Analyst. It's my pleasure to host this presentation with European Wax Center, represented by David Willis, CEO and Director, and Andrea Wasserman, Chief Commercial Officer. We're gonna get into Q&A, and if maybe we have some time at the end, we'll let you open it to the audience. In the spirit of announcements, you announced some things this morning. Can you give us an update on what you said?
Yeah. Good morning, everyone. We put a press release out this morning. Very pleased in terms of how European Wax Center and our franchise partners finished fiscal 2023. We announced that we had opened 100 net new centers, which is at the high end of our prior guidance. We increased our guidance on system-wide sales, same-store sales comps, reaffirmed guidance on Adjusted Net Income and Adjusted EBITDA. Need a bit of time to close the books, but overall, network felt very good in terms of the delivery in the fourth quarter, and we feel great about the strength of our development pipeline.
On unit growth, how did your new center openings in 2023 compare to how you expected them to go? And then what about 2024?
You know, they've ramped with consistency, Simeon. One of the things that our teams have spent a fair amount of energy this year is working on a new and improved, what we call a new center opening playbook. We can prove with data that those centers that open with the requisite number of new guests in their file, day one, and the appropriately trained staff, both in terms of head count and levels, tend to open with better rate and consistency than if you don't have those elements. So we've packaged all this together.
We plan to launch this to our network later here in the first quarter to say, "Team, here's what you've got to spend and where you have to spend the money prior to opening, the number of new guests you wanna have in your file," and candidly, not just on day one. What's really important is for our franchisees to maintain the appropriate levels of staff through month three, month six, and to continue spending money driving local marketing efforts. So overall, the 2023 NCOs, we were very pleased with, but we wanna make sure that we can... future NCOs can open with more revenue and more consistency on a very predictable basis, regardless of the market that they open.
Can I go back to the first question, the fourth quarter. Why it performed better? Was it transactions? Was it ticket? Was it a combination of both?
It was a combination of both. As we had talked on, and Andrea, feel free to go further into this, we had switched media agencies early into the fourth quarter. We had tried to condition our investors that it would take some time for the new group to get up to speed. As we kind of moved through the fourth quarter, we very early into their new tenure, but we were pleased to see the activity on guest reservations, and so we saw the fourth quarter really delivered through both tickets and price.
I think a cornerstone of this business is the connection with the franchise base. Can you talk about the levers you have at your disposal to continue to support them?
Yeah, they, as you know, Simeon, they're the lifeblood of this brand, and their profitability is what's really driving the reinvestment rates that we've seen in our business. In fact, over 90% of all new centers over the last couple of years have come from our existing franchisees, so we do everything we can to support them. From an operational perspective, we launched this thing called Manager Mingles, where it's a pretty cool tool where we're sharing best practices among the network. Our center managers sign up for these events, and they really love to hear from each other. So we, as the brand, always communicate best operating practices, but we wanna create the vehicle where they can hear from other center managers and share what works best with them.
As I just touched on, we've always supported our new centers with pre-opening marketing activities and staffing recommendations. We've done a lot. We've talked over the last couple of years, Simeon, about all those efforts to really build and drive our wax specialist pipeline. We now have beauty partnerships with 27 different beauty schools in seven different states. We wanna do those things to provide our franchisees every tool possible to ensure they can consistently and continually recruit wax specialists, and we feel very good about that. Andrea, maybe you wanna click on how we're using data to really drive some marketing efforts.
Using data, using people, using new resources. Today, actually, is the first day that we have a brand-new local marketing director who is working with franchisees day in and day out, bringing experience from, other franchisors and sharing best practices, marketing calendars with a plan through execution, to work with specific franchisees. As part of that, we've restructured the local marketing team so that at least for a part of the country, as a pilot, we're able to pair up specific local marketing talent on our end with franchisees and do a bit more hand-holding and day-to-day support, as opposed to, "Here are some great tools, you know, good luck with them." And so we think there's a lot of promise there.
On the media side, as David said, we've begun working with a new media agency, and an offer that we're putting out there to our franchisees is a media match from us, where pending certain conditions, we will actually go dollar for dollar with them in certain markets, which we think is an exciting opportunity for them to get involved, show commitment, and amplify the impact of what we can do with this new media agency. We're also helping them by saying: If you don't wanna put in that extra amount of money and you want more tactical support, here are three additional agencies we've vetted who are perfect to work with you at a local level.
We've also put more resources out there around how franchisees can help use their wax specialists as evangelists, and really be on social more, work with influencers in their local markets, and a whole toolkit of creative assets that franchisees are able to customize based on what they know their guests want. So really a lot of progress in the flexibility and the optionality that we're providing to them across the board. And then I would just add that when you think about digital, we know that franchisees, as we do, want more and more reservations. Everything we do is focused on driving that. But historically, we hadn't spent a lot of time looking at our website, where are we losing guests who are coming in and trying to book reservations?
Providing that extra, extra eye there for franchisees to make sure that when we do drive traffic, it's actually showing up in centers, is really another key, another key piece of what we're doing.
