for joining. Good morning. I'm Jonathan Komp, senior analyst covering the active lifestyle sector. Very pleased to have European Wax Center joining us for the next session here. You may know EWC is the leading provider of out-of-home waxing services in the U.S. The company has grown to over 1,050 units in the U.S., generating over $1 billion of system-wide revenue on an annual basis with a franchise model, and continues to grow with a long runway here. Pleased to be joined by management. We have CEO David Willis, CFO Stacie Shirley, and Chief Commercial Officer Andrea Wasserman. And I'm gonna turn it over to David to start off with some opening remarks, and then we'll have Q&A and session five at R.W. Baird.
We can also work in questions from the audience that I'll receive up here. So, David, I'll turn it to you.
John, thank you. Thank you for hosting us, and thanks everyone for being here today. No, I think you hit, you hit the high points. For those that aren't quite as familiar with the model, we operate in a highly fragmented market. So we are really the category creator. We're celebrating our twentieth anniversary of the brand this year. As the franchisor, obviously, we make money only to the extent our franchisees are making money. So we have a very compelling four-wall economic model that has led to our franchisees to keep reinvesting in the brand. So we're quite pleased to be here, share a few minutes of our story. So thanks for hosting.
Great. Thank you very much. David, I want to maybe start off with a bigger picture to set the stage a little bit. Could you just maybe share a little bit more what makes the European Wax Center offering unique to the customer, some of the points of differentiation, and really where you excel as a brand?
Yeah, I would say, John, we really professionalize what was not a professional service industry before EWC got started. We have our own proprietary wax that we use in our centers, but the training that we provide our wax specialists, for those that don't know, average center employs 8-10 wax specialists, and they are really the ones that drive revenue within the centers in performing these services. So the exclusive training we do within European Wax Center, we, our franchisees only hire licensed cosmetologists and estheticians. We put them through a proprietary training program that has a very descriptive 4-step wax process. So I would say in terms of how we've differentiated ourselves in the market, it's really that providing consistent training across the brand.
As you said, we've got 1,000 centers in 40-45 different states, and we wanna make sure every guest experience is consistent and exceptional.
Great, and maybe, can you just talk a little bit about the competitive landscape, you know, how you really differentiate yourself versus a largely fragmented landscape that you operate within?
Absolutely. So, as I mentioned earlier, we do operate in a highly fragmented market. In terms of the branded competitors, we are 11 x bigger in terms of revenue, 6 x bigger in terms of unit count, the next biggest branded competitor. Our real competition are over 10,000 mom-and-pops throughout the country. So we really try to differentiate our brand by providing the guest that consistent, exceptional experience, and as we've seen our growth since our IPO, we've continued to really distance, widen the moat of our leadership position in the market.
I want to touch on a lot of the unit growth and the long-term growth drivers, but maybe to start off, you know, some of the short-term trends you're seeing in the business and the customer behaviors. Could you maybe discuss some of the trends you've seen in the more recent quarters? You know, first quarter, you had slightly negative same-store sales, but there were some unique factors, and you're guiding to positive for the year. So maybe, if you could talk about the trend you're seeing, and then some of the initiatives and how you're positioning the business.
Sure. So, for, for those maybe not as familiar, over 75% of our system-wide sales comes from what we call our core guest. So a guest that commits to purchasing a Wax Pass or a routine guest, they have come with incredible stability and consistency over the last several years, and so that's been a very reliable revenue stream for, for our franchisees. The current macro has had a bit of an impact on, we-- on the other part of our guest file, and we see a real opportunity there, John, to attract more new guests to the brand. We've put a lot of efforts, and Andrea can go, deeper into this, but I really look at the two core things where we're focused. I, I would put these in two buckets. The first one is marketing.
We have changed our national media agency and our strategies and approach to attract more new guests to the brand and drive better efficiency in terms of the cost of acquiring those guests. As we saw, this is a new group that joined us in fourth quarter of last year. As we exited 2023, we saw encouraging signs in terms of impact they were driving, and the same thing, we saw more green shoots of opportunity and impact as we were exiting the first quarter when we had our call. More recently, we have retained and sourced two new local agencies.
So our franchisees give us 3% of their revenues that we use at the national level to ultimately drive local reservations, and then we encourage our franchisees to spend a bit more at the local level, and we're seeing these two new folks were onboarded in April. And what really informed our sequential improvement through the year is, we see as more and more franchisees start spending with these local agencies, we expect that to scale throughout the year. So those are kind of the, in the bucket, I would say, from a marketing and a media perspective... then operationally, we've really redeployed our field trainers in a different way than what we've done historically.
