clear about is that we do continue to expect that we will have new openings on a gross basis, what we talked about in my prepared remarks was that given sort of the dynamic environment that we're in closures could exceed gross openings next year. It is possible that we would have a <unk>.
Net negative number we're not we'll give we will give more specific guidance on that when.
When we announce Q4 in early March.
So thats, probably as far as we're going on that guidance John I think on the we've been very fortunate as I mentioned in my response to Jason's question about our growth has come from our current franchisee base again, our strong preferences that we have discussions with our current franchisees that have signed multi unit development agreements or that want to grow with us and.
To do that and we've got to readjust those.
That's work that's going on right now with within our development team.
With respect to bringing on new franchisees. This is still an attractive model given the returns that you have from a four wall standpoint, the cost of the cost of entry of the cash on cash returns.
And we have hired in the last month, a couple of new folks on that development team that will specifically be working with both our current franchisees, but also talking with other folks about coming into the system. So a little bit too early given that they are just kind of ramped up here in the last 30 days, but its the discipline around our new growth.
Is front and center and we want to make sure that we're as I said in my prepared remarks that we're consistent as reliable and we're thoughtful about how we grow the.
Unit count going forward.
Okay, great. Thank you and just as a follow up David or Stacy.
In a scenario where units don't grow in 2025, just could you give any thoughts at a high level, how you plan to.
Ballots preserving the overall profitability of the organization versus keeping keeping the growth infrastructure in place for the longer term opportunity. Thanks again, Sir yes, yes. Thanks for the question.
What I would say for obviously, we haven't given any guidance and that will.
Certainly impact on the overall results, but when we look at anything that's below sales, we think about our gross margin, we've shown tremendous increase or growth this year.
So there is no reason, we would think that that would change we should be able to sustain that level thats coming in around 73 basis points and then from a cost perspective, we will.
We don't require a lot.
Once we start to lever, we will leverage our cost structure as we get the topline growing.
But don't expect to see any increases that would be put us in a position to necessarily deleverage, but more more to come when we.
We report our Q4 results as it relates to 2025.
Thank you one moment for our next question.
Speaker Change: And that will come from the line of chlorine Wolf Meyer with Piper Sandler Your line is open.
Hey, good morning team thanks for taking the question.
Not to harp on the unit growth too much but maybe could you provide a little bit of color on some of the criteria you're using to SaaS.
The unit is worth closing or not if it's not the franchisee, making that ultimate decision just what metrics are you looking at and then.
At what point would you consider using your cash to bring some of these units under the corporate umbrella.
Hey, great good morning.
We have a closure policy.
We want to work closely with our franchisees.
Talk to them about where there are opportunities within their P&L that we can be hopeful if there are areas that.
Where we could add additional support or training, we do that we certainly are monitoring the potential at risk and closure list with a lot more robustness really really starting in the.
The last 30 days or so to make sure that we've got better visibility to that so that we can work with our franchisees.
Either help them stay open or in the event that they have to close potentially look for someone to transfer that to where the ultimate decision is they have to close out that we've got awareness to that and we can do that in a thoughtful way.
The.
Speaker Change: Okay.
On using the balance sheet I mean listen this is a great model as you know that generates a lot of cash flow one of the things that we do think about is using some of our cash.
To buy up franchisees that might want to close we're going to do that again in a thoughtful manner. We always want to make sure that we are an asset light model, but we do.
We've got opportunities to deploy cash.
Places that make the most sense and given given kind of the attractive four wall returns there may be instances, where that absolutely does makes sense.
Great. Thank you and then maybe if you could touch a little bit interest from prospective franchisees wanting to come into the European wax.
Group.
Is there opportunity to pass on these closing units Q.
<unk> interested.
Potential franchisees and is that something that you've started to do that.
And that we could think about into 2025 and 2026 as a way to keep that unit growth still up.
Yes, really really early days, Corinne, but and I think there's two I think we've certainly seen interest from our current franchisees were in great partners that have said, hey, here's a franchisee that might want to exit or are struggling a little bit and oftentimes we're able to have.
Have a transfer to a stronger operator that takes on those those centers Thats a great result for all of US and I think just again reinforces the belief that our franchisees have in the current system again very early days about sort of soliciting or talking to folks that want to come into the system, but.
The early early early read is that given again, the low cost of entry and the returns that you can have.
Sure.
Our business model that we expect that we can attract folks where these returns are better than other franchise concepts.
Okay. Thank you.
Thank you one moment our next question.
And that will come from the line of Simeon Gutman with Morgan Stanley. Your line is open.
Hi, This is <unk> on for Simeon.
Yes.
Press release, you mentioned enhancing unit economics I was wondering if you could maybe expand or elaborate on this one whether this may be because the business has seen comp store declines just can you give more color on how unit economics are performing relative to your expectations. Thank you.
Yes, I think Lauren thanks for the question I think this is really our as we look at those key focus areas right about driving new guests driving more tickets, that's going to that's going to increase the overall productivity from a four wall standpoint, So I just want to make sure everybody understands that our job here is the franchise or in the corporate team is to be the the customer service department for our franchisees to help them.