2024, starting to think about it. What can you share? How are you approaching it?
Well, I'd say, Simeon, we plan to give thorough guidance in March when we've wrapped up the year, closed the books. We feel that we ended the year strong per our press release. And one other thing that I would say we're quite excited about, Simeon, we had talked in fiscal 2023 about a new initiative to further support our franchisee, and that is testing of laser in a handful of centers. Our hypothesis there was we could drive new guests to the brand with laser, that we could drive a greater share of wallet from our existing guests. So those guests that are waxing a certain body part, we were convinced we could get them to laser another body part.
And then we also wanted to make sure we could not see significant cannibalization, that all of our guests just converting from waxing one body part to lasering that same body part. We're 12 weeks into the pilot. We're encouraged on all three fronts in terms of our hypothesis. We have six centers in New York that are involved in the pilot, and one of our franchisees, who has five of those centers, has... We're working with them to extend that to another 10 centers in the state of New York here in the first quarter. So still pretty early, 12 weeks in, but the initial readings are encouraging enough for this franchise owner wants to, you know, further expand the pilot. What we would plan to do, Simeon, is in 2024, measure this expanded pilot and evaluate other pilot states outside of New York.
Back to 2024, anything you can share on CapEx, or capital allocation?
Yeah, as you know, Simeon, we're very CapEx-light business model. Our strong free cash flows, I fully expect us to continue to generate those. So in terms of capital allocation, we mentioned in today's press release that in the fourth quarter, we purchased $23.5 million of shares under the previously authorized share buyback program. We'll continue to work with our board and evaluate options for deploying excess cash, but that'll be an ongoing dialogue with the board.
Can we talk about what you're seeing with trends with different guest cohorts, the episodic customer? It's been a focal point for your public company history. Can you talk about that cohort and any other relevant ones?
You bet. So I'll start, Andrea, please, please chime in. In terms of guest behavior in the fourth quarter, we saw our core guests, and we really defined our core guests as our Wax Pass guests and our routine guests. This, these cohorts have maintained their visit frequency throughout all of 2023, candidly, over the last prior years. A very consistent guest cohort for us, and represents over 75% of our system-wide sales. This is a predictable guest, predictable revenue for our franchise base. I want to step back. We do talk. I have talked a bit, Simeon, about this episodic guest, and we really want to kind of define what is episodic. That's kind of everyone else. So what we have said before is we've talked... That includes new guests to the brand.
That includes bid-driven waxers, and these folks that are not on a Wax Pass or coming with the same regularity as our core guests. Management's time and efforts are keenly focused on driving new guests to the brand. If we can get them in the door, our operations teams are focused on working them through that guest journey, ultimately to convert them to a Wax Pass or a routine guest. So we are quite pleased that we saw, kind of notwithstanding whatever this macro is, that our core guests continue to demonstrate their commitments to the brand and their spend with EWC.
I would just add to that, that what we're able to do now with the, with the data investments that we've made over the past couple of years and our new media agency, is go out and actually target more prospects who are likely to become Wax Pass and routine guests over time. And so this is really a big lever for us, regardless of the macro environment, to be able to look at what we know about these core guests and go get more of them. And then once we have the new guests, we've built new capabilities, new education flows, where from the beginning, we're telling people more about Wax Pass, making this more prominent on our website, within our app, building journeys around this to really make sure that guests understand from the outset what it would mean to express their loyalty to us in that way.
Also, actively looking at additional programs through which they can demonstrate that loyalty, that spend, that frequency with the brand. We've done things like now, just last quarter, introduced the ability to purchase Wax Pass online, as well as gift cards. Believe it or not, this is something that guests couldn't do before, so it's another traffic driver to centers, another ticket driver, and a way that we're supporting franchisees in bringing in those new guests and then converting them to Wax Pass.
On the new media partnership, it was used as, as a factor that helped drive the fourth quarter. Was it expected to contribute so quickly? And then typically, with these new relationships, when do they reach their, you know, proper run rate?
You wanna take that?
Sure.
As we've said, it is something that is a slow and steady ramp, is what I would really expect. So while we don't have concrete results to share at this time that would inform our outlook, we are already seeing signs of increased efficiency in certain channels. We've been able to get into new channels. We've started testing incrementality, which is a new capability. I keep using that word, but they really are new for us, with an always-on level of mixed media modeling, to understand what will move the needle for the business. And then going into the remainder of this quarter, we have a robust testing plan in place to really understand more about that. But already, as I was saying, we are seeing positive indicators when we do things like use the data that we have and what we know about our best current guests to go out and get more who look like them.
Outside of the episodic customer, the Wax Pass customer, can you talk about initiatives, new or existing, to retain, and increase their frequency?
Well, I can tell you, yes, we also want to increase their share of wallet. So if we think about this guest as coming to visit us on a regular basis, it's, in some cases, much easier to get a few more dollars out of her wallet under each trip visit. We monitor services per ticket. That is a KPI that's very prevalent throughout our network, and so there's a bunch of training strategies in terms of our with our wax specialists trying to add that second service. If you think about the gross margin profile of that second or third service within the same 15-minute window, it's very accretive to the franchisee. We had talked a bit about piloting service bundles in earlier in 2023. This was intended to drive DPT. We were pleased with the initial pilot.