Internally, we refer to this as Operation Elevate, and so we send our field trainers into a given market to really do in-the-moment coaching in a given center or for a given franchisee's portfolio. Historically, we had field trainers deployed throughout the country that would check in on centers a couple of times a year, and we said, "You know what? If we really wanna drive impact, let's go embed them in a market for four weeks or five weeks, work with two or threee franchise owners' portfolio of centers," and we're seeing an immediate improvement in terms of all the relevant 4 KPIs when they do this, when they have these coaching sessions. This is really, John, kind of blocking and tackling, but where we are confident is we can directly control and influence, we think, better KPI improvement.
The rationale for kind of guiding a sequential improvement in same-store sales as we navigate through the year is really scaling that program as well.
Maybe, David or Andrea, if you're willing to expand tactically on some of the marketing shifts, you know, what you're doing to reach both existing and new customers, and then how we can think about that, you know, playing out here in 2024, and as you, you know, put some of it in place.
Sure. So David talked a bit about the media. To get more specific on what we're doing there, it. I would categorize it in two ways. One is all of the analytics that supports everything we're doing in media and actually even beyond that. So we're getting clearer and clearer through something specifically called Media Mix Modeling on where we're able to drive incremental reservations, and that's important because there are, you know, any number of tactics brands can take to drive some type of action, but if it's an action that you would've been getting anyway, then it's really not worth the media dollars. And so making sure that everything we're doing is driving incremental value has become a big focus for us and is a lot of what drives our improving efficiency of every ad dollar that we're spending.
And that's kind of like, if you think about that as, like, the pipes that power everything that we're doing, it also informs which of our CRM is most effective. We've recently launched national cable TV. It gives us new ways to measure that, and so all of that is powering what we're doing. And then, as we get more specific, again, still within the realm of media, we're able to know where we are finding our guests who are most likely to become repeat and loyal guests, so that we can go back to those same places and get more guests who look just like them. That's one example. Another example is learning about the types of creative that work really well for us.
So it's become important, especially in this macroeconomic environment, to make sure that we're communicating a very clear price value proposition in everything that we're doing, and so that's something that we've pulled forward in terms of messaging in recent months that may not have been as prominent a year ago. So certainly a shift, and one that we do think is really working. And then beyond that, still under the umbrella of marketing, doing a lot with the guests that are already on our books.
Our Wax Pass and routine guests are 75% of our revenue, and we wanna increase the frequency that we have with them by using CRM tactics, by re-engaging anybody who looks like they might even slow down, with some predictive modeling and getting to them through email, through text, through app push notifications, through direct mail, you name it. So all of that is reflect some of the newness in our marketing strategies.
Maybe, if you're willing to just expand the price value-
Mm-hmm
... pull forward some of the actions there. What, what does that look like to the, to the consumer?
Well, it's getting very clear about what our value propositions as a brand are, how we differentiate ourselves, and then making sure that guests and prospective guests who may be deciding, "Should I stay home and shave, or should I come to European Wax Center, or should I go to the competition?" Making sure they know that we are the market leaders, that we have a level of expertise and training that nobody else has, that we have set the bar for cleanliness and hygiene, that we're super efficient. You can book online. You can be in and out in 15 minutes, and so making sure that this is something that, that everybody knows.
We're seeing, as a very tactical example, that when we message First Wax Free, which is our longtime entry offer, as the headline, as opposed to having it somewhere else in an ad, things like that actually do move the needle. And so that's what it looks like to these guests who are making decisions in, more often now about how they should spend their money and, and where they should spend it.
And one more follow-up, the local piece, the adoption of some of the new local agencies, what are you seeing in terms of the uptake from your franchise partners? Is it too early to get any feedback on, on-
It's not too early, actually. I mean, it is—certainly, it's early in the tenure of what we're doing, but we already are seeing not only positive results from these new media agencies, but also a lot of enthusiasm from franchisees who have already gotten on board. There has been significant uptake, in part because, for a lot of franchisees, they want to do more naturally to drive their businesses, and they had prior agency partners who weren't able to serve them as well. And so now that we're able to illustrate for them, this is the level of hand-holding and support and dashboard visualization that you get when you spend this money, and here's what that return on the spend looks like, they are very apt to say, "I see it. I believe it. It's working for my peer franchisees.
Let me get on board with this." So we're pleased so far with the responsiveness to that.
It really helps, too, John, so, you know, while we get, as the brand, all these recommendations from an operational and marketing perspective, we find our franchisees are the biggest advocates. So Monday, we hosted a webinar with all of our franchisees, and we spotlighted three different franchise owners that had done Operation Elevate, that had invested in local marketing or local grass, you know, started grassroots marketing initiatives. And we've got a great relationship with our network, but franchise owners really like to hear from their colleagues: "Hey, I was hesitant, or I was skeptical. I wound up doing this, and here's the impact it had on my centers." That's a very compelling argument to kind of accelerate the network's adoption of some of these initiatives.
And just to follow up there, Operation Elevate, can you just talk a little bit more how that was born? Is there any sort of admission that operations were lagging in a certain area, or, you know, more thinking about the potential to drive the business as you place focus on the in-center operations?
You bet. So this really stemmed from a pilot we launched in fourth quarter of last year. We had a great operator that operates in several different markets, and one of their markets had been struggling in terms of ticket trends. So we analyzed that with our field business consultant and said, "Hey, how can we make a difference?" So we deployed our field trainer and our field business consultant to go work with that franchisee, 17 different locations over a four-to-six-week period. As we saw immediate improvement, this informed kind of how we tweaked what we're calling Operation Elevate.
So in the early days, when our field trainers would show up, you'd see great results for the week that they were in market, and the week when they would leave market, we would see a kind of reversion to the mean. So a really good learning for us was, hey, we can't just do in-the-moment coaching. We've got to make sure that the peer trainers that are hired by the franchise operators, that these best practices and learnings become more sticky, and they can be replicated in other markets. So this was a franchise owner we actually had on Monday's webinar that said: "Hey, here's what we learned out of this.
Our original hesitation was our regional directors viewed it as we were being audited by the brand, or they were going to be judged for underperformance." We really had to sell them on, "Hey, we are here to help." This is a program that we're not charging for, but we want to help improve their KPIs. If they can drive more tickets and revenue, obviously, as the brand, we benefit from that in the form of additional royalties and product sales. So once we got them over the hump of, "This isn't an audit, we actually are here to help," they fully embraced it. So that was the genesis of this program. So the learnings we took out of this pilot are informing how do we go scale this further in the network?
We had another franchise operator that is a really good operator in multiple markets, struggling in a particular market. We showed up with our team to help, and they just weren't properly staffed, so it didn't make sense to stay in market for four or six weeks when you don't have the right people to actually train. So we've gotten smarter through these pilot programs to say: What are the foundational things a franchise owner needs to have in place for our SWAT team, this Operation Elevate, to show up? What can we logically expect to accomplish in four, five, or six weeks, based on the number of centers in that market we're trying to drive improvements for?
Really important, we want to continue to measure the markets where we've already been to ensure they can sustain the improvements and the KPIs that we're helping them drive, and thus far, we've seen that.
And as you think about scaling those efforts, is it a team that's already in place? Is it more investment to come, or is it-
We do have a team in place, but we're adding to that team throughout the year, and our expectation is that we would scale that team of field trainers as we go throughout the year.
Okay, great. Going back to targeting existing customers, I know, you know, from time to time, you've been pretty effective in pulling levers or different tests around the Wax Pass offers. What's your current thinking of the optimal offer, and are you able to drive behavior with some of the actions?
Sure. Andrea, do you want to touch on our new retention offer?
Sure. I think the biggest change there, really not a change, but an addition, is what we're calling the 3 + 1 Wax Pass. So the idea is that for new guests who are not very familiar with waxing, maybe they come in, they do it once. They're presented with the opportunity to buy a 9 + 2 or a 9 + 3 Wax Pass, which means that you're essentially paying for 9 sessions, and you're getting 11, or in a promo period, you're getting 12. That's something big to bite off for a brand-new guest who doesn't yet have a waxing routine, and so the thesis here was that if we offered a smaller package, specifically buy 3 and get 4 sessions, that would be a little bit easier to bite off for a newer guest.
We tested this throughout the fall, saw a really good activation rate there and have since rolled it out to the network and have seen an increase in our first-time guest retention rates. So-
'Cause we also know that when you get to that third-
Mm-hmm
... that third visit is when you really have-
Yes
... the opportunity to retain.
Yes, exactly.
Right.
Mm-hmm, and that's then continued with all of our education and reminders about, you see more value in your wax when you come on a routine basis, and like Stacie said, it becomes less painful over time, and something that becomes more habitual for you. So we're excited about the early reads there.
If we're sitting here a year from now and the business hasn't re-accelerated like you've planned and guided to, is it more because of, you know, the macro environment has changed? Or, I'm trying to get to, you know, the degree of success around the factors you're talking about, and the confidence level that you have in driving the business forward here.
Extremely confident in those things that we control. So if we're sitting here a year from now and we've delivered on this, I think we've maintained a stable macro environment, and we've been able to execute on both the marketing and the operational strategies that we've talked about this morning. What we don't control is the unknown in the macro. And so if that gets, it doesn't remain stable, it gets worse, that would be the only thing I would foresee is maybe restricting our ability to deliver what we have committed to.
Yeah, great. Maybe switching to unit growth a bit. I wanna ask, just to start at a high level, how do you think about the right pace of unit growth that's, you know, the appropriate pace for the system you can execute? Just given that you've had a couple of years where you've been, you know, at the high end or above your long-term targets. You know, a little bit of a step back, but still a healthy growth rate. But how do you think about the, you know, the optimal pace?
Yeah, John, so when we went public and first met you, our long-term growth algorithm for unit growth was high single digits. We had a lot of interest and demand from the network wanting to expand their footprints. We were very supportive of that. And out of the gate, candidly, we delivered back-to-back double-digit unit growth. We guided this year to high single digit because we still feel that's the right long-term growth rate for this business. We have been very active the last couple of years in select markets, and this year, by design, we said we need time for those markets to mature, to absorb the units that our franchise owners have developed in those respective markets. So it doesn't mean this year we expect to all go into new markets, but I'll pick on California.
We've had a great franchise partner that very aggressively built, built a number of units in the San Diego market. I would not expect us to put up a whole bunch of new units in San Diego, but we have a phenomenal partner up in the San Francisco area that has a number of units in their pipeline they expect to develop in that part of the state. So we feel great about high single digits. We're very fortunate that over 90% of our units over the last several years have come from existing franchise owners. And to us, John, that kind of is the ultimate bellwether. For franchise owners making adequate cash-on-cash returns that they want to reinvest with this brand, we've seen that play out time and time again over the last couple of years.
We feel really good about not just the high single-digit unit for this year, but with the 370 licenses in our pipeline yet to be developed, we've got really good visibility over the next several years.
Can you talk a little bit more, some of the newer markets? I know you've expanded the number of states you operate in, and I know typically you'll target specific metropolitan areas or within new geographies. Just any observations or learnings as you've gone into, you know, newer markets?
You know, when we've gone... So Nebraska was new to the brand last year or year before last, I forget. We find that when you go to a new market, the AUV ramps are still pretty consistent, but what you've got to spend the money on out of the gate is educating somebody on what waxing is and why waxing is a better modality of hair removal compared to maybe other methods. So when we first went to Nebraska, our franchise owner was deploying the same marketing assets and imagery that we had in other more mature markets, where we had a bit better brand awareness. And we found that a lot of folks in that particular market didn't really know what waxing was or why that they should consider waxing relative to other things.
The overall performance of the units tends to be consistent, but where we spend the money and what's the messaging, that could be nuanced if it's a new market versus a place where we're adding our 15th or 20th or 25th unit.
And then touching on a little bit, the new store productivity ramp. I know by year five, the units return as good as any concept that I've seen from a franchising perspective. What about the efforts? I know you've put a lot of focus behind accelerating, you know, that initial ramp to bring the returns even sooner, you know, and the payback, earlier on, you know, sooner than the five-year target that you have. But what are you doing on the new productivity focus, and what have you seen?
So we have studied what the brand has been, has benefited over the last 20 years with a very consistent revenue ramp from years one through five. What we call our mature center is kind of years five and older. But in this environment and in many markets, the cost of construction are elevated relative to the day we went public. A number of markets have elevated labor rates. So we really studied our best performing NCOs over the last couple of years that informed what we call our new NCO Playbook, which launched in the first quarter of this year. This is very prescriptive. What does the franchise owner need to spend, both in terms of money and in what channels, to ensure that the day they open, they have the requisite number of guests in their file that they can market to?
We also are a bit more prescriptive in this playbook as to both the headcount and the level of training that the wax specialists need to have. You don't want to open a new center with a bunch of inexperienced waxers. So this was launched in, midway through the first quarter of this year, so we have a very limited data set. But those centers that have opened post the implementation of this new playbook are performing very, very well. Their amplitude out of the gate is very encouraging. Now, granted, limited data set, but we're very confident we can continue to replicate this, as it was really informed by just studying our best performing NCOs over the last three years.
Great. Maybe, Stacie, to touch a little bit more on the long-term financial picture. And, you know, David, before outlined the unit growth algorithm that you've had historically.