Perform it at four wall.
The partnership with <unk> is really focused on doing just what you've talked about how do we drive more revenue generation that is through driving new guests, where we're getting a lot smarter about our creative how we buy media, how we place how we how we message to both new and existing guests.
So all kind of all those focus areas that we've talked about that.
There arent 10 of them and it's really those two or three that we're hyper focused on and have reallocated resources to address is to do just what you said, which is to continue to enhance our.
Our productivity it before at a four wall basis.
Great. Thank you and then my follow up is just you mentioned the core guests remain committed to the brand I guess, how should we think about the base of our core guests. Specifically are you pleased with maybe the retention of the cohort and also just any color on Bob's gas.
Thank you.
Sure I'll start and then David can add yeah. So as we said that core guest room continues to be about 75% of our system wide sales. So we're pleased with that the routines have not changed and so they've proven to be a very loyal loyalty guests for us.
So we're pleased with that.
Certainly pleased with so far with how our WAC Fest promo is going.
So that piece of it is good as well the issue that we have and as we've talked about and the challenge is really bringing in new guests to the center and so those are the initiatives that we spoke about specifically around marketing as well as the.
The operations team to help drive additional guests into center, which will then overall help overall kind of continue to fill the funnel and grow core guest and if you think about that journey. It is us driving that core guest and then real hyper focus from our our operations team on and making sure that the guest experience once they are.
In the center is amazing so that we retain that guests and then those lapsed guests that we talked about that haven't visited us in a period of time being more specific with really hyper personalized marketing and CRM efforts to bring them back into the center again once they get there ensuring that that with the partnership with our franchisees.
They're getting an amazing guest experience. So we convert them into a wax festival or into that core guests that drive that recurring revenue.
Great. Thank you.
Speaker Change: Thank you one moment our next question.
And that will come from the line of John <unk> with Guggenheim. Your line is open.
Hey, Dave I wanted to start with.
Underperforming centers, you think that number is less than 5% of the network.
Is that fair I don't know I don't know what percent Youre working on at any at any one point in time.
Then when you think about non revenue ways to improve the economic model right. There are ways to think about.
Capital cost <unk>.
Labor.
But the catch 22 being right with the WAC specialist you can cut back on that too much.
So you've got to address WAC specialist productivity, how do you think about doing that.
Yes, so John I think part part of underperforming is definitional right, but if we think about stores that are probably negative EBITDA. It's a it's a small percentage less than 10%, 10% ish or so of mature of mature centers and again, we continue to work with them about how to how to enhance that profitability.
Non revenue questions is a really good one.
Always I think Theres, a couple of things from a from a cost of the box standpoint, we continue to look at ways, how do we make opening a new center.
Construction of that more affordable so that we can we can get you ramp faster and get to breakeven faster and drive those cash on cash return. So that work continues to go on again in concert with our franchisees labor is.
We've called out specifically labor continues to be a challenge as we as we look at particularly high cost states like California regions like.
The northwest Seattle, and Portland in those areas.
And as I mentioned John.
Pricing is an area that we've got to be conscious of that that can help us offset some of those those costs that our franchisees are looking at.
But I keep coming back to sort of what our real opportunity is to drive new guests into the system.
And then once we get them there to make sure that we retain them and reactivate those guests that haven't been there. So that truly is our hyper focus to help him to elaborate on what theyre doing.
Confident we're going to see we're going to get traction doing that and thats.
That's really the flywheel.
Flywheel that'll get us get us moving back to the thoughtful growth that we talked about.
And do you think just as a follow up to that is it too early to think about you had an algo.
Couple of years ago.
So I think does that alagoas does that still apply.
Has it changed a little bit.
Speaker Change: If it still applies.
It's certainly not 25, but 26.
Some part of 2006 do you see that starting to manifest itself.
No.
I think at this point.
We're really not in a place to provide that guidance as we talked about we're really just very focused on thoughtful growth.
And doing that right and also to get the three things that you know that.
David just talked about tracking new gas increase in tickets and improving the productivity. So at this point I don't think that we can say 25 is.
We'll know more in the coming weeks.
But there's no reason that we don't believe that we won't be able to get back to that in the future.
A lot of white space in front of US we have a lot of franchisees that are very supportive and still excited about the brand.
And so that's what we're focused on.
Thank you.
Thank you.
Thank you as a reminder, if you have a question. Please press star one one our next question will come from the line of Melanie <unk> with Bank of America. Your line is open.
Hi, good morning, Thanks for taking my question.
Wanted to ask just on promotional efforts in or Youre in the middle of the wax semiannual can you talk about any new efforts on the promotional front I think you did a six plus two in the past.
In California, and then you've done some other limited time ones for college students or just anything new to call out or will that be more of a factor actor.
Some of these initiatives with El Abra comes through.
Yes, I think Melanie it was.
Thanks, Thanks for the question.