We've rolled that out to a couple of hundred centers, and we're monitoring that. The end goal of this would be to really change behavior, where a guest, on a regular basis, comes and purchases two or three services on each visit instead of one service. So those are some of the initiatives that we're really trying to drive increased share of wallet from that core guest.
If you think about the competitive landscape for waxing, and then even broader into laser, can you talk about the competitive set, competition increasing, staying the same, or decreasing? And then speak to the entire market.
Yeah, so we are, you know, continue to operate in a very fragmented market. As you think about our size and scale, our primary competition are independently owned mom-and-pop salons. We're way bigger in terms of scale. I think the investments we can make in the hygiene in our centers really puts us unmatched compared to that everyday primary competitor. Now, there's very credible regional competitors that we compete with that kind of range in the size of 50 units. The largest is a 150 units. So in terms of a fragmented space, we're the dominant player by a wide margin. We really haven't seen much change in the core waxing competitive landscape. As we introduce laser on a pilot basis, we think we are uniquely positioned to really leverage our scale and our footprint as the experts in out-of-home hair removal.
It does not have to be just limited to waxing. So in terms of overall shifts in the competitive landscape, we haven't seen anything dramatic, Simeon, in 2023. Continues to be highly fragmented, and we candidly plan to leverage our, our size and scale to extend our leadership position.
One more from me, and if we have time, I guess we can go to the audience. Talking about pricing in 2024, or even currently, as inflation continues to normalize, how are you thinking about it?
You wanna take that?
Sure. So pricing, as we've said, was a tailwind for us in over the past couple of years, and consistent with Q1 and Q2 of this year. Q3 also saw system-wide sales that were driven by price, by dollars per transaction overall. We know that our franchisees legally are setting their own prices. We also know that they look to us for analysis, for recommendations, for our guidance on what those prices can and should be. So while we don't have specific plans yet for 2024 price changes, we are constantly evaluating it, looking at a number of factors. What are our costs? What do franchisees' four-wall margins look like? What are those competitive trends that we're seeing out there? What are our transactions trends?
Arguably most importantly, what is the price elasticity that we perceive consumers, and that our research shows consumers would have right now?
One thing I would also say, Simeon, we have seen over the last couple of years, when we've taken price, generally the market will catch up to us. So as Andrea said, we'll continue to study it. If we decide that we're gonna take price, we're... For those that are our competitors, that are in the core waxing services, we're all within the directional same zip code. We might be a little bit premium to the independently owned mom-and-pops. We're certainly gonna be more accessible than the high-end beauty spas that are offering waxing as an ancillary service. But as the market leader, we've at least seen over the last couple of years, when we tend to set the market pricing for the core wax concepts.
I'll throw one more, and I think we spoke about this last month, your ability to attract and hire and retain, being a critical piece of this, of the proposition. Can you talk about that? Has it normalized? Was there even a blip during the last couple of years, and where you are today?
... Yeah, I assume you're talking wax specialists within it-
Yes
Within the four walls. We have normalized, and we've made tremendous progress. On the backside of COVID, as we've talked with some of you before, you know, California was the last state to reopen, and at the time that our centers were allowed to reopen, we had over 140 centers there. Those centers were literally starting all over. They didn't have a single wax specialist on their payroll. So we found that some of our playbooks, we had to put on overdrive, and we developed a number of partnerships with beauty schools in California to help our California franchisees recruit. We've caught up. We spent several quarters in 2021 and 2022 saying our efforts are about recruitment, recruitment. If you were to poll our average franchisee today, they would say they have enough waxers.
We can tell you we're very close, in fact, in line with our target staffing levels across the country. We still think we have an opportunity, working with our franchisees, to level up. So when I say level up, our most experienced waxers are the most proficient. They can perform any service in a 12-15-minute window. So from a pure headcount perspective, I think our network is adequately staffed, but I think we still have an opportunity to elevate the mix of our most experienced waxers.
Great. Any questions in the audience?
Hi, thanks for the update and the presentation. So you bought back 2.7% of shares outstanding. Sorry, I'll repeat that question. Can you talk a little bit about capital allocation and your preference for share repurchase versus debt paydown? You bought back nearly 3% of shares outstanding in the fourth quarter. What would you prefer to do with excess cash flows going forward? What leverage do you think is ideal?
No, thanks for the question. It is an ongoing dialogue with, with, with our board in terms of the best use, and return to shareholders on excess cash. Within the fourth quarter, we had consumed the balance of the previously authorized $40 million share buyback program. We'll continue to evaluate what the options are there. We're very CapEx light, so in terms of excess cash flow, a year and a half ago, we declared a special dividend of a sizable amount when we took down the WBS facility. So I would say ongoing dialogue with our board, we will evaluate how we think our excess cash flow can benefit our shareholders.
Thank you.
We have time for one more. Okay. Don't see any hands?