Mm-hmm.
How should we think about, you know, the profitability? You know, adjusted EBITDA margins already at 34%, I think, at the midpoint of your guidance. How, how should we think going forward? You know, driving bottom line leverage and the, the appropriate targets?
Sure. So like you said, yeah, at that midpoint, we're at 34%, you're basically flat to LY. But if that also includes about a $4 million investment in laser, which I don't think we've touched on yet. A significant amount of which is a one-time kind of foundational investment. So if you took that out, if you took that $4 million out this year, you would see meaningful impact. That's what we're projecting from an adjusted EBITDA margin perspective. As we look forward, and I think about, you know, what is the opportunity ahead, a couple of things, you know, considering the growth from a unit perspective, driving that top line from a gross margin standpoint, we would, you know, see some improvement there just as we continue to gain scale.
From an operating expense perspective, we've got marketing, which our goal is to always operate that on a net neutral basis. Then SG&A, which is a large amount of that is fixed, and so you should see leverage, and, you know, driving that bottom line. So we would expect to continue to see improvement year-over-year.
Expectations for cash returns over time and the current capital structure-
Mm-hmm.
you know, what, what are the highlights?
Sure. So we are an asset-light, you know, capital-light model, which allows us to generate a significant amount of free cash flow every year. So it's then evaluating how are we going to best use those funds to, you know, drive long-term shareholder value. We did, and the board did just authorize a $50 million share repurchase program a few weeks ago, and so we will execute that on a, you know, very opportunistic, you know, perspective, and then continue to evaluate what are the other, you know, options, whether it's, you know, a, a dividend or other opportunities, again, to drive shareholder value. We're very fortunate that our, you know, our long-term debt is at a very attractive rate of 5.5%. So we're, we're pleased with that.
We're pleased with the leverage of a little over 4 x and would continue to expect that to also come down just through the organic, you know, natural growth of our EBITDA.
Great, and then maybe to go back to the laser opportunity. I was saving it for last, last, certainly not least, but yeah, that's been one of the biggest maybe shifts that I would say since the IPO, the messaging around, you know, the leader in waxing, but now also testing the laser hair removal opportunity. So maybe just, you know, a little more foundational background, why, why test laser? What are you willing to share from New York? And as you, you know, get ready to test in Florida, you know, the, you know, what, what, what we should be thinking about in terms of the opportunity.
You bet. So our hypothesis when we introduced laser on a pilot basis in New York is, could we attract more new guests to the brand through laser? You know, I think we talked, John, at IPO, that we felt that laser was never a competitive threat. It's a slightly different demographic, slightly higher household income than our core guests. And so we said, "It's an opportunity to get more of those folks into the brand." Second hypothesis was, can we get an existing wax guest to laser a body part that they're not waxing today? So can we drive a greater share of wallet? Ultimately, the litmus test would be, can we drive incremental revenues and EBITDA to what we think is an already robust, you know, four-wall model?
The franchise owner that did the pilot in New York saw enough that exiting first quarter, he added another 10 centers. So now we're in 16 centers in New York. We're still getting smarter, John, by the week, in terms of what's the most cost-efficient way to acquire that guest. It is a more expensive guest. It's a more considered purchase than a wax service. So we're getting smarter by the week in terms of how you drive the CAC efficiencies. And we figured out, we feel really good about our ability to execute in New York. We were able to cross-train wax specialists, get them certified on the laser machines, and so we feel good about kind of the operational model in New York.
What we want to learn is, given this has a bit different regulatory environment, different states, can we be just as successful operationally as it showed the potential from a top-line and a bottom-line perspective when you throw, incremental requirements that are needed from a regulatory environment into the mix? That's why we're expanding to our, our corporate centers this quarter in Florida. We have a number of franchise owners that have expressed interest in wanting to pilot in states that have yet different regulatory environments than both Florida and New York. So our objective, John, is to get smart enough in enough different markets to say, "Hey, by the end of the year, what does laser really mean to European Wax Center? What are the new AUVs for those centers that have laser?
What are the new same-store sales comps that have laser? So we're very excited and encouraged by the early readings, but I think we have a number of markets and a number of centers to get smarter that could inform what this means to the brand ultimately.
Well, great. I'm sure we'll be talking more, you know, in the quarters to come, and certainly appreciate the three of you sharing the story today and walking through, you know, a lot of the drivers. If you could all join me in thanking the European Wax team.
Thank you for having us.
Thank you.
Thank you.
Appreciate it.
Thanks for joining.