As you know we have the semiannual wax pass sale were $9 two becomes a $9 three.
That continues to be a great driver for us as Stacy talked about in her prepared remarks, even though we're kind of four weeks just four weeks into this.
This promotional period very pleased with the early results of our wax pass sales.
In the past 30 days, we are not a discount brand right and we're not going to rely on sort of promotions and discounts one of the things that we've worked.
We're working with our marketing subcommittee of our franchise Advisory Council as to have real clarity around what our 2025 promotional calendar looks like so.
So we will continue to use those of those promotions that we know drive.
Drive profitability at a four wall standpoint, and I think that lens is incredibly important that we keep that in mind that any promotion that we run that we both have a franchisor and franchisee lens on it.
We'll continue to use LTE OS and limited time offers and product to enhance excitement and bringing in guests to make additional purchases, but I don't think that our overall promotional mentality is going to change. It's just we're going to have better clarity around it make sure that we've got the support of our franchisee system and understand.
The impact.
From them clearly with El Abra coming in again that better insight into what our guests want to see what the pricing impacts might be that that's going to be incredibly helpful. As we as we move forward.
Yes.
Got it thank you.
Thank you Melanie one moment our next question.
Okay.
We do have a follow up question from Randy <unk> with Jefferies. Your line is open.
Hey, Thanks and sorry.
Phone issues earlier.
Just wanted to David back to you I wanted to kind of just get your perspective on.
They are focusing on the near term here in this reset our items.
Give us your thoughts just on the long term Tam.
They'll have an industry. That's fragmented you are the largest branded player.
How do you want us to think about.
<unk>.
The on the store side.
And if it's the same is there any changes or not I will let us know and just if it didn't sustain any changes in terms of how you think about where those pins are put in the ground.
Perhaps less in California, I don't know just wanted to get your perspective on how we should be thinking about long term is obviously.
A couple a couple of quarters, and it's going to be kind of written off.
And is already reflected in the stock just give us your perspective long term there. Thanks.
Yeah, Randy I think I would start with the business model is absolutely still solid right, we feel great about.
That recurring revenue model that we talked about.
Quite often from it from a <unk>.
Tam standpoint, still still believe in the opportunity that we have.
In the U S that it's still robust we still like the fact that we.
We are the leader six times bigger in terms of unit count than the next biggest competitor 11 times bigger in terms of system wide sales.
And our modality continues to grow.
So we're very we're very pleased with.
We think that the white space is still there that we've got plenty of room to grow continue to be as we talked about Randy thoughtful growth to make sure that we're doing that in a way that as we open new centers, they can ramp and be and be successful and thats really our focus is to have that thoughtful consistent reliable growth as we go forward. So we again feel great.
<unk> leadership position in the category that dominated by mom and Pops highly fragmented.
Much smarter and better in terms of our working media spend with our partnership with the offer that we can put more of those dollars to work to make the investments in the guest experience from a technology standpoint that candidly our competitive set can't do we didn't get a question about laser today, but we also are.
We're going to continue to test that in our New York centers, We think that's another place where both the brand and our guests gives us permission. So we're going to look at modality that makes sense for us and that our guests gives us permission to do so.
We continue to feel good about the opportunities or any Vermont, an overall market standpoint, and white space.
Helpful. Thanks, guys. Okay. Thank you. Thank you.
Thank you.
And we do have a follow up question from Jonathan Komp with Baird.
Thanks, just squeeze two follow ups here.
David I'm wondering if you could talk about.
Or quantify their working media budget in 2025 could that could that be up.
Year over year, just given some of the changes you mentioned and then Stacy just to confirm sorry. If I missed this have you have you already purchased any corporate units from franchisees and if you have or if you do could you just.
Remind us how that would flow through the income statement. Thanks again.
So let me start with that that's an easy one at this point in time no. We have not purchased any units we've had transfers to our franchisees, which is always kind of our first course, but at this point no we have not purchased any.
And John on the marketing funds as you know the franchisees, where we are the stewards of franchisees 3%.
Contribution.
Clearly and we should spend that money in a way. That's most effective we do think there is an opportunity for us to improve that in terms of more dollars towards working media. We've got kind of the first cut at that talking with our franchisee group about how to do that and I think we can see some.
Fairly fairly significant improvement in that year over year part of what we talked about was bringing some of this work in house being more efficient.
Some of the classic retainer.
Kind of relationships will will move away from those and really redeploy those dollars into working media, which is good for good for us as a franchise or and certainly good for our franchisee system as well.
Got it that's helpful. Thank you both thanks again, John Thank you.
Thank you I'm showing no further questions in the queue at this time I would now like to turn the call over to Mr. David Burke for closing remarks.
Hey, thanks, everybody for listening in today, and we'll certainly look forward to talking to you in the coming days and weeks and more to follow when we talk about Q4 in early March. Thank you all very much.
This concludes today's program. Thank you all for participating you may now disconnect.
Okay.
Speaker Change: [music].
Yes.
[